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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
[X]            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                                      OR
 
[_]          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                          COMMISSION FILE NO. 1-10760
 
                               ----------------
 
                          MUTUAL RISK MANAGEMENT LTD.
              (EXACT NAME REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                                    BERMUDA
                        (JURISDICTION OF INCORPORATION)
 
                                NOT APPLICABLE
                     (I.R.S. EMPLOYER IDENTIFICATION NO.)
 
                               44 CHURCH STREET
                            HAMILTON HM 12 BERMUDA
                                (441) 295-5688
              (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
      INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES).
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
<TABLE>
<CAPTION>
                                                            NAME OF EXCHANGE
                     TITLE OF EACH CLASS                   ON WHICH REGISTERED
                     -------------------                   -------------------
      <S>                                                <C>
      Common Shares, $.01 par value..................... New York Stock Exchange
</TABLE>
 
       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
 
  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    .
 
  Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10K or any
amendment to this Form 10K. [X]
 
  At March 14, 1997 registrant had outstanding 19,063,557 Common Shares, the
only class of registrant's common stock outstanding, and the aggregate market
value of voting stock held by non-affiliates at such date was $591,701,097.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Certain portions of registrant's Proxy Circular relating to its Annual
General Meeting of Shareholders scheduled to be held on May 21, 1997 are
incorporated by reference into Part III of this report.
 
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
THE COMPANY
 
  Mutual Risk Management Ltd. (the "Company") is a Bermuda company
incorporated in 1977. The Company's principal business is the provision of
risk management services to clients seeking an alternative to traditional
commercial insurance for certain of their risk exposures, especially workers'
compensation. Risk management involves a process of analyzing loss exposures
and developing risk financing methods to reduce exposure to loss and to
control associated costs. The use of such loss financing methods in place of
traditional insurance has become known as the alternative market and involves
clients participating in a significant amount of their loss exposure and
transferring only the unpredictable excess risk to insurers. The benefits of
such alternative market techniques typically include lower and more stable
costs, greater control over the client's risk management program and an
increase in the emphasis within the client's organization on loss prevention
and loss control. In addition to its insurance industry services, in 1996 the
Company entered the financial services business through its acquisition of The
Hemisphere Group Limited ("Hemisphere"). Hemisphere, which is based in
Bermuda, provides administrative and other services to offshore mutual funds
and other companies.
 
INSURANCE SERVICES
 
  The Company's principal source of profits is fees received for the various
insurance and other services provided to clients in connection with the
Company's programs. In a typical program these fees total between 11% and 13%
of the client's premium. The structure of the Company's programs places most
of the underwriting risk with the Company's client. For regulatory and other
reasons, however, the Company is required to assume a limited amount of risk.
The Company seeks to limit this risk to the minimum level feasible. This
approach to risk distinguishes the Company from typical property/casualty
companies which assume significant levels of underwriting risk as part of
their business. The Company does not seek to earn income from underwriting
risk, but rather from fees for services provided. The Company markets its
services exclusively to retail insurance brokers and consultants representing
clients. The services offered to clients in connection with the Company's
products include the following:
 
  . Design and implementation of a risk financing program.
 
  . Issuance of an insurance policy by one the Company's wholly-owned,
    licensed insurance companies, Legion Insurance Company ("Legion") or
    Legion Indemnity Ltd. ("Legion Indemnity"). In August 1995, A.M. Best
    Company raised the rating of Legion from "A-" to "A" (excellent).
 
  . Use of the Company's Insurance Profit Center Program or IPC Program as
    the vehicle within which to fund a chosen portion of the client's risk
    or, alternatively, the management by the Company of the client's captive
    insurance company.
 
  . Brokering to unaffiliated reinsurers the excess risk which the client
    chooses not to fund and in some cases arranging for insurers, other than
    Legion, to issue the original insurance policy.
 
  . Coordinating the purchase, on behalf of the client, of loss prevention,
    loss control and claims administration services from unaffiliated
    providers.
 
  The Company's major product is the IPC Program. This program allows the
client to retain a significant portion of its own loss exposure without the
administrative costs and capital commitment necessary to establish and operate
its own captive insurance company. The actual amount of underwriting profit
and investment income produced by the client's IPC Program is returned to the
client, creating a direct incentive for it to engage in loss prevention and
loss control in order to reduce the overall cost of financing its loss
exposures. A growing segment of the Company's business is its program
business, in which third-parties other than the insured, typically the broker
and re-insurers, finance a portion of the insured's risk and participate in
any underwriting profit or loss.
<PAGE>
 
 Lines of Business
 
  The Company's programs can be utilized by clients for many lines of
insurance. In 1996, approximately 60% of the Company's fee income was derived
from workers' compensation for companies or associations typically producing
at least $.75 million in annual premiums. During the 1980's and through 1993,
workers' compensation presented many employers with substantial problems due
to cost increases and the limited availability of commercial coverage in
certain states. Workers' compensation costs accelerated rapidly due to (a) the
general level of medical cost inflation, since medical costs generally amount
to 40% or more of all workers' compensation costs; (b) an increase in the
number of workers' compensation claims which resulted in litigation; (c) a
broadening of injuries which are considered to be work-related; and (d) an
increase in state mandated benefit levels. Since 1993 workers' compensation
reforms have been occurring in a number of states, most notably in California,
which have addressed many of these issues. A number of markets have recently
seen a significant decline in premium rates due to new capacity entering the
market subsequent to these reforms. These lower premium rates reduce the fees
that the Company earns on its programs as its fees are based on premiums.
Notwithstanding the changes in the market, workers' compensation continues to
be suitable for the alternative market because many states set rates or
enforce minimum rate laws which prohibit the commercial insurance market from
offering premium discounts to insureds with favorable loss experience. This
causes such clients to seek an alternative method of funding their workers'
compensation exposure which rewards their status as a preferred risk. In
addition, workers' compensation involves relatively frequent, predictable
levels of loss which are the type favored by clients for alternative market
insurance programs.
 
  In addition to workers' compensation, the Company's programs have been
utilized for other casualty insurance lines such as medical malpractice,
general liability, and auto liability. Of these other lines of business,
medical malpractice accounted for approximately 4% of the Company's fee income
during 1996.
 
  At December 31, 1996, the Company had a total of 433 employees.
 
 Marketing--CRS
 
  The Company's wholly owned subsidiary, Commonwealth Risk Services ("CRS"),
markets the Company's services in the United States, Canada and Europe to
insurance brokers and consultants representing clients. CRS also designs risk
financing programs for potential clients in conjunction with their insurance
brokers and consultants. Through offices in Philadelphia, Southern California
and London, CRS markets these services using direct mail, advertising,
seminars and trade and industry conventions.
 
  CRS seeks to become actively involved with the insurance broker in the
presentation of the Company's services to potential clients and maintains a
direct relationship with the client after the sale. CRS assists brokers in the
design and implementation of risk financing programs, although the extent of
this involvement depends on the size, experience and resources of the
particular broker. Members of the CRS staff frequently provide supporting
promotional materials and assist in the preparation of financial analyses
comparing the net present value, after-tax cost of an IPC Program with
alternative approaches. Representatives of CRS seek to be present at meetings
with potential clients to explain how the IPC Program works, including how
reinsurance is handled, how funds are invested, and how underwriting profits
and investment income are returned.
 
  CRS currently has 50 employees in Philadelphia, 5 in Southern California and
2 in Northern California. Of these employees, 43 are involved primarily in
marketing, program design and implementation, 3 in brokerage and 11 in support
functions. CRS does not act as an agent of the IPC Companies or Legion and
does not have authority to negotiate or conclude contracts that bind the IPC
Companies or Legion.
 
 The Insurance Profit Center Program
 
  In 1980 the Company developed a program which provides clients with a
facility for managing their insurance exposures. This type of structure is
frequently referred to as a "rent-a-captive" although the facility has many
significant differences from a captive. The facility was designed to provide
certain of the benefits
 
                                       2
<PAGE>
 
available through captive insurance companies without the administrative cost
and capital commitment necessary to establish and operate a captive insurance
company. Since the IPC Program involves a retention of risk by the client, it
encourages the implementation of risk management and risk reduction programs
to lower the losses incurred.
 
  The IPC Program is appropriate for corporations and associations which
generate $.75 million or more in annual premiums. Typically clients which use
an IPC Program are profitable and have adequate working capital but generate
insufficient premium to consider or are otherwise unsuitable for a wholly-
owned captive. During 1996, the Company significantly increased the number of
agency IPC Programs in which an insurance agent or broker, rather than the
insured, becomes the preferred shareholder and participates in the profit or
loss on the program. These types of programs are referred to as "Program
Business".
 
  Return on the program is a function of the loss experience of the client.
The principal benefits of the IPC Program to the client are:
 
  . A reduction of the net present value, after-tax cost of financing the
    client's risks.
 
  . A lower commitment of funds than would be necessary to capitalize and
    maintain a captive insurance company.
 
  . Access to commercial reinsurance markets for the client's excess risk.
 
  . Program structure that is customized, flexible and relatively easily
    implemented.
 
  The Company operates the IPC Program from offices in Bermuda. The Bermuda
office is involved in designing, negotiating and administering IPC Programs
and reviews each prospective client, negotiates the shareholder's agreement
with the client and the reinsurance agreement with Legion or other policy-
issuing company. One of the Company's foreign insurance company's (the "IPC
Companies") receives and invests premiums, administers policy claims,
establishes reserves, provides quarterly financial reports to clients and,
ultimately, returns the underwriting profit and investment income to the
client as preferred share dividends.
 
  The funds of each IPC Program are invested by a subsidiary, Mutual Finance
Ltd., in a common investment pool (the "Mutual Investment Pool"). The assets
are invested using the services of professional investment advisors. The
investment yields of the Mutual Investment Pool, were 8.0% in 1996, 11.4% in
1995 and (2.6%) in 1994.
 
  Neither Legion nor the IPC Companies underwrite risk in the traditional
sense. Rather, their function is to ensure that substantially all of the
underwriting risk of the client is either retained by the client in the IPC
Program (or its captive insurance company) or transferred to unaffiliated
reinsurers. In the event that the IPC Company sustains an underwriting loss on
a program which exceeds that program's investment income, the IPC Company
recovers this loss from the client. Since the client has generally
collateralized the Company for at least the difference between the funds
available in that client's IPC Program and the level of currently expected
losses by cash or a letter of credit, the Company should not be affected by
the bankruptcy of a client. In the event, however, that the IPC Company is
unable to recover the full amount of its loss from the cash collateral or the
letter of credit, the IPC Company would seek to recover from the client
pursuant to the indemnity provisions of the shareholder's agreement. As of
December 31, 1996 the Company maintained a provision of $4.5 million, against
losses which may occur on programs where it may be forced to rely solely on
the clients indemnity. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
 
  In addition to programs for corporate clients, the Company also offers an
association IPC Program which allows smaller insureds collectively to take
advantage of the financial benefits available to larger corporate insureds
individually.
 
LEGION
 
  Legion is domiciled in Pennsylvania and is admitted in 49 states of the
United States and the District of Columbia. Legion Indemnity is domiciled in
Illinois, is an admitted insurer in Illinois, and an authorized surplus
 
                                       3
<PAGE>
 
lines insurer in 34 states and the District of Columbia. (Legion and Legion
Indemnity are collectively referred to herein as "Legion"). In the Company's
corporate risk management business segment, one of the Legion companies issues
an insurance policy to the client, which either fulfills a legal requirement
that the client have a policy from a licensed insurer or satisfies a business
need the client may have for such an admitted policy. The client and Legion
determine the level of exposure the client wishes to retain and Legion
transfers the specific excess risk and the aggregate excess risk beyond that
retention to unaffiliated reinsurers. Legion then reinsures the client's
chosen retention to one of the IPC Companies or to the client's captive
insurance company. In certain cases Legion may issue a large deductible type
policy in which the client pays claims up to its chosen retention directly.
Payments within the deductible are covered by a deductible reimbursement
policy issued by one of the IPC Companies. In either type of policy Legion
retains only a relatively small portion of the risk on each program for its
own account.
 
  In Program Business, Legion replaces traditional insurers as the conduit
between producers of specialty books of business and reinsurers wishing to
write that business. In this line of business, the reinsurer replaces the
insured as the risk-bearing entity. As with the corporate risk management line
of business, Legion negotiates the reinsurance, and performs certain
administrative services in connection with the program. Program Business
differs from the corporate risk management line of business in that policy
underwriting, issuance and premium collection are usually provided by the
general agent, rather than Legion.
 
  Legion analyzes each program prior to inception, arranges for the specific
and aggregate excess reinsurance coverage through its reinsurance treaties,
collects the premium from the client, prepares accounting cessions for the
reinsurers, audits the final premium, supervises the independent claims
adjuster, collects claim reimbursements from reinsurers, and performs certain
other related services for each account.
 
  For its Corporate Risk Management business, Legion has established several
reinsurance treaties to transfer the specific and aggregate excess risk above
the client's retention. The client's retention is negotiated separately for
each program and reflects the amount of risk the client wishes to retain on a
program on both a specific and aggregate loss occurrence basis. For its
Program business, Legion has established several reinsurance treaties, both on
a quota share and a specific and aggregate excess of loss occurrence basis.
Legion currently places substantially all of the reinsurance in both lines of
business with unaffiliated commercial reinsurers whose ratings from A.M. Best
Company are A- or higher. At December 31, 1996, the largest reinsurance
recoverables from unaffiliated commercial reinsurers were $105.4 million from
Transatlantic Reinsurance Co., a participant on several layers of specific and
aggregate reinsurance with respect to the Company's program business, $30.8
million from Odyssey Reinsurance Corp., (formerly Skandia America Reinsurance
Corp.) a participant on the 1990-1992 primary aggregate and specific excess
treaty years and $29.8 million from Federal Insurance Company, a reinsurer on
several different current treaties. Transatlantic is rated "A+", Odyssey is
rated "A-" and Federal is rated "A++" (Superior) by A.M. Best Company. During
the period from January, 1988 to October, 1991 one of Legion's aggregate
reinsurers was Mutual Benefit Life Insurance Company ("Mutual Benefit"). In
July, 1991 Mutual Benefit was placed in rehabilitation by the Insurance
Department of the State of New Jersey. The proposed plan of rehabilitation for
Mutual Benefit would make no distribution to Mutual Benefit's reinsureds such
as Legion. At December 31, 1996, Legion wrote off its recoverable from Mutual
Benefit of $.9 million and reduced its provision for uncollectable reinsurance
by an equivalent amount. For a discussion of current reinsurance arrangements,
see "Management's Discussion and Analysis of Financial Condition and Results
of Operations".
 
  Through its reinsurance arrangements, Legion places significant amounts of
reinsurance with a variety of unaffiliated reinsurance companies. In order to
maintain an acceptable level of net written premium for regulatory purposes,
Legion seeks to develop a level of net written premium which will not involve
a significant degree of underwriting risk. In most Legion programs, Legion
retains liability for a specified amount of losses equal to at least 10% of
gross written premium. The level of losses retained by Legion are set at a
level such that no underwriting profit or loss should occur.
 
  In order to take regulatory credit for reinsurance ceded to one of the IPC
Companies or to a captive insurance company, Legion must receive a letter of
credit for the amount of the insurance reserves ceded, since
 
                                       4
<PAGE>
 
such companies are not licensed reinsurers in any state of the United States.
The letter of credit must be issued or confirmed by a bank which is a member
of the U.S. Federal Reserve System. At December 31, 1996, Legion had $239
million of such letters of credit, of which $226 million was supplied by the
IPC Companies. Legion and Legion Indemnity are also subject to other
regulation by the insurance departments of Pennsylvania and Illinois, their
respective domiciles, and other states where they are licensed. See
"Regulatory Considerations."
 
  As of December 31, 1996 Legion had 284 programs of which 222 involved the
IPC Companies. Legion wrote gross statutory premiums of $344.0 million during
1996 and had statutory capital of $150.9 million at December 31, 1996. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations".
 
 Other Services
 
  Brokerage Services
 
  CRS provides brokerage and consulting services for the IPC Program and for
the operation of captive insurance companies. These services include acting as
a broker or intermediary to locate insurance companies, including Legion,
willing to issue policies of insurance and to reinsure those excess risks
which the client chooses not to retain. CRS had revenues from these activities
of $10.6 million, $9.0 million and $8.5 million during the years ended
December 31, 1996, 1995 and 1994, respectively, of which $10.6 million, $8.9
million, and $8.5 million were earned as commissions on programs where Legion
acted as the policy-issuing company.
 
  In 1991 the Company acquired a 51% interest in a newly-formed London
reinsurance brokerage firm, MRM Hancock Limited ("MRM Hancock"). MRM Hancock
specializes in the placement of reinsurance for captive insurance companies in
the London market, including Lloyds of London. The remaining 49% of MRM
Hancock was owned by management of MRM Hancock and General International Ltd.,
a Bermuda insurance subsidiary of General Motors Corporation. During 1996, the
Company acquired the minority interests in MRM Hancock and it is now a wholly
owned subsidiary.
 
  In July 1992 the Company acquired 100% of Park International Limited, a
Bermuda broker specializing in placing coverage with Bermuda-based excess
liability and corporate officers and directors liability carriers. During the
third quarter of 1995 the Company acquired HJF International Ltd. HJF is an
insurance broker to Bermuda specialty insurance and reinsurance markets and
operates as part of the Company's subsidiary Park International Limited.
 
  Claims Adjusting Services
 
  In connection with the establishment of an IPC Program or a captive
insurance company program, the Company generally arranges for the purchase of
claims adjusting services from unaffiliated third-party providers. These
services include claims adjusting, claims management, management information
systems to evaluate claims, loss control and engineering services,
rehabilitation services, medical cost containment services and subrogation.
Legion maintains a claims department which supervises the work of these
independent claims adjusters and integrates the claims information into
Legion's accounting systems. In certain instances the claims handling services
are provided directly by Legion.
 
  In June, 1994 the Company acquired The Worksafe Group, Inc., ("Worksafe"), a
California based consulting firm providing a proprietary loss control service.
Worksafe, which has 8 employees, offers its services to Legion's customers in
the United States.
 
  Captive Management Services
 
  Although the IPC Program provides many of the benefits of a captive
insurance company, there are situations where a wholly-owned captive or group-
owned captive may be more beneficial to its owners due principally to cost and
control. The cost considerations result from the fact that management expenses
of a captive are fixed whereas those of an IPC Program are variable. In
addition, a wholly-owned captive is controlled
 
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<PAGE>
 
by the client whereas the IPC Companies are controlled by the Company. For
this reason, the Company has established its own captive management facilities
in Bermuda, Cayman Islands, Vermont and Barbados and a 40% owned joint venture
in Ireland's International Financial Services Centre ("IFSC").
 
  The Company provides its captive management clients with administrative,
compliance, accounting and reinsurance services and maintains professional
relationships with auditors and law firms on behalf of the client. Five of the
Company's subsidiaries provide these administrative and accounting services to
116 unaffiliated captive insurance companies, 66 in Bermuda, 41 in the Cayman
Islands, 8 in Barbados and 1 in Vermont. Total revenues from captive
management operations were $4.6 million in 1996, $3.7 million in 1995 and $2.0
million in 1994.
 
  The Company has entered into a joint venture agreement with Coyle Hamilton
International Ltd., a major Irish insurance broker, to operate a captive
management company, Mutual Coyle Hamilton Managers Ltd. ("MCHM") in the IFSC.
The Company has a 40% interest in MCHM. MCHM markets its services to European
companies who wish to establish captive insurance companies in the IFSC and
manages the Company's wholly owned reinsurance subsidiary Mutual Indemnity
(Dublin) Limited ("MILD").
 
  In December, 1994 the Company acquired Shoreline Mutual Management (Bermuda)
Ltd., the manager of Shoreline Mutual (Bermuda) Ltd., a Bermuda mutual
insurance company which issues guarantees to the United States Coast Guard to
support Certificates of Financial Responsibility ("COFRs") for ships entering
Unites States waters. COFRs are required in connection with potential
incidents of oil pollution. The Company will earn risk management fees for
providing underwriting, accounting and administrative services to Shoreline
but does not participate in any of the associated underwriting risks.
 
 Program Design and Policy Issuance
 
  The Company acquired Professional Underwriters Corp. ("PUC") on January 1,
1996. PUC specializes in placing and managing Program Business which is a
growing segment of the Company's product line in which third parties other
than the insured, typically the broker and reinsurer, finance the insured risk
and participate in any underwriting profit or loss. PUC operates as an
underwriting manager and policy services provider for "Program Business", and
through its Prowriter division, manages "Alternative Market" insurance
programs.
 
  In January 1997, the Company acquired all of the assets and certain of the
liabilities of The McDonough Insurance Agency of Manasquan, New Jersey. The
acquired business, which will operate under the "Small Business Underwriters"
or "SBU" name, acts as an underwriting manager of workers' compensation
insurance programs for small commercial insured accounts produced by a large
number of independent agencies. The major states in which SBU has programs are
Massachusetts, New Jersey and Georgia. It has recently commenced programs for
insureds in New York, Pennsylvania, Delaware, Alabama and South Carolina.
SBU's revenues for the year ended December 31, 1996 were approximately $4
million.
 
FINANCIAL SERVICES
 
  In July 1996, the Company acquired The Hemisphere Group Limited
("Hemisphere"), a Bermuda financial services company. Hemisphere, which has
been in business since 1980, has three active subsidiary operations in Bermuda
providing company management, corporate secretarial, fund administration and
trust management services. It also has a wholly-owned Cayman Islands
subsidiary. With a total staff of 55 Hemisphere had approximately 85 mutual
fund clients as of December 31, 1996. In addition Hemisphere administers
investment holding companies, trading companies and trusts. Hemisphere has
formed a network of professional relationships in the major financial centers
of the world and these are the source for significant ongoing referrals of
business. The total net asset value of clients for which Hemisphere provides
administrative services is in excess of $2 billion.
 
  In January 1997, the Company incorporated MRM Life Ltd. in Bermuda to
provide life insurance and related products, including annuities and variable
annuities.
 
                                       6
<PAGE>
 
COMPETITION
 
  The Company's insurance services compete with self-insurance plans, captive
insurance companies managed by others and a variety of risk financing
insurance policies. The Company believes that the IPC Program is the largest
independent alternative market facility that is not affiliated with either a
major retail insurance broker or a major insurance company. However, the
Company faces significant competition in marketing the IPC Program from other
risk management programs offered by U.S. insurance companies, from captive
insurance companies for large insureds, and from rent-a-captives organized by
large insurance companies and brokers.
 
  The primary basis for competition among these alternative risk management
vehicles varies with the financial and insurance needs and resources of each
potential insurance buyer. The principal factors that are considered include
an analysis of the net present-value, after-tax cost of financing the buyer's
expected level of losses, the amount of premium and collateral required, the
attachment point of excess coverage provided in the event losses exceed
expected levels as well as cash flow and tax planning considerations and the
expected quality and consistency of the services to be provided. The Company
believes that for insureds with financial characteristics and loss experience
lending themselves to an IPC Program, the IPC Companies compete effectively
with other risk financing alternatives.
 
  In the present soft insurance market, characterized by excess capital and
competitive pricing, it is generally easier for the Company to structure
programs because of the availability and pricing of reinsurance, but more
difficult to attract potential participants and sell programs because of
competition. In a hard market, such as that experienced during 1985-1987, it
is more difficult to structure programs due to the high price and
unavailability of reinsurance, but the Company experiences less competition in
attracting clients and selling programs.
 
REGULATORY CONSIDERATIONS
 
  The Bermuda-based IPC Companies, Mutual Indemnity Ltd., Mutual Indemnity
(Bermuda) Ltd. and Mutual Indemnity (US) Ltd., are subject to regulation under
the Bermuda Companies Act 1981 and, as insurers, under the Bermuda Insurance
Act 1978 (as amended by the Insurance Amendment Act 1995) and the Regulations
promulgated thereunder and are required, amongst other things, to meet and
maintain certain standards of solvency, to file periodic reports in accordance
with Bermuda statutory accounting rules, to produce annual audited financial
statements and to maintain a minimum level of statutory capital and surplus.
In general, the regulation of insurers in Bermuda relies heavily upon the
auditors, directors and managers of the Bermuda insurer, each of which must
certify that the insurer meets the solvency and capital requirements of the
Bermuda Insurance Act 1978. Mutual Indemnity (Barbados) Ltd. and MILD are
subject to similar regulation in Barbados and Ireland, respectively.
 
  Legion and Legion Indemnity are subject to regulation and supervision by the
insurance regulatory authorities of the various states in which they conduct
business. Such regulation is intended primarily for the benefit of
policyholders. Legion is admitted in 49 states and the District of Columbia,
and is subject to regulation in each jurisdiction. Legion Indemnity is
admitted in Illinois, and is authorized in 34 states as a surplus lines
insurer. Legion Indemnity is regulated in Illinois, but is generally not
subject to regulation in those states where it acts as a surplus lines
insurer. State insurance departments have broad regulatory, supervisory and
administrative powers. These powers relate primarily to the standards of
solvency which must be met and maintained; the licensing of insurers and their
agents; the approval of rates and forms and policies used; the nature of, and
limitations on, insurers' investments; the form and content of periodic and
other reports required to be filed; and the establishment of reserves required
to be maintained for unearned premiums, losses and loss expenses or other
purposes.
 
  Legion and Legion Indemnity are also subject to state laws regulating
insurance holding companies. Under these laws, state insurance departments may
examine Legion at any time, require disclosure of material transactions by the
holding company and require prior approval of certain "extraordinary"
transactions, such as dividends from the insurance subsidiary to the holding
company, or purchases of certain amounts of the insurance
 
                                       7
<PAGE>
 
subsidiary's capital stock. These laws also generally require approval of
changes of control which are usually triggered by the direct or indirect
acquisition of 10% or more of the insurer.
 
  Most states require all admitted insurance companies to participate in their
respective guaranty funds, which cover certain claims against insolvent
insurers. Solvent insurers licensed in such states are required to cover the
losses paid on behalf of insolvent insurers by the guaranty funds and are
generally subject to annual assessments in that state by the guaranty fund to
cover such losses. Certain states also require licensed insurance companies to
participate in assigned risk plans which provide coverage for workers'
compensation, automobile insurance and other lines for insureds which, for
various reasons, cannot otherwise obtain insurance in the open market. This
participation may take the form of reinsuring a portion of a pool of such
policies, or the direct issuance of policies to insureds. Generally, Legion
participates as a pool reinsurer, or assigns to other companies the direct
policy issuance obligations. The calculation of an insurer's participation in
such plans is usually based on the amount of premium for that type of coverage
that was written by the insurer on a voluntary basis in a prior year. Assigned
risk pools tend to produce losses, which result in assessments to insurers
writing the same lines on a voluntary basis. Legion also pays a fee to
carriers assuming Legion's direct policy issuance obligations. For each
program Legion writes, Legion estimates the amount of assigned risk and
guaranty fund assessments that Legion will incur as a result of having written
that program. If that estimate proves to be inadequate, Legion is entitled
under its reinsurance agreements with the IPC Companies to recover from the
reinsurer the amount of such assessments in excess of the estimate. The IPC
Companies then are entitled under the terms of the shareholders agreement to
recover this excess from the client. However, the IPC Companies are generally
only able to collateralize this obligation up to the amount of the estimated
assessments.
 
  The National Association of Insurance Commissioners ("NAIC") has established
the Insurance Regulatory Information System ("IRIS") to assist state insurance
departments in their regulation and oversight of insurance companies domiciled
or operating in their respective states. IRIS established a set of twelve
financial ratios and specifies "unusual values" for each ratio. Companies
reporting four or more unusual values on the IRIS ratios may expect inquiries
from individual state insurance commissioners concerning specific aspects of
the insurer's financial position. As of December 31, 1996, Legion Insurance
Company's results were all usual values, Legion Indemnity had two unusual
values, change in writings and investment yield. The change in writings was
unusual because of the start up of the company and is likely to be unusual in
the next few years due to the company's anticipated growth. Investment yield
was low due to starting the company in the second quarter of 1996. This
calculation expects a full year of investment income.
 
  The NAIC has also adopted a Risk Based Capital for Insurers Model Act (the
"Risk Based Capital Model Act"). The Risk Based Capital Model Act sets forth a
risk based capital formula for property and casualty insurers. The formula
measures minimum capital and surplus needs based on the risk characteristics
of the company's products and investment portfolio. The formula is part of
each company's annual financial statement filings, and is to be used as a tool
to identify weakly capitalized companies. In those states having enacted the
Risk Based Capital Model Act, companies having capital and surplus greater
than the minimum required by the formula, but less than a specified multiple
of the minimum may be subject to additional regulatory scrutiny from
domiciliary state insurance departments. To date, the Risk Based Capital Model
Act has been enacted as to property/casualty insurers in two states. It has
not been enacted in Pennsylvania, Legion's domiciliary state, as of the date
of this report. At December 31, 1996 Legion's combined risk-based capital was
$142.3 million and the threshold requiring the least regulatory involvement
was $32.0 million. Therefore, Legion's capital exceeds all requirements of the
Risk Based Capital Model Act.
 
  In reaction to increasing rates for and decreasing availability of workers'
compensation insurance, many states have recently proposed or enacted reforms
designed to reduce the cost of workers' compensation insurance, principally
through a reduction in benefits or an increase in efficiencies in the system.
In California, a reform package was enacted in 1993 providing, in part, a
reduction of premium rates, an increase in the standard necessary to prove
"stress"-related work injuries, group-self insurance for employers and the
repeal of the minimum rate law effective January 1, 1995. In Florida, the
assigned risk plan was abolished, and replaced by a joint underwriting
authority. Other states have enacted or are considering similar reforms.
Workers' compensation reform, to the extent it reduces premiums and introduces
relative stability in the traditional
 
                                       8
<PAGE>
 
workers' compensation market, may reduce the appeal of alternative market
products such as those offered by the Company. This is apparent in California
where workers' compensation rates have declined by more than 50% since mid-
1993 while benefit levels actually increased. This will inevitably lead to
significant losses for those traditional carriers who are writing this
business. A number of these carriers have recently filed for significant rate
increases. However, because of open rating in California, actual rates charged
by carriers may vary significantly from filed base rates due to extensive use
of credits.
 
  Legion is permitted to pay dividends only from statutory earned surplus.
Subject to this limitation, the maximum amount of dividends that it is able to
pay in any twelve-month period will be the greater of statutory net income in
the preceding year or 10% of statutory surplus. Based on 1996 results, the
maximum dividend Legion will be permitted to pay in 1997 is $21.2 million.
 
LOSSES AND LOSS RESERVES
 
  The Company establishes reserves for losses and loss adjustment expenses
related to claims which have been reported on the basis of the evaluations of
independent claims adjusters under the supervision of Legion's claims staff.
In addition, reserves are established for losses which have occurred but have
not yet been reported and for adverse development of reserves on reported
losses by the Company on a quarterly basis. The estimate of claims arising for
accidents which have not yet been reported is based upon the Company's and the
insurance industry's experience together with statistical information with
respect to the probable number and nature of such claims.
 
  Gross loss reserves of $131.4 million and $83.9 million at December 31, 1996
and 1995 have been discounted by $19.8 million and $22.1 million,
respectively, assuming interest rates of 6% for medical malpractice reserves
and 4% for excess workers' compensation reserves based on the recommended rate
under Pennsylvania law. These reserves are also discounted in the Company's
regulatory filings. In 1993 the Company adopted SFAS 113 and reclassified
substantially of all of its net retained medical malpractice reserves as
claims deposit liabilities. On a net basis, therefore, the only discounted
reserves are those relating to the Company's share of the excess reinsurance
coverage provided in connection with each Legion program. After reinsurance,
the net effect of this discounting was to increase net income after tax for
1996 and 1995 by $.2 million and $.3 million, respectively. This discounting
reduced net loss reserves on the Consolidated Balance Sheets by $3.5 million
and $3.3 million at December 31, 1996 and 1995, respectively
 
  Subsequent to 1989, loss development has been generally favorable. The
deficiencies in earlier years primarily relate to the loss development on the
Company's share of the aggregate excess coverage provided in connection with
each Legion program. Estimation of reserves for losses and loss adjustment
expenses on such aggregate excess coverage is more difficult than on primary
insurance coverage because coverage does not attach until the underlying
aggregate retention is exhausted. Commencing in 1990, the Company (a) reduced
its net retention on this coverage; (b) generally increased its minimum
attachment points; and (c) increased pricing so as to reduce the underwriting
loss on this business in the future.
 
                                       9
<PAGE>
 
  The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss adjustment expenses:
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                  ----------------------------
                                                    1996      1995      1994
                                                  --------  --------  --------
                                                        (IN THOUSANDS)
<S>                                               <C>       <C>       <C>
Gross reserves for losses and loss adjustment
 expenses, beginning of year....................  $314,927  $241,427  $204,510
Recoverable from reinsurers.....................   256,678   178,002   148,637
                                                  --------  --------  --------
Net reserves for losses and loss adjustment
 expenses,
 beginning of year..............................    58,249    63,425    55,873
Other reserves(1)...............................      (246)     (244)     (356)
                                                  --------  --------  --------
                                                    58,003    63,181    55,517
Provision for losses and loss adjustment
 expenses for claims occurring in:
  Current year..................................    35,456    26,569    38,862
  Prior years...................................    (3,021)   (2,264)     (386)
                                                  --------  --------  --------
Total losses and loss adjustment expenses
 incurred.......................................    32,435    24,305    38,476
                                                  --------  --------  --------
Payments for losses and loss adjustment expenses
 for claims occurring in:
  Current year..................................   (11,072)   (9,763)  (12,903)
  Prior years...................................   (10,955)  (19,720)  (17,909)
                                                  --------  --------  --------
Total payments..................................   (22,027)  (29,483)  (30,812)
                                                  --------  --------  --------
Net reserves for losses and loss adjustment
 expenses, end of year..........................    68,411    58,003    63,181
Other Reserves (1)..............................       246       246       244
                                                  --------  --------  --------
                                                    68,657    58,249    63,425
Recoverable from reinsurers.....................   350,318   256,678   178,002
                                                  --------  --------  --------
Gross reserves for losses and loss adjustment
 expenses, end of year..........................  $418,975  $314,927  $241,427
                                                  ========  ========  ========
</TABLE>
--------
(1) Other reserves represent two reinsurance contracts which are being run-off
    and which were written in subsidiaries other than Legion, plus reserves
    for other run-off business.
 
                                      10
<PAGE>
 
  The previous table presents a reconciliation of reserves in accordance with
generally accepted accounting principles ("GAAP"). The following table
reconciles the difference between the Legion portion of these reserves and
those contained in regulatory filings made by Legion in accordance with
statutory accounting practices ("SAP").
 
                    RECONCILIATION OF SAP AND GAAP RESERVES
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                   ----------------------------
                                                     1996      1995      1994
                                                   --------  --------  --------
                                                         (IN THOUSANDS)
<S>                                                <C>       <C>       <C>
Reserves for Legion losses and loss adjustment
 expenses, end of year SAP.......................  $105,657  $123,091  $131,682
Gross-up for ceded reinsurance reserves..........   349,218   255,579   176,902
Provision for reinsurance uncollectible on a GAAP
 basis reported as a provision for unauthorized
 reinsurance on a SAP basis......................       924     1,500     1,500
Reclassification of loss reserves to Claims
 deposit liabilities.............................   (34,456)  (61,631)  (64,930)
Elimination of statutory increase in assigned
 risk reserves...................................   (15,000)  (15,000)  (15,000)
Reserves for audit premium estimates not included
 on SAP basis....................................     1,198     1,178     2,139
                                                   --------  --------  --------
Reserves for Legion losses and loss adjustment
 expenses, end of year GAAP......................   407,541   304,717   232,293
Other non-US Reserves............................    10,088     8,864     7,790
                                                   --------  --------  --------
Liabilities for unpaid losses and loss adjustment
 expenses........................................   417,629   313,581   240,083
Reserves on run-off business.....................     1,346     1,346     1,344
                                                   --------  --------  --------
Total Reserves for Losses and Loss adjustment
 expenses, end of year GAAP......................  $418,975  $314,927  $241,427
                                                   ========  ========  ========
</TABLE>
 
  The following table presents the development of the Company's ongoing net
reserves for 1988 through 1996. The top line of the table shows the estimated
reserve for unpaid losses and loss adjustment expenses recorded at the balance
sheet date for each of the indicated years. This amount represents the
estimated amount of losses and loss adjustment expenses for claims that are
unpaid at the balance sheet date, including losses that have been incurred but
not yet reported to the Company. The table also shows the re-estimated amount
of the previously recorded reserve based on experience as of the end of each
succeeding year. The estimate changes as more information becomes known about
the frequency and severity of claims for individual years. The "Cumulative
redundancy (deficiency)" represents the aggregate change in the estimates over
all prior years. It should be noted that the following table presents a "run-
off" of balance sheet reserves, rather than accident or policy year loss
development. Therefore, each amount in the table includes the effects of
changes in reserves for all prior years.
 
                                      11
<PAGE>
 
                 ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
                        (NET OF REINSURANCE RECOVERABLE)
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31
                          --------------------------------------------------------------------------------------------
                           1988      1989      1990      1991      1992       1993       1994       1995       1996
                          -------  --------  --------  --------  ---------  ---------  ---------  ---------  ---------
                                                             (IN THOUSANDS)
<S>                       <C>      <C>       <C>       <C>       <C>        <C>        <C>        <C>        <C>
Gross reserve for losses
 and loss adjustment
 expenses (1)...........  $18,887  $ 42,577  $ 87,675  $141,843  $ 191,013  $ 204,510  $ 241,427  $ 314,927  $ 418,975
Reinsurance reserves....   (9,525)  (22,221)  (52,321)  (89,295)  (113,075)  (148,637)  (178,002)  (256,678)  (350,318)
                          -------  --------  --------  --------  ---------  ---------  ---------  ---------  ---------
Net reserve for losses
 and loss adjustment
 expenses...............    9,362    20,356    35,354    52,548     77,938     55,873     63,425     58,249     68,657
Other reserves (3)......   (3,199)   (1,778)     (595)     (702)      (769)      (356)      (244)      (246)      (246)
                          -------  --------  --------  --------  ---------  ---------  ---------  ---------  ---------
                            6,163    18,578    34,759    51,846     77,169     55,517     63,181     58,003     68,411
Reclassification of
 reserves to claims
 deposit liabilities
 (2)....................   (4,793)  (12,560)  (20,796)  (28,322)   (36,078)       --         --         --         --
                          -------  --------  --------  --------  ---------  ---------  ---------  ---------  ---------
Reserve for losses and
 loss adjustment
 expenses restated for
 the effects of SFAS
 113:                       1,370     6,018    13,963    23,524     41,091     55,517     63,181     56,003     68,411
Reserve re-estimated as
 of:
 One year later.........    6,741    20,220    35,453    53,193     40,443     55,131     60,917     54,982
 Two years later........    7,640    20,476    34,953    24,269     41,433     52,381     56,767
 Three years later......    8,213    20,434    13,131    23,298     39,351     47,657
 Four years later.......    7,737     6,328    12,132    22,010     36,330
 Five years later.......    2,042     6,397    12,268    20,390
 Six years later........    2,218     5,993    10,649
 Seven years later......    2,110     4,737
 Eight years later......    1,859
Cumulative Redundancy
 (Deficiency)...........     (489)    1,281     3,314     3,134      4,761      7,860      6,414      3,021
Percentage..............      -36%       21%       24%       13%        12%        14%        10%         5%
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES WITHOUT THE EFFECT OF DISCOUNTING:
Discounted reserve......  $ 6,163  $ 18,578  $ 34,759  $ 51,846  $  77,169  $  55,517  $  63,181  $  58,003  $  68,411
Total Discount..........    1,919     4,144     6,091     8,345     10,785      1,387      2,905      3,291      3,547
                          -------  --------  --------  --------  ---------  ---------  ---------  ---------  ---------
Ultimate Reserve
 Liability..............    8,082    22,722    40,850    60,191     87,954     56,904     66,086     61,294     71,958
Reclassification of
 reserves to claims
 deposit liabilities
 (2)....................   (6,712)  (16,704)  (26,889)  (36,667)   (46,863)       --         --         --         --
                          -------  --------  --------  --------  ---------  ---------  ---------  ---------  ---------
Ultimate reserve
 liability restated for
 the effects of SFAS
 113....................    1,370     6,018    13,961    23,524     41,091     56,904     66,086     61,294     71,958
Reserve re-estimated as
 of:
 One year later.........    8,364    23,493    41,084    60,820     40,443     56,272     63,480     57,866
 Two years later........    8,827    23,760    39,668    24,269     41,433     53,410     59,186
 Three years later......    9,494    23,025    13,131    23,298     39,351     48,499
 Four years later.......    8,743     6,328    12,132    22,010     36,330
 Five years later.......    2,042     6,397    12,268    20,390
 Six years later........    2,218     5,993    10,649
 Seven years later......    2,110     4,737
 Eight years later......    1,859
Cumulative Redundancy
 (Deficiency) without
 discount effect........     (489)    1,281     3,312     3,134      4,761      8,405      6,900      3,428
Percentage..............      -36%       21%       24%       13%        12%        15%        10%         6%
Cumulative Amount of
 Reserve Paid Through:
 One year later.........  $   432  $  1,768  $  4,705  $  9,647  $  15,972  $  17,909  $  19,720    $10,955
 Two years later........      807     2,590     4,986    13,158     21,121     25,306     21,054
 Three years later......    1,115     3,541     6,077    15,104     24,991     27,134
 Four years later.......    1,452     3,857     6,859    16,897     25,510
 Five years later.......    1,637     4,093     7,533    17,311
 Six years later........    1,723     4,322     7,381
 Seven years later......    1,899     3,842
 Eight years later......    1,713
</TABLE>
--------
(1) Medical malpractice reserves have been discounted at 8% in 1988, 8.25% in
    1989 and 1990, and 6% in 1991, 1992, 1993, 1994, 1995 and 1996.
(2) The re-classification of reserves to claims deposit liabilities is a result
    of the adoption of SFAS 113.
(3) Other reserves represent two reinsurance contracts which are being run-off
    and which were written in subsidiaries other than Legion, plus reserves for
    other run-off business.
 
                                       12
<PAGE>
 
INVESTMENTS AND INVESTMENT RESULTS
 
  The amount and type of investments that may be made by certain of the
Company's insurance subsidiaries are regulated by the jurisdictions in which
the subsidiaries conduct business. Investment policies and investment
decisions are approved by the Investment Committee of the Board of Directors
of the Company. The fixed maturity investment portfolio consists of United
States Treasury Securities and obligations of U.S. Government agencies and
authorities, municipal securities and fixed maturity corporate securities. The
mix of the Company's portfolio between tax- exempt and taxable securities is
dependent in part on effective after-tax yield considerations. The following
table sets forth certain information concerning the Company's investment
portfolio:
 
<TABLE>
<CAPTION>
                                               AS OF DECEMBER 31, 1996
                                      -----------------------------------------
                                                ESTIMATED
                                      AMORTIZED  MARKET   UNREALIZED UNREALIZED
                                        COST      VALUE      GAIN       LOSS
                                      --------- --------- ---------- ----------
                                                   (IN THOUSANDS)
<S>                                   <C>       <C>       <C>        <C>
Bonds:
  United States Treasury Securities
   and obligations of U.S. Government
   Corporations and Agencies......... $163,068  $162,874    $  966     $1,160
  Debt securities issued by States
   and political subdivisions........  121,859   121,758     1,848      1,949
  Corporate bonds....................  106,161   106,608       746        299
  Debt securities issued by Foreign
   Governments.......................    2,983     2,982       --           1
                                      --------  --------    ------     ------
Total bonds..........................  394,071   394,222     3,560      3,409
Redeemable Preferred Stock...........    5,800     5,969       213         44
Cash and cash equivalents............   52,243    52,243       --         --
                                      --------  --------    ------     ------
Total marketable investments......... $452,114  $452,434    $3,773     $3,453
                                      ========  ========    ======     ======
</TABLE>
 
  It is the general practice of the Company to purchase investment grade
fixed-maturity securities. As of December 31, 1996, the Company did not own
any "high-yield" or "non-investment grade" bonds, or own any non-performing
debt securities. The securities in the Company's portfolio are, however,
subject to economic conditions and normal market risks and uncertainties.
 
  The following table sets forth certain information regarding the investment
ratings of the Company's investment portfolio at December 31, 1996:
 
<TABLE>
<CAPTION>
   RATINGS(1)                                               COST      PERCENTAGE
   ----------                                          -------------- ----------
                                                       (IN THOUSANDS)
   <S>                                                 <C>            <C>
   AAA................................................    $329,798       82.48%
   AA.................................................      28,345        7.09%
   A..................................................      29,064        7.27%
   BBB................................................      12,568        3.14%
   BB.................................................         --           --%
   B..................................................          96        0.02%
                                                          --------      ------
     Total............................................    $399,871      100.00%
                                                          ========      ======
</TABLE>
--------
(1) Ratings as assigned by Standard & Poor's Corporation.
 
                                      13
<PAGE>
 
  The following table sets forth certain information regarding the maturity of
the Company's investment portfolio at December 31, 1996:
 
<TABLE>
<CAPTION>
   MATURITY                                                 COST      PERCENTAGE
   --------                                            -------------- ----------
                                                       (IN THOUSANDS)
   <S>                                                 <C>            <C>
   One year or less...................................    $  6,973        1.74%
   After one year through five years..................     132,845       33.22%
   After five years through ten years.................     100,893       25.23%
   After ten years....................................     159,160       39.81%
                                                          --------      ------
     Total............................................    $399,871      100.00%
                                                          ========      ======
</TABLE>
 
ITEM 2. PROPERTIES
 
  The Company and its subsidiaries operate out of leased premises the most
significant of which are in Philadelphia and Bermuda.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is a party to various lawsuits generally arising in the normal
course of its business. The Company does not believe that the eventual outcome
of any such suits will have a material effect on the Company's financial
condition.
 
  The United States Internal Revenue Service (the "IRS") has commenced an
examination of the Company's calculation of "Related Party Insurance Income"
("RPII") for 1993 and 1994. The Company calculates RPII on behalf of certain
of its clients participating in its Insurance Profit Center Program in order
to provide those clients with information used in preparing their United
States income tax returns. The Company believes that its calculation of RPII
was materially correct in both years. In addition, any adjustment made by the
IRS would affect the Company's clients and not the Company directly.
 
  The Company believes, however, that as a part of this examination the IRS
may question whether certain clients of the Insurance Profit Center Program
properly deducted all or a portion of the premium paid in connection with
their program. In general, the IRS has challenged the deductibility of
premiums paid to captive insurance companies in a series of rulings and cases
since 1977. It is not presently possible to determine whether the IRS will
challenge any deductions taken by the Company's clients or the outcome of any
such challenge. The Company believes that the particular fact situations of
each of its Insurance Profit Center clients are sufficiently diverse such that
no general determination can be made with respect to the appropriate tax
treatment of the premium paid by participants in the Company's programs.
 
ITEM 4. SUBMISSION OF MATTERS TO SECURITY HOLDERS
 
  Not applicable.
 
                                      14
<PAGE>
 
                              EXECUTIVE OFFICERS
 
<TABLE>
<CAPTION>
                                   OFFICER         PRINCIPAL OCCUPATION
 NAME                          AGE  SINCE          & BUSINESS EXPERIENCE
 ----                          --- -------         ---------------------
 <C>                           <C> <C>     <S>
 Robert A. Mulderig..........   44  1982   Chief Executive Officer of the Com-
                                           pany since 1982; Chairman of Legion
                                           Insurance Co., ("Legion"); Director
                                           of Professional Risk Management
                                           Services, Inc., The GaltneyGroup,
                                           Inc., Everest Re (Holdings) Ltd and
                                           The Bank of N.T. Butterfield & Sons
                                           Ltd. Also serves as a director or
                                           officer of a number of unaffiliated
                                           captive insurance companies to which
                                           the Company provides management
                                           services.
 John Kessock, Jr............   48  1979   President of the Company, Mutual
                                           Group Ltd. and Legion; primarily
                                           responsible for marketing the
                                           Company's programs since 1979;
                                           Chairman of CRS and the IPC
                                           Companies.
 Richard G. Turner...........   46  1984   Executive Vice President of the Com-
                                           pany; President of CRS since 1984;
                                           Vice President of Marketpac Interna-
                                           tional, a subsidiary of American In-
                                           ternational Group from 1979 to 1984.
 Glenn R. Partridge..........   43  1983   Executive Vice President of the Com-
                                           pany; Senior Vice President of Le-
                                           gion Insurance Co.; primarily re-
                                           sponsible for Legion's underwriting
                                           function since 1987; Vice President
                                           of CRS from 1983 to 1987.
 James C. Kelly..............   42  1985   Senior Vice President and Chief Fi-
                                           nancial Officer of the Company; Vice
                                           President and Chief Financial Offi-
                                           cer since March 1991; Vice President
                                           & Controller since 1985.
 Paul D. Watson..............   38  1986   Senior Vice President of the Compa-
                                           ny; Vice President of the Company
                                           since March 1991; President of the
                                           IPC Companies since July 1992; held
                                           various management and accounting
                                           positions since joining the Company
                                           in 1986.
 Richard E. O'Brien..........   39  1995   Vice President, Secretary and Gen-
                                           eral Counsel since March 1995. Prior
                                           thereto partner in the law firm of
                                           Dunnington, Bartholow & Miller, New
                                           York.
</TABLE>
 
  All Executive Officers are appointed by the Company's Board of Directors and
serve until the next annual general meeting of the shareholders or until their
successors are appointed
 
                                      15
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR COMMON SHARES
 
  The Company's Common Shares have been listed on the New York Stock Exchange
under the symbol MM since June 25, 1991. The Common Shares were listed in
connection with the Company's initial public offering completed in July 1991.
There were 419 holders of record of the Company's Common Shares as of February
28, 1997.
 
  The following table sets forth the high and low closing sale prices for the
Shares during 1995 and 1996 for the calendar quarters indicated as reported by
the New York Stock Exchange Composite Tape.
 
<TABLE>
<CAPTION>
                                                                 HIGH     LOW
                                                               -------- --------
<S>                                                            <C>      <C>
Year Ended December 31, 1995
  First Quarter............................................... 21 3/4   18 15/16
  Second Quarter.............................................. 26 29/32 21 3/16
  Third Quarter............................................... 30 3/16  24 21/32
  Fourth Quarter.............................................. 34 5/16  27 21/32
Year Ended December 31, 1996
  First Quarter............................................... 34 11/16 30 15/16
  Second Quarter.............................................. 34 1/2   28 13/32
  Third Quarter............................................... 31 5/8   27 1/4
  Fourth Quarter.............................................. 37       28 1/2
Year Ended December 31, 1997
  First Quarter (through March 14)............................ 39 3/8   35
</TABLE>
 
  The last reported sale price of the Common Shares on the New York Stock
Exchange Composite Tape on March 14, 1997 was $39.
 
  During 1996 and 1995 the Company paid dividends of $.32 and $.26 per Common
Share respectively. Dividends are paid quarterly.
 
  The Company's ability to pay dividends is restricted due to certain
insurance regulations. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and Note 11 to Consolidated Financial
Statements.
 
                                      16
<PAGE>
 
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                          -----------------------------------------------------
                             1996        1995        1994       1993     1992
                          ----------  ----------  ----------  -------- --------
                               (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                       <C>         <C>         <C>         <C>      <C>
INCOME STATEMENT DATA:
Revenues................  $  157,702  $  127,493  $  133,010  $109,495 $ 94,148
                          ----------  ----------  ----------  -------- --------
Income from continuing
 operations before
 income taxes...........      45,596      39,692      33,376    28,101   22,426
                          ----------  ----------  ----------  -------- --------
Income from continuing
 operations.............      37,454      30,830      25,361    21,710   16,163
                          ----------  ----------  ----------  -------- --------
Net income..............      37,198      30,354      25,102    21,598   16,156
                          ----------  ----------  ----------  -------- --------
Net income available to
 common shareholders....      37,032      30,164      24,973    21,493   16,034
                          ----------  ----------  ----------  -------- --------
Fully diluted earnings
 per share: (1)
Operating income (2)....        1.97        1.66        1.42      1.18      .90
Realized capital
 (losses) gains (3).....        (.06)       (.03)       (.03)      .01      .01
Cumulative effect of
 change in accounting
 principle..............         --          --          --        --      (.01)
                          ----------  ----------  ----------  -------- --------
Net income available to
 common shareholders....        1.91        1.63        1.39      1.19      .90
                          ----------  ----------  ----------  -------- --------
Dividends per Common
 Share..................         .32         .26         .22       .16      .12
                          ----------  ----------  ----------  -------- --------
Fully diluted weighted
 average number of
 common shares
 outstanding (1)........      22,639      19,155      18,022    18,028   17,767
<CAPTION>
                                          AS AT DECEMBER 31,
                          -----------------------------------------------------
                             1996        1995        1994       1993     1992
                          ----------  ----------  ----------  -------- --------
                                            (IN THOUSANDS)
<S>                       <C>         <C>         <C>         <C>      <C>
BALANCE SHEET DATA:
Total assets............  $1,638,671  $1,379,608  $1,022,537  $861,946 $692,151
                          ----------  ----------  ----------  -------- --------
Reserve for losses and
 loss expenses..........     418,975     314,927     241,427   204,510  191,013
                          ----------  ----------  ----------  -------- --------
Long-term debt (4)......     122,211     116,613       3,400     6,486    8,000
                          ----------  ----------  ----------  -------- --------
Redeemable preferred and
 common shares..........       4,462       4,026       3,564     3,455    3,337
                          ----------  ----------  ----------  -------- --------
Shareholders' equity....     207,991     165,503     124,993   115,068   99,135
                          ----------  ----------  ----------  -------- --------
</TABLE>
--------
(1) See Note 2K of Notes to Consolidated Financial Statements for an
    explanation of the method used to determine the number of shares used to
    compute per share amounts.
(2) Operating income--under generally accepted accounting principles ("GAAP")
    Operating income, which excludes realized capital (losses) gains--net of
    tax, is not separately presented. It is presented here as supplemental
    information. This should not be considered a better measure than net
    income calculated in accordance with GAAP.
(3) Net of tax.
(4) See Note 6 of Notes to Consolidated Financial Statements.
 
                                      17
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
 FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
 
  Revenues for the year ended December 31, 1996 amounted to $157.7 million, a
24% increase from the 1995 amount of $127.5 million which in turn was a 4%
decrease from $133.0 million in 1994. Revenue is not considered to be a good
measure of the Company's performance since it includes Premiums earned which
historically have been closely matched by Total insurance costs and should not
have a material impact on Net income. Excluding Premiums earned, revenues
increased in 1996 by 28% over 1995 which in turn was a 22% increase over 1994.
Set forth in Table I is an analysis of the components of the Company's
revenues for each of the last three years.
 
  Table I--Revenues
 
<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                    -------------------------------------------
                                        1996           1995           1994
                                    -------------  -------------  -------------
                                                (IN THOUSANDS)
<S>                                 <C>       <C>  <C>       <C>  <C>       <C>
Fee income......................... $ 80,691   51% $ 64,107   50% $ 54,153   41%
Premiums earned....................   56,413   36    48,207   38    68,202   51
Net investment income..............   22,461   14    16,182   13    11,442    9
Realized capital losses............   (1,983)  (1)   (1,102)  (1)     (872)  (1)
Other income.......................      120  --         99  --         85  --
                                    --------  ---  --------  ---  --------  ---
  Total............................ $157,702  100% $127,493  100% $133,010  100%
                                    ========  ===  ========  ===  ========  ===
 
  The components of Fee income by company are illustrated in Table II.
 
  Table II--Risk Management Fees
 
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                    -------------------------------------------
                                        1996           1995           1994
                                    -------------  -------------  -------------
                                                (IN THOUSANDS)
<S>                                 <C>       <C>  <C>       <C>  <C>       <C>
Legion policy-issuing fees......... $ 30,591   38% $ 27,574   43% $ 24,982   46%
IPC program fees...................   16,581   20    14,469   22    12,133   22
CRS fees...........................   10,574   13     8,957   14     8,453   16
Underwriting management fees.......    5,674    7       --   --        --   --
Captive management fees............    4,604    6     3,677    6     2,050    4
Financial services fees............    6,060    8     4,330    7     3,674    7
Other fees.........................    6,607    8     5,100    8     2,861    5
                                    --------  ---  --------  ---  --------  ---
  Total............................ $ 80,691  100% $ 64,107  100% $ 54,153  100%
                                    ========  ===  ========  ===  ========  ===
</TABLE>
 
  Fee income increased 26% to $80.7 million in 1996 and 18% in 1995 to $64.1
million from $54.2 million in 1994. The growth of Fee income has been
primarily due to the growth in the number of Legion Insurance Company and
Legion Indemnity Company (together "Legion" or the "Legion Companies")
accounts, which totaled 284 at the end of 1996 as compared to 235 in 1995 and
193 in 1994, since most Legion accounts also produce IPC Program fees,
Commonwealth Risk Services, Inc. ("CRS") fees and Specialty Brokerage fees.
The growth in the number of Legion accounts in each period resulted from the
addition of new clients and the retention of a relatively high percentage of
existing clients as detailed in Table III. There were 108 new Legion accounts
sold in 1996 compared to 80 new accounts sold in 1995 and 66 new accounts sold
in 1994. Legion's renewal rate amounted to 75% in 1996 as compared to 80% in
1995 and 84% in 1994. The decline in Legion's renewal rate was caused by the
increasing competition from traditional insurance companies in the workers'
compensation market.
 
                                      18
<PAGE>
 
  Table III--Legion Accounts
 
<TABLE>
<CAPTION>
                            NUMBER OF
                             ACCOUNTS                               NUMBER OF
                           AT BEGINNING ACCOUNTS PERCENT   NEW       ACCOUNTS
YEAR                         OF YEAR    RENEWED  RENEWED ACCOUNTS AT END OF YEAR
----                       ------------ -------- ------- -------- --------------
<S>                        <C>          <C>      <C>     <C>      <C>
1994......................     151        127       84%     66         193
1995......................     193        155       80%     80         235
1996......................     235        176       75%    108         284
</TABLE>
 
  Pre-tax Profit margins declined slightly each year from 45% in 1994 to 43%
in 1995 and to 40% in 1996. These decreases reflect the lower profit margin
nature of two companies acquired in 1996, Professional Underwriters Corp.
("PUC") and The Hemisphere Group Limited ("Hemisphere"), decreasing premium
rates, along with increases in Operating expenses. Excluding the results of
these two acquisitions the Profit margins were 46% in 1994, 45% in 1995 and
43% in 1996.
 
  The components of Fee income by business segment are illustrated in Table
IV.
 
  Table IV--Fee Income by Business Segment
 
                        FEE INCOME BY BUSINESS SEGMENT
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                          -------------------------------------
                                             1996         1995         1994
                                          -----------  -----------  -----------
                                                    (IN THOUSANDS)
<S>                                       <C>     <C>  <C>     <C>  <C>     <C>
Corporate risk management fees........... $49,451  61% $48,147  75% $45,077  83%
Program business fees....................  19,569  24    7,280  11    3,258   6
Specialty brokerage fees.................   5,612   7    4,350   7    2,144   4
Financial services fees..................   6,059   8    4,330   7    3,674   7
                                          ------- ---  ------- ---  ------- ---
  Total.................................. $80,691 100% $64,107 100% $54,153 100%
                                          ======= ===  ======= ===  ======= ===
</TABLE>
 
  Corporate Risk Management, the Company's original business segment, involves
providing services to businesses and associations seeking to insure a portion
of their risk in a loss sensitive Alternative Market structure. This business
segment, which accounted for 61% of total Fee income for 1996 compared to 75%
in 1995 and 83% in 1994, has been the most affected by the extremely soft
insurance market cycle for commercial risks. Corporate Risk Management fees
increased by 3% in 1996 to $49.5 million and 7% in 1995 to $48.1 million from
$45.1 million in 1994. Profit margins declined slightly to 43% in 1996
compared to 45% in 1995 and 47% in 1994 reflecting decreasing premium rates
and increases in related Operating expenses.
 
  Program Business, the fastest growing segment of the Company's business,
involves replacing traditional insurers as the conduit between producers of
specialty books of business and reinsurers wishing to write that business.
Program Business accounted for 24% of total Fee income for 1996 compared to
11% in 1995 and 6% in 1994. Program Business fees increased by 169% in 1996 to
$19.6 million and 123% in 1995 to $7.3 million from $3.3 million in 1994.
Program Business fee growth was assisted by the acquisition of PUC in 1996. If
PUC's results were included in 1995 and 1994 comparatives, Program Business
fee growth would have been 64% in 1996 and 54% in 1995. Profit margins
excluding the underwriting management business of PUC were 45% for 1996, 48%
for 1995 and 50% for 1994. Including PUC's underwriting management business
profit margins were 38% for 1996.
 
  Historically, workers' compensation has been the major line of business
written by the Company. Competition for workers' compensation business
increased in 1995 and 1996 as a result of generally improved reported workers'
compensation results and reform legislation. This was especially true in
California. Increased competition reduces the incentive for insureds to enter
"Alternative Market" programs such as those offered by the Company. Generally
in states other than California which have enacted significant workers'
compensation reform, the Company has been able to increase its business. In
1996 the Company added 8 new accounts in
 
                                      19
<PAGE>
 
California compared to 6 in 1995 and 5 in 1994. The California renewal rate
was 77% in 1996 compared to 74% in 1995 and 78% in 1994. There were 27
California accounts at the end of 1996 compared to 25 in 1995 and 26 in 1994.
The percentage of the Company's fee income generated from workers'
compensation accounts decreased from over 80% at December 31, 1994 to
approximately 71% at December 31, 1995 to 60% a year later as a result of the
Company writing accounts which comprise of other lines of coverage such as
multi peril and auto liability.
 
  The Company generally requires each client to indemnify them against an
underwriting loss and generally the client provides collateral for at least
the difference between the funds available in that client's Program and the
level of expected losses as actuarially determined by the Company, although in
certain circumstances the collateral level is below the level of expected
losses. The Company faces a credit exposure in the event that losses exceed
their expected level and the client is unable or unwilling to honor its
indemnity to the Company or fails to pay the premium due.
 
  The Company has established provisions for losses as a result of these
exposures for certain clients. These provisions, which totaled $4.5 million at
December 31, 1996, $4.0 million in 1995 and $3.8 million in 1994, reduced the
level of Fee income in each of these years by $.5 million, $.2 million and
$1.1 million respectively. The increase in the number of accounts, the
increase in the clients' aggregate retentions since 1991, in addition to
competitive factors which have limited the amount of collateral that clients
are willing to provide, have significantly increased the Company's exposure to
such losses.
 
  Premiums earned increased 17% to $56.4 million in 1996 from $48.2 million in
1995 which was in turn a 29% decrease from $68.2 million in 1994. The increase
in earned premiums in 1996 and decrease in 1995 is directly related to the
volume of large deductible policies issued by the Company. The use of large
deductible policies increased when they were introduced by the Company in
California for the first time during 1995 but their use decreased in 1996. In
connection with large deductible policies the Company writes substantially
less premium than on other policies. Increases or decreases in Premiums earned
have been offset by similar movements in Total insurance costs. Premiums
earned represent the net premiums retained by the Company on which it bears
underwriting risk. The Company believes that both the volatility of
underwriting profit or loss and the probability of experiencing a severe
underwriting loss are less than would ordinarily be expected for a traditional
property / casualty insurer, due to the nature of the business written by the
Company and the structure of its reinsurance. In the past, the level of
Premiums earned has been relatively closely matched by the level of Total
insurance costs , resulting in small amounts of underwriting loss as a
percentage of Premiums earned. The fact that Premiums earned are generally
matched by Total insurance costs means that even a significant fluctuation in
Premiums earned will have a relatively insignificant impact on the Company's
Net income.
 
  Included in Premiums earned are assigned risk premiums of $7.8 million in
1996 as compared to $11.9 million in 1995 and $15.2 million in 1994. The
underwriting losses associated with these assigned risk premiums, together
with other charges imposed by certain states on voluntary insurers such as
Legion to support involuntary market losses ("residual market loads"), are
passed on by Legion to client's accounts.
 
  The Company's principal exposure to underwriting loss exists in relation to
the premium associated with the Company's retention of a portion of the
specific and aggregate excess risk on each client's account. It is on this
retained excess risk that the Company may experience the most significant
volatility in underwriting results. The portion of the Company's Premiums
earned which relate to this risk was $3.3 million in 1996 as compared to $3.9
million in 1995 and $4.9 million in 1994, representing 6%, 8% and 7% of
Premiums earned in 1996, 1995 and 1994. The Company incurred an underwriting
loss of $.2 million in 1996, $1.0 million in 1995 and $.7 million in 1994 as a
result of the retained risk on its treaties and increases in acquisition
expenses. The Company takes 100% of the risk within the first $1.25 million
layer of the aggregate excess exposure on its main treaty up to a deductible
amount equal to 1.5% of the Company's gross premiums (as defined) and 10% of
the risk over a loss ratio of 120%, in the event that the loss ratio for the
first layer exceeds 120% the Company takes no share of the risk in the layer
$3.75 million excess of $1.25 million per account. The maximum retention for
specific excess losses is 10% of $.75 million excess of $.25 million per
occurrence. On other treaties the Company has decreased its exposure for
excess losses.
 
                                      20
<PAGE>
 
  The Company's Specialty Brokerage business segment provides access to
Alternative Risk Transfer insurers and reinsurers in Bermuda and Europe.
Specialty Brokerage accounted for 7% of total Fee income in both 1996 and 1995
and 4% in 1994. Specialty Brokerage fees grew by 29% in 1996 and 103% in 1995
to $5.6 million and $4.4 million from $2.1 million in 1994. Renewal rates
remained high in this segment at 86% for 1996, 87% for 1995 and 89% for 1994.
Profit margins decreased to 37% for 1996 from 40% in 1995 up from 28% in 1994.
The decrease in 1996 was primarily as a result of the Company's acquisition of
substantially all of the minority interest in one of these businesses. This
acquisition lowered the business's profit margin by replacing a charge for
minority interest which is not part of the profit margin calculation with a
bonus expense which is.
 
  Financial Services is the Company's newest business segment and will be
built on the acquisition of Hemisphere which took place during 1996.
Hemisphere provides administrative services to offshore mutual funds and other
companies. Financial Services fees accounted for 8% of total Fee income for
1996, and 7% for 1995 and 1994. Fees from Financial Services increased in 1996
by 40% to $6.1 million compared to 18% for 1995 to $4.3 million from $3.7
million in 1994 primarily as a result of an increase in the number of mutual
funds under management from 42 in 1994, to 60 in 1995 and 85 in 1996. Renewal
rates remained high in this business segment at 80% for 1996 compared to 98%
in 1995 and 90% in 1994. Profit margins improved somewhat in 1996 to 20% as
opposed to 14% in 1995 but down from 23% in 1994.
 
  Gross investment income increased by $7.2 million or 35.3% to $27.5 million
in 1996 and by $5.0 million or 32.8% to $20.3 million in 1995 from $15.3
million in 1994 as a result of increases in gross invested assets. Net
investment income after adjusting for investment income which is payable to
others increased by 38.8% to $22.5 million in 1996 from $16.2 million in 1995
which was a 41.4% increase from $11.4 million in 1994. Net invested assets
increased $42.2 million or 12.2% to $387.3 million in 1996 from $345.1 million
in 1995 which was a 64.9% increase from $209.7 million in 1994. The lower
increase in Net invested assets from 1995 to 1996 as compared to the increase
in investment income is due to the timing of the $112.0 million net proceeds
of the Zero Coupon Convertible Debenture offering which was completed in
October 1995. Investment income on these funds is included for the whole of
1996 and only two months of 1995. The yield on these assets decreased to 6.1%
from 6.3% in 1995 up from 6.1% in 1994. The Company's investment income is
produced through the investment of its capital funds, long term debt, other
funds held representing amounts due others and reserves held by the Company
for unearned premiums and unpaid losses. The Company carries $45.7 million at
December 31, 1996 and $71.8 million at December 31, 1995 on its Consolidated
Balance Sheets as Claims deposit liabilities. These liabilities relate to loss
obligations which, under SFAS 113, are not classified as insurance. Investment
income on these funds is credited directly to the claims deposit liability
account.
 
  Pre-tax realized capital losses of $2.0 million in 1996, $1.1 million in
1995 and $.9 million in 1994 consisted of losses and gains primarily realized
from the sale of investments as detailed in Note 5B(ii) to the Consolidated
Financial Statements. There were also gross unrealized gains of $3.8 million
and $6.8 million and gross unrealized losses of $3.5 million and $5.4 million
on investments held at December 31, 1996 and 1995 respectively, as a result of
changes in the market for fixed income securities.
 
  Total expenses increased 28% in 1996 to $112.1 million from $87.8 million in
1995 which was a 12% decrease from $99.6 million in 1994. The breakdown of
expenses for each of 1996, 1995 and 1994 is set forth in Table V.
 
                                      21
<PAGE>
 
  Table V--Expenses
 
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                         --------------------------------------
                                             1996         1995         1994
                                         ------------  -----------  -----------
                                                    (IN THOUSANDS)
<S>                                      <C>      <C>  <C>     <C>  <C>     <C>
Losses incurred......................... $ 32,435  29% $24,305  28% $38,476  39%
Acquisition costs.......................   24,185  22   24,935  28   30,446  30
                                         -------- ---  ------- ---  ------- ---
Total insurance costs...................   56,620  51   49,240  56   68,922  69
Operating expenses......................   48,663  43   36,481  42   30,011  30
Interest expense........................    6,215   6    1,852   2      507   1
Other expense...........................      608 --       228 --       195 --
                                         -------- ---  ------- ---  ------- ---
  Total................................. $112,106 100% $87,801 100% $99,635 100%
                                         ======== ===  ======= ===  ======= ===
</TABLE>
 
  The increase in Total insurance costs of 15% from 1995 to 1996 and the
decrease of 29% from 1994 to 1995 were the direct result of the 17% increase
and 29% decrease in Premiums earned during those periods. Losses incurred have
increased 33% in 1996 over 1995 and decreased 37% in 1995 over 1994 as a
direct result of the increased use of large deductible policies in 1995 and
the subsequent decreased use in 1996 as discussed in relation to Premiums
earned. The Company discounts its specific and aggregate workers' compensation
reserves using a 4% rate recommended under Pennsylvania law where Legion
Insurance is domiciled. The net effect of this discounting was to increase Net
income after tax for the years ended December 31, 1996, 1995 and 1994 by $.2
million, $.3 million and $1.4 million respectively. Discounting also reduced
net loss reserves by $3.5 million, $3.3 million and $2.9 million at December
31, 1996, 1995 and 1994. The 3% decrease in Acquisition costs from 1995 to
1996 and the 18% decrease from 1994 to 1995 compared to the change in Premiums
earned in the same periods is attributable to: (a) the fact that Acquisition
costs in both 1995 and 1996 include significant expenses associated with the
involuntary workers' compensation business the Company is required to assume.
Such expenses have no net financial impact on the Company as they are
recharged to clients. These expenses decreased in 1995 and 1996; and (b)
Acquisition costs on large deductible policies are higher in relation to the
associated premium than under a traditional guaranteed cost policy. The volume
of deductible programs written by the Company increased in 1995 but decreased
in 1996.
 
  Operating expenses increased 33% to $48.7 million in 1996 from $36.5 million
in 1995, which was a 22% increase over the 1994 level of $30.0 million. The
primary factors responsible for these increases in Operating expenses were:
(a) the increased cost of administering the Legion Companies as highly
regulated insurers, as the volume of policies issued increased; (b) increased
personnel costs in all areas, caused by an increase in the number of full time
employees from 261 in 1994 to 316 in 1995 and 433 in 1996, resulting from the
growth of the Company's businesses as well as the impact of the Company's
growth in revenues and profits on employee bonus plans; and (c) the
acquisitions of HJF International Ltd. in 1995 and PUC in 1996.
 
  The increase in interest expense was attributable to the Convertible
Debentures issued on October 30, 1995.
 
  The provision for Income taxes was $8.1 million in 1996, $8.9 million in
1995 and $8.0 million in 1994, representing effective tax rates of 17.9%,
22.3% and 24.0% respectively. The decrease to 17.9% in 1996 from 22.3% in 1995
was primarily due to increased earnings outside of the United States and the
tax benefit derived from the exercise of employee stock options. These factors
plus the Company's investment in tax-exempt municipal securities, offset by
state income taxes, are the major causes of the difference between the
expected federal income tax rate in the United States of 35% plus state income
taxes and the Company's effective rates in each year. The Legion Companies, as
insurance companies in the United States, are subject to income tax on an
accelerated basis and, as a result, a deferred tax benefit was carried on the
Consolidated Balance Sheets of $3.4 million in 1996, $6.2 million in 1995 and
$9.5 million in 1994.
 
  Fully diluted earnings per Common Share increased by 17% to $1.91 in 1996
from $1.63 in 1995 which was in turn a 17% increase from the 1994 amount of
$1.39.
 
                                      22
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
  At December 31, 1996 the market value of the Company's Total marketable
investments was $452.4 million, as compared to $431.6 million at December 31,
1995. In accordance with SFAS 115, Investments available for sale are reported
at fair market value with unrealized gains and losses included as a separate
component of Shareholders' equity. These Investments generally consist of
investment grade fixed-income securities which the Company believes are
readily marketable and could be liquidated to meet cash requirements, if
necessary. Cash flow from operations has historically provided the Company its
principal source of liquidity. The Company has continued to produce a positive
cash flow with $61.5 million of cash provided from operations during 1996, as
compared to $33.5 million in 1995 and $40.1 million in 1994. The increase in
operating cash flow in 1996 was due to the decreased use of large deductible
policies together with an increase in Program Business, reductions in the
amount of taxes paid and increases in funds withheld under certain reinsurance
agreements. This positive cash flow was offset by payments made in respect of
claims deposit liabilities of $26.1 million in 1996. The Company believes that
it will continue to maintain a positive cash flow from operations in the
foreseeable future and will be able to meet its liquidity requirements. Excess
cash flow from operations has principally been used in each year to increase
the Company's investment portfolio. In October 1995 the Company completed a
private placement of Zero Coupon Convertible Exchangeable Subordinated
Debentures due 2015 with a principal amount at maturity of $324.3 million. The
net proceeds from the offering were $112.0 million after expenses. The
Debentures carry a yield of 5.25% per annum and are convertible into 10.760
Common Shares of the Company per $1,000 principal amount at maturity or an
aggregate of 3,489,400 Common Shares.
 
  At the end of 1996 and 1995, 68% and 64% respectively, of the Company's
Total marketable investments were held by the Legion Companies. The Legion
Companies are restricted by regulation in the amount of dividends they can pay
without prior regulatory approval to $21.2 million in 1997 (based on 1996
results) and will continue to face these restrictions in the future. During
1996 Legion Insurance paid a dividend of $8 million. The Legion Companies are
required to maintain certain deposits with or supply letters of credit to
regulatory authorities which totaled $126.0 million at December 31, 1996
($43.8 million of deposits and $82.2 million of letters of credit) as compared
to $133.4 million at December 31, 1995 ($32.4 million of deposits and $101.0
million of letters of credit).
 
  A widely accepted factor used by regulators and rating agencies in
evaluating insurance companies is the ratio of net premiums written to
policyholders' surplus which is an indication of the degree to which an
insurer is leveraged. Because of the low level of net premiums written, the
Legion Companies have produced a relatively low ratio on this basis of
approximately 0.3:1 in 1996 and 0.5:1 in 1995 and should continue to produce
relatively low ratios in the future. The accepted industry standard for this
ratio is below 3:1. Due to the nature of Legion's operations, the Company
believes that a more appropriate indication of Legion's leverage is the ratio
of gross premium written to policyholders' surplus, which amounted to 2.4:1 in
1996 and 2.6:1 in 1995. The National Association of Insurance Commissioners
("NAIC") has established that an "unusual value" for this ratio would be 9:1
or higher. The Company has adopted a policy that this ratio should not exceed
4:1. Commencing in 1994 Legion's statutory surplus was affected by a Schedule
P reserve adjustment. This adjustment was a $10.1 million increase to
statutory surplus in 1996, a $.7 million increase in 1995 and a $10.8 million
reduction in 1994 as a result of applying the minimum reserving requirements
of Schedule P to the non-risk associated premium on large deductible programs.
As at December 31, 1996 there is no longer a surplus charge for the Schedule P
reserve adjustment due to the decreased use of large deductible programs and
increased Program Business which has higher premium and loss retentions and
corresponding higher loss ratios, as well as reinsurance that was put in place
in 1995 to minimize the effect of large deductible business on Schedule P
reserving requirements. The GAAP reserves of Legion were unaffected as GAAP
accounting rules do not apply such a minimum reserving requirement. The
Company, in consultation with its outside consulting actuaries, believes that
Legion's GAAP reserves are adequate and feel that Legion had approximately
$3.8 million and $12.9 million in statutory reserves beyond what is required
on an actuarial basis at December 31, 1996 and 1995 respectively. Management
believes that the statutory surplus of Legion of $150.9 million (1995--$106.5
million) is adequate in the light of their current business.
 
                                      23
<PAGE>
 
  The NAIC has adopted a risk-based capital ("RBC") formula to be applied to
all property/casualty insurance companies. The formula measures capital and
surplus needs based on an insurance company's products and investment
portfolio and is to be used as a tool to identify weakly capitalized
companies. An insurance company that does not meet the threshold RBC
measurement standards could be required to reduce the scope of its operations
and ultimately could become subject to statutory receivership proceedings. At
December 31, 1996 the Legion Companies met the RBC requirements with a
combined required risk-based capital of $32.0 million and an actual adjusted
capital of $142.3 million.
 
  Shareholders' equity increased 26% to $208.0 million at December 31, 1996
from $165.5 million at December 31, 1995. This increase was attributable
primarily to Net income in 1996, less dividends paid, plus the value of shares
issued on the exercise of employee stock options and corporate acquisitions,
less the movement in unrealized gains and losses on Investments. The
unrealized gain on Investments was $.1 million at December 31, 1996, net of
tax compared to $1.2 million a year earlier. This $1.1 million change was a
result of the changes in the market for fixed income securities. During 1996
the total number of Common Shares outstanding increased to 19,031,853 from the
1995 level of 18,273,722, as a result of the exercise of employee stock
options and the Common Shares issued in connection with corporate
acquisitions.
 
  Total assets increased to $1.6 billion at December 31, 1996, a 19% increase
from $1.4 billion at December 31, 1995. $576.7 million, or 35.2% of Total
assets, in 1996 and $525.2 million, or 38.1%, in 1995 related to Assets held
in separate accounts. As detailed in Note 2A to the Consolidated Financial
Statements, such assets are principally managed assets attributable to
participants in the Company's IPC Programs.
 
  The Company does not believe its operations have been materially affected by
inflation. The potential adverse impacts of inflation include: (a) a decline
in the market value of the Company's fixed maturity investment portfolio; (b)
an increase in the ultimate cost of settling claims which remain unresolved
for a significant period of time; and (c) an increase in the Company's
Operating expenses. However, the Company generally holds its fixed maturity
investments to maturity and currently believes that an acceptable amount is
included in the yield to compensate the Company for the risk of inflation. In
addition, any increase from inflation in the ultimate cost of settling unpaid
claims will be borne by the Company's clients and offset by investment income
earned for the benefit of the client during the period that the claim is
outstanding. Finally, the increase in Operating expenses resulting from
inflation should generally be matched by similar inflationary increases in the
client's premium and therefore the Company's fee income which includes a fee
based upon a percentage of the client's premium.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The Company's consolidated financial statements for the years ended December
31, 1996 and 1995 are filed herewith in response to Item 14.
 
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING DISCLOSURE
 
  None.
 
                                      24
<PAGE>
 
                                    PART III
 
ITEM 10. MANAGEMENT
 
  See Part I for information relating to Company's executive officers.
 
ITEM 11. EXECUTIVE COMPENSATION
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
ITEM 13. CERTAIN TRANSACTIONS
 
  Pursuant to General Instructions G(3) of Form 10-K, Items 10 to 13,
inclusive, have not been restated or answered since the Company intends to file
within 120 days after the close of its fiscal year with the Securities and
Exchange Commission a definitive proxy statement pursuant to Regulation 14A
under the Securities Exchange Act of 1934 and the information contained therein
is hereby incorporated by reference. The information included in such proxy
statement pursuant to the requirements of Sections 402(k) and (l) of Regulation
S-K is not incorporated by reference herein.
 
                                       25
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8K
 
  A. EXHIBITS
 
<TABLE>
<CAPTION>
   EXHIBIT NO.                            DESCRIPTION
   -----------                            -----------
   <C>         <S>
       3.1     Memorandum of Association(1)
       3.2     Bye-Laws of Registrant(4)
       3.3     Bye-Laws of IPC Mutual Holdings Ltd.(1)
       4.1     Form of Stock Certificate(1)
       4.2     Indenture dated as of October 30, 1995 relating to the Company's
               Zero Coupon Convertible Exchangeable Subordinated Debentures due
               2015. (5)
      10.1     Exchange Agreement between The Galtney Group Inc. and Mutual
               Group Ltd. with respect to shares of common stock of
               Professional Risk Management Services, Inc.(1)
      10.2     Share Purchase Agreements with Messrs. Partridge, Turner and
               Kelly(1)(3)
      10.3     Mutual Risk Management Ltd. 1988 Stock Option Plan(1)(3)
      10.4     Long Term Incentive Plan(2)(3)
      10.5     Form of Director's Stock Option Grant Agreement(2)(3)
      10.6     Form of Non-Qualified Stock Option Grant Agreement(2)(3)
      10.7     Form of Shareholders Agreement relating to the IPC Program(1)
      10.8     Agreement between Mutual Risk Management (Bermuda) Ltd. and
               Robert A. Mulderig relating to Hemisphere Trust Company Limited.
      10.9     Directors Deferred Cash Compensation Plan(3)(5)
      10.10    Directors Restricted Stock Plan(3)(5)
      11.1     Computation of Earnings Per Share
      21.1     List of subsidiaries
      23.1     Consent of Ernst & Young
      23.2     Consent and Reports of KPMG Peat Marwick
      27.1     Financial Data Schedule
</TABLE>
--------
(1) Incorporated by reference to Form S-1 Registration Statement (No. 33-
    40152) of Mutual Risk Management Ltd. declared effective June 25, 1991.
(2) Incorporated by reference to the 1991 Annual Report on Form 10-K of Mutual
    Risk Management Ltd.
(3) This exhibit is a management contract or compensatory plan or arrangement.
(4) Incorporated by reference to Form 10-Q of Mutual Risk Management Ltd. for
    the period ended June 30, 1996.
(5) Incorporated by reference to 1995 Annual Report on Form 10-K of Mutual
    Risk Management Ltd.
 
  B. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
 
<TABLE>
      <S>                                                                   <C>
      Consolidated Financial Statement..................................... F-1
      Notes to Consolidated Financial Statements........................... F-5
      Independent Auditors' Report......................................... F-22
      Schedule II--Condensed Financial Information of Registrant........... S-1
      Schedule VI Supplementary Insurance Information...................... S-4
</TABLE>
 
    All other schedules required by Article 7 of Regulation S-X are not
  required under the related instructions, are inapplicable or are included
  elsewhere in this filing, and therefore have been omitted.
 
  C. REPORTS ON FORM 8-K
 
    None
 
                                      26
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN HAMILTON,
BERMUDA, ON MARCH 19, 1997.
 
                                          MUTUAL RISK MANAGEMENT LTD.
 
                                                 /s/ Robert A. Mulderig
                                          By: _________________________________
                                                   Robert A. Mulderig
                                          Chairman and Chief Executive Officer
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
 
            SIGNATURE                         TITLE                   DATE
 
     /s/ Robert A. Mulderig        Chairman and Chief            March 19,
_________________________________   Executive Officer            1997
       ROBERT A. MULDERIG           (Principal Executive
                                    Officer)
 
      /s/ John Kessock, Jr.        President, Director and       March 19,
_________________________________   Authorized U.S.              1997
        JOHN KESSOCK, JR.           Representative
 
      /s/ Richard G. Turner        Executive Vice President      March 19,
_________________________________   and Director                 1997
        RICHARD G. TURNER
 
                                   Executive Vice President      March 19,
_________________________________   and Director                 1997
       GLENN R. PARTRIDGE
 
       /s/ James C. Kelly          Senior Vice President and     March 19,
_________________________________   Chief Financial Officer      1997
         JAMES C. KELLY             (Principal Financial and
                                    Accounting Officer)
 
       /s/ Roger E. Dailey         Director                      March 19,
_________________________________                                1997
         ROGER E. DAILEY
 
       /s/ David J. Doyle          Director                      March 19,
_________________________________                                1997
         DAVID J. DOYLE
 
       /s/ Arthur E. Engel         Director                      March 19,
_________________________________                                1997
         ARTHUR E. ENGEL
 
                                      27
<PAGE>
 
            SIGNATURE              TITLE                              DATE
 
     /s/ Allan W. Fulkerson        Director                      March 19,
_________________________________                                1997
       ALLAN W. FULKERSON
 
                                   Director                      March 19,
_________________________________                                1997
     WILLIAM F. GALTNEY, JR.
 
     /s/ Beverly H. Patrick        Director                      March 19,
_________________________________                                1997
       BEVERLY H. PATRICK
 
     /s/ Jerry S. Rosenbloom       Director                      March 19,
_________________________________                                1997
       JERRY S. ROSENBLOOM
 
      /s/ Joseph D. Sargent        Director                      March 19,
_________________________________                                1997
        JOSEPH D. SARGENT
 
                                       28
<PAGE>
 
                  MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31,   DECEMBER 31,
                                                          1996           1995
                                                     -------------- --------------
<S>                                                  <C>            <C>
ASSETS
Cash and cash equivalents..........................  $   52,242,353 $   79,669,981
Investments:
  Held in available for sale account at fair value
   (Amortized cost $399,871,107; 1995--
   $350,540,285)...................................     400,191,211    351,917,852
                                                     -------------- --------------
    Total marketable investments...................     452,433,564    431,587,833
Investments in affiliates..........................         535,504        202,457
Other investments..................................       2,432,325      2,282,833
Investment income due and accrued..................       4,976,145      4,487,430
Accounts receivable................................     123,956,477     82,394,552
Reinsurance receivables............................     350,317,706    256,678,476
Deferred expenses..................................      20,612,715     19,118,668
Prepaid reinsurance premiums.......................      73,587,920     39,221,053
Fixed assets.......................................       9,382,000      5,480,686
Deferred tax benefit...............................       3,361,571      6,182,842
Goodwill...........................................      14,956,786      4,874,634
Other assets.......................................       5,406,177      1,920,030
Assets held in separate accounts...................     576,711,687    525,176,516
                                                     -------------- --------------
    Total Assets...................................  $1,638,670,577 $1,379,608,010
                                                     ============== ==============
LIABILITIES, REDEEMABLE PREFERRED & COMMON SHARES &
 SHAREHOLDERS' EQUITY
LIABILITIES
Reserve for losses and loss expenses...............  $  418,975,493 $  314,927,486
Reserve for unearned premiums......................      93,741,088     59,775,181
Claims deposit liabilities.........................      45,688,793     71,788,775
Accounts payable...................................     133,265,076     93,259,762
Accrued expenses...................................       5,708,286      4,870,979
Taxes payable......................................       9,261,685      4,811,592
Loans payable......................................               0        574,022
Prepaid fees.......................................      13,231,468     13,125,653
Debentures.........................................     122,210,991    116,038,987
Other liabilities..................................       7,422,743      5,729,685
Liabilities related to separate accounts...........     576,711,687    525,176,516
                                                     -------------- --------------
    Total Liabilities..............................   1,426,217,310  1,210,078,638
                                                     -------------- --------------
REDEEMABLE PREFERRED & COMMON SHARES
  Preferred Shares--Series B non-voting
   Redeemable--authorized and issued 2,951,835 (par
   value and redemption value $1.00)...............       2,951,835      2,951,835
  Common Shares subject to redemption--468,584
   Common Shares (par value $0.01, redemption value
   $3.50 less subscription loans receivable--
   $767,522, plus interest received)..................    1,510,544      1,074,389
                                                     -------------- --------------
    Total Redeemable Preferred & Common Shares.....       4,462,379      4,026,224
                                                     -------------- --------------
SHAREHOLDERS' EQUITY
  Common Shares--Authorized 60,000,000 (par value
   $0.01) Issued 18,563,269 (1995--17,805,138).....         185,633        178,051
  Additional paid-in capital.......................      79,997,919     65,396,652
  Unrealized gain on investments--net of tax.......          47,682      1,154,823
  Retained earnings................................     127,759,654     98,773,622
                                                     -------------- --------------
    Total Shareholders' Equity.....................     207,990,888    165,503,148
                                                     -------------- --------------
    Total Liabilities, Redeemable Preferred &
     Common Shares & Shareholders' Equity..........  $1,638,670,577 $1,379,608,010
                                                     ============== ==============
</TABLE>
 
          See Accompanying Notes to Consolidated Financial Statements
 
                                      F-1
<PAGE>
 
                  MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
                       CONSOLIDATED STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,
                                      ----------------------------------------
                                          1996          1995          1994
                                      ------------  ------------  ------------
<S>                                   <C>           <C>           <C>
REVENUES
  Fee income......................... $ 80,691,479  $ 64,107,228  $ 54,153,558
  Premiums earned....................   56,412,821    48,206,859    68,202,079
  Net investment income..............   22,460,893    16,181,729    11,442,278
  Realized capital losses............   (1,982,822)   (1,102,402)     (872,387)
  Other income.......................      119,248        99,050        84,870
                                      ------------  ------------  ------------
    Total Revenues...................  157,701,619   127,492,464   133,010,398
                                      ------------  ------------  ------------
EXPENSES
  Losses and loss expenses incurred..   32,435,131    24,304,840    38,476,386
  Acquisition costs..................   24,184,595    24,934,391    30,446,213
  Operating expenses.................   48,662,696    36,481,307    30,010,861
  Interest expense...................    6,215,647     1,851,974       506,826
  Other expenses.....................      608,001       228,328       194,422
                                      ------------  ------------  ------------
    Total Expenses...................  112,106,070    87,800,840    99,634,708
                                      ------------  ------------  ------------
INCOME FROM CONTINUING OPERATIONS
 BEFORE INCOME TAXES.................   45,595,549    39,691,624    33,375,690
  Income taxes.......................    8,141,438     8,861,565     8,014,303
                                      ------------  ------------  ------------
INCOME FROM CONTINUING OPERATIONS....   37,454,111    30,830,059    25,361,387
  Minority interest..................     (255,974)     (475,688)     (259,287)
                                      ------------  ------------  ------------
NET INCOME...........................   37,198,137    30,354,371    25,102,100
  Preferred share dividends..........      166,041       190,024       129,143
                                      ------------  ------------  ------------
NET INCOME AVAILABLE TO COMMON
 SHAREHOLDERS........................ $ 37,032,096  $ 30,164,347  $ 24,972,957
                                      ============  ============  ============
EARNINGS PER COMMON SHARE (1)
  Primary EPS........................ $       1.93  $       1.62  $       1.39
  Fully Diluted EPS.................. $       1.91  $       1.63  $       1.39
  Dividends per Common Share......... $       0.32  $       0.26  $       0.22
  Weighted average number of Common
   Shares outstanding................   19,149,633    18,573,558    18,022,300
                                      ============  ============  ============
</TABLE>
--------
(1) Prior periods per share calculations have been restated to reflect the
    four-for-three stock split to holders of record at May 31, 1996.
 
          See Accompanying Notes to Consolidated Financial Statements
 
 
                                      F-2
<PAGE>
 
                  MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                                                SERIES B
                                                                               PREFERRED      COMMON
                                                     CHANGE IN                   SHARE        SHARE
                            OPENING       SHARES     UNREALIZED       NET      DIVIDENDS    DIVIDENDS      CLOSING
                            BALANCE       ISSUED    GAIN (LOSS)     INCOME    DECLARED (1) DECLARED (2)    BALANCE
                          ------------  ----------- ------------  ----------- ------------ ------------  ------------
<S>                       <C>           <C>         <C>           <C>         <C>          <C>           <C>
YEAR ENDED DECEMBER 31, 1996
Common Shares...........  $    178,051  $     7,582 $        --   $       --   $      --   $        --   $    185,633
Additional paid-in
 capital................    65,396,652   14,601,267          --           --          --            --     79,997,919
Unrealized gain on
 investments............     1,154,823          --    (1,107,141)         --          --            --         47,682
Retained earnings.......    98,773,622          --           --    37,198,137    (166,041)   (8,046,064)  127,759,654
                          ------------  ----------- ------------  -----------  ----------  ------------  ------------
 Total Shareholders'
 Equity at December 31,
 1996...................  $165,503,148  $14,608,849 $ (1,107,141) $37,198,137  $ (166,041) $ (8,046,064) $207,990,888
                          ============  =========== ============  ===========  ==========  ============  ============
YEAR ENDED DECEMBER 31, 1995(3)
Common Shares...........  $    176,560  $     1,491 $        --   $       --   $      --   $        --   $    178,051
Additional paid-in
 capital................    63,779,856    1,616,796          --           --          --            --     65,396,652
Unrealized (loss) gain
 on investments.........   (12,913,950)         --    14,068,773          --          --            --      1,154,823
Retained earnings.......    73,950,774          --           --    30,354,371    (190,024)   (5,341,499)   98,773,622
                          ------------  ----------- ------------  -----------  ----------  ------------  ------------
 Total Shareholders'
 Equity at December 31,
 1995...................  $124,993,240  $ 1,618,287 $ 14,068,773  $30,354,371  $ (190,024) $ (5,341,499) $165,503,148
                          ============  =========== ============  ===========  ==========  ============  ============
YEAR ENDED DECEMBER 31, 1994(3)
Common Shares...........  $    173,159  $     3,401 $        --   $       --   $      --   $        --   $    176,560
Additional paid-in
 capital................    61,694,961    2,084,895          --           --          --            --     63,779,856
Unrealized loss on
 investments............           --           --   (12,913,950)         --          --            --    (12,913,950)
Retained earnings.......    53,200,157          --           --    25,102,100    (129,143)   (4,222,340)   73,950,774
                          ------------  ----------- ------------  -----------  ----------  ------------  ------------
 Total Shareholders'
 Equity at December 31,
 1994...................  $115,068,277  $ 2,088,296 $(12,913,950) $25,102,100  $ (129,143) $ (4,222,340) $124,993,240
                          ============  =========== ============  ===========  ==========  ============  ============
</TABLE>
--------
(1) Dividend per share amounts were $.06 for 1996 and 1995 and $.04 in 1994.
(2) Dividend per share amounts were $.32, $.26 and $.22 for 1996, 1995 and 1994
    respectively (prior periods restated for stock split).
(3) Effective May 31, 1996 the Company effected a four-for-three stock split
    recorded in the form of a stock dividend. 4,438,974 Common Shares were
    issued in respect of this split. Prior periods have been restated.
 
                                      F-3
<PAGE>
 
                  MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                             YEARS ENDED DECEMBER 31,
                                      -----------------------------------------
                                          1996          1995           1994
                                      ------------  -------------  ------------
<S>                                   <C>           <C>            <C>
NET CASH FLOW FROM OPERATING
 ACTIVITIES
Net income..........................  $ 37,198,137  $  30,354,371  $ 25,102,100
Items not affecting cash
  Depreciation......................     2,830,128      1,986,948     1,508,206
  Amortization of investments and
   net gain on sales................       266,189     (1,956,001)   (2,479,385)
  Amortization of Convertible
   Debentures.......................     6,172,004      1,006,534           --
  Deferred tax benefit..............     2,771,595      1,649,435      (525,995)
  Other items.......................       436,941        150,404       121,449
Net changes in non-cash balances
 relating to operations :
  Accounts receivable...............   (41,561,925)   (15,824,235)  (27,830,907)
  Reinsurance receivables...........   (93,639,230)   (78,676,254)  (29,365,784)
  Investment income due and
   accrued..........................      (488,715)      (429,461)     (453,053)
  Deferred expenses.................     1,752,578     (3,356,089)   (1,450,142)
  Prepaid reinsurance premiums......   (34,366,867)   (20,216,478)   (3,139,881)
  Other assets......................    (3,486,147)      (480,523)      161,365
  Reserve for losses and loss
   expenses.........................   104,048,007     73,500,042    36,917,412
  Prepaid fees......................       105,815        965,373     3,760,788
  Reserve for unearned premium......    33,965,907     25,477,666     2,557,803
  Accounts payable..................    40,005,314     18,666,676    33,537,169
  Taxes payable.....................     4,450,093     (1,632,842)     (361,080)
  Accrued expenses..................       837,307      1,563,362       391,205
  Other liabilities.................       186,404        781,159     1,617,615
                                      ------------  -------------  ------------
NET CASH FLOW FROM OPERATING
 ACTIVITIES.........................    61,483,535     33,530,087    40,068,885
                                      ------------  -------------  ------------
CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from sale of
   investments--Available for sale..   119,661,981     96,289,328    75,398,703
  Proceeds from maturity of
   investments--Available for sale..    40,157,446     30,740,597     3,925,900
  Fixed assets purchased............    (6,763,900)    (1,671,419)   (1,763,518)
  Investments purchased--Available
   for sale.........................  (209,319,264)  (226,665,507) (120,527,924)
  Investment in affiliates and other
   investments......................    (5,604,614)    (2,425,033)     (643,224)
  Swap expense......................    (3,246,625)    (3,357,299)          --
  Other items.......................        99,819      1,264,078         6,102
                                      ------------  -------------  ------------
NET CASH APPLIED TO INVESTING
 ACTIVITIES.........................   (65,015,157)  (105,825,255)  (43,603,961)
                                      ------------  -------------  ------------
CASH FLOWS FROM FINANCING ACTIVITIES
  Loan repaid.......................      (574,022)    (2,825,978)   (3,085,862)
  Loan repayment & interest
   received.........................       436,154        462,037       534,213
  Proceeds from shares issued.......     9,047,295      1,618,288     2,088,296
  Claims deposit liabilities........   (26,099,982)     1,315,697    24,790,942
  Net proceeds from issue of
   convertible debentures...........           --     112,119,082           --
  Dividends paid....................    (6,705,451)    (5,596,971)   (5,119,665)
                                      ------------  -------------  ------------
NET CASH FLOW (APPLIED TO) FROM
 FINANCING ACTIVITIES...............   (23,896,006)   107,092,155    19,207,924
                                      ------------  -------------  ------------
Net (decrease) increase in cash and
 cash equivalents...................   (27,427,628)    34,796,987    15,672,848
Cash and cash equivalents at
 beginning of period................    79,669,981     44,872,994    29,200,146
                                      ------------  -------------  ------------
Cash and cash equivalents at end of
 period.............................  $ 52,242,353  $  79,669,981  $ 44,872,994
                                      ============  =============  ============
Supplemental cash flow information:
  Interest paid.....................  $     43,643  $     845,440  $    506,826
                                      ============  =============  ============
  Income taxes paid, net............  $  4,902,257  $  10,375,356  $ 10,504,719
                                      ============  =============  ============
</TABLE>
 
          See Accompanying Notes to Consolidated Financial Statements
 
 
                                      F-4
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                               DECEMBER 31, 1996
 
1. GENERAL
 
  Mutual Risk Management Ltd. (the "Company") was incorporated under the laws
of Bermuda in 1977. The Company is a holding company engaged, through its
subsidiaries, in providing risk management services in the United States,
Bermuda, Barbados, the Cayman Islands and Europe. The "IPC Companies", offer
the IPC Program, an alternative risk facility for insureds. The Company also
provides administrative, accounting and reinsurance services for unaffiliated
captive insurers. Legion Insurance Company ("Legion"), a Pennsylvania
insurance company and Legion Indemnity Company, an Illinois excess and surplus
lines insurance company, (together "Legion" or the "Legion Companies") act as
policy-issuing companies on many of the IPC Programs reinsuring a portion of
the liability and premium to one of the IPC Companies. MRM Financial Services
Ltd (formerly The Hemisphere Group Limited) provides financial services to
offshore mutual funds and other companies. Other subsidiaries provide
specialty brokerage, proprietary loss control services and underwriting
management.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  These Consolidated Financial Statements have been prepared in accordance
with generally accepted accounting principles prevailing in the United States
("GAAP") and are presented in United States Dollars.
 
A. CONSOLIDATION
 
 (i) General
 
  The Consolidated Financial Statements include the accounts of the Company
and all of its subsidiaries. All significant intercompany transactions and
balances have been eliminated on consolidation. Management is required to make
estimates that affect the amounts reported in the Consolidated Financial
Statements and accompanying notes. Actual results may differ from those
estimates.
 
 (ii) Assets Held in and Liabilities Related to Separate Accounts
 
  A substantial majority of the assets and liabilities of the IPC Companies
represents assets under management and related liabilities of the IPC
Programs. Under these programs, the program holders, through their ownership
of preferred shares, assume investment and underwriting risk and the IPC
Company receives a fee for managing the program. Accordingly, the Company
treats the Premium written in connection with these programs, whether written
directly or assumed as reinsurance, as Premiums ceded to the separate accounts
of the IPC Companies and does not include such amounts in the Company's
Premiums earned on the Consolidated Statements of Income. This Premium ceded
amounted to $195.2 million in 1996 (1995--$152.8 million; 1994--$161.8
million). The related assets and liabilities are shown separately on the
Consolidated Balance Sheets as "Assets held in and Liabilities related to
separate accounts". These assets and liabilities amounted to $566.2 million at
December 31, 1996 (1995--$515.8 million). Included in these assets are cash
and marketable investments of $378.1 million at December 31, 1996 (1995--
$337.5 million) and other assets of $188.1 million (1995--$178.3 million).
Consolidated assets and liabilities of the IPC Companies which accrue to the
Company are included on a line-by-line basis in the Consolidated Financial
Statements.
 
B. INVESTMENTS
 
  Investments are comprised of bonds and redeemable preferred shares. All
Investments are classified as available for sale in accordance with SFAS 115
and are reported at fair market value with unrealized gains and losses
included as a separate component of Shareholders' Equity.
 
                                      F-5
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Realized gains and losses on the sale of Investments are recognized in Net
income using the specific identification basis. Investments which incur a
decline in value, which is other than temporary, are written down to fair
value as a new cost basis with the amount of the write down included in Net
income. Investment income is accrued as earned and includes amortization of
premium and discount relative to bonds acquired at amounts other than their
par value.
 
C. REVENUE RECOGNITION
 
  (i) Policy issuing fees earned are recorded as the premium is written and
earned over the applicable policy period. The unearned portion is included in
Prepaid fees on the Consolidated Balance Sheets.
 
  (ii) Underwriting fees of the IPC Companies are earned as premiums are
reported or over the applicable policy period. The unearned portion of such
fees is included in Prepaid fees on the Consolidated Balance Sheets.
 
  (iii) Investment fees earned by the IPC Companies are accrued on a daily
basis.
 
  (iv) Commissions and brokerage fees are recorded and earned as premiums are
billed.
 
  (v) Premiums written and assumed are recorded on an accruals basis. Premiums
earned are calculated on a pro-rata basis over the terms of the applicable
underlying insurance policies with the unearned portion deferred on the
Consolidated Balance Sheets as Reserve for unearned premiums. Reinsurance
premiums ceded are similarly pro-rated with the prepaid portion recorded as an
asset in the Consolidated Balance Sheets. Premiums written which are related
to the separate accounts of the IPC Companies are included in Premiums ceded
(see Note 2A(ii)). Premiums earned are the result of the following:
 
<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                         ----------------------------------------------------------------
                                1996                  1995                  1994
                              PREMIUMS              PREMIUMS              PREMIUMS
                         --------------------  --------------------  --------------------  
                          WRITTEN    EARNED     WRITTEN    EARNED     WRITTEN    EARNED
                         ---------  ---------  ---------  ---------  ---------  ---------
                                               (IN THOUSANDS)
<S>                      <C>        <C>        <C>        <C>        <C>        <C>        
Direct.................. $ 392,659  $ 349,223  $ 287,772  $ 262,205  $ 276,289  $ 267,344
Assumed.................    13,232     15,514     41,109     40,688     29,044     29,412
Ceded...................  (350,843)  (308,324)  (276,721)  (254,686)  (237,272)  (228,554)
                         ---------  ---------  ---------  ---------  ---------  ---------
Net Premiums............ $  55,048  $  56,413  $  52,160  $  48,207  $  68,061  $  68,202
                         =========  =========  =========  =========  =========  =========
</TABLE>
 
  (vi) Net investment income is included after deducting various items as
detailed in Note 5C.
 
  (vii) Other income (losses) includes equity in earnings (losses) of
affiliates (see Note 2I).
 
  (viii) Realized capital (losses) gains include gains and losses on the sale
of investments available for sale, other investments and fixed assets (see
Note 5B(ii)).
 
D. LOSSES AND LOSS EXPENSES INCURRED
 
  Losses and related loss adjustment expenses are charged to income as they
are incurred and are net of losses recovered and recoverable of $203.2 million
in 1996 (1995--$239.5 million; 1994--$205.0 million). Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy. Included in loss reserves are gross loss
reserves of $131.4 million and $83.9 million at December 31, 1996 and 1995
which have been discounted by $19.8 million and $22.1 million respectively,
assuming interest rates of approximately 6% for medical malpractice reserves
and 4% for specific and aggregate
 
                                      F-6
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
workers' compensation reserves. These reserves are also discounted for
regulatory filings. After reinsurance, the net effect of this discounting was
to increase Net income by $.2 million, $.3 million and $1.4 million in 1996,
1995 and 1994 respectively. Discounting also reduced net loss reserves by $3.5
million and $3.3 million at December 31, 1996 and 1995 respectively.
 
  Reserves are established for losses and loss adjustment expenses relating to
claims which have been reported on the basis of evaluations of independent
claims adjusters under the supervision of the Company's claims staff. In
addition, reserves are established, in consultation with the Company's
independent actuaries, for losses which have occurred but have not yet been
reported to the Company and for adverse development of reserves on reported
losses. Reinsurance receivables are shown separately on the Consolidated
Balance Sheets. Management believes that the resulting estimate of the
liability for losses and loss adjustment expenses at December 31, 1996 and
1995 is adequate to cover the ultimate net cost of losses and loss expenses
incurred, however, such liability is necessarily an estimate and no
representation can be made that the ultimate liability will not exceed such
estimate.
 
E. CLAIMS DEPOSIT LIABILITIES
 
  The Company records certain programs that do not meet the conditions for
reinsurance accounting as Claims deposit liabilities on the Consolidated
Balance Sheets.
 
F. INCOME TAXES
 
  The Company records its income tax liability and deferred tax asset in
accordance with SFAS 109. In accordance with this statement the Company
records deferred income taxes which reflect the net tax effect of the
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
 
G. DEPRECIATION AND AMORTIZATION
 
  Depreciation of furniture and equipment is provided on a straight-line basis
over their estimated useful lives ranging from 2 to 10 years. Amortization of
leasehold improvements is computed on a straight-line basis over the terms of
the leases. Goodwill related to the acquisition of subsidiaries is amortized
on a straight-line basis over 25 to 40 years, is evaluated periodically for
any impairment in value and is included in Other expenses on the Consolidated
Statements of Income.
 
H. DEFERRED EXPENSES
 
  Deferred expenses which consist primarily of policy acquisition costs are
deferred and charged to income on a pro-rata basis over the periods of the
related policies.
 
I. INVESTMENTS IN AFFILIATES
 
  Investments in affiliates are accounted for on an equity basis.
 
J. OTHER INVESTMENTS
 
  The Company is a 16.67% limited partner in a partnership involved in the
acquisition of emerging health care enterprises. The partnership interest was
acquired in a private placement, there are no quoted market prices for the
limited partnership interest and there is no stated rate of return. The
investment is carried at its original cost of $2.4 million on the Consolidated
Balance Sheet and is accounted for using the cost method.
 
 
                                      F-7
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
K. EARNINGS PER SHARE
 
  Primary earnings per share calculations are computed using the weighted
average number of Common Shares and common share equivalents outstanding
during each period presented. Common share equivalents consist of the
Company's Redeemable Common Shares and Common Shares issuable upon the
exercise of stock options (using the treasury stock method). On a fully-
diluted basis, both earnings and shares outstanding are adjusted to assume the
conversion of the Zero Coupon Convertible Exchangeable Subordinated
Debentures. All periods presented have been restated to reflect the four-for-
three stock split effective May 31, 1996 (see Note 13A).
 
L. CASH AND CASH EQUIVALENTS
 
  Cash and cash equivalents include cash on hand, money market instruments and
other debt issues purchased with an original maturity of ninety days or less.
 
M. ZERO COUPON CONVERTIBLE EXCHANGEABLE SUBORDINATED DEBENTURES
 
  The Debentures are recorded at original issue price plus accrued original
issue discount. The current amortization of the original issue discount is
included in Interest expense on the Consolidated Statements of Income.
 
N. STOCK-BASED COMPENSATION
 
  The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock option plans and, accordingly, does not recognize compensation
cost as all options are issued with an exercise price equal to the market
price of the stock on the date of issue. Note 12 contains a summary of the pro
forma effects to reported Net income and earnings per share for 1996 and 1995
had the Company elected to recognize compensation cost based on the fair value
of the options granted at grant date as prescribed by SFAS 123.
 
3. REINSURANCE AND CLIENT INDEMNIFICATION
 
  A. Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company and allowances are established for amounts deemed
uncollectible. The Company evaluates the financial condition of its reinsurers
to minimize its exposure to losses from reinsurer insolvencies.
 
  B. At December 31, 1996, Losses recoverable and Prepaid reinsurance of
$423.9 million (1995--$295.9 million) had been ceded to reinsurers other than
the IPC Companies. $404.8 million of this amount (1995--$229.7 million) has
been ceded to reinsurers licensed in the United States which are not required
to provide letters of credit or other collateral to secure their obligations.
One such U.S. reinsurer accounted for $105.1 million (1995--$32.6 million).
The remaining $19.1 million of reinsurance ceded (1995--$66.2 million) was
ceded to reinsurers not licensed in the United States, including $10.8 million
ceded to companies managed by the Company (1995--$58.0 million). These non-
U.S. reinsurers have provided collateral security to the Company in the form
of letters of credit and cash at December 31, 1996 of $31.8 million (1995--
$84.4 million). Letters of credit held by the Company are issued by and/or
confirmed by member banks of the U.S. Federal Reserve. The Company regularly
reviews the credit exposure which it has to each bank, together with that
bank's financial position and requires replacement of the collateral security
in cases where the exposure to the bank exceeds acceptable levels. The
Company's largest exposure to an individual bank amounted to $12.1 million at
December 31, 1996 (1995--$54.4 million). The IPC Companies have a $260 million
Letter of Credit facility pursuant to which letters of credit are issued on
their behalf to The Legion Companies and certain other U.S. insurance
companies. This facility is fully collateralised by incoming letters of credit
and funds on deposit. The facility is guaranteed by the Company. At December
31, 1996 a reserve for uncollectible reinsurance of $.6 million was
outstanding.
 
                                      F-8
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  C. The Company's Reserve for unearned premiums and Reserve for losses and
loss expenses exclude reserves related to Premiums ceded to the IPC Companies,
where the program holders assume the underwriting risk relating to such
premium (see Note 2A(ii)). These reserves are included in Liabilities related
to separate accounts and amounted to $425.2 million at December 31, 1996
(1995--$396.3 million). Clients of the Company's IPC Program generally agree,
as part of a Shareholder Agreement, to indemnify the Company against certain
underwriting losses on the IPC Program. Clients generally provide letters of
credit or cash deposits as collateral for this indemnification, either in the
full amount of the potential net loss or to the level of expected losses as
projected by the Company. These contractual indemnifications from clients,
whether fully or partially secured, amounted to approximately $97.9 million at
December 31, 1996 (1995--$99.3 million) of which $27.6 million (1995--$23.9
million) is uncollateralized. The uncollateralized amounts will vary based on
the underwriting results of the IPC Programs. Management reviews its
collateral security position at the inception and renewal of each IPC Program
in order to minimize the risk of loss. In order for the Company to sustain a
loss on the portion of such indemnity agreement secured by a letter of credit,
the Company would have to be unable to collect from both the client and the
bank issuing the letter of credit. The Company has a credit exposure in the
event that losses exceed their expected level and the client is unable or
unwilling to honor its indemnity to the Company or fails to pay the premium
due. For these reasons the Company has established provisions for losses on
certain of these programs. These provisions, which totalled $4.5 million at
December 31, 1996 (1995--$4.0 million), reduced the level of Risk management
fees by $.5 million, $.2 million and $1.1 million for the years ending
December 31, 1996, 1995 and 1994 respectively.
 
4. RESERVE FOR LOSSES AND LOSS EXPENSES
 
  The following table sets forth a reconciliation of beginning and ending
reserves for losses and loss expenses.
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                                ----------------------------
                                                  1996      1995      1994
                                                --------  --------  --------
                                                      (IN THOUSANDS)
   <S>                                          <C>       <C>       <C>
   Gross reserves for losses and loss
    adjustment expenses, beginning of year..... $314,927  $241,427  $204,510
   Recoverable from reinsurers.................  256,678   178,002   148,637
                                                --------  --------  --------
   Net reserves for losses and loss adjustment
    expenses, beginning of year................   58,249    63,425    55,873
   Provision for losses and loss adjustment
    expenses for claims occurring in:
     Current year..............................   35,858    26,569    38,862
     Prior years...............................   (3,423)   (2,264)     (386)
                                                --------  --------  --------
   Total losses and loss adjustment expenses
    incurred...................................   32,435    24,305    38,476
                                                --------  --------  --------
   Payments for losses and loss adjustment
    expenses for claims occurring in:
     Current year..............................  (16,754)   (9,820)  (12,903)
     Prior years...............................   (5,273)  (19,661)  (18,021)
                                                --------  --------  --------
   Total payments..............................  (22,027)  (29,481)  (30,924)
                                                --------  --------  --------
   Net reserves for losses and loss adjustment
    expenses, end of year......................   68,657    58,249    63,425
   Recoverable from reinsurers.................  350,318   256,678   178,002
                                                --------  --------  --------
   Gross reserves for losses and loss
    adjustment expenses, end of year........... $418,975  $314,927  $241,427
                                                ========  ========  ========
</TABLE>
 
                                      F-9
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
5. INVESTMENTS
 
  A. Cash and cash equivalents include amounts invested in commercial paper at
December 31, 1996 of $13.6 million (1995--$39.4 million). Substantially all of
the remaining amount is invested in money market or interest-bearing bank
accounts.
 
  B. (i) All Investments are held as available for sale. The amortized cost
and fair market value are as follows:
 
<TABLE>
<CAPTION>
                                                                         FAIR
                                       AMORTIZED UNREALIZED UNREALIZED  MARKET
                                         COST       GAIN       LOSS     VALUE
                                       --------- ---------- ---------- --------
                                                    (IN THOUSANDS)
                                                 AT DECEMBER 31, 1996
   <S>                                 <C>       <C>        <C>        <C>
   U.S. Treasury Securities and
    Obligations of U.S. Government
    Corporations and Agencies......... $284,927    $2,814     $3,109   $284,632
   Debt securities issued by foreign
    governments.......................    2,983       --           1      2,982
   Corporate debt securities..........  106,161       746        299    106,608
                                       --------    ------     ------   --------
   Total Bonds........................  394,071     3,560      3,409    394,222
   Redeemable Preferred Shares........    5,800       213         44      5,969
                                       --------    ------     ------   --------
     Total Investments................ $399,871    $3,773     $3,453   $400,191
                                       ========    ======     ======   ========
   AT DECEMBER 31, 1995
   U.S. Treasury Securities and
    Obligations of U.S. Government
    Corporations and Agencies......... $277,552    $5,481     $5,286   $277,747
   Debt securities issued by foreign
    governments.......................      --        --         --         --
   Corporate debt securities..........   66,366       830         34     67,162
                                       --------    ------     ------   --------
     Total Bonds......................  343,918     6,311      5,320    344,909
   Redeemable Preferred Shares........    6,622       443         56      7,009
                                       --------    ------     ------   --------
     Total Investments................ $350,540    $6,754     $5,376   $351,918
                                       ========    ======     ======   ========
</TABLE>
 
  The Company does not have any investment in a single corporate security
which exceeds 1.0% of total bonds at December 31, 1996 (1995--1.3%).
 
  The following unrealized gains and losses on available for sale securities
have been recorded as a component of Shareholders' Equity:
 
<TABLE>
<CAPTION>
                                               GROSS                   NET
                                             UNREALIZED             UNREALIZED
                                           GAINS (LOSSES)  TAX    GAINS (LOSSES)
                                           -------------- ------  --------------
                                                      (IN THOUSANDS)
   <S>                                     <C>            <C>     <C>
   January 1, 1995........................    $(14,399)   $1,485     $(12,914)
   Movement...............................      15,777    (1,708)      14,069
                                              --------    ------     --------
   December 31, 1995......................       1,378      (223)       1,155
   Movement...............................      (1,058)      (49)      (1,107)
                                              --------    ------     --------
   December 31, 1996......................    $    320    $ (272)    $     48
                                              ========    ======     ========
</TABLE>
 
                                     F-10
<PAGE>
 
                  MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table sets forth certain information regarding the investment
ratings of the Company's portfolio.
 
<TABLE>
<CAPTION>
                                        DECEMBER 31, 1996    DECEMBER 31, 1995
                                       -------------------- --------------------
                                       AMORTIZED            AMORTIZED
                                         COST    PERCENTAGE   COST    PERCENTAGE
                                       --------- ---------- --------- ----------
                                                    (IN THOUSANDS)
   <S>                                 <C>       <C>        <C>       <C>
   Ratings(1)
     AAA.............................. $329,798     82.48%  $281,040     80.17%
     AA...............................   28,345      7.09     38,986     11.12
     A................................   29,064      7.27     28,019      7.99
     BBB..............................   12,568      3.14      1,988      0.57
     BB...............................      --        --         411      0.12
     B................................       96      0.02         96      0.03
                                       --------    ------   --------    ------
                                       $399,871    100.00%  $350,540    100.00%
                                       ========    ======   ========    ======
</TABLE>
--------
(1) Ratings as assigned by Standard & Poor's Corporation.
 
  The maturity distribution of Investments is as follows:
 
<TABLE>
<CAPTION>
                                          DECEMBER 31, 1996  DECEMBER 31, 1995
                                          ------------------ ------------------
                                                      FAIR               FAIR
                                          AMORTIZED  MARKET  AMORTIZED  MARKET
                                            COST     VALUE     COST     VALUE
                                          --------- -------- --------- --------
                                                     (IN THOUSANDS)
   <S>                                    <C>       <C>      <C>       <C>
   Due in one year or less............... $  6,973  $  8,845 $  9,111  $  9,127
   Due in one year through five years....  132,845   132,241  105,095   107,721
   Due in five years through ten years...  100,893   100,959   59,757    61,497
   Due after ten years...................  159,160   158,146  176,577   173,573
                                          --------  -------- --------  --------
     Total............................... $399,871  $400,191 $350,540  $351,918
                                          ========  ======== ========  ========
</TABLE>
 
    (ii) Realized gains and losses:
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                      1996     1995     1994
                                                    --------  -------  -------
                                                         (IN THOUSANDS)
   <S>                                              <C>       <C>      <C>
   Proceeds from sale of Investments
     --held as available for sale.................. $119,662  $96,289  $75,399
                                                    ========  =======  =======
   Realized gains on Investments
     --held as available for sale.................. $    808  $ 3,314  $   632
   Realized losses on Investments
     --held as available for sale..................   (2,670)  (4,495)  (1,506)
                                                    --------  -------  -------
   Net realized losses.............................   (1,862)  (1,181)    (874)
   Other non-investment (losses) gains.............     (121)      79        2
                                                    --------  -------  -------
   Realized capital losses......................... $ (1,983) $(1,102) $  (872)
                                                    ========  =======  =======
</TABLE>
 
                                      F-11
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  C. Details of investment income by major categories are presented below:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                                      -------------------------
                                                       1996     1995     1994
                                                      -------  -------  -------
                                                          (IN THOUSANDS)
   <S>                                                <C>      <C>      <C>
   Cash and cash equivalents......................... $11,570  $ 6,256  $ 2,693
   Preferred stock...................................     453      961      731
   Bonds.............................................  15,910   13,629   12,698
                                                      -------  -------  -------
   Gross investment income...........................  27,933   20,846   16,122
   Claims deposit liabilities........................  (4,023)  (3,475)  (3,412)
   Contract expense..................................    (930)    (541)    (582)
   Investment expenses...............................    (519)    (648)    (686)
                                                      -------  -------  -------
   Net investment income............................. $22,461  $16,182  $11,442
                                                      =======  =======  =======
</TABLE>
 
  Net investment income is reported after deducting investment income earned
on assets related to Claims deposit liabilities. Investment income has been
excluded from Net investment income where the Company has contracted to pay
this income to the insured. Investment expenses consisting of investment
advisory fees and custodian charges have been deducted from Net investment
income.
 
  D. Legion is required by certain states in which it operates to maintain
special deposits or provide letters of credit. This obligation amounted to
$126.0 million at December 31, 1996 (1995--$133.4 million) and included
deposits of $43.8 million (1995--$32.4 million) and letters of credit of $82.2
million (1995--$101.0 million).
 
6. ZERO COUPON CONVERTIBLE EXCHANGEABLE SUBORDINATED DEBENTURES
 
  On October 30, 1995, the Company issued $324.3 million principal amount of
Zero Coupon Convertible Exchangeable Subordinated Debentures ("Debentures")
with an aggregate issue price of $115.0 million. The issue price of each
Debenture was $354.71 and there will be no periodic payments of interest. The
Debentures will mature on October 30, 2015 at $1,000 per Debenture
representing a yield to maturity of 5.25% (computed on a semi-annual bond
equivalent basis). The Debentures are subordinated to all existing and future
senior indebtedness of the Company.
 
  Each Debenture is convertible at the option of the holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased by the
Company, into Common Shares of the Company at a conversion rate of 10.760
shares per Debenture or an aggregate of 3,489,400 Common Shares. The
Debentures may be purchased by the Company, at the option of the holder, as of
October 30, 2000, October 30, 2005 and October 30, 2010, at the issue price
plus accrued original issue discount. The Company, at its option, may elect to
pay such purchase price on any particular purchase date in cash or Common
Shares, or any combination thereof. After October 30, 2000, each Debenture is
redeemable in cash at the option of the Company for an amount equal to the
issue price plus accrued original issue discount.
 
  Prior to October 30, 2000 the Debentures will be purchased for cash by the
Company, at the option of the holder, in the event of a Fundamental Change (as
defined). In addition, the Company will have the right, under certain
circumstances, to require the holders to exchange the Debentures for
Guaranteed Zero Coupon Exchangeable Subordinated Debentures due 2015 of Mutual
Group Ltd. (the "Exchangeable Debentures"), to be guaranteed on a subordinated
basis by the Company. The Exchangeable Debentures will be exchangeable for the
Company's Common Shares and will otherwise have terms and conditions
substantially identical to the Debentures.
 
                                     F-12
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
7. DERIVATIVE FINANCIAL INVESTMENTS
 
  The Company has had only limited involvement with derivative financial
instruments and does not use them for trading or speculative purposes. They
are utilized to manage interest rate risk.
 
  Interest rate swaps are utilized to reduce the potential impact of increases
in interest rates on the market value of the fixed income portfolio. At
December 31, 1996, the Company had no interest rate swaps outstanding. At
December 31, 1995, the Company was a party to one interest rate swap agreement
with a maturity of October 31, 2006. The agreement entitles the Company to
receive from the counterparty on a semi-annual basis 3 month LIBOR compounded
quarterly and pay a fixed rate of 7.45% on a semi-annual basis. At December
31, 1995 the notional amount of the swap was $40 million.
 
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
 
<TABLE>
<CAPTION>
                                              DECEMBER 31,      DECEMBER 31,
                                                  1996              1995
                                            ----------------- -----------------
                                            CARRYING   FAIR   CARRYING   FAIR
                                             AMOUNT   VALUE    AMOUNT   VALUE
                                            -------- -------- -------- --------
                                                      (IN THOUSANDS)
   <S>                                      <C>      <C>      <C>      <C>
   Investments............................. $400,191 $400,191 $351,918 $351,918
   Claims deposit liabilities.............. $ 45,689 $ 44,248 $ 71,789 $ 69,637
   Loans receivable........................ $    768 $    741 $  1,151 $  1,100
   Debentures.............................. $122,211 $122,211 $116,039 $116,039
</TABLE>
 
  The following methods and assumptions were used to estimate the fair value
of specific classes of financial instruments. The carrying values of all other
financial instruments, as defined by SFAS 107, approximate their fair values
due to their short term nature.
 
<TABLE>
 <C>                                  <S>
 Investments: ....................... The fair market value of Investments is
                                      calculated using quoted market prices.
                                      The fair value of the interest rate swap
                                      is estimated by obtaining quotes from
                                      brokers of the amount the Company would
                                      need to pay at the reporting date to
                                      cancel the contract or transfer it to
                                      other parties.
 Claims deposit liabilities: ........ The fair value of Claims deposit
                                      liabilities is calculated by discounting
                                      the actuarially determined ultimate loss
                                      payouts at a rate of 6%.
 Loans receivable: .................. See Note 10.
 Debentures:......................... The fair value of the Debentures is
                                      calculated by amortizing the original
                                      issue discount over the life of the
                                      Debentures (see Note 2N).
 Assets held in separate accounts: .. (a) Within Assets held in separate
                                          accounts are cash and marketable
                                          investments with a carrying value
                                          and fair value of $378.1 million
                                          (1995: $337.5 million). Fair value
                                          is calculated using quoted market
                                          prices (see Note 2A(ii)).
                                      (b) Within the $188.1 million of other
                                          assets (1995: $178.3 million) $73.2
                                          million (1995: $65.7 million) are
                                          financial instruments. The fair
                                          market value of other assets
                                          approximates carrying value due to
                                          the short term nature of these items
                                          (see Note 2A(ii)).
</TABLE>
 
                                     F-13
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
9. INCOME TAXES
 
  The Company is incorporated under the laws of Bermuda and, under current
Bermuda law, is not obligated to pay any taxes in Bermuda based upon income or
capital gains. The Company has received an undertaking from the Minister of
Finance in Bermuda pursuant to the provisions of the Exempted Undertakings Tax
Protection Act, 1966, which exempts the Company and its shareholders, other
than shareholders ordinarily resident in Bermuda, from any Bermuda taxes
computed on profits, income or any capital asset, gain or appreciation, or any
tax in the nature of estate duty or inheritance tax, at least until the year
2016.
 
  The Company does not consider itself to be engaged in a trade or business in
the United States and accordingly does not expect to be subject to direct
United States income taxation.
 
  The United States subsidiaries of the Company file a consolidated U.S.
federal income tax return. Mutual Indemnity (U.S.) Ltd., a Bermuda subsidiary
of the Company, has made an irrevocable election to be taxed as a domestic
United States corporation.
 
  Income tax expense attributable to income from continuing operations
consists of:
 
<TABLE>
<CAPTION>
                                                         CURRENT DEFERRED TOTAL
                                                         ------- -------- ------
                                                             (IN THOUSANDS)
   <S>                                                   <C>     <C>      <C>
     December 31, 1996:
     U.S. federal....................................... $3,068   $2,556  $5,624
     U.S. state and local...............................  1,163        9   1,172
     Foreign............................................  1,345      --    1,345
                                                         ------   ------  ------
                                                         $5,576   $2,565  $8,141
                                                         ======   ======  ======
     December 31, 1995:
     U.S. federal....................................... $5,499   $1,649  $7,148
     U.S. state and local...............................    914      --      914
     Foreign............................................    800      --      800
                                                         ------   ------  ------
                                                         $7,213   $1,649  $8,862
                                                         ======   ======  ======
     December 31, 1994:
     U.S. federal....................................... $7,402   $ (526) $6,876
     U.S. state and local...............................    722      --      722
     Foreign............................................    416      --      416
                                                         ------   ------  ------
                                                         $8,540   $ (526) $8,014
                                                         ======   ======  ======
</TABLE>
 
  The effective tax rate on income from continuing operations differed from
the statutory U.S. federal tax rate for the following reasons:
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                                   --------------------------
                                                     1996     1995     1994
                                                   --------  -------  -------
   <S>                                             <C>       <C>      <C>
     Statutory U.S. federal tax rate..............     35.0%    35.0%    35.0%
     Increase (reduction) in income taxes
      resulting from:
      U.S. state taxes............................      1.7      1.5      1.4
      Tax-exempt interest income..................     (6.0)    (7.9)    (7.9)
      Foreign income not expected to be taxed in
       the U.S....................................    (12.2)    (9.5)    (6.8)
      Foreign taxes...............................      3.0      2.0      1.2
      Other, net..................................     (3.6)     1.2      1.1
                                                   --------  -------  -------
                                                       17.9%    22.3%    24.0%
                                                   ========  =======  =======
</TABLE>
 
                                     F-14
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are presented below:
 
<TABLE>
<CAPTION>
                                                                1996     1995
                                                               -------  -------
                                                               (IN THOUSANDS)
   <S>                                                         <C>      <C>
   Deferred tax assets:
     Unearned premiums not deducted for tax................... $ 4,625  $ 3,320
     Unpaid losses, discounted for tax........................   7,284    7,018
     Other....................................................     102      641
                                                               -------  -------
       Total gross deferred tax assets........................  12,011   10,979
                                                               -------  -------
   Deferred tax liabilities:
     Deferred acquisition costs...............................  (3,981)  (1,968)
     Deferred marketing expenses..............................    (795)  (1,178)
     Deferred gain on insurance claim.........................    (200)    (200)
     Unrealized gains.........................................    (272)    (223)
     Interest rate swap.......................................    (776)    (177)
     Other....................................................  (2,625)  (1,050)
                                                               -------  -------
       Total gross deferred tax liabilities...................  (8,649)  (4,796)
                                                               -------  -------
   Deferred tax benefit....................................... $ 3,362  $ 6,183
                                                               =======  =======
</TABLE>
 
  The movement in deferred income tax benefit of $2.8 million for the year
ended December 31, 1996 consists of $2.6 million attributable to income from
continuing operations and $.2 million attributable to the acquisition of
Professional Underwriters Corp.
 
  The Company does not recognize taxes with respect to certain temporary
differences that exist in some subsidiary companies. These temporary
differences relate to Assets held in and Liabilities related to separate
accounts. Any temporary differences attributable to these assets and
liabilities will not result in taxable income to the Company but will be
attributed to the beneficial owners of these assets and liabilities.
 
10. REDEEMABLE PREFERRED AND COMMON SHARES
 
  A. Series B Non-Voting Redeemable Preferred Shares--Authorized and issued
2,951,835, par value $1.00 per share. These shares were issued to one of the
IPC Companies as the holder of record for the benefit of the IPC Program
participants and are entitled to fixed, cumulative, preferential, semi-annual
dividends calculated at the six month LIBOR rate based on the redemption price
of $2.95 million. The Series B Non-Voting Redeemable Preferred Shares are
redeemable for their $1.00 par value or $2.95 million in 1997. The average
effective interest rate on these shares was 5.6% in 1996 (1995--6.4%; 1994--
4.4%).
 
  B. Common Shares Subject to Redemption--Issued 468,584 at $3.50 per share.
These shares were issued to four executive officers of the Company. The
Company has the right to reacquire these shares if the employees default on
the loans used for the purchase. The employees have the right to require the
Company to repurchase the shares upon a change of control of the Company, as
defined. Two subsidiaries of the Company made loans to these executive
officers during the third quarter of 1990, for the purchase of the Common
Shares Subject to Redemption. These loans are for a period of eight years and
bore interest at 7.7% per annum to September 17, 1994, 5.7% to September 17,
1995, 5.4% to September 17, 1996 and currently 5.3%. Interest received by the
Company on these loans is credited to Redeemable Common Shares on the
Consolidated Balance Sheets. The loans are repayable in four equal annual
installments commencing September 1995. One loan of $.1 million was repaid on
February 1, 1992 and additional amounts totalling $.4 million were repaid
during each of 1995 and 1996. The fair value of these loans estimated using
discounted cash flow analyses at 8.25% is $.7 million.
 
                                     F-15
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
11. SHAREHOLDERS' EQUITY AND RESTRICTIONS
 
  A. In May 1996 the Company announced a four-for-three stock split of its
Common Shares. In connection with this split the Company issued an additional
4,438,974 Common Shares and 117,146 Common Shares subject to redemption.
 
  B. The Company's ability to pay dividends is subject to certain restrictions
including the following:
 
    (i) The Company is subject to a 30% U.S. withholding tax on any dividends
  received from its U.S. subsidiaries and certain of the IPC Companies.
 
    (ii) The Company's ability to cause the Legion Companies to pay a
  dividend is limited by insurance regulation to an annual amount equal to
  the greater of 10% of the Legion Companies' statutory surplus as regards
  policyholders or the Legion Companies' statutory income for the preceding
  year. The maximum dividend the Legion Companies will be permitted to pay
  under this restriction in 1997 is $21.2 million based upon 1996 results
  (1996--$19.8 million based on 1995 results). The Legion Companies' net
  assets which were restricted by the above were $157.2 million at December
  31, 1996 (1995--$120.2 million). Loans and advances by the Legion Companies
  to the Company or any other subsidiary would require the prior approval of
  the Pennsylvania insurance department and possibly other states in which
  they are licensed.
 
  C. At December 31, 1996 the Legion Companies' risk-based capital was $142.3
million (1995--$101.8 million). Under the risk-based capital costs, the
threshold requiring the least regulatory involvement was $32.0 million.
 
  D. Net income and policyholders' surplus of the Legion Companies, as filed
with regulatory authorities on the basis of statutory accounting practices,
are as follows:
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                                      -------------------------
                                                        1996     1995    1994
                                                      -------- -------- -------
                                                           (IN THOUSANDS)
   <S>                                                <C>      <C>      <C>
   Statutory net income for the year................. $ 19,903 $ 19,773 $16,266
   Statutory policyholders' surplus at year end...... $150,911 $106,540 $72,404
</TABLE>
 
12. STOCK OPTIONS
 
  Employees have been granted options to purchase Common Shares under the
Company's Long Term Incentive Plan. In each case, the option price equals the
fair market value of the Common Shares on the day of the grant and an option's
maximum term is five to ten years. Options granted vest ratably over a four
year period.
 
  In accordance with the provisions of SFAS 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option
plans and, accordingly, does not recognize compensation cost. If the Company
had elected to recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS 123, net income and
earnings per share would have been reduced to the pro forma amounts indicated
in the table below (in thousands except per share amounts):
 
<TABLE>
<CAPTION>
                                                                 1996    1995
                                                                ------- -------
   <S>                                                          <C>     <C>
   Net income--as reported..................................... $37,032 $30,164
   Net income--pro forma....................................... $36,140 $30,050
   Primary Earnings per share--as reported..................... $  1.93 $  1.62
   Primary Earnings per share--pro forma....................... $  1.90 $  1.62
</TABLE>
 
                                     F-16
<PAGE>
 
                  MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used in
1996:
 
<TABLE>
   <S>                                                             <C>
   Expected dividend yield........................................     1.24%
   Expected stock price volatility................................ 28.3% - 29.0%
   Risk-free interest rate........................................     5.00%
   Expected life of options.......................................    4 years
</TABLE>
 
  The weighted average fair value of options granted during 1996 is $8.19 per
share (1995--$8.00 per share).
 
  The pro forma effect on net income for 1995 and 1996 is not representative of
the pro forma effect on net income in future years because it does not take
into consideration pro forma compensation expense related to grants made prior
to 1995.
 
  Options issued and outstanding under the plan are as follows:
 
<TABLE>
<CAPTION>
                                          SUMMARY OF EMPLOYEE
                                      STOCK OPTION PLAN ACTIVITY
                                       YEARS ENDED DECEMBER 31,
                            -------------------------------------------------
                                 1996             1995             1994
                            ---------------  ---------------  ---------------
   <S>                      <C>              <C>              <C>
   NUMBER OF OPTIONS
   Outstanding, beginning
    of year................       1,499,247        1,346,963        1,307,193
   Granted.................         734,917          295,933          206,934
   Exercised...............        (493,242)        (128,724)        (136,568)
   Cancelled...............         (19,766)         (14,925)         (30,596)
                            ---------------  ---------------  ---------------
   Outstanding and
    exercisable, end of
    year...................       1,721,156        1,499,247        1,346,963
                            ===============  ===============  ===============
   OPTION PRICE PER SHARE
   Granted................. $28.50 - $33.56  $19.03 - $30.28  $15.94 - $20.44
   Exercised............... $15.50 - $21.66  $ 3.50 - $21.66  $ 3.25 - $19.00
   Cancelled............... $15.50 - $30.28  $ 3.50 - $21.66  $ 3.25 - $21.66
   Outstanding and
    exercisable, end of
    year................... $17.00 - $33.56  $15.50 - $30.28  $ 3.50 - $21.66
</TABLE>
 
              SUMMARY OF OPTIONS OUTSTANDING AT DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                   WEIGHTED
                                   AVERAGE
 YEAR OF   NUMBER OF   NUMBER OF   EXERCISE    EXERCISE         EXPIRATION
  GRANT     SHARES   SHARES VESTED  PRICE     PRICE RANGE       DATE RANGE
 --------  --------- ------------- --------   -----------       ----------
<S>        <C>       <C>           <C>      <C>             <C>
1992......   283,252    283,252     $18.99  $17.00 - $19.00 March 16, 1997 to
                                                             December 14, 1997
1993......   217,669    159,896     $21.31  $18.00 - $21.66 May 10, 1998 to
                                                             December 14, 1998
1994......   192,584     94,368     $17.56  $15.94 - $20.44 March 15, 1999 to
                                                             December 14, 1999
1995......   292,734     73,184     $28.59  $19.03 - $30.28 February 3, 2000 to
                                                             December 1, 2000
1996......   734,917        --      $30.20  $28.50 - $33.56 January 2, 2001 to
                                                             December 17, 2005
           ---------    -------
           1,721,156    610,700
           =========    =======
</TABLE>
 
                                      F-17
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  All options vest 25% annually commencing one year after issuance except for
385,000 of the options issued in 1996 at a grant price of $30 which were
issued to executives of the Company. These options are for 10 years and 75%
have vesting schedules tied to the conversion of the Zero Coupon Convertible
Exchangeable Subordinated Debentures (see Note 6) and other performance
benchmarks.
 
  Options have been granted to each of seven non-executive directors. All
options are for five years and become exercisable six months after issuance.
 
  Total options granted to directors are as follows:
 
<TABLE>
<CAPTION>
                                    NUMBER OF SHARES
                                    ----------------   EXERCISE    EXPIRATION
            YEAR OF GRANT          GRANTED OUTSTANDING  PRICE         DATE
            -------------          ------- ----------- --------    ----------
   <S>                             <C>     <C>         <C>      <C>
   1992...........................  70,000    50,000    $18.00  December 1, 1997
   1993...........................  70,000    70,000    $22.22  December 1, 1998
   1994...........................  70,000    70,000    $18.38  December 1, 1999
   1995...........................  70,000    70,000    $30.28  December 1, 2000
   1996...........................  52,500    52,500    $33.38  December 1, 2001
                                   -------   -------
                                   332,500   312,500
                                   =======   =======
</TABLE>
 
13. SEGMENT INFORMATION
 
  Selected information by business segment is summarized in the chart below.
The Company's two business segments are, Risk management, which represents the
Company's Fee income less its Operating expenses and Underwriting which
represents the Company's income or loss from underwriting risks it retains.
 
LINE OF BUSINESS FINANCIAL INFORMATION
 
<TABLE>
<CAPTION>
                                                                  INCOME (LOSS)
                                                                 FROM CONTINUING
                                                                   OPERATIONS
                                                                     BEFORE
                                                      REVENUE(1)  INCOME TAXES
                                                      ---------- ---------------
                                                            (IN THOUSANDS)
<S>                                                   <C>        <C>
YEAR ENDED DECEMBER 31, 1996
  Corporate risk management..........................  $ 49,451      $21,346
  Program business...................................    19,569        7,412
  Specialty brokerage................................     5,612        2,050
  Financial services.................................     6,059        1,221
  Underwriting.......................................    56,413         (207)
  Net investment income..............................    20,478       14,262
  Other..............................................       120         (488)
                                                       --------      -------
    Total............................................  $157,702      $45,596
                                                       ========      =======
YEAR ENDED DECEMBER 31, 1995
  Corporate risk management..........................  $ 48,147      $21,769
  Program business...................................     7,280        3,508
  Specialty brokerage................................     4,350        1,759
  Financial services.................................     4,330          590
  Underwriting.......................................    48,207       (1,032)
  Net investment income..............................    15,080       13,227
  Other..............................................        99         (129)
                                                       --------      -------
    Total............................................  $127,493      $39,692
                                                       ========      =======
</TABLE>
 
                                     F-18
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                                  INCOME (LOSS)
                                                                 FROM CONTINUING
                                                                   OPERATIONS
                                                                     BEFORE
                                                      REVENUE(1)  INCOME TAXES
                                                      ---------- ---------------
                                                            (IN THOUSANDS)
<S>                                                   <C>        <C>
YEAR ENDED DECEMBER 31, 1994
  Corporate risk management..........................  $ 45,077      $21,059
  Program business...................................     3,258        1,626
  Specialty brokerage................................     2,144          597
  Financial services.................................     3,674          861
  Underwriting.......................................    68,202         (721)
  Net investment income..............................    10,570       10,063
  Other..............................................        85         (109)
                                                       --------      -------
    Total............................................  $133,010      $33,376
                                                       ========      =======
</TABLE>
--------
(1) Fee income from two clients accounted for 3% and 2% of total Fee income in
    1996 (1995--4% and 4%; 1994--9% and 6%). No other client accounted for
    over 10% of Risk management fees during these periods. Premiums earned
    from two clients accounted for 5% and 4% of total Premiums earned during
    1996 (1995--4% and 3%; 1994--11% and 10%).
 
  The subsidiaries' accounting records do not capture information by reporting
segment sufficient to determine identifiable assets by such reporting
segments.
 
14. FOREIGN SALES AND OPERATIONS
 
  The Company's non-U.S. operations include Bermuda, Barbados, the Cayman
Islands and Europe.
 
FINANCIAL INFORMATION RELATING TO GEOGRAPHIC AREAS
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                      1996     1995     1994
                                                    -------- -------- --------
                                                          (IN THOUSANDS)
   <S>                                              <C>      <C>      <C>
   NET REVENUES
     U.S. Business................................. $ 97,778 $ 79,697 $107,560
     Non-U.S. Business.............................   59,924   47,795   25,450
                                                    -------- -------- --------
       Total....................................... $157,702 $127,492 $133,010
                                                    ======== ======== ========
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                    --------------------------
                                                      1996     1995     1994
                                                    -------- -------- --------
                                                          (IN THOUSANDS)
   <S>                                              <C>      <C>      <C>
   INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
    TAXES
     U.S. Business................................. $ 27,435 $ 26,452 $ 25,831
     Non-U.S. Business.............................   18,161   13,240    7,545
                                                    -------- -------- --------
       Total....................................... $ 45,596 $ 39,692 $ 33,376
                                                    ======== ======== ========
</TABLE>
 
                                     F-19
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
<TABLE>
<CAPTION>
                                                       AS AT DECEMBER 31,
                                                --------------------------------
                                                   1996       1995       1994
                                                ---------- ---------- ----------
                                                         (IN THOUSANDS)
   <S>                                          <C>        <C>        <C>
   TOTAL ASSETS
     U.S. Business............................. $  890,722 $  689,885 $  518,167
     Non-U.S. Business (1).....................    747,948    689,723    504,370
                                                ---------- ---------- ----------
       Total................................... $1,638,670 $1,379,608 $1,022,537
                                                ========== ========== ==========
</TABLE>
--------
(1) Includes Assets held in separate accounts of $576.7 million, $525.2
    million and $442.9 million for 1996, 1995 and 1994 respectively.
 
15. ACQUISITIONS
 
  During 1996 the Company acquired Legion Indemnity Company (formerly Dearborn
Insurance Company) for $24.0 million. The excess of the purchase price over
net assets acquired was $2.8 million. The pro-forma effect on the Company's
revenue, net income and earnings per share is not material.
 
16. RELATED PARTY TRANSACTIONS
 
  A. $.6 million (1995--$.8 million; 1994--$.2 million) of fee income and $2.9
million (1995--$(.6) million; 1994--$6.6 million) of premiums were earned from
a certain IPC Program participant associated with a director and shareholder
of the Company.
 
  B. A number of subsidiaries of the Company have written business involving
subsidiaries of The Galtney Group, Inc. ("GGI") of which a director of the
Company is the principal shareholder. During 1996 the Company paid fees of
$3.5 million on such business to GGI (1995--$2.1 million; 1994--$2.2 million)
and received $Nil in fees from GGI (1995--$Nil; 1994--$Nil). During 1995 the
Company sold its holding of GGI shares for $1.3 million, realizing a gain of
$.4 million.
 
  C. The Company and its subsidiaries provide administrative and accounting
services to a number of unaffiliated insurance and reinsurance companies.
Certain officers, directors and employees of the Company serve as officers and
directors of these companies, generally without remuneration.
 
  D. Two subsidiaries of the Company made loans to four executive officers in
1990 for the purchase of Common Shares (see Note 12B).
 
  E. In connection with the Company's acquisition of The Hemisphere Group
Limited ("Hemisphere") in July 1996, the Company acquired a 40% interest in
the Hemisphere Trust Company Limited ("Hemisphere Trust"), a Bermuda "local"
trust company, which had formerly been a wholly owned subsidiary of
Hemisphere. As a "local" Bermuda company, at least 60% of the shares of
Hemisphere Trust must be owned by Bermudians. In compliance with this
requirement, Mr. Robert A. Mulderig, Chairman and CEO of the Company, acquired
60% of Hemisphere Trust for $.2 million at the time of the Company's
acquisition of Hemisphere. The amount of the purchase price was equal to 60%
of the book value of Hemisphere Trust on the date of acquisition.
 
  The Company and Mr. Mulderig have entered into a Shareholders' Agreement
relating to Hemisphere Trust which provides, amongst other things, that (i)
the Company has the option, subject to regulatory approval to acquire Mr.
Mulderig's interest in Hemisphere Trust at Mr. Mulderig's cost, plus interest
at 6% per annum; (ii) the Company has a pre-emptive right, also subject to
regulatory approval, over the shares held by Mr. Mulderig and (iii) no
dividends or other distributions can be made by Hemisphere Trust without the
prior consent of the Company.
 
                                     F-20
<PAGE>
 
                 MUTUAL RISK MANAGEMENT LTD. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
1996--QUARTERS ENDED                 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
--------------------                 ----------- ------------ ------- --------
                                       (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                  <C>         <C>          <C>     <C>
Revenues............................   $47,621     $32,779    $40,609 $36,693
Income from continuing operations
 before income taxes................    11,246      11,335     11,014  12,001
Income from continuing operations...     9,517       9,482      9,066   9,389
Net income..........................     9,509       9,475      9,032   9,182
Net income available to common
 shareholders.......................     9,467       9,433      8,991   9,141
Primary Earnings per Common Share:
 (1)(2)
  Net income available to common
   shareholders.....................       .49         .49        .47     .48
<CAPTION>
1995--QUARTERS ENDED                 DECEMBER 31 SEPTEMBER 30 JUNE 30 MARCH 31
--------------------                 ----------- ------------ ------- --------
                                       (IN THOUSANDS EXCEPT PER SHARE DATA)
<S>                                  <C>         <C>          <C>     <C>
Revenues............................   $28,276     $35,619    $33,761 $29,836
Income from continuing operations
 before income taxes................     9,391      10,294     10,423   9,583
Income from continuing operations...     7,544       7,880      8,258   7,148
Net income..........................     7,451       7,740      8,157   7,006
Net income available to common
 shareholders.......................     7,407       7,696      8,106   6,955
Primary Earnings per Common Share:
 (1)(2)
  Net income available to common
   shareholders.....................       .39         .41        .44     .38
</TABLE>
--------
(1) See Note 2K of Notes to Consolidated Financial Statements for an
    explanation of the method used to determine the number of shares used to
    compute per share amounts.
(2) Prior periods per share calculations have been restated to reflect the
    four-for-three stock split to holders of record at May 31, 1996.
 
                                     F-21
<PAGE>
 
To The Board of Directors and Shareholders
Mutual Risk Management Ltd.
 
  We have audited the accompanying consolidated balance sheets of Mutual Risk
Management Ltd. and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, shareholders' equity and cash flows
for the years then ended. Our audits also included the financial statement
schedules listed in the index at Item 14B. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
The consolidated financial statements of Mutual Risk Management Ltd. and
subsidiaries for the year ended December 31, 1994, were audited by other
auditors whose report dated February 21, 1995 expressed an unqualified opinion
on those statements prior to restatement.
 
  We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Mutual Risk Management Ltd. and subsidiaries at December 31, 1996 and 1995
and the consolidated results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
 
  We also audited the adjustments that were applied to restate the 1994
financial statements to give effect to the acquisition of The Hemisphere Group
Limited as described in Note 16. In our opinion, such adjustments are
appropriate and have been properly applied.
 
                                          Ernst & Young
 
Hamilton, Bermuda
February 19, 1997
 
                                     F-22
<PAGE>
 
                                                                     SCHEDULE II
 
                           MUTUAL RISK MANAGEMENT LTD
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                       PARENT COMPANY ONLY BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                  DECEMBER 31,
                            -------------------------
                                1996         1995
                            ------------ ------------
<S>                         <C>          <C>
ASSETS
Cash and cash
 equivalents..............  $  4,250,235 $  3,176,255
Investments...............    59,082,682   78,426,224
Investments in
 subsidiaries and
 affiliates...............   262,993,522  198,932,789
Due from subsidiaries and
 affiliates...............     2,386,157    1,531,537
Fixed assets..............     1,265,818      942,371
Other assets..............     7,840,114    3,979,895
                            ------------ ------------
Total Assets..............  $337,818,528 $286,989,071
                            ============ ============
LIABILITIES, REDEEMABLE
 PREFERRED & COMMON SHARES
 & SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable and
 accrued expenses.........  $  1,356,259 $  1,330,881
Other liabilities.........     1,798,011       89,831
Debentures................   122,210,991  116,038,987
                            ------------ ------------
  Total Liabilities.......   125,365,261  117,459,699
                            ------------ ------------
REDEEMABLE PREFERRED &
 COMMON SHARES
Preferred Shares--Series B
 Non-Voting Redeemable--
 authorized and issued
 2,951,835 (par value and
 redemption value $1.00)..     2,951,835    2,951,835
Common Shares subject to
 redemption--468,584
 Common Shares (par value
 $0.01 redemption value
 $3.50; less subscription
 loans receivable--
 $767,522, plus interest
 received)...................  1,510,544    1,074,389
                            ------------ ------------
                               4,462,379    4,026,224
                            ------------ ------------
SHAREHOLDERS' EQUITY
Common Shares--Authorized
 60,000,000 (par value
 $0.01) Issued 18,563,269
 (1995--17,805,138).......       185,633      178,051
Additional paid-in
 capital..................    79,997,919   65,396,652
Unrealized gain on
 investments--net of tax..        47,682    1,154,823
Retained earnings.........   127,759,654   98,773,622
                            ------------ ------------
  Total Shareholders'
   Equity.................   207,990,888  165,503,148
                            ------------ ------------
  Total Liabilities,
   Redeemable Preferred &
   Common Shares &
   Shareholders' Equity...  $337,818,528 $286,989,071
                            ============ ============
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
                                      S-1
<PAGE>
 
                                                                     SCHEDULE II
 
                          MUTUAL RISK MANAGEMENT LTD.
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                     PARENT COMPANY ONLY INCOME STATEMENTS
 
<TABLE>
<CAPTION>
                                           YEARS ENDED DECEMBER 31,
                                      -------------------------------------
                                         1996         1995         1994
                                      -----------  -----------  -----------
<S>                                   <C>          <C>          <C>          
INCOME
  Risk management fees..............  $ 1,093,993  $   623,309  $ 1,324,576
  Net investment income.............    3,808,090    1,426,671      309,925
  Equity in earnings of affiliates..     (101,128)      12,657      (58,235)
                                      -----------  -----------  -----------
TOTAL INCOME........................    4,800,955    2,062,637    1,576,266
  Operating expenses................    2,104,297    1,002,648    1,544,549
  Amortization of debentures........    6,172,004    1,006,534            0
                                      -----------  -----------  -----------
NET INCOME BEFORE
EQUITY IN EARNINGS OF SUBSIDIARIES..   (3,475,346)      53,455       31,717
  Dividends from subsidiaries.......      135,000    2,027,905    6,183,497
  Undistributed equity in earnings
   of subsidiaries..................   40,538,483   28,273,011   18,886,886
                                      -----------  -----------  -----------  
NET INCOME..........................   37,198,137   30,354,371   25,102,100
  Preferred share dividends.........     (166,041)    (190,024)    (129,143)
                                      -----------  -----------  -----------
NET INCOME AVAILABLE TO COMMON
 SHAREHOLDERS.......................  $37,032,096  $30,164,347  $24,972,957
                                      ===========  ===========  ===========
</TABLE>
 
 
 
                 See Notes to Consolidated Financial Statements
 
 
                                      S-2
<PAGE>
 
                                                                     SCHEDULE II
 
                          MUTUAL RISK MANAGEMENT LTD.
 
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
                  PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                                         -------------------------------------
                                            1996          1995         1994
                                         -----------  ------------  ----------
<S>                                      <C>          <C>           <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income before dividends and equity
 in earnings of subsidiaries...........  ($3,475,346) $     53,455  $   31,717
Items not affecting cash
  Depreciation.........................      649,409       492,918     437,088
  Amortization of debentures...........    6,172,004     1,006,534           0
  Amortization of investments..........      (13,588)     (266,487)    (60,265)
  Loss (gain) on disposal of fixed
   assets..............................        2,893           (25)        228
  Equity in earnings of affiliates.....      101,128       (12,657)     58,235
Net changes in non-cash balances
 relating to operations:
  Other assets.........................   (3,860,219)     (757,497)    (39,641)
  Accounts payable and accrued
   expenses............................       25,378       536,671     201,374
  Other liabilities....................       (4,686)      (14,469)     56,976
  Due from subsidiaries and
   affiliates..........................     (854,620)     (262,005)    846,296
                                         -----------  ------------  ----------
NET CASH FLOW (APPLIED TO) FROM
 OPERATING ACTIVITIES..................   (1,257,647)      776,438   1,532,008
                                         -----------  ------------  ----------
CASH FLOWS FROM INVESTING ACTIVITIES
  Fixed assets purchased...............     (991,336)     (278,097)   (458,701)
  Proceeds from sale of fixed assets...       15,587        18,028      22,971
  Cost of investments..................   (1,520,088)  (97,328,258) (5,885,683)
  Proceeds from sale of investments....   20,197,989    26,300,171     241,657
  Cost of investments in affiliates and
   subsidiaries........................  (18,928,487)  (38,338,483) (1,525,655)
  Loan repayment received..............            0             0     417,583
  Dividends received from
   subsidiaries........................      135,000     2,027,905   6,183,497
                                         -----------  ------------  ----------
NET CASH APPLIED TO INVESTING
 ACTIVITIES............................   (1,091,335) (107,598,734) (1,004,331)
                                         -----------  ------------  ----------
CASH FLOWS FROM (APPLIED TO) FINANCING
 ACTIVITIES
  Net proceeds from shares issued......    9,047,295     1,618,288   1,083,171
  Net proceeds from issue of
   Debentures..........................            0   112,119,082           0
  Subscription loans receivable........      383,761       383,760           0
  Loan interest received...............       52,394        78,277     109,060
  Dividends paid.......................   (6,060,488)   (4,724,815) (3,949,436)
                                         -----------  ------------  ----------
NET CASH FLOW FROM (APPLIED TO)
 FINANCING ACTIVITIES..................    3,422,962   109,474,592  (2,757,205)
                                         -----------  ------------  ----------
Net increase in cash and cash
 equivalents...........................    1,073,980     2,652,296  (2,229,528)
Cash and cash equivalents at beginning
 of year...............................    3,176,255       523,959   2,753,487
                                         -----------  ------------  ----------
Cash and cash equivalents at end of
 year..................................  $ 4,250,235  $  3,176,255  $  523,959
                                         ===========  ============  ==========
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
                                      S-3
<PAGE>
 
                                                                    SCHEDULE VI
 
                          MUTUAL RISK MANAGEMENT LTD.
 
                      SUPPLEMENTARY INSURANCE INFORMATION
 
                          (U.S. DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                        NET CLAIM AND CLAIMS
                                  GROSS                                                  EXPENSES INCURRED     AMORTIZATION
   YEAR ENDED     DEFERRED     RESERVE FOR      GROSS                                      RELATED TO (1)      OF DEFERRED
  DECEMBER 31,     POLICY     UNPAID CLAIMS   DISCOUNT,    GROSS     NET       NET     ----------------------     POLICY
   PROPERTY-     ACQUISITION       AND         IF ANY,    UNEARNED  EARNED  INVESTMENT   CURRENT     PRIOR     ACQUISITION
    CASUALTY        COSTS    CLAIMS EXPENSES DEDUCTED (1) PREMIUMS PREMIUMS   INCOME      YEAR        YEAR        COSTS
  ------------   ----------- --------------- ------------ -------- -------- ---------- ----------- ----------  ------------
<S>              <C>         <C>             <C>          <C>      <C>      <C>        <C>         <C>         <C>
1996............   11,158        418,975        19,752     93,741   56,413    13,253       35,456      (3,021)    24,185
1995............   10,833        314,927        22,056     59,775   48,207    11,719       26,569      (2,264)    24,934
1994............    8,136        241,427         8,282     34,297   68,202     9,564       38,862        (386)    30,446
<CAPTION>
                   NET
                   PAID
   YEAR ENDED     CLAIMS
  DECEMBER 31,     AND      NET      OTHER
   PROPERTY-      CLAIMS  PREMIUMS OPERATING
    CASUALTY     EXPENSES WRITTEN  EXPENSES
  ------------   -------- -------- ---------
<S>              <C>      <C>      <C>
1996............  22,027   55,048   15,810
1995............  29,481   52,160   12,436
1994............  30,924   68,061   10,855
</TABLE>
----
(1) Medical malpractice reserves have been discounted at 6% in 1996, 1995 and
    1994. Workers' compensation reserves have been discounted at 4% in 1996,
    1995 and 1994.
 
                                      S-4