**ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES **

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTSYEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 **

**(Columnar Amounts in Thousands Except Per Share Data)**

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-  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES          *Descriptionof Operations*  – Acceptance Insurance Companies Inc. and subsidiaries (the“Company”) is primarily an agricultural risk management company. TheCompany concentrates on helping agricultural producers manage their risks byproviding comprehensive insurance products. The Company also continues to managethe run-off of discontinued and sold property and casualty lines.      TheCompany’s results may be influenced by factors which are largely beyond theCompany’s control. Important among such factors are weather conditions,natural disasters, changes in commodity prices, changes in state and federalregulations, changes in premium pricing and agency commission rates in theindustry, changes in the reinsurance market, including pricing, availability andcoverage, changes in tax laws, financial market performance, changes in federalpolicies or court decisions affecting coverages, changes in the rate ofinflation, interest rates and general economic conditions. The Company’scrop insurance results are particularly subject to wide fluctuations because ofweather factors influencing crop harvests and commodity prices. TheCompany’s increased emphasis in its agricultural segment may produce morevolatility in the operating results on a quarter-to-quarter or year-to-yearbasis than has historically been the case due to the seasonal and short-termnature of the Company’s crop business, as well as the impact on the cropbusiness of weather and other natural perils.     *Principlesof Consolidation*  – The Company’s consolidated financial statementsinclude the accounts of its majority-owned subsidiaries. All significantintercompany transactions have been eliminated. *InsuranceAccounting*  – The Company writes multi-peril crop insurance(“MPCI”) and crop revenue coverage (“CRC”) pursuant to termsestablished by the Federal Risk Management Agency (“RMA”). As usedherein, the term MPCI includes CRC. The Company issues and administers policies,for which it receives administrative fees, and the Company participates in aprofit sharing arrangement in which it receives from the government a portion ofthe aggregate profit, or pays a portion of the aggregate loss, with respect tothe business it writes. The Company’s share of profit or loss from its MPCIbusiness is determined after the crop season ends on the basis of a profitsharing formula established by law and the RMA. Due to the nature of several ofthe CRC products whereby results are based on the market prices of variouscommodities in the fourth quarter, as well as yields, and the significance ofCRC as a percentage of MPCI, the Company records its initial estimate of profitor loss for MPCI and related products in the fourth quarter. Any changes in suchestimates will typically occur during the first two quarters of the followingyear after the claim adjustment process is substantially complete. The Companyreceives its profit share in cash, with 60% of the amount in excess of 17.5% ofits MPCI Retention (as defined in the profit sharing agreement) in any yearcarried forward to future years, or it must pay its share of losses. The Companyrecognizes as income in the current year these profit sharing amounts which arecarried forward as a receivable. The amounts carried forward as a receivable arereceived in future years in cash or as a reduction of losses due the RMA. MPCIpremiums received during the year which correspond to next year’s cropseason are deferred until the next year. Insurance underwriting expenses arepresented net of administrative fees received from the RMA for reimbursement ofcosts incurred by the Company.     Unearnedpremiums represent the portion of property and casualty segment premiums writtenwhich relates to the unexpired term of policies and is calculated generallyusing the pro rata method. The Company also records a liability for policyclaims based on its review of individual claim cases and the estimated ultimatesettlement amounts. This liability also includes estimates of claims incurredbut not reported based on Company and industry paid and reported claim andsettlement expense experience. Differences which arise between the ultimateliability for claims incurred and the liability established, which may bematerial are reflected in the statement of operations in the period suchinformation becomes known.     Certaincosts of writing property and casualty segment business, principallycommissions, premium taxes, and other underwriting expenses are deferred andamortized as related premiums are earned. The recovery of deferred acquisitioncosts considers anticipated investment income and is reviewed periodicallyduring the year. In the fourth quarter of fiscal 1999, the Company amortized$3.3 million of previously deferred policy acquisition costs in conjunction withits review of recoverability. *Statementsof Cash Flows*  – The Company aggregates cash and short-term investments withmaturity dates of three months or less from the date of purchase for purposes ofreporting cash flows. As of December 31, 2001 and 2000, approximately$48,733,000 and $27,504,000 of short-term investments had maturity dates atacquisition of greater than three months. Restricted short-term investments arenot considered a cash equivalent. *RestrictedShort-Term Investments*  – The restricted short-term investments balance iscomprised of investments deposited with a trustee for the Company’sissuance of an outstanding letter of credit relating to reinsurance coverage. *Investments* – Investments in fixed maturities include bonds, notes and redemptivepreferred stocks and investments in marketable equity securities include commonand nonredemptive preferred stocks. All investments in fixed maturities andmarketable equity securities have been classified as available-for-sale andcertain marketable equity securities do not pay dividends. Available-for-salesecurities are stated at fair value with the unrealized gains and lossesreported as a separate component of other comprehensive income (loss), net oftax. Realized investment gains and losses on sales of securities are determinedon the specific identification method.  Realestate is stated at the lower of cost or estimated net realizable value and isnon-income producing.***Propertyand Equipment*** – Property and equipment are stated at cost, net ofaccumulated depreciation. Depreciation is recognized principally using thestraight-line method over periods of three to ten years.***Excessof Cost Over Acquired Net Assets*** – The excess of cost over equity inacquired net assets is being amortized principally using the straight-linemethod over periods not exceeding 40 years. Accumulated amortizationapproximated $5,709,000 and $4,573,000 at December 31, 2001 and 2000,respectively.***Impairmentof Long-Lived Assets*** – The Company reviews long-lived assets and certainidentifiable intangibles for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. An impairment loss would be recognized when evidence exists thatthe carrying value is not recoverable. Measurement of the impairment oflong-lived assets is based upon management’s estimate of discounted futurecash flows.***Useof Estimates*** – The preparation of financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results may differsignificantly from those estimates.***Stock-BasedCompensation*** – The Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards No. 123 (“SFAS No.123”), Accounting for Stock-Based Compensation, establishing financialaccounting and reporting standards for stock-based compensation plans. Aspermitted by SFAS No. 123, the Company will continue to use the methodprescribed by the Accounting Principles Board Opinion No. 25 (“APB25”), Accounting for Stock Issued to Employees. Companies using APB 25 arerequired to make pro forma footnote disclosures of net income and earnings pershare as if the fair value method of accounting, as defined in SFAS No. 123, hadbeen applied.***Changein Accounting Principle*** – In December 1997, the Accounting StandardsExecutive Committee of the American Institute of Certified Public Accountants(“AcSEC”) issued Statement of Position 97-3, *Accounting by Insuranceand Other Enterprises for Insurance-Related Assessments* (“SOP 97-3”).SOP 97-3 provides guidance for determining when an entity should recognizea liability for guaranty-fund and other insurance-related assessments, how tomeasure that liability, and when an asset may be recognized for the recovery ofsuch assessments through premium tax offsets. The Company adopted SOP 97-3 onJanuary 1, 1999 resulting in a cumulative effect of change in accountingprinciples of $338,000.***Recent  Statements of Financial  Accounting  Standards*** - Statement of Financial  Accounting  Standards No.      133 ("SFAS  No.  133"), *Accounting  for  Derivative  Instruments  and for  HedgingActivities*,  requires      companies to recognize  all  derivatives  as either  assets or  liabilities  in the statement of financial      condition  and to measure  all  derivatives  at fair value.  SFAS No. 133  requires  that  changes in fair      value of a derivative be recognized  currently in earnings unless specific hedge  accounting  criteria are      met. Upon  implementation  of SFAS No. 133,  hedging  relationships  may be  redesignated,  and securities      held to maturity  may be  transferred  to  available-for-sale  or trading.  SFAS No. 137,*Accounting  for      Derivative  Instruments and Hedging  Activities-Deferral  of the Effective Date of FASB Statement No. 133,*      deferred the  effective  date of SFAS No. 133 to fiscal  years  beginning  after June 15,  2000.  SFAS No.      138, *Accounting for Certain Derivative  Instruments and Certain Hedging Activities* amended the accounting      and  reporting  standards of SFAS No. 133 for certain  derivative  instruments,  hedging  activities,  and      decisions made by the  Derivatives  Implementation  Group.  The adoption of SFAS No. 133, SFAS No. 137 and      SFAS No. 138 had no impact on the Company's financial statements.  In July  2001,  the  Financial  Accounting  Standards  Board  issued  Statement  of  Financial  Accounting      Standards  No. 141 ("SFAS No.  141"), *Business Combinations*,  and  Statement  No. 142 ("SFAS No.  142"),*Goodwill and Other Intangible Assets*.  SFAS No. 141 requires business  combinations  initiated after June      30, 2001 to be accounted  for using the  purchase  method of  accounting  and  specifies  the criteria for      recognition of intangible assets separately from goodwill.  SFASNo. 142 requires that goodwill and intangible assets with indefinite usefullives no longer be amortized, but instead tested for impairment at leastannually. Intangible assets with a determinable useful life will continue to beamortized over that period. The Company is required to implement SFAS No. 142effective January 1, 2002 and has not determined the full impact that thisstatement will have on its consolidated financial position or results ofoperations.***Reclassifications***– Certain prior period amounts have been reclassified to conform withcurrent year presentation. 
-  INVESTMENTS     Asummary of net investment income earned on the investment portfolio for theyears ended December 31 is as follows:   
Theamortized cost and related estimated fair values of investments in theaccompanying balance sheets are as follows:

Theamortized cost and related estimated fair values of the fixed maturitysecurities as of December 31, 2001 are shown below by stated maturity dates.Actual maturities may differ from stated maturities because the borrowers mayhave the right to call or prepay obligations with or without call or prepaymentpenalties.