##### Table of Contents



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------------



| |  | FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
| |  | ---------------------------------------------



OR



| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------



Commission File Number 1-7461



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ACCEPTANCE INSURANCE COMPANIES INC.

(Exact
name of registrant as specified in its charter)



|Delaware                                                       |  | 31-0742926                             
|-------------------------------------------------------------- |  | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



Suite
1600, 300 West Broadway

Council Bluffs, Iowa 51503

(Address of principal executive offices)

(Zip
Code)



(712) 328-3918

Registrants Telephone Number, Including Area Code:



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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
has been 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act).    Yes ̈No  x



The number of shares of each class of the
Registrants common stock outstanding on May 12, 2003 was:



|Class of Common Stock        |  | No. of Shares Outstanding
|---------------------------- |  | -------------------------
|Common Stock, $.40 Par Value |  | 14,201,486               



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##### Table of Contents

ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES



FORM 10-Q



TABLE OF CONTENTS



|                                                                         |  |                                                                                       |  | PAGE
|------------------------------------------------------------------------ |  | ------------------------------------------------------------------------------------- |  | ----
|PART I. FINANCIAL INFORMATION                                            |  |                                                                                      
|Item 1.                                                                  |  | Financial Statements (unaudited):                                                     |  |     
|                                                                        
|                                                                         |  | Consolidated Balance Sheets                                                           |  |     
|                                                                         |  | March 31, 2003 and December 31, 2002                                                  |  | 3   
|                                                                        
|                                                                         |  | Consolidated Statements of Operations                                                 |  |     
|                                                                         |  | Three Months Ended March 31, 2003 and 2002                                            |  | 4   
|                                                                        
|                                                                         |  | Consolidated Statements of Cash Flows                                                 |  |     
|                                                                         |  | Three Months Ended March 31, 2003 and 2002                                            |  | 5   
|                                                                        
|                                                                         |  | Notes to Interim Consolidated Financial Statements                                    |  | 6   
|                                                                        
|Item 2.                                                                  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 18  
|                                                                        
|Item 3.                                                                  |  | Quantitative and Qualitative Disclosure about Market Risk                             |  | 28  
|                                                                        
|Item 4.                                                                  |  | Controls and Procedures                                                               |  | 28  
|                                                                        
|PART II. OTHER INFORMATION                                               |  |                                                                                      
|Item1.                                                                   |  | Legal Proceedings                                                                     |  | 29  
|                                                                        
|Item 5.                                                                  |  | Other Information                                                                     |  | 31  
|                                                                        
|Item 6.                                                                  |  | Exhibits and Reports on Form 8-K                                                      |  | 31  
|                                                                        
|Signatures                                                               |  |                                                                                       |  | 32  
|                                                                        
|Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | 33                                                                                   
|                                                                        
|Exhibit Index                                                            |  | 35                                                                                   







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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1. Financial Statements (unaudited)

ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS (dollars in thousands except share data)

---

|                                                                                                                                                 
|-------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                 
|ASSETS                                                                                                                                           
|Investments:                                                                                                                                     
|Short-term investments, at cost, which approximates market                                                                                       
|Real estate                                                                                                                                      
|                                                                                                                                                 
|                                                                                                                                                 
|Cash                                                                                                                                             
|Receivables, net                                                                                                                                 
|Property and equipment, net                                                                                                                      
|Other assets                                                                                                                                     
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Discontinued operations:                                                                                                                         
|Investments:                                                                                                                                     
|Fixed maturities available-for-sale, at fair value                                                                                               
|Marketable equity securities available-for-sale, at fair value                                                                                   
|Real estate                                                                                                                                      
|Short-term investments, at cost, which approximates market                                                                                       
|                                                                                                                                                 
|                                                                                                                                                 
|Cash                                                                                                                                             
|Receivables, net                                                                                                                                 
|Reinsurance recoverable on unpaid losses and loss adjustment expenses                                                                            
|Prepaid reinsurance premiums                                                                                                                     
|Property and equipment, net of accumulated depreciation                                                                                          
|Other assets                                                                                                                                     
|                                                                                                                                                 
|Discontinued operations                                                                                                                          
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                   
|Accounts payable and accrued liabilities                                                                                                         
|Company-obligated mandatorily redeemable Preferred Securities of AICI Capital Trust,
holding solely Junior Subordinated Debentures of the Company
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 
|Discontinued operations:                                                                                                                         
|Losses and loss adjustment expenses                                                                                                              
|Unearned premiums                                                                                                                                
|Amounts payable to reinsurers                                                                                                                    
|Accounts payable and accrued liabilities                                                                                                         
|                                                                                                                                                 
|Discontinued operations                                                                                                                          
|                                                                                                                                                 
|Total liabilities                                                                                                                                
|                                                                                                                                                 
|Commitments and contingencies                                                                                                                    
|Stockholders equity (deficit):                                                                                                                  
|Preferred stock, no par value, 5,000,000 shares authorized, none issued                                                                          
|Common stock, $.40 par value, 40,000,000 shares authorized; 15,685,473 shares
issued                                                             
|Capital in excess of par value                                                                                                                   
|Accumulated other comprehensive income (loss), net of tax                                                                                        
|Accumulated deficit                                                                                                                              
|Treasury stock, at cost, 1,463,591 shares                                                                                                        
|Contingent stock, 20,396 shares                                                                                                                  
|                                                                                                                                                 
|Total stockholders equity (deficit)                                                                                                             
|                                                                                                                                                 
|                                                                                                                                                 
|                                                                                                                                                 



The
accompanying notes are an integral part of the consolidated financial statements.



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ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share data)



THREE MONTHS ENDED MARCH 31, 2003 AND 2002

---

|                                                    
|----------------------------------------------------
|                                                    
|Revenues:                                           
|Net investment income                               
|Net realized capital gains                          
|                                                    
|                                                    
|                                                    
|Costs and expenses:                                 
|General and administrative expenses                 
|                                                    
|Operating income (loss)                             
|                                                    
|Interest expense                                    
|                                                    
|Loss before income taxes and discontinued operations
|Income tax expense (benefit):                       
|Current                                             
|Deferred                                            
|Change in valuation allowance                       
|                                                    
|                                                    
|                                                    
|Loss from continuing operations                     
|Loss from discontinued operations, net of tax       
|                                                    
|Net loss                                            
|                                                    
|Loss per share:                                     
|Basic and diluted                                   
|Loss from continuing operations                     
|Loss from discontinued operations                   
|Net loss                                            



The
accompanying notes are an integral part of the consolidated financial statements.



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ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)



THREE MONTHS ENDED MARCH 31, 2003 AND
2002

---

|                                                                       
|-----------------------------------------------------------------------
|                                                                       
|Cash flows from operating activities:                                  
|Net loss                                                               
|Adjustments to reconcile net loss to net cash from operating activities
|                                                                       
|Net cash from operating activities                                     
|                                                                       
|Cash flows from investing activities:                                  
|Sale of property and equipment                                         
|                                                                       
|Net cash from investing activities                                     
|                                                                       
|Cash flows from financing activities:                                  
|Proceeds from issuance of common stock                                 
|                                                                       
|Net cash from financing activities                                     
|                                                                       
|Net decrease in cash and short-term investments                        
|Cash and short-term investments at beginning of period                 
|                                                                       
|Cash and short-term investments at end of period                       
|                                                                       



The
accompanying notes are an integral part of the consolidated financial statements.



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ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES



NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

THREE MONTHS ENDED MARCH 31, 2003 AND 2002

(Columnar Amounts in Thousands Except Per Share Data)

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Description of OperationsAcceptance
Insurance Companies Inc. and subsidiaries (the Company) historically has been an agricultural risk management company providing comprehensive insurance products (Agricultural Segment) and a provider of property and casualty
insurance (Property and Casualty Segment). Due to the financial condition of the Company and regulatory restrictions placed on the Company in the fourth quarter of 2002, the Company neither intends nor has the ability to continue its
operations in the Agricultural Segment or the Property and Casualty Segment. As such, all operations in these segments have been presented as discontinued operations. Assets and liabilities have been reflected separately as discontinued operations
on the consolidated balance sheets.



The
Companys results may be influenced by factors which are largely beyond the Companys control. Important among such factors are changes in state and federal regulations, decisions by regulators including any increased regulatory control
over Acceptance Insurance Company, changes in the reinsurance market, including the ability and willingness of reinsurers to pay claims, changes in tax laws, financial market performance, changes in federal policies or court decisions affecting
coverages, changes in the rate of inflation, interest rates and general economic conditions.



Principles of ConsolidationThe Companys consolidated financial statements include the accounts of its majority-owned subsidiaries. All significant intercompany transactions
have been eliminated. American Growers Insurance Company (AGIC), the Companys subsidiary previously conducting insurance operations within the Agricultural Segment, was placed into rehabilitation by the District Court of Lancaster
County, Nebraska on December 20, 2002. Effective as of December 20, 2002, AGIC and its subsidiaries ceased to be under the control of the Company and are not included as consolidated subsidiaries of the Company after that date. As the Companys
equity interest in AGIC and its subsidiaries is negative, the Company has reflected its investment in AGIC and its subsidiaries at fair market value of zero as the Company is no longer responsible for AGICs net liabilities.



Going ConcernThe Companys only
consolidated insurance subsidiary at December 31, 2002, Acceptance Insurance Company (AIC), is regulated by the Nebraska Department of Insurance (NEDOI). AIC is currently under supervision by the NEDOI. The NEDOI Director
(Director) currently has the authority to increase regulatory control of AIC by requesting an appropriate court to enter an Order of Rehabilitation or an Order of Liquidation, with or without a change in the financial condition of AIC.
The Company believes increased regulatory control of AIC would have a significant negative impact on the Company.



Additionally, there is significant uncertainty as to whether AIC will be able to meet its future cash flow needs. A major portion of
AICs investments are pledged and AICs ability to meet its cash flow needs will be highly dependent upon AICs ability to get significant amounts of pledged funds released. Additionally, AICs cash flows are significantly
impacted by any changes in the expected payout of insurance losses and loss adjustment expenses. AICs ability to meet its cash flow needs is also dependent upon the timely recovery of reinsurance balances, including the favorable resolution of
balances currently in dispute. While based upon current expectations AIC would likely have the ability to meet its cash flow needs through March 31, 2004, there can be no assurances considering the significant uncertainties that exist.



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There is also
significant uncertainty as to whether Acceptance Insurance Companies Inc. (AICI) will be able to meet its cash flow needs. AICI has deferred interest payments on its Junior Subordinated Debentures, which in turn deferred the interest on
the Trust Preferred Securities issued by AICI Capital Trust, as permitted by the trust agreement and indenture, and has disputed or denied payments of certain other liabilities and commitments. While based upon current expectations AICI would likely
have the ability to meet its cash flow needs through March 31, 2004, there can be no assurances considering the significant uncertainties that exist.



Basis of PresentationThe accompanying consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments except as otherwise disclosed, which in the opinion of management are considered necessary to fairly present the Companys consolidated financial position as of March 31, 2003 and December 31, 2002, and the results
of operations for the three months ended March 31, 2003 and 2002 and cash flows for the three months ended March 31, 2003 and 2002.



Recent Statements of Financial Accounting StandardsIn July 2001, the Financial Accounting Standards Board
(FASB) 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.



SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Intangible assets with a determinable useful life will continue to be amortized over that period. The adoption of SFAS No. 142 had no impact on
the Companys financial statements at January 1, 2002. With the adoption of SFAS No. 142 on January 1, 2002 goodwill is no longer amortized and in accordance with SFAS No. 142 the goodwill is tested for impairment annually and between annual
tests if an event occurs that would more likely than not reduce the fair value of the reporting unit. During the second quarter of 2002, the Company completed the transitional goodwill impairment test required by SFAS No. 142 and determined that
there was no goodwill impairment. As a result of the significant operating losses and the discontinuance of the Agricultural Segment, the Company reevaluated the recoverability of the goodwill and intangible assets during the third and fourth
quarters of 2002. Based upon the results of such reviews, it was determined that the intangible asset related to non-competition agreements, approximately $5.7 million, and the goodwill of approximately $30.0 million were impaired and were written
down to zero during 2002.



In June 2001, the
FASB issued Statement of Financial Accounting Standards No. 143 (SFAS No. 143), Accounting for Asset Retirement Obligations. SFAS No. 143 requires recognition on the balance sheet of legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of such assets. Additionally, at the time an asset retirement obligation (ARO) is recognized, an ARO asset of the same
amount is recorded and depreciated. This pronouncement is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 had no impact on our consolidated financial statements.



In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption
of SFAS No. 144 resulted in the impairment of certain long-lived assets and the recording of insurance operations as discontinued operations.



In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS No. 146), Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. This pronouncement is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application



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encouraged. The Company
elected to adopt SFAS No. 146 during 2002. As noted above, the Company exited its Agricultural Segment and Property and Casualty Segment operations during 2002. In the Property and Casualty Segment, the Company expects to incur approximately $1.1
million of employee termination benefits, of which approximately $179,000 have been expensed in discontinued operationsunderwriting expenses during the three months ended March 31, 2003 and $131,000 had been expensed in previous periods.
During the first quarter of 2003, approximately $87,000 of termination benefits were paid and as of March 31, 2003 the Company has an accrued liability for approximately $223,000.



In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS No.
148), Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of SFAS No. 123, which provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The transition
guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods
beginning after December 15, 2002. The Company adopted the disclosure requirements of SFAS No. 148.



In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. Initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for financial statements of annual periods ending after December 15, 2002. The adoption of FIN No. 45 had no impact on our consolidated financial statements.



In January 2003, the FASB issued FIN No. 46, Consolidation
of Variable Interest Entities, which addresses the consolidation of certain entities (variable interest entity) when control exists through other than voting interests. FIN No. 46 requires that a variable interest entity be
consolidated by the holder of the majority of the risks and rewards associated with the activities of the variable interest entity. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003. For variable
interest entities created prior to February 1, 2003, FIN No. 46 is effective for the first interim period beginning after June 15, 2003, and may be applied retroactively or prospectively. The adoption of FIN No. 46 had no impact on our consolidated
financial statements.



ReclassificationsCertain prior period amounts have been reclassified to conform with the current period presentation.



2. RECEIVABLES



At March 31, 2003 and December 31, 2002, the Company had a $27.5 million receivable from AGIC related to the draw down of an Acceptance
Insurance Companies Inc. letter of credit by an AGIC reinsurer during the fourth quarter of 2002. Considering the uncertainty regarding the collection of this balance from AGIC, the Company has recorded an allowance for the entire $27.5 million.



At March 31, 2003 the Company had a note
receivable carried at fair value of approximately $1.3 million. During the first quarter of 2003, the Company sold its office building and certain contents in Council Bluffs, Iowa. The proceeds included approximately $204,000 of cash and a note
receivable with a fair value of approximately $1.3 million and the sale resulted in a gain of approximately $334,000.



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3. INCOME TAXES



The Company provides for income taxes on its statements of operations pursuant to Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), Accounting for Income Taxes. The primary components of the Companys deferred tax assets and liabilities as of March 31, 2003 and December 31, 2002, respectively, are as follows:



|                                                  |  | March 31, 2003 |         |   | December 31, 2002 |  
|------------------------------------------------- |  | -------------- | ------- | - | ----------------- | -
|Losses and loss adjustment expenses               |  | $              | 4,782   |   |                   | $
|Allowance for doubtful accounts                   |  |                | 19,516  |   |                   |  
|Net operating loss carryforward                   |  |                | 30,557  |   |                   |  
|Basis difference in AGIC                          |  |                | 26,140  |   |                   |  
|Other                                             |  |                | 3,774   |   |                   |  
|                                                  |  |                |         |   |                   |  
|Deferred tax asset                                |  |                | 84,769  |   |                   |  
|                                                  |  |                |         |   |                   |  
|Unrealized gain on investments available-for-sale |  |                | (255    | ) |                   |  
|Other                                             |  |                | (1,176  | ) |                   |  
|                                                  |  |                |         |   |                   |  
|Deferred tax liability                            |  |                | (1,431  | ) |                   |  
|                                                  |  |                |         |   |                   |  
|                                                  |  |                | 83,338  |   |                   |  
|Valuation allowance                               |  |                | (83,338 | ) |                   |  
|                                                  |  |                |         |   |                   |  
|Net deferred tax asset                            |  | $              |        |   |                   | $
|                                                  |  |                |         |   |                   |  



The net
deferred tax asset is comprised of temporary differences arising from both the Companys continuing and discontinued operations. AGIC is no longer a consolidated subsidiary of the Company for financial reporting purposes. Accordingly, the
specific components of AGICs deferred tax assets are not included and the basis difference between the Companys equity investment in AGIC and AGICs tax basis is presented as a separate component as the Company is no longer
permanently reinvested in AGIC.



The realization
of the net deferred tax asset is dependent upon the Companys ability to generate sufficient taxable income in future periods. For tax purposes, the Company has net operating loss carryforwards that expire, if unused, beginning in 2019. During
2002, the Companys ability to generate sufficient taxable income in future periods was significantly impacted by results in its Agricultural Segment and its discontinuance of both its Agricultural Segment and Property and Casualty Segment
operations. Based on this information, management believes that it is unlikely that the tax benefits will be realized in the future and therefore a valuation allowance was established for the entire deferred tax asset.



Income taxes computed by applying statutory rates to loss
before income taxes and discontinued operations are reconciled to the provision for income taxes set forth in the consolidated statements of operations for the three months ended March 31, 2003 and 2002 are as follows:



|                                |  | 2003 |      |   | 2002 |  
|------------------------------- |  | ---- | ---- | - | ---- | -
|Income taxes at statutory rates |  | $    | (738 | ) |      | $
|Increase in valuation allowance |  |      | 738  |   |      |  
|                                |  |      |      |   |      |  
|Income tax benefit              |  | $    |     |   |      | $
|                                |  |      |      |   |      |  



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4. COMPANY-OBLIGATED
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF AICI CAPITAL TRUST, HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE COMPANY



In August 1997, AICI Capital Trust, a Delaware business trust organized by the Company (the Issuer Trust) issued 3.795 million
shares or $94.875 million aggregate liquidation amount of its 9% Preferred Securities (liquidation amount $25 per Preferred Security). The Company owns all of the common securities (the Common Securities) of the Issuer Trust. The
Preferred Securities represent preferred undivided beneficial interests in the Issuer Trusts assets. The assets of the Issuer Trust consist solely of the Companys 9% Junior Subordinated Debentures due in 2027, which were issued in August
1997 in an amount equal to the total of the Preferred Securities and the Common Securities.



Distributions on the Preferred Securities and Junior Subordinated Debentures are cumulative, accrue from the date of issuance and are payable quarterly in arrears. The Junior Subordinated Debentures
are subordinate and junior in right of payment to all senior indebtedness of the Company and are subject to certain events of default and can be called at par value after September 30, 2002. At March 31, 2003 and December 31, 2002, the Company had
Preferred Securities of $94.875 million outstanding at a weighted average interest cost of 9.2%.



During the three months ended March 31, 2002 no interest was paid on the Junior Subordinated Debentures as the distribution of interest
for the first quarters were due and paid in April 2002. Effective November 18, 2002, the Company elected to defer payment of interest on its Junior Subordinated Debentures, as permitted by the trust agreement and indenture, beginning with the
interest payment date on December 31, 2002 until not later than September 30, 2007. The interest payments on the Preferred Securities will be deferred for a corresponding period. As of March 31, 2003 approximately $4.3 million of accrued interest
had been deferred.



5. NET LOSS PER SHARE



|The |  | net loss per basic and diluted share for the three months ended March 31, 2003 and 2002 were as follows:
|--- |  | --------------------------------------------------------------------------------------------------------



|                                           |  | 2003 |        |   | 2002 |  
|------------------------------------------ |  | ---- | ------ | - | ---- | -
|Loss from continuing operations            |  | $    | (2,109 | ) |      | $
|Loss from discontinued operations          |  |      | (1,471 | ) |      |  
|                                           |  |      |        |   |      |  
|Net loss                                   |  | $    | (3,580 | ) |      | $
|                                           |  |      |        |   |      |  
|Weighted average common shares outstanding |  |      | 14,201 |   |      |  
|                                           |  |      |        |   |      |  
|Loss per share:                            |  |      |        |   |      |  
|Basic and diluted:                         |  |      |        |   |      |  
|Loss from continuing operations            |  | $    | (0.15  | ) |      | $
|Loss from discontinued operations          |  |      | (0.10  | ) |      |  
|Net loss                                   |  |      | (0.25  | ) |      |  



Contingent stock and stock options were not included in the above calculations for the three months ended March 31, 2003 and 2002 due to their antidilutive nature.



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##### Table of Contents

6. OTHER COMPREHENSIVE INCOME



Other comprehensive income determined in accordance with SFAS No. 130 for the three months ended March 31,
2003 and 2002 are as follows:



|                                                                                    |  | 2003 |        |   | 2002 |  
|----------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | -
|Net loss                                                                            |  | $    | (3,580 | ) |      | $
|Unrealized holding gains (losses) of investments,net of reclassification
adjustment |  |      | 23     |   |      |  
|Income tax expense (benefit)                                                        |  |      |       |   |      |  
|                                                                                    |  |      |        |   |      |  
|                                                                                    |  |      | 23     |   |      |  
|                                                                                    |  |      |        |   |      |  
|Other comprehensive loss                                                            |  | $    | (3,557 | ) |      | $
|                                                                                    |  |      |        |   |      |  





7. STOCK-BASED COMPENSATION



The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. No stock-based employee compensation cost has been recognized in the financial statements as all options granted under those plans had an exercise price equal to
the market value of the underlying common stock at the date of the grant.



Had compensation cost for the Companys stock-based compensation plans been determined based on the fair value for awards under those plans consistent with the method of SFAS No. 123, the Companys net loss and net
loss per share for the three months ended March 31, 2003 and 2002 would have been as indicated below:



|                                             |  | 2003 |        |   | 2002 |  
|-------------------------------------------- |  | ---- | ------ | - | ---- | -
|Net loss:                                    |  |      |        |   |      |  
|As reported                                  |  | $    | (3,580 | ) |      | $
|Fair value based method compensation expense |  |      | (150   | ) |      |  
|                                             |  |      |        |   |      |  
|Pro forma                                    |  | $    | (3,730 | ) |      | $
|                                             |  |      |        |   |      |  
|Net loss per share:                          |  |      |        |   |      |  
|Basic and diluted:                           |  |      |        |   |      |  
|As reported                                  |  | $    | (0.25  | ) |      | $
|Pro forma                                    |  |      | (0.26  | ) |      |  



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8. DISCONTINUED OPERATIONSGENERAL



In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets. Under SFAS No. 144 a component of business is considered abandoned when it ceases to be used, and such business
operations are to be reported as discontinued operations. Due to the financial condition of the Company and regulatory restrictions placed on the Company in the fourth quarter of 2002, the Company does not intend nor have the ability to continue its
operations in the Agricultural Segment or the Property and Casualty Segment. Accordingly, all operations in both segments have ceased and these segments have been presented as discontinued operations.



Assets and liabilities have been separately classified on the
face of the consolidated balance sheets. Operating results for these segments for the three months ended March 31, 2003 and 2002 were as follows:



|                                              |  | 2003 |        |   | 2002 |  
|--------------------------------------------- |  | ---- | ------ | - | ---- | -
|Revenues:                                     |  |      |        |   |      |  
|Insurance premiums earned                     |  | $    | 441    |   |      | $
|Net investment income                         |  |      | 984    |   |      |  
|Net realized capital gains (losses)           |  |      | 120    |   |      |  
|                                              |  |      |        |   |      |  
|                                              |  |      | 1,545  |   |      |  
|                                              |  |      |        |   |      |  
|Costs and expenses:                           |  |      |        |   |      |  
|Insurance losses and loss adjustment expenses |  |      | 692    |   |      |  
|Insurance underwriting expenses               |  |      | 2,024  |   |      |  
|Impairment of property and equipment          |  |      | 300    |   |      |  
|                                              |  |      |        |   |      |  
|                                              |  |      | 3,016  |   |      |  
|                                              |  |      |        |   |      |  
|Operating loss                                |  |      | (1,471 | ) |      |  
|                                              |  |      |        |   |      |  
|Income tax expense (benefit):                 |  |      |        |   |      |  
|Current                                       |  |      |       |   |      |  
|Deferred                                      |  |      | (442   | ) |      |  
|Change in valuation allowance                 |  |      | 442    |   |      |  
|                                              |  |      |        |   |      |  
|                                              |  |      |       |   |      |  
|                                              |  |      |        |   |      |  
|Loss from discontinued operations, net of tax |  | $    | (1,471 | ) |      | $
|                                              |  |      |        |   |      |  



The
impairment of property and equipment represents the write-off of property and equipment assets utilized in the Agricultural Segment net of expected proceeds. These items were assets of Acceptance Insurance Company (AIC) but are not being
utilized by any operations of the companies in the consolidated group.



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9. DISCONTINUED OPERATIONSINVESTMENTS



The amortized cost and related estimated fair values of
investments in the accompanying consolidated balance sheets are as follows:



|                                             |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Fair Value
|-------------------------------------------- |  | -------------- | ------- | ---------------------- | - | ----------------------- |  | --------------------
|March 31, 2003:                              |  |                |         |                        |   |                         |  |                     
|Fixed maturities available-for-sale:         |  |                |         |                        |   |                         |  |                     
|U.S. Treasury and government securities      |  | $              | 52,492  |                        | $ | 1,152                   |  | $                   
|Other debt securities                        |  |                | 30,380  |                        |   | 683                     |  |                     
|                                             |  |                |         |                        |   |                         |  |                     
|                                             |  | $              | 82,872  |                        | $ | 1,835                   |  | $                   
|                                             |  |                |         |                        |   |                         |  |                     
|Marketable equity securitiespreferred stock |  | $              | 831     |                        | $ | 4                       |  | $                   
|                                             |  |                |         |                        |   |                         |  |                     
|Marketable equity securitiescommon stock    |  | $              | 3,174   |                        | $ | 1                       |  | $                   
|                                             |  |                |         |                        |   |                         |  |                     
|                                            
|                                             |  | Amortized Cost |         | Gross Unrealized Gains |   | Gross Unrealized Losses |  | Estimated Fair Value
|December 31, 2002:                           |  |                |         |                        |   |                         |  |                     
|Fixed maturities available-for-sale:         |  |                |         |                        |   |                         |  |                     
|U.S. Treasury and government securities      |  | $              | 59,744  |                        | $ | 1,472                   |  | $                   
|Other debt securities                        |  |                | 53,137  |                        |   | 1,198                   |  |                     
|                                             |  |                |         |                        |   |                         |  |                     
|                                             |  | $              | 112,881 |                        | $ | 2,670                   |  | $                   
|                                             |  |                |         |                        |   |                         |  |                     
|Marketable equity securitiespreferred stock |  | $              | 2,500   |                        | $ |                        |  | $                   
|                                             |  |                |         |                        |   |                         |  |                     
|Marketable equity securitiescommon stock    |  | $              | 5,952   |                        | $ | 69                      |  | $                   
|                                             |  |                |         |                        |   |                         |  |                     



As
required by insurance regulatory laws, certain fixed maturities with an estimated fair value of approximately $7.5 million at March 31, 2003 were deposited in trust with regulatory agencies. Additionally, at March 31, 2003, approximately $45.8
million of fixed maturities available-for-sale and $15.4 million of short-term investments were pledged to Clarendon to secure the Companys obligations under reinsurance agreements and approximately $11.2 million of fixed maturities
available-for-sale and $600,000 of short-term investments were pledged to McM to secure the Companys net obligations under the reinsurance agreements (See Note 14).



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10. DISCONTINUED
OPERATIONSINSURANCE PREMIUMS AND CLAIMS



Insurance premiums written and earned by the Companys insurance subsidiaries for the three months ended March 31, 2003 and 2002 were as follows:



|                         |  | 2003 |      |   | 2002 |  
|------------------------ |  | ---- | ---- | - | ---- | -
|Direct premiums written  |  | $    | 240  |   |      | $
|Assumed premiums written |  |      | 391  |   |      |  
|Ceded premiums written   |  |      | (222 | ) |      |  
|                         |  |      |      |   |      |  
|Net premiums written     |  | $    | 409  |   |      | $
|                         |  |      |      |   |      |  
|Direct premiums earned   |  | $    | 288  |   |      | $
|Assumed premiums earned  |  |      | 415  |   |      |  
|Ceded premiums earned    |  |      | (262 | ) |      |  
|                         |  |      |      |   |      |  
|Net premiums earned      |  | $    | 441  |   |      | $
|                         |  |      |      |   |      |  



Net
insurance losses and loss adjustment expenses have been increased by ceded losses and loss adjustment expenses of $4.1 million for the three months ended March 31, 2003 and reduced by ceded losses and loss adjustment expenses of approximately $102.3
million for the three months ended March 31, 2002.



11.
DISCONTINUED OPERATIONSREINSURANCE



The Companys insurance subsidiaries cede insurance to other companies under quota share, excess of loss, catastrophe and facultative treaties. The reinsurance agreements are tailored to the various programs offered by the
insurance subsidiaries. Reinsurance does not discharge the insurer from its obligations to its insured. If the reinsurer fails to meet its obligations, the ceding insurer remains liable to pay the insured loss, but the reinsurer is liable to the
ceding insurer to the extent of the reinsured portion of any loss.



The Company reinsures certain portions of business written by Clarendon, Redland, AIIC and ACIC (See Note 14). Under these reinsurance agreements, the Company assumes business after Clarendon, Redland, AIIC, and ACIC
cessions to outside reinsurers. However, the Company is contingently liable for any uncollectible amounts due from these outside reinsurers related to business produced and managed by the Company.



As of December 31, 2002 the Company has outstanding
reinsurance recoverables from Constitution Insurance Company (CIC) of approximately $26.2 million and is contingently liable for AIIC and Redland reinsurance recoverables from CIC totaling approximately $2.8 million. CIC had its
financial strength rating lowered by A.M. Best from A- (Excellent) to B- (Fair) during the fourth quarter of 2002. In January 2003, in response to a request from CICs parent to withdraw from the rating process, A.M. Best withdrew its financial
strength rating of B- and assigned CIC and its parent an NR-3 rating (Rating Procedure Inapplicable). As of March 31, 2003 CIC continues to make payments to the Company for reinsurance billings and accordingly, no allowance for doubtful accounts or
liability has been established for these balances.



In September 2001 the Company initiated an arbitration proceeding to recover from a pool of solvent reinsurers sums the Company believes are due under a workers compensation insurance program of the Company written on Redland.
The Company is contingently liable to Redland for amounts due from these reinsurers. At December 31, 2002 the Company is contingently liable for approximately $20.4 million due from these reinsurers and approximately $5.1 million conditionally paid
by the reinsurers



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but still subject to the outcome of the arbitration. While as of March 31, 2003 the Company believes the
reinsurers will be required to pay amounts due and, accordingly, a liability has not been established for these reinsurance recoveries, the ultimate outcome cannot be predicted at this time.



The Company has other reinsurance recoverables and is
contingently liable for AIIC and Redland reinsurance recoverables that are currently being disputed or payments have been delayed pending audit of the Companys records. While the Company believes the reinsurers will be required to pay amounts
due and, accordingly, a liability has not been established for these reinsurance recoveries, the ultimate outcome cannot be predicted at this time.



12. DISCONTINUED OPERATIONSREGULATORY MATTERS



AGIC was placed into rehabilitation by the District Court of Lancaster County, Nebraska on December 20, 2002. Effective as of December 20,
2002, AGIC and its subsidiaries ceased to be under the control of the Company and are not included as consolidated subsidiaries of the Company.



The only remaining consolidated insurance company of AICI is AIC. The Director entered an administrative Order of Supervision with respect
to AIC on December 20, 2002 and AIC is currently operating pursuant to that Order.



The National Association of Insurance Commissioners has established risk-based capital (RBC) standards. RBC standards are designed to measure the acceptable level of capital an insurer
should have, based on the inherent and specific risks of each insurer. As of March 31, 2003 and December 31, 2002, AIC had negative surplus, resulting in a RBC at the mandatory control level. Under the mandatory control level, the Director may take
such actions as necessary to place AIC under regulatory control under the Nebraska Insurers Supervision, Rehabilitation, and Liquidation Act. Since AIC is currently in run-off, the Director is permitted to allow AIC to continue its run-off under
supervision of the NEDOI. While AIC is currently in supervision, the Director currently has the authority to increase regulatory control of AIC by requesting an appropriate court to enter an Order of Rehabilitation or an Order of Liquidation, with
or without a change in the financial condition of AIC. The Company believes increased regulatory control of AIC would have a significant negative impact on the Company.



Under the Order of Supervision, AIC is required to pay all costs incurred by the Supervisor, AIC may not
accept or renew any insurance business and may not perform any activities beyond those that are routine in the day-to-day conduct of its runoff business without prior approval of the Director or Supervisor. Additionally, any transactions with
affiliates or former affiliates require prior approval of the Director or Supervisor. AICI does not expect to have access to any surplus note interest payments or dividend payments from AIC, as these payments would require Nebraska Department of
Insurance approval.



13. DISCONTINUED OPERATIONSBUSINESS
SEGMENTS



The Company was engaged in the
agricultural and specialty property and casualty insurance business. The principal lines of the Agricultural Segment were Multi-Peril Crop Insurance (MPCI), supplemental coverages and named peril insurance. The Property and Casualty
Segment primarily consisted of general liability, commercial property, commercial casualty, inland marine and workers compensation.



The Companys results have been significantly impacted by its crop business, particularly its MPCI line. Estimated results from MPCI
and related products are not generally recorded until after the crops are harvested and final market prices are established. Due to the nature of several of the Crop Revenue Coverage (CRC) products whereby results are based on the market
prices of various commodities in the fourth quarter, as well as yields, and the significance of CRC as a percentage of MPCI, the Company recorded its initial estimate of profit or loss for MPCI and related products in the fourth



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quarter of 2001. Due to the significance of known and estimatible losses for the 2002 crop year, the
Company recorded its initial estimate of loss for MPCI and related products in the third quarter of 2002. Any changes in estimates typically occur during the following two to three quarters, after the claim adjustment process is substantially
complete.



Management evaluates the performance
of and allocates its resources to its segments based on underwriting earnings (loss). Underwriting earnings (loss) is comprised of insurance premiums earned less insurance losses and loss adjustment expenses and insurance underwriting expenses.
Management does not utilize assets as a significant measurement tool for evaluating segments.



Segment insurance premiums earned and segment underwriting earnings (loss) for the three months ended March 31, 2003 and 2002 are as follows:



|                             |  | Agricultural Insurance |        |   | Property and Casualty Insurance |   |        | Total | 
|---------------------------- |  | ---------------------- | ------ | - | ------------------------------- | - | ------ | ----- | 
|2003                         |  |                        |        |   |                                 |   |        |       | 
|Insurance premiums earned    |  | $                      |       |   |                                 | $ | 441    |       | 
|                             |  |                        |        |   |                                 |   |        |       | 
|Underwriting earnings (loss) |  | $                      |       |   |                                 | $ | (2,275 | )     | 
|                             |  |                        |        |   |                                 |   |        |       | 
|2002                         |  |                        |        |   |                                 |   |        |       | 
|Insurance premiums earned    |  | $                      | (4,055 | ) |                                 | $ | 3,764  |       | 
|                             |  |                        |        |   |                                 |   |        |       | 
|Underwriting earnings (loss) |  | $                      | (3,787 | ) |                                 | $ | (1,790 | )     | 
|                             |  |                        |        |   |                                 |   |        |       | 



14. DISCONTINUED
OPERATIONSSALE OF SUBSIDIARIES AND PROPERTY AND CASUALTY BUSINESS AND RELATED GUARANTEES



The Company sold its wholly owned subsidiary, Redland Insurance Company (Redland), to Clarendon National Insurance Company
(Clarendon) effective as of July 1, 2000. The sale was a cash transaction of approximately $10.9 million based upon the market value of Redland after the divestiture of various assets, including the Redland subsidiaries, to a wholly
owned subsidiary of Acceptance Insurance Companies Inc. The transaction included the appointment of other Company subsidiaries as a producer and administrator for the business the Company wrote through Clarendon and Redland. The Company also
reinsures certain portions of the business written by Clarendon and Redland. At March 31, 2003, approximately $45.8 million of fixed maturities available-for-sale and $15.4 million of short-term investments were placed in a trust and pledged to
Clarendon to secure the Companys obligations under reinsurance agreements. Under these reinsurance agreements, the Company assumes business from Clarendon and Redland after cessions to outside reinsurers (Clarendon Reinsurers). The
Company is contingently liable for any uncollectible amounts due from Clarendon Reinsurers related to this business. At March 31, 2003, Clarendon and Redland reinsurance recoverables from Clarendon Reinsurers, which are not included on the
consolidated balance sheets of the Company, totaled approximately $106 million.



The amounts pledged to Clarendon were used to secure the issuance of a $20.6 million Redland letter of credit to the California Department of Insurance related to bond requirements resulting from the
Companys workers compensation business written on Redland paper (Bond Requirements).



In March 2003, the Company and Clarendon agreed to a Master Collateral Agreement (MCA) which supercedes previous agreements
with respect to the minimum pledged assets to be included in the trust, the methodology for releasing these pledged assets from the trust and use of the trust account for



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collateral for the issuance of letter of credits to the California Department of Insurance. Additionally,
the Company has agreed to take whatever action may be reasonably necessary to permit Clarendon, in accordance with the MCA, to increase the Redland letter of credit amount by approximately $29 million.



In general, the minimum amount to be included in the trust
account is based upon the greater of 1) certain percentages of loss and loss adjustment expense reserves assumed by the Company from Clarendon and Redland and reinsurance recoverables from Clarendon Reinsurers for which the Company is contingently
liable or 2) 70% of the Bond Requirements.



As
of July 1, 2001, the Company sold two wholly owned insurance companies to McM Corporation, a Raleigh, North Carolina based insurance holding company (McM). The two companies, Acceptance Indemnity Insurance Company (AIIC) and
Acceptance Casualty Insurance Company (ACIC), underwrote primarily Property and Casualty Segment insurance. The Company reinsures certain portions of the business written by AIIC and ACIC. As of March 31, 2003 approximately $11.2 million
of fixed maturities available-for-sale and $600,000 of short-term investments were placed in a trust and pledged to McM to secure the Companys net obligations under the reinsurance agreements. Under these reinsurance agreements, the Company
assumes business from AIIC and ACIC after cessions to outside reinsurers (AIIC Reinsurers). The Company is contingently liable for any uncollectible amounts due from AIIC Reinsurers related to this business. At March 31, 2003, AIIC and
ACIC reinsurance recoverables from AIIC Reinsurers, which are not included on the consolidated balance sheets of the Company, totaled approximately $36 million.



As of May 1, 2001 the Company engaged Berkley Risk Administrators Company (BRAC) to manage the
adjustment and completion of all remaining Property and Casualty Segment claims. BRAC has employed certain persons previously employed by the Company.



15. DISCONTINUED OPERATIONSACQUISITION OF IGF CROP INSURANCE ASSETS



On June 6, 2001 the Company completed the acquisition of substantially all crop insurance assets and the
assumption of certain crop insurance and reinsurance liabilities of Symons International Group, Inc. and affiliates including IGF Insurance Company (collectively referred to as IGF). The Company paid approximately $27.4 million at
closing and agreed to make deferred payments of up to an additional $9.0 million, which included amounts for non-competition agreements, prospective reinsurance agreements, and property and equipment. Additionally, the Company reimbursed IGF for
certain costs related to the 2001 crop season. The Company funded the acquisition with internally generated resources, including proceeds from the sale of certain property and casualty assets. During 2000, IGFs gross crop insurance premiums,
including MPCI subsidies, totaled approximately $241 million and the Companys gross crop insurance premiums for the same period totaled approximately $434 million.



The acquisition was accounted for by the purchase method of accounting and, accordingly, the consolidated
statements of operations include the acquired crop results beginning June 6, 2001. The assets acquired and recognition of liabilities directly related to the acquisition of $34.2 million and $6.8 million, respectively, were recorded at estimated
fair values as determined by the Companys management. The Companys purchase price allocation included $18.3 million of goodwill and $10.1 million of intangible assets. The assets acquired and recognition of liabilities directly related
to the acquisition and the allocation of the purchase price was revised in the second quarter of 2002 based upon final determination of fair values. During the third and fourth quarters of 2002, it was determined that the intangible asset related to
non-competition agreements and goodwill were impaired and these assets were written down to zero.



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



The following discussion and analysis of financial condition and results of operations of the Company and its consolidated subsidiaries
should be read in conjunction with the Companys Interim Consolidated Financial Statements and the notes thereto included elsewhere herein.



General



The Company historically has been an agricultural risk management company providing comprehensive insurance products (Agricultural
Segment) and a provider of property and casualty insurance (Property and Casualty Segment). Due to the financial condition of the Company and regulatory restrictions placed on the Company in the fourth quarter of 2002, the Company
neither intends nor has the ability to continue its operations in the Agricultural Segment or the Property and Casualty Segment. As such, all operations in these segments have been presented as discontinued operations for financial statement
purposes.



The principal lines of the
Companys Agricultural Segment were Multi-Peril Crop Insurance (MPCI), supplemental coverages, and named peril insurance. MPCI is a federally subsidized risk management program designed to encourage agricultural producers to manage
their risk through the purchase of insurance policies. MPCI provides the agricultural producers with yield coverage for crop damage from substantially all natural perils. Crop Revenue Coverage (CRC) is an extension of the MPCI program
that provides a producer of crops with varying levels of insurance protection against loss of revenues caused by changes in crop prices, low yields, or a combination of the two. As used herein, the term MPCI includes CRC, unless the context
indicates otherwise.



Certain characteristics of
the Companys crop business may affect comparisons, including: (i) the seasonal nature of the business whereby profits or losses are generally recognized predominately in the third or fourth quarter of the year; (ii) the nature of crop business
whereby losses are known within a one year period; and (iii) the limited amount of investment income associated with crop business. In addition, cash flows from such business differ from cash flows from certain more traditional lines. The
Companys Agricultural Segment produced more volatility in the operating results on a quarter-to-quarter or year-to-year basis than has historically been the case due to the seasonal and short-term nature of the Companys crop business, as
well as the impact on the crop business of weather and other natural perils.



During 2002, the operations of the Agricultural Segment were discontinued and AGIC was placed in rehabilitation by the District Court of Lancaster County, Nebraska. In rehabilitation, AGIC and its
subsidiaries ceased to be under the control of the Company and are not included as consolidated subsidiaries of the Company at March 31, 2003 and December 31, 2002. As the Companys equity interest in AGIC and its subsidiaries are negative, the
Company has reflected its investment in AGIC and its subsidiaries at fair market value of zero as the Company is no longer responsible for AGICs net liabilities. The Company does not expect to be materially impacted by the discontinued
operations of the Agricultural Segment in the future.



The Company announced several strategic decisions over the last several years which have significantly impacted the Property and Casualty Segment. During 1999, the Company discontinued or reduced its underwriting in several product
lines of the Property and Casualty Segment business. In September 1999, the Company sold its nonstandard automobile business, including Phoenix Indemnity Insurance Company. In the first quarter of 2000 the Company transferred the renewal rights to
all business previously produced and serviced by the Companys Scottsdale, Arizona office and its long haul



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trucking business. During 2001 the Company discontinued or sold all remaining Property and Casualty
Segment business. Additionally, as part of its strategy to exit the Property and Casualty Segment business, the Company sold Acceptance Indemnity Insurance Company (AIIC) and Acceptance Casualty Insurance Company (ACIC).



As of March 31, 2003 and December 31, 2002 the
only remaining consolidated insurance company of Acceptance Insurance Companies Inc. (AICI) is Acceptance Insurance Company (AIC). The Nebraska Department of Insurance Director (Director) entered an administrative
Order of Supervision with respect to AIC on December 20, 2002 and AIC currently is operating pursuant to that Order. Under the Order of Supervision, AIC is required to pay all costs incurred by the Supervisor, AIC may not accept or renew any
insurance business and may not perform any activities beyond those that are routine in the day-to-day conduct of its runoff business without prior approval of the Director or Supervisor. The Director currently has the authority to increase
regulatory control of AIC by requesting an appropriate court to enter an Order of Rehabilitation or an Order of Liquidation, with or without a change in the financial condition of AIC. The Company believes increased regulatory control of AIC would
have a significant negative impact on the Company.



The Company continues to manage the run-off of discontinued and sold businesses. Based upon the above, the Company expects the Property and Casualty Segment net premiums earned in 2003 to be significantly lower than 2002 and be
primarily comprised of adjustments related to audits and endorsements for policies expiring in 2002 and prior years.



Critical Accounting Policies



Critical accounting policies are those that are important to the presentation of the Companys financial condition and results of
operations and require the Companys management to make significant estimates or exercise significant judgment.



The Company historically has been an agricultural risk management company providing comprehensive insurance products (Agricultural
Segment) and a provider of property and casualty insurance (Property and Casualty Segment). Due to the financial condition of the Company and regulatory restrictions placed on the Company in the fourth quarter of 2002, the Company
neither intends nor has the ability to continue its operations in the Agricultural Segment or the Property and Casualty Segment. As such, all operations in these segments have been presented as discontinued operations. Assets and liabilities have
been reflected separately as discontinued operations on the consolidated balance sheets.



A critical accounting policy of the Company relates to the accounting treatment for MPCI business which is different than more traditional property and casualty insurance lines. The Company issued and
administered MPCI policies, for which it received administrative fees, and the Company participated in a profit sharing arrangement in which it received from the government a portion of the aggregate profit, or paid a portion of the aggregate loss,
with respect to the business it wrote. The Companys share of profit or loss from its MPCI business is determined after the crop season ends on the basis of a profit sharing formula established by law and the Risk Management Agency
(RMA). Due to the nature of several of the CRC products whereby results are based on the market prices of various commodities in the fourth quarter, as well as yields, and the significance of CRC as a percentage of MPCI, the Company
historically has recorded its initial estimate of profit or loss for MPCI and related products in the fourth quarter. Due to the significance of known and estimatible losses for the 2002 crop year, the Company recorded its initial estimate of loss
for MPCI and related products in the third quarter of 2002. Any changes in estimates typically occur during the following two to three quarters, after the claim adjustment process is substantially complete. The Company receives its profit share in
cash, with 60% of the amount in excess of 17.5% of its MPCI Retention (as defined in the profit sharing agreement) in any year carried forward to future years, or it must pay its share of losses. For statement of operations



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purposes, gross premiums written consist of the aggregate amount of MPCI premiums paid by agricultural
producers, and do not include any related federal premium subsidies. Additionally, any profit share earned by the Company, net of the cost of third party excess of loss reinsurance, is shown as net premiums written, which equals net premiums earned
for MPCI business; whereas, any share of losses payable by the Company is charged to losses and loss adjustment expenses. MPCI premiums received during the year which correspond to next years crop season are deferred until the next year.
Insurance underwriting expenses are presented net of administrative fees received from the RMA for reimbursement of costs incurred by the Company.



The Company accrues liabilities for unpaid losses and loss adjustment expenses. This liability for policy claims is established based on
its review of individual claim cases and the estimated ultimate settlement amounts. This liability also includes estimates of claims incurred but not reported based on Company and industry paid and reported claim and settlement expense experience.
Due to the inherent uncertainties in estimating this liability, the actual amounts may differ materially from the recorded amounts. These differences that arise between the ultimate liability for claims incurred and the liability established are
reflected in the statement of operations in the period such information becomes known.



Reinsurance recoverables on unpaid losses and loss adjustment expenses are similarly subject to change of estimations. In addition to factors noted above, estimates of reinsurance recoveries may prove
uncollectible if the reinsurer is unable or unwilling to meet its responsibilities under the reinsurance contracts. Reinsurance contracts do not relieve the ceding company of its obligations to indemnify its own policyholders.



Under reinsurance agreements with previously owned insurance
subsidiaries, the Company assumes business, after cessions to outside reinsurers. While the amounts recoverable from these outside reinsurers are not assets of the Company, the Company is contingently liable for any uncollectible amounts due from
outside reinsurers related to this business. The Company analyzes this contingent liability as part of its review of reinsurance recoverable exposures. Any differences that arise between previously accrued amounts and actual unrecoverable amounts
are reflected in the statement of operations in the period such information becomes known.



The Company has recorded a net deferred income tax asset to reflect the Companys net operating loss carryforwards and the tax impact of temporary differences between the carrying amounts for
financial and tax purposes. For tax purposes, the Companys net operating loss carryforwards expire, if unused, beginning in 2019. The realization of the net deferred tax asset is dependent upon the Companys ability to generate sufficient
taxable income in future periods. In determining whether the net deferred tax asset will be realized, management is required to estimate future earnings and project reversal of temporary differences. Future effects from any changes in these
estimates, which may be material, are recorded in the period of the change.



Forward-Looking Information



Except for the historical information contained in this Quarterly Report on Form 10-Q, matters discussed herein may constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995.
Such forward-looking information reflects the Companys current best estimates regarding future operations, but, as these are only estimates, actual results may differ materially from such estimates.



A variety of events, most of which are outside the control of
the Company, cannot be accurately predicted and may materially impact estimates of future operations. Important among such factors are changes in state and federal regulations, decisions by regulators including any increased regulatory control over
Acceptance Insurance Company, changes in the reinsurance market, including the ability



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and willingness of reinsurers to pay claims, changes in tax laws, financial market performance, changes in
federal policies or court decisions affecting coverages, changes in the rate of inflation, interest rates and general economic conditions.



The only consolidated insurance subsidiary of AICI at December 31, 2002, AIC, is regulated by the Nebraska Department of Insurance
(NEDOI). AIC is currently under supervision by the NEDOI. The Director currently has the authority to increase regulatory control of AIC by requesting an appropriate court to enter an Order of Rehabilitation or an Order of Liquidation,
with or without a change in the financial condition of AIC. The Company believes increased regulatory control of AIC would have a significant negative impact on the Company.



Additionally, there is significant uncertainty as to whether AIC will be able to meet its future cash flow
needs. A major portion of AICs investments are pledged to states and to acquirers of former Company affiliates and AICs ability to meet its cash flow needs will be highly dependent upon AICs ability to get significant amounts of
pledged funds released. Additionally, AICs cash flows are significantly impacted by any changes in the expected payout of insurance losses and loss adjustment expenses. AICs ability to meet its cash flow needs is also dependent upon the
timely recovery of reinsurance balances, including the favorable resolution of balances currently in dispute. While based upon current expectations AIC would likely have the ability to meet its cash flow needs through March 31, 2004, there can be no
assurances considering the significant uncertainties that exist.



There is also significant uncertainty as to whether AICI will be able to meet its cash flow needs. AICI has deferred interest payments on its Junior Subordinated Debentures, which in turn deferred the interest on the Trust
Preferred Securities issued by AICI Capital Trust, as permitted by the trust agreement and indenture, and has disputed or denied payments of certain other liabilities and commitments. While based upon current expectations AICI would likely have the
ability to meet its cash flow needs through March 31, 2004, there can be no assurances considering the significant uncertainties that exist.



Forward-looking information set forth herein does not take into account any impact from the various factors noted above which may affect
future results.



Results of Operations



Three Months Ended March 31, 2003

Compared to Three Months Ended March 31, 2002



The Companys net loss decreased to $3.6 million, or $0.25 per share, for the three months ended March 31, 2003 from $4.3 million, or
$0.30 per share, for the three months ended March 31, 2002. Loss before income taxes and discontinued operations were approximately $2.1 million and $2.3 million for the three months ended March 31, 2003 and 2002, respectively. During the first
quarter of 2003, the Company sold its office building and certain contents in Council Bluffs, Iowa. The proceeds included approximately $204,000 of cash and a note receivable with a fair value of approximately $1.3 million and the sale resulted in a
gain of approximately $334,000. During the three months ended March 31, 2002 the income tax benefit from continuing operations was approximately $820,000. During the three months ended March 31, 2003 there was no income tax benefit or expense as the
change in valuation allowance offset the deferred tax benefit.



The loss from discontinued operations, net of tax, decreased from $2.8 million during the three months ended March 31, 2002 to $1.5 million for the three months ended March 31, 2003. Included in the discontinued operations was the
underwriting loss for the Property and Casualty Segment of $2.3



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million and $1.8 million for
the three months ended March 31, 2003 and 2002, respectively and the underwriting loss for the Agricultural Segment of zero and $3.8 million for the three months ended March 31, 2003 and 2002, respectively. The Company was not impacted in the first
quarter of 2003 and does not expect to be materially impacted by the discontinued operations of the Agricultural Segment in the future (See General).



MPCI underwriting results accounted for $3.7 million of the Agricultural Segment underwriting loss for the
three months ended March 31, 2002. The Company recorded its 2001 crop year initial estimate of profit or loss for MPCI and related products in the fourth quarter of 2001. Any changes in such estimates typically occurred during the first two quarters
of the following year after the claim adjustment process was substantially complete. Accordingly, the first quarter of 2002 underwriting results for the MPCI business is generally comprised of any adjustments to prior year MPCI results.



During the first quarter of 2002 the estimated
profit share for the 2001 crop year was reestimated at $80.8 million on a MPCI retained pool of $498.7 million, or 16.2% as compared to an estimated profit share recorded at December 31, 2001 of $86.2 million on a MPCI retained pool of $499.4
million, or 17.3%. This reduction in estimated profit share was partially offset by a related reduction in private MPCI reinsurance costs totaling approximately $1.9 million. The primary factor impacting the estimated MPCI profit share was excessive
rain in cotton producing areas in the Southeastern United States, which delayed processing of the 2001 cotton harvest into 2002 and damaged the cotton before it could be processed, combined with lower commodity prices for cotton.



During the past few years, the Company discontinued or sold
all remaining Property and Casualty Segment business. In March 2001, the Company sold a significant portion of its property and casualty business to Insurance Corporation of Hannover and in May 2001, the Company sold several of the remaining
lines of business to McM Corporation and to American Reliable Insurance Company (See Sale of Subsidiaries and Property and Casualty Segment Business and Related Guarantees). Accordingly, the net premiums earned in the Property and
Casualty Segment decreased from approximately $3.8 million for the three months ended March 31, 2002 to $441,000 for the three months ended March 31, 2003.



The Companys Property and Casualty Segment had an underwriting loss of approximately $2.3 million and
$1.8 million for the three months ended March 31, 2003 and 2002, respectively. The results for the first quarter of 2003 included a reserve strengthening of approximately $692,000, primarily for auto liability claims. The results for the first
quarter of 2002 included a reserve strengthening of approximately $831,000, primarily for general liability claims.



While the Company has discontinued its Property and Casualty Segment business, its operating results may continue to be significantly
impacted by the Property and Casualty Segment. Significant factors that may impact future results include the adequacy of the Companys estimate of loss and loss adjustment expense reserves, the recoverability of the Companys reinsurance
recoverables and the recoverability of certain reinsurance recoverables of previously owned subsidiaries for which the Company is contingently liable, and the ability to meet the cash flow needs of AIC. See Sale of Subsidiaries and Property
and Casualty Segment Business and Related Guarantees and Liquidity and Capital Resources.



During the three months ended March 31, 2003 the Company impaired approximately $300,000 of property and equipment related to the
write-off of crop related property and equipment assets net of expected proceeds. These items were assets of Acceptance Insurance Company (AIC) but were not being utilized by any operations of the companies in the consolidated group.



The Companys net investment income
related to discontinued operations declined from approximately $1.5 million for the three months ended March 31, 2002 to approximately $1.0 million for the three



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months ended March 31, 2003. This decrease in investment income was primarily a result of the continuing decline in the size of the
investment portfolio.



During the three months
ended March 31, 2002 the income tax benefit from discontinued operations was approximately $1.4 million. During the three months ended March 31, 2003 there was no income tax benefit or expense from discontinued operations as the change in valuation
allowance offset the deferred tax benefit.



Liquidity and
Capital Resources



The Company has included
a discussion of the liquidity and capital resources requirement of the Company and the Companys insurance subsidiary.



The CompanyParent Only



As an insurance holding company, the AICIs assets consist primarily of the equity interest in AIC, a surplus note issued by AIC and
investments held at the holding company level. The Companys liquidity needs are primarily to service debt and pay operating expenses.



At March 31, 2003 the Company has $2.9 million in cash and short-term investments. The Company also holds a surplus note for $20 million
issued by AIC, bearing interest at the rate of 9% per annum payable quarterly. The Company does not expect to have access to any surplus note interest payments or dividend payments from AIC as these payments would require NEDOI approval as AIC is
currently under the supervision of the NEDOI.



During the first quarter of 2003, the Company sold its office building and certain contents in Council Bluffs, Iowa. The proceeds included approximately $204,000 of cash and a note receivable with a fair value of approximately $1.3
million.



In August 1997, AICI Capital Trust, a
Delaware business trust organized by the Company (the Issuer Trust) issued 3.795 million shares or $94.875 million aggregate liquidation amount of its 9% Preferred Securities (liquidation amount $25 per Preferred Security). The Company
owns all of the common securities (the Common Securities) of the Issuer Trust. The Preferred Securities represent preferred undivided beneficial interests in the Issuer Trusts assets. The assets of the Issuer Trust consist solely
of the Companys 9% Junior Subordinated Debentures due in 2027, which were issued in August 1997 in an amount equal to the total of the Preferred Securities and the Common Securities.



Distributions on the Preferred Securities and Junior Subordinated Debentures are cumulative, accrue from the
date of issuance and are payable quarterly in arrears. The Junior Subordinated Debentures are subordinate and junior in right of payment to all senior indebtedness of the Company and are subject to certain events of default and can be called at par
value after September 30, 2002, all as described in the Junior Debenture Indenture. At March 31, 2003 and December 31, 2002 the Company had Preferred Securities of $94.875 million outstanding at a weighted average interest cost of 9.2%.



During the three months ended March 31, 2002 no
interest was paid on the Junior Subordinated Debentures as the distribution of interest for the first quarters were due and paid in April 2002. Effective November 18, 2002, the Company elected to defer payment of interest on its Junior Subordinated
Debentures, as permitted by the trust agreement and indenture, beginning with the interest payment date on December 31, 2002 until not later than September 30, 2007. The interest payments on the Preferred Securities will be deferred for a
corresponding period. As of March 31, 2003 approximately $4.3 million of accrued interest had been deferred.



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There is
significant uncertainty as to whether the Company will be able to meet its cash flow needs. As noted above, the Company has deferred interest payments on its Trust Preferred Securities and additionally, the Company has disputed or denied payment of
certain other liabilities and commitments. While based upon current expectations AICI would likely have the ability to meet its cash flow needs through March 31, 2004, there can be no assurances considering the significant uncertainties that exist.



Acceptance Insurance Company



The Companys only consolidated insurance subsidiary at
March 31, 2003 is AIC. The principal liquidity needs of AIC are to fund losses and loss adjustment expense payments and operating expenses related to the run-off of its operations. The available sources to fund these requirements are cash flows from
the Companys investment activities.



The
Companys investment portfolio is primarily comprised of fixed maturities and short-term investments. At March 31, 2003, approximately $72.9 million of fixed maturity securities and short-term investments were placed in a trust and pledged in
order to secure the Companys obligations under reinsurance agreements. The agreements provide for the release of the pledged securities as the obligations under the reinsurance agreements decrease. However, if the Company is unsuccessful in
obtaining the release of pledged securities, the Companys liquidity would suffer a significant negative impact. See Sale of Subsidiaries and Property and Casualty Segment Business and Related Guarantees for additional information.
Additionally, as required by insurance regulatory laws, certain fixed maturity securities with an estimated fair value of approximately $7.5 million at March 31, 2003 were deposited in trust with regulatory agencies.



There is significant uncertainty as to whether AIC will be
able to meet its future cash flow needs. As noted above, a major portion of AICs investments are pledged and AICs ability to meet its cash flow needs will be highly dependent upon AICs ability to get significant amounts of pledged
funds released. Additionally, AICs cash flows are significantly impacted by any changes in the expected payout of insurance losses and loss adjustment expenses. AICs ability to meet its cash flow needs is also dependent upon the timely
recovery of reinsurance balances, including the favorable resolution of balances currently in dispute. While based upon current expectations AIC would likely have the ability to meet its cash flow needs through March 31, 2004, there can be no
assurances considering the significant uncertainties that exist.



Changes in Financial Condition



The Companys stockholders deficit increased by approximately $3.6 million from December 31, 2002 to March 31, 2003. The principal component of this increase was a net loss of $3.6 million for the three months ended March
31, 2003.



Consolidated Cash Flows



Cash used by operating activities was approximately $447,000
and $329,000 during the three months ended March 31, 2003 and 2002, respectively. The Company expects negative cash flows from operating activities as the Company runs off its operations. See The ParentCompany Only and
Acceptance Insurance Company regarding uncertainties of the Company to meet its ongoing cash flow needs.



Inflation



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The Company
does not believe that inflation has had a material impact on its consolidated financial condition or the results of operations.



Acquisition of IGF Crop Insurance Assets



On June 6, 2001 the Company completed the acquisition of substantially all crop insurance assets and the assumption of certain crop
insurance and reinsurance liabilities of Symons International Group, Inc. and affiliates including IGF Insurance Company (collectively referred to as IGF). The Company paid approximately $27.4 million at closing and agreed to make
deferred payments of up to an additional $9.0 million, which included amounts for non-competition agreements, prospective reinsurance agreements, and property and equipment. Additionally, the Company reimbursed IGF for certain costs related to the
2001 crop season. The Company funded the acquisition with internally generated resources, including proceeds from the sale of certain property and casualty assets. During 2000, IGFs gross crop insurance premiums, including MPCI subsidies,
totaled approximately $241 million and the Companys gross crop insurance premiums for the same period totaled approximately $434 million.



The acquisition was accounted for by the purchase method of accounting and, accordingly, the statements of operations include the acquired
crop results beginning June 6, 2001. The assets acquired and recognition of liabilities directly related to the acquisition of $34.2 million and $6.8 million, respectively, were recorded at estimated fair values as determined by the Companys
management. The Companys purchase price allocation included $18.3 million of goodwill and $10.1 million of intangible assets. The assets acquired and recognition of liabilities directly related to the acquisition and the allocation of the
purchase price was revised in the second quarter of 2002 based upon final determination of fair values. During 2002, it was determined that the intangible asset related to non-competition agreements and goodwill were impaired and these assets were
written down to zero.



Sale of Subsidiaries and Property and
Casualty Segment Business and Related Guarantees



The Company sold its wholly owned insurance subsidiary, Redland Insurance Company (Redland), to Clarendon National Insurance Company (Clarendon) effective as of July 1, 2000. The sale was a cash transaction of
approximately $10.9 million based upon the market value of Redland after the divestiture of various assets, including the Redland subsidiaries, to a wholly owned subsidiary of AICI. The transaction included the appointment of other Company
subsidiaries as a producer and administrator for the business the Company wrote through Clarendon and Redland. The Company also reinsures certain portions of the business written by Clarendon and Redland. At March 31, 2003, approximately $45.8
million of fixed maturities available-for-sale and $15.4 million of short-term investments were placed in a trust and pledged to Clarendon to secure the Companys obligations under reinsurance agreements. Under these reinsurance agreements, the
Company assumes business from Clarendon and Redland after cessions to outside reinsurers (Clarendon Reinsurers). The Company is contingently liable for any uncollectible amounts due from Clarendon Reinsurers related to this business. At
December 31, 2002, Clarendon and Redland reinsurance recoverables from Clarendon Reinsurers, which are not included on the balance sheet of the Company, totaled approximately $106 million.



The amounts pledged to Clarendon were used to secure the issuance of a $20.6 million Redland letter of credit
to the California Department of Insurance related to bond requirements resulting from the Companys workers compensation business written on Redland paper (Bond Requirements).



In March 2003, the Company and Clarendon agreed to a Master
Collateral Agreement (MCA) which supercedes previous agreements with respect to the minimum pledged assets to be included in the trust,



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the methodology for releasing these pledged assets from the trust and use of the trust account for
collateral for the issuance of letters of credit to the California Department of Insurance. Additionally, the Company has agreed to take whatever action may be reasonably necessary to permit Clarendon, in accordance with the MCA, to increase the
Redland letter of credit amount by approximately $29 million.



In general, the minimum amount to be included in the trust account is based upon the greater of 1) certain percentages of loss and loss adjustment expense reserves assumed by the Company from Clarendon and Redland and reinsurance
recoverables from Clarendon Reinsurers for which the Company is contingently liable or 2) 70% of the Bond Requirements.



As of July 1, 2001, the Company sold two wholly owned insurance companies to McM Corporation (McM), a Raleigh, North Carolina
based insurance holding company. The two companies, Acceptance Indemnity Insurance Company (AIIC) and Acceptance Casualty Insurance Company (ACIC), underwrote primarily Property and Casualty Segment insurance. The Company
reinsures certain portions of the business written by AIIC and ACIC. As of March 31, 2003 approximately $11.2 million of fixed maturities available-for-sale and $600,000 of short-term investments were placed in a trust and pledged to McM to secure
the Companys net obligations under the reinsurance agreements. Under these reinsurance agreements, the Company assumes business from AIIC and ACIC after cessions to outside reinsurers (AIIC Reinsurers). The Company is contingently
liable for any uncollectible amounts due from AIIC Reinsurers related to this business. At March 31, 2003, AIIC and ACIC reinsurance recoverables from AIIC Reinsurers, which are not included on the balance sheet of the Company, totaled approximately
$36 million.



As of May 1, 2001 the
Company engaged Berkley Risk Administrators Company (BRAC) to manage the adjustment and completion of all remaining Property and Casualty Segment claims. BRAC has employed certain persons previously employed by the Company.



Recent Statements of Financial Accounting Standards



In July 2001, the Financial Accounting Standards Board
(FASB) 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.



SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for impairment at least annually. Intangible assets with a determinable useful life will continue to be amortized over that period. The adoption of SFAS No. 142 had no impact on the
Companys financial statements at January 1, 2002. With the adoption of SFAS No. 142 on January 1, 2002 goodwill is no longer amortized and in accordance with SFAS No. 142 the goodwill is tested for impairment annually and between annual tests
if an event occurs that would more likely than not reduce the fair value of the reporting unit. During the second quarter of 2002, the Company completed the transitional goodwill impairment test required by SFAS No. 142 and determined that there was
no goodwill impairment. As a result of the significant operating losses and the discontinuance of the Agricultural Segment, the Company reevaluated the recoverability of the goodwill and intangible assets during the third and fourth quarters of
2002. Based upon the results of such reviews, it was determined that the intangible asset related to non-competition agreements, approximately $5.7 million, and the goodwill of approximately $30.0 million were impaired and were written down to zero
during 2002.



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In June 2001,
the FASB issued Statement of Financial Accounting Standards No. 143 (SFAS No. 143), Accounting for Asset Retirement Obligations. SFAS No. 143 requires recognition on the balance sheet of legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of such assets. Additionally, at the time an asset retirement obligation (ARO) is recognized, an ARO asset of the same
amount is recorded and depreciated. This pronouncement is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS No. 143 had no impact on our consolidated financial statements.



In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 (SFAS No. 144), Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption
of SFAS No. 144 resulted in the impairment of certain long-lived assets and the recording of insurance operations as discontinued operations.



In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (SFAS No. 146), Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities. This pronouncement is effective for exit or disposal activities that are initiated after
December 31, 2002, with early application encouraged. The Company elected to adopt SFAS No. 146 during 2002. As noted above, the Company exited its Agricultural Segment and Property and Casualty Segment operations during 2002. In the Property and
Casualty Segment, the Company expects to incur approximately $1.1 million of termination benefits, of which approximately $179,000 have been expensed in discontinued operationsunderwriting expenses during the three months ended March 31, 2003
and $131,000 had been expensed in previous periods. During the first quarter of 2003, approximately $87,000 of termination benefits were paid and as of March 31, 2003 the Company has an accrued liability for approximately $223,000.



In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148 (SFAS No. 148), Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of SFAS No. 123, which provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of
stock-based compensation. The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing
financial statements for interim periods beginning after December 15, 2002. The Company adopted the disclosure requirements of SFAS No. 148.



In November 2002, the FASB issued Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others. Initial recognition and initial measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.
The disclosure requirements are effective for financial statements of annual periods ending after December 15, 2002. The adoption of FIN No. 45 had no impact on our consolidated financial statements.



In January 2003, the FASB issued FIN No. 46, Consolidation
of Variable Interest Entities, which addresses the consolidation of certain entities (variable interest entity) when control exists through other than voting interests. FIN No. 46 requires that a variable interest entity be
consolidated by the holder of the majority of the risks and rewards associated with the activities of the variable interest entity. FIN No. 46 is effective immediately for variable interest entities created after January 31, 2003. For variable
interest entities created prior to February 1, 2003, FIN No. 46 is effective for the first interim period beginning after June 15, 2003, and may be applied retroactively or prospectively. The adoption of FIN No. 46 had no impact on our consolidated
financial statements.



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Item 3. Quantitative and Qualitative Disclosure about Market Risk



The Companys consolidated balance sheets include a significant amount of assets and liabilities whose fair value are subject to market risk. Market risk is the risk of loss arising from adverse
changes in market interest rates or prices. The Company currently has interest rate risk as it relates to its fixed maturity securities and equity price risk as it relates to its marketable equity securities. The Companys market risk sensitive
instruments are entered into for purposes other than trading.



At March 31, 2003 and December 31, 2002 the Company had $84.5 million and $114.7 million, respectively, of fixed maturity investments that were subject to market risk. At March 31, 2003 and December 31, 2002 the Company had $3.1
million and $7.3 million, respectively, of marketable equity securities that were subject to market risk. The Companys investment strategy is to manage the duration of the portfolio relative to the duration of the liabilities while managing
interest rate risk.



The Company uses two models
to analyze the sensitivity of its market risk assets. For its fixed maturity securities, the Company uses duration modeling to calculate changes in fair value. For its marketable equity securities, the Company uses a hypothetical 20% decrease in the
fair value of these securities. Actual results may differ from the hypothetical results assumed in this disclosure due to possible actions taken by management to mitigate adverse changes in fair value and because fair values of securities may be
affected by credit concerns of the issuer, prepayment speeds, liquidity of the security and other general market conditions. The sensitivity analysis duration model used by the Company produces a loss in fair value of $900,000 and $1.6 million on
its fixed maturity securities as of March 31, 2003 and December 31, 2002, respectively, based on a 100 basis point increase in interest rates. The hypothetical 20% decrease in fair value of the Companys marketable equity securities produces a
loss in fair value of $600,000 and $1.5 million as of March 31, 2003 and December 31, 2002, respectively.



Item 4. Controls and Procedures



Based on their evaluation, as of a date within 90 days of the filing of this Form 10-Q, the Companys President and Chief Executive Officer (the CEO) and the Chief Financial Officer and Treasurer (the
CFO) have concluded the Companys disclosure controls and procedures are effective. During 2002 the Company downsized its internal audit department. In 2003 the Company eliminated its internal audit department with the expectation
to replace its functions with a management compliance committee. There have been no significant changes in the Companys internal controls or in other factors, including the elimination of the internal audit department, that could significantly
affect these controls subsequent to the date of the evaluation.



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Limitations on the
Effectiveness of Controls



Company
management, including the CEO and CFO, does not expect that the Companys disclosure controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people,
or by management override of the control.



The
design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.



CEO and CFO
Certifications



Appearing immediately
following the Signatures section of this report there are Certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this
report, which you are currently reading, is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.



PART II. OTHER
INFORMATION



Item 1. Legal Proceedings



Acceptance Insurance Companies Securities Litigation (USDC, Nebraska, Master File No. 8:99CV547). In December 1999 the Company was sued in the United States District Court for the District of Nebraska. Plaintiffs
alleged the Company knowingly and intentionally understated the Companys liabilities in order to maintain the market price of the Companys common stock at artificially high levels and made untrue statements of material fact, and sought
compensatory damages, interest, costs and attorney fees. In February 2000 other plaintiffs sued the Company in the same Court, alleging the Company intentionally understated liabilities in a registration statement filed in conjunction with the
Companys Trust Preferred Securities.



The
Court consolidated these suits in April 2000 and Plaintiffs subsequently filed a consolidated class action complaint. Plaintiffs sought to represent a class consisting of all persons who purchased either Company common stock between March 10, 1998
and November 16, 1999, or AICI Capital Trust Preferred Securities between the July 29, 1997 public offering and November 25, 1999. In the consolidated complaint Plaintiffs alleged violation of Section 11 of the Securities Act of 1933 through
misrepresentation or omission of a material fact in the registration statement for the Trust Preferred Securities, and violation of Section 10b of the Securities Exchange Act of 1934 and Rule 10b-5 of the U.S. Securities and Exchange Commission
through failure to disclose material information between March 10, 1998 and November 16, 1999. The Company, three of its former officers, the Companys



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Directors and independent accountants and other individuals, as well as the financial underwriters for the
Companys Trust Preferred Securities, were defendants in the consolidated action.



On March 2, 2001, the Court entered an order dismissing all claims alleging violations of Section 11 of the Securities Act, and dismissing the Companys Directors, financial underwriters,
independent accountants and others as defendants in this action. The Court also ruled that certain of Plaintiffs allegations regarding the remaining defendants alleged failure to properly report contingent losses attributable to the
Montrose decision did not state a claim under Section 10b and Rule 10b-5. In two subsequent rulings, the Court and Magistrate Judge clarified the March 2 ruling to specify which of Plaintiffs Montrose-related allegations failed
to state a Section 10b and Rule 10b-5 claim. These three rulings reduced the litigation to a claim that the Company and three of its former officers, during the period from August 14, 1997 to November 16, 1999, failed to disclose adequately
information about various aspects of the Companys operations, including information relating to the Companys exposure after January 1, 1997 to losses resulting from the Montrose decision. Nevertheless, Plaintiffs continue to seek
compensatory damages, reasonable costs and expenses incurred in this action and such other and such further relief as the Court may deem proper.



On August 6, 2001, the Magistrate Judge granted Plaintiffs Motion for Class Certification. Plaintiffs fact discovery was
concluded July 31, 2002 in accordance with a schedule established by the Court. On September 16, 2002 Plaintiffs sought the Courts permission to reinstate certain previously dismissed claims under Section 11 and 15 of the Securities Act. The
Court denied Plaintiffs request in its entirety on February 27, 2003; Plaintiffs asked the Court to reconsider this decision and the Court has not ruled on that request. On March 31, 2003, however, the Court established a schedule for the
submission during May 2003 of briefs regarding the Companys proposed motion to decertify the class. The Court also established a schedule concluding in August 2003 for submission of briefs regarding both parties anticipated motions for
summary judgment.



The Company intends to
continue vigorously contesting this action and believes Plaintiffs allegations are without merit. Nevertheless, the ultimate outcome of this action cannot be predicted at this time and the Company currently is unable to determine the potential
effect of this litigation on its consolidated financial position, results of operations or cash flows.



Reinsurance Arbitration. In September 2001 AIC initiated an arbitration proceeding against certain quota-share reinsurers
under a reinsurance contract. Under the contract, the reinsurers agreed to reimburse the Company and certain former affiliates for all loss and loss adjustment expenses incurred in conjunction with workers compensation insurance policies produced by
a specified agency and issued by the reinsured companies between April 1 and October 31, 1999. In its arbitration demand the Company alleged certain sums due under the contract had not been paid. The reinsurers responded to the demand, three
arbitrators were selected, the parties and arbitrators entered into a confidentiality agreement and the arbitration has proceeded in accordance with the reinsurance contract and industry practices. Discovery was completed in April 2003 and the
arbitration hearing is scheduled to be completed in May 2003.



In this proceeding, reinsurers acknowledge their failure to pay AIC amounts specified in the reinsurance contract, but seek to excuse that failure on the basis that the specified agency failed to follow certain of the
reinsurers underwriting guidelines. Reinsurers also have attempted to excuse their failure to pay based upon alleged but unspecified deficiencies in the adjustment of insured claims; the Company has asked arbitrators to disregard such claim
related defense as untimely. The Company contends the specified agencys performance throughout a several year business relationship with the reinsurers and other insurance companies, which preceded the reinsurance contract between those
reinsurers and AIC, was unchanged during the period of the AIC reinsurance contract and, therefore, provides no basis for the reinsurers failure to reimburse losses and loss adjustment expenses paid by AIC with respect to the reinsured
policies.



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While the
Company will continue to vigorously pursue its claim in this arbitration, there can be no assurance regarding the outcome of this arbitration proceeding.



Item 5. Other Information



The Officers Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 has been filed with the Securities and Exchange Commission as correspondence.



Because the Company is much smaller, with far more narrow
interests, the Board of Directors determined the number of Directors should be reduced to four effective April 30, 2003. Accordingly, Myron L. Edleman, Michael R. McCarthy and Richard L. Weill resigned as Directors effective April 30, 2003.



Item 6. Exhibits and Reports on Form 8-K



| | (a) |  | Exhibits
| | --- |  | --------



| |  |  | See Exhibit Index.
| |  |  | ------------------



| | (b) |  | Form 8-K
| | --- |  | --------



| |  |  | The following Current Reports on Form 8-K have been filed during the last fiscal quarter of the period covered by this Report:
| |  |  | ------------------------------------------------------------------------------------------------------------------------------



|Item                  |  | Financial Statements Filed |  | Date of Report  
|--------------------- |  | -------------------------- |  | ----------------
|Item 5. Other Events. |  | No                         |  | January 22, 2003



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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.



ACCEPTANCE INSURANCE COMPANIES INC.

|   
|---
|By:
|   
|   
|By:
|   







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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, John E. Martin, certify that:



1. I have reviewed this quarterly report on Form 10-Q of Acceptance Insurance Companies Inc.;



2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
quarterly report;



3. Based on my knowledge, the
financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this quarterly report;



4. The registrants
other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a) designed such disclosure controls and
procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



b) evaluated the effectiveness
of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and



c) presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of
directors (or persons performing the equivalent function):



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and



6. The
registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: May 12, 2003



|                                                    
|----------------------------------------------------
|/S/    JOHN E. MARTIN                               
|John E. Martin President and Chief Executive Officer







33



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CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002



I, Gary N. Thompson, certify that:



1. I have reviewed this quarterly report on Form 10-Q of Acceptance Insurance Companies Inc.;



2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;



3. Based on my knowledge, the financial statements, and other financial information included in this
quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;



4. The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



a) designed such disclosure controls and procedures to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;



b) evaluated the effectiveness of the
registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and



c) presented in this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of
directors (or persons performing the equivalent function):



a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses in internal controls; and



b) any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrants internal controls; and



6. The
registrants other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



Date: May 12, 2003



|                                                      
|------------------------------------------------------
|/S/    GARY N. THOMPSON                               
|Gary N. Thompson Chief Financial Officer and Treasurer







34



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ACCEPTANCE INSURANCE COMPANIES INC.

QUARTERLY REPORT ON FORM 10-Q

THREE MONTHS ENDED MARCH 31, 2003



EXHIBIT INDEX



|NUMBER |  | EXHIBIT DESCRIPTION                                                                      
|------ |  | -----------------------------------------------------------------------------------------
|      
|10.1   |  | Employment Agreement dated as of April 11, 2003 between the Company and Gary N.
Thompson.
|      
|10.2   |  | Employment Agreement dated as of April 22, 2003 between the Company and John E.
Martin.  



35