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222 S. 15th St., Suite 600 North,

Omaha, Neb. 68102;

402-344-8800; fax: 402-341-0792

1997* 1996*

Gross premiums $249,894,071 $281,399,887

Non-Admitted $177,612,843 $195,728,421

Commercial risks 100% 100%

Net premiums $113,155,960 $187,382,799

Paid-in capital $5,619,520 $5,619,520

Capital & surplus $128,811,406 $115,727,610

Employees 1,200 1,200

Combined ratio 104.8% 110.9%

Rating agency 105.5% 111.0%

Net income $13,000,505 ($7,987,433)

Best's rating A- VIII A- VIII

S&P rating BBB BBB

* All figures, except gross premiums, reported on a pooling basis for Acceptance Insurance Co. and Acceptance Indemnity Insurance Co. Combined ratios and net income also include Redland Insurance Co., Acceptance Casualty Insurance Co., and Phoenix Indemnity Insurance Co.

Acceptance Insurance Co. is doing all it can to support its surplus lines producers as the soft pricing environment continues to stymie premium volume growth.

Acceptance not only is keeping an open mind toward underwriting a broad array of products but also is focusing on efficiencies with its managing general agencies by beefing up its technological capabilities and offering a profit-sharing plan.

Simply put, "if the surplus lines broker does not survive, our non-admitted business is not going to survive," said Ken Coon, chief executive officer. "We're looking for ways to support the surplus lines broker so it continues to be there" when a capacity crisis does occur, he said. In the past when this has happened, the first response often came from the non-admitted market, he said.

In the meantime, Acceptance must grapple with a competitive surplus lines environment, where capacity is plentiful and prices are low.

As a result, 1997 gross premium volume on a pre-pooled basis for Acceptance Insurance Co. and its wholly owned subsidiary, Acceptance Indemnity Co., was down 11.2% to $249.9 million. Non-admitted premium volume slid 9.3% to $177.6 million.

Despite the drop, Acceptance remains the ninth-largest U.S.-based surplus lines insurer, based on Business Insurance's survey.

Mr. Coon said Acceptance has had a difficult time growing premium volume because the bulk of its business is in casualty lines and casualty prices continue to decline.

"There is an increase in policy count, but the average premium has dropped considerably," he said.

This trend for Acceptance has continued into 1998, as non-admitted premium volume dropped to $88.1 million for the first six months of year, down 3.6% from the first half of 1997.

Mr. Coon, however, is more focused on Acceptance's bottom line.

"1997, for us as a company, was a very good year," he said. "All four of our key operating divisions contributed to the bottom line, including our general agency business, where a majority of our non-admitted business is written."

Holding company Acceptance Insurance Cos. Inc. divides its business into four units: crop, general agency, program business and non-standard auto.

While premium volume figures include only non-admitted business from Acceptance Insurance and Acceptance Indemnity, net income figures are reported on a pooling basis.

In addition to Acceptance Insurance and Acceptance Indemnity, the pool includes Redland Insurance Co. and its Acceptance Casualty Insurance Co. subsidiary. Both companies write specialty program business through independent retail agents. Acceptance Insurance Co. also owns Phoenix Indemnity Insurance Co., a non-standard auto insurer.

American Growers Insurance Co., which writes crop programs, also is a subsidiary of Redland Insurance but is not included in the pooling.

On a pooled basis, the insurer reported a $13 million profit in 1997, a $21 million improvement from the $8 million loss reported in 1996 as a result of a difficult year with its non-standard auto division. Acceptance reported a $5.5 million loss in 1995 as a result of a $22.5 million reserve strengthening charge taken in the third quarter that year.

"We turned the corner," Mr. Coon said of 1997's bottom line. "We're on target again to see profit from all our operating divisions" in 1998.

To aid in that effort, Acceptance is seeking to gain efficiencies in its relationships with its managing general agents. This means not only underwriting a broader base of products but also doing so more efficiently.

Acceptance, for example, is beefing up its technological capabilities so that general agencies can upload information directly to Acceptance's systems. This single-entry system streamlines operations, cuts down on duplication and makes general agencies more responsive to clients, Mr. Coon said.

In addition, Acceptance wants to increase the number of general agency partners that share in some of the risk-taking as well as company profits, Mr. Coon said. About a dozen of Acceptance's 120 general agencies participate in the profit-sharing arrangement.

Under this system, agencies have the opportunity to boost profits, which provides the incentive to assume a higher standard of care for accounts.

"We still believe that the independent agency and general agency system, where the surplus lines business is generated, will be a viable and very active marketplace," Mr. Coon stressed.

That said, Acceptance also "needs to look at a broader spectrum of products, so the surplus lines broker can survive," he observed.

Each year Acceptance looks at between 100 and 200 new programs and new lines of business; it chooses about four or five of those offerings.

In 1997, Acceptance introduced a new $1 million brown water hull and liability marine program in the non-admitted market for boats serving the Gulf Coast oil rig business.

And this year, Acceptance introduced a medical malpractice program that targets specific physician groups such as anesthesiologists, obstetricians/gynecologists and maxillofacial surgeons who are unable to obtain medical malpractice insurance in the standard market.

As a primary insurer, Acceptance underwrites limits of $1 million per occurrence and $3 million aggregate. As an excess insurer, it provides $4 million in coverage above a $1 million primary layer.

Mr. Coon said that while Acceptance has $5 million in capacity for a single program and is able to underwrite one program as both the primary and excess insurer, it typically acts as one or the other.

Acceptance is principally a writer of the first layer of risk or the first layer above a self-insured retention. The bulk of its casualty accounts have limits of $1 million, but it can write up to $5 million in-house and, on occasion, more than $10 million with facultative reinsurance support.

On property accounts, Acceptance generally writes $2 million in first-layer coverage, while a few programs have limits up to $5 million. Mr. Coon said that with reinsurance support, Acceptance has written a few $50 million property programs.

Acceptance and its subsidiary, Acceptance Indemnity, are approved non-admitted insurers in 46 states, the District of Columbia, Guam, Puerto Rico and the U.S. Virgin Islands. Approval is pending in Michigan, New Hampshire and Rhode Island. It does not write business in Vermont.

The majority of Acceptance's reinsurance is placed with PMA Reinsurance Corp., Swiss Re America Holding Corp. and Constitution Reinsurance Corp.

In addition to Mr. Coon, other Acceptance executives include: J.P. Nelson, chief operating officer; and Thomas D. Stamm, Bruce W. Slaughter and Richard Gibson, senior vps.