CROP GROWERS CORP, 10-K/A, 1997-07-15

CROP GROWERS CORP
10-K/A, 1997-07-15
INSURANCE AGENTS, BROKERS & SERVICE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K/A-2

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<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
</TABLE>

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-23830

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CROP GROWERS CORPORATION

(Exact name of registrant as specified in its charter)

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<S> <C>
DELAWARE 81-0491497
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

10895 LOWELL, SUITE 300
OVERLAND PARK, KANSAS 66210
(Address of principal executive (zip code)
offices)
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Registrant's telephone number, including area code: (913) 338-7800

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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value

(Title of Class)

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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 was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _X_

The aggregate market value of the registrant's Common Stock held by
non-affiliates as of March 21, 1997, was approximately $65,334,951

As of March 21, 1997, the shares outstanding of the registrant's common
stock was 7,972,251.

DOCUMENTS INCORPORATED BY REFERENCE

None

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PART I

ITEM 3. LEGAL PROCEEDINGS

From time to time the Company is involved in litigation relating to claims
arising from its operations in the normal course of business. Neither the
Company nor any of its subsidiaries is a party to any legal proceedings other
than as described below, the adverse outcome of which individually or in the
aggregate, in the Company's opinion, would have a material adverse effect on the
Company's results of operations, financial position or liquidity.

INDEPENDENT COUNSEL INVESTIGATION. On January 21, 1997, the court in the
matter of UNITED STATES OF AMERICA V. CROP GROWERS CORPORATION, JOHN J.
HEMMINGSON AND GARY A. BLACK (Crim. No. 96-0181(GK)) accepted Crop Growers
Corporation's (the "Company") plea of NOLO CONTENDERE to two charges brought
against it by the Independent Counsel ("IC") appointed to investigate former
Secretary of Agriculture Mike Espy. Pursuant to an agreement with the IC, the
Company also agreed to pay a fine of $2.0 million. The settlement concludes
matters between the Company and the IC. The entire amount of the settlement has
been accrued for at December 31, 1996.

The indictment as initially filed against the Company alleged conspiracy to
violate federal election laws, false statements to a government agency,
falsification of books and records, false statements to auditors, various
securities law violations and other matters. The allegations were made in
connection with alleged corporate reimbursement of individual campaign
contributions to the 1993 Congressional primary campaign of Henry Espy, brother
of Mike Espy and an amount paid as a retainer to an attorney who used the funds,
allegedly with the knowledge of an officer of the Company, to retire certain
Congressional primary campaign debts of Henry Espy. In January 1997, the court
dismissed (i) 10 of the counts against the Company based on its ruling that the
Company had no duty to disclose uncharged criminal conduct under the concealment
prong of 18 U.S.C. ("Section 1001") and because the indictment did not
adequately allege the use of an affirmatively false writing under the false
statement prong of Section 1001 on various grounds, (ii) one count against the
Company based on its ruling that the Company had no duty to disclose the alleged
omissions to the investing public and (iii) one count based on its ruling that
venue did not lie in the District of Columbia for the charge of making and
keeping false records and accounts, but rather venue is determined by the laws
of the offense (the making and keeping of books, records and accounts).

By its terms, the Company's agreement with the IC does not compromise or
preclude civil actions by other governmental regulatory authorities, such as the
Federal Election Commission, Securities and Exchange Commission, the USDA, or
state or federal insurance regulatory authorities, or shareholders as a result
of the allegations made by the IC and the Company's NOLO CONTENDERE plea. No
assurance can be given as to what action a regulatory authority might take in
response to the Company's plea and its agreement with the IC.

SECURITIES CLASS ACTION. On February 28, 1997, the Company agreed to a
settlement of the matter entitled IN RE CROP GROWERS SECURITIES LITIGATION (Civ.
No. 95-58-GF-PGH) with members of the class consisting of purchasers of the
Company's common stock during the period from February 15, 1995 to May 16, 1995.
The complaint alleged, among other things, that the Company made false and
misleading statements in publicly filed or disseminated documents to inflate
artificially the price of its stock. Specifically, plaintiffs' primary
allegation was that the Company's statements regarding the potential impact on
the Company's premiums and earnings for 1995 due to the passage of legislation
in the Fall of 1994 amending the MPCI program were false and misleading. Under
the settlement, the Company has agreed to pay $2.5 million, $1.22 million of
which is payable by the Company, with the remainder to be paid out under the
terms of a directors' and officers' insurance policy. The $1.22 million has been
accrued for at December 31, 1996. The settlement is subject to court approval.

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PART II

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto included elsewhere in the Company's
Annual Report on Form 10-K.

AGENCY OPERATIONS

SERVICE FEES

The Company's agency operations revenues include service fees related to the
servicing of MPCI and crop hail insurance, excess loss adjusting expense
reimbursement related to MPCI premiums serviced and profit sharing amounts, if
any, resulting from underwriting gains, if any, on the premiums it services.

For Buy-Up Coverage, the Company is entitled to the expense reimbursement
payable by the FCIC. This expense reimbursement is passed through to the Company
under its MPCI contracts with third party insurance companies and is paid
directly to the Company for MPCI premiums underwritten by its property and
casualty insurance subsidiaries. For the 1997 crop year, beginning July 1, 1996,
the expense reimbursement for Buy-Up Coverage was established by the FCIC at
29%. For the 1996 and 1995 crop years, the expense reimbursement for Buy-Up
Coverage was established by the FCIC at 31%.

For Basic Coverage, the Company retains a portion of the administrative fee
paid by the insured and receives an amount for loss adjusting expenses
(regardless of the loss experience of the insureds), which amounts are passed
through or paid directly to the Company under its MPCI contracts. For Basic
Coverage, the Company's portion of the administrative fee is up to the first
$100 of the fee paid by the insured and the loss adjusting expense reimbursement
which is equal to 4.7% of an imputed premium (based upon a 65% production
guarantee at a 100% price election).

The expense reimbursement level for the 1998 and 1999 crop years for Buy-Up
coverage is limited under the Reform Act to levels not to exceed 28% and 27.5%,
respectively. See the following paragraph for a discussion of proposed changes
to the expense reimbursement level for the 1998 crop year. Because the Company's
MPCI service fees are directly related to the expense reimbursement established
by the FCIC, the Company's future MPCI service fees will be affected by
reductions in the level of expense reimbursement. Prior to the 1996 crop year,
the impact of FCIC expense reimbursement level reductions on the Company's net
earnings had been minimized because the Company had reduced its agents'
commissions in order to minimize the impact on its margin on MPCI business. MPCI
agent commissions vary by agent depending on such factors as the volume of
premium produced by the agent, whether or not the agent is responsible for any
direct costs and other competitive factors. The Company believes, based on
competitive factors within the industry, that it will have to absorb a
significant portion of the expense reimbursement reduction in the 1997 crop
year.

On March 20, 1997, a draft of the SRA (effective for the 1998 crop year) was
released by the FCIC. The draft SRA proposes to revise the expense reimbursement
for Buy-Up Coverage to an amount equal to a flat $100 per policy plus 18% of the
premium related to that policy (17% in the case of Crop Revenue Coverage
policies, a revenue protection coverage introduced by the FCIC in the 1997 crop
year). For Basic Coverage, private companies would receive a flat $50 per policy
plus 4.8% of the premium related to that policy (based on a 50% production
guarantee at a 60% price election). The draft SRA also proposes certain changes
to the risk sharing arrangement (calculation of underwriting gain or loss on
premiums retained by private companies) between private companies and the FCIC.
Under the proposed draft, private companies would receive the expense
reimbursement in one installment at the time acreage reports are reported to and
validated by the FCIC. The draft SRA also proposes certain other changes to the
administration of the MPCI program, including certain compliance and program
integrity issues. Earlier in 1997 and as a part of the Clinton Administration's
budget proposal for the government's 1998 fiscal year, funding for the expense
reimbursement was proposed at 24.5% for the 1998 crop year.

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The Company is not able to predict whether any or all of the proposed
revisions to the SRA will ultimately be adopted, but believes that the proposed
revisions (particularly the revisions to the expense reimbursement), if
implemented as proposed, would have an adverse impact on the Company's results
of operations in the 1998 crop year. The FCIC has requested written comments on
the proposed SRA draft by April 11, 1997. The Company cannot predict what the
final terms of the SRA will ultimately be or what other legislative or
administrative actions may occur as a part of the SRA revision process or the
federal budget process. For the 1998 crop year the Company expects to negotiate
with agents regarding reduced commissions on Buy-Up coverage to offset expense
reimbursement reductions, however, there is no assurance that any reduction will
be able to be passed through to agents as a result of competitive or other
factors.

Under its MPCI contracts, the Company is also entitled to receive any excess
loss adjustment expense reimbursement from the FCIC. The FCIC pays contracting
insurance companies an amount up to 4% of premium on Buy-Up coverage for excess
loss adjusting expenses on such coverage if loss ratios on the Company's total
book of MPCI business, by state and by risk retention fund, are in excess of the
ratios established by the FCIC. Generally, the excess loss adjustment expense
reimbursement increases as the loss ratio increases. Under Basic Coverage
policies, the FCIC pays contracting insurance companies an amount up to 1.7% of
the imputed premium for excess loss adjusting expenses in the event loss ratios
on the overall book of Basic Coverage are in excess of loss ratios established
by the FCIC.

Additionally, the Company has arrangements with its third party insurance
companies pursuant to which it is entitled to receive a percentage of the
underwriting gains, if any, on MPCI premiums it services. These gains, or profit
sharing, are reflected as additional service fees.

The Company's operating results may vary significantly depending on the
underwriting results of the premiums serviced and underwritten by it. The
Company does not assume any of the underwriting loss under its MPCI agreements
with third party insurers; and under the Company's MPCI agreement with Fireman's
Fund, there is no loss carryforward to reduce future underwriting gains.
Underwriting gains or losses on crop insurance are generally not determinable
until sometime after the second quarter of any year and, accordingly, the
Company expects that revenues, if any, from these arrangements will typically be
recognized in the third and fourth quarters. Underwriting gains on premiums
serviced by the Company are recognized by the Company as additional service fees
and, because they generally have very low related expenses, can have a material
impact on the Company's operating results. Accordingly, although the Company's
risk management strategy is to minimize its exposure to underwriting risk, the
Company's earnings can be materially affected by factors which impact
underwriting results and, accordingly, its portion of any underwriting gains,
including the timing and severity of losses from storms and other natural
perils.

The Company's service fees related to crop hail insurance are a percentage
of the premiums serviced for third party insurance companies.

AGENT COMMISSIONS AND OTHER DIRECT COSTS

Agent commissions and other direct costs related to marketing and servicing
MPCI are obligations of the Company under its MPCI agreements and, accordingly,
are reflected as expenses of the Company. Additionally, agent commissions and
other direct costs on crop hail insurance are generally direct obligations of
the Company and, therefore, are reflected as expenses of the Company. Under the
Company's crop hail contract with CNA, agent commissions and other direct costs,
except loss adjusting expense, are the direct obligations of CNA and therefore
are not reflected as an expense of the Company.

Other direct costs include overwrite fees payable to third party insurance
companies, loss adjusting expenses, premium taxes on crop hail insurance, bureau
fees and other costs. These costs, except for loss adjusting expense, vary
proportionally with the amount of premiums serviced. Beginning in the 1997 crop

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year and as a result of the restructuring of its MPCI agreement with Fireman's
Fund, the Company will no longer pay any overwrite fees on MPCI premiums it
places with Fireman's Fund.

Loss adjustment expenses are based on management's estimate of all Company
adjusting costs to settle claims incurred or to be incurred on policies on which
revenue has been recognized. The estimate is reviewed periodically and
variances, if any, in estimated versus actual amounts are reflected in current
operations. In some instances, agents are responsible for loss adjusting
expenses or other direct costs associated with policies sold by them, and those
agents generally receive higher commissions in return for the assumption of
those direct costs. Bureau fees are fees charged by NCIS for providing rates and
procedures required to be used by the FCIC.

RECOGNITION OF SERVICE FEES AND DIRECT COSTS

Crop Growers recognizes service fees from MPCI policies and the related
direct costs as of the sales closing date for the particular policy. The sales
closing date, which is established by the FCIC, is the date on which coverage
for a crop must be bound or renewed by the policyholder and when substantially
all required services relating to placing the insurance have been rendered by
the Company. Unless canceled by the farmer, policies in place from the prior
year automatically renew on the same terms on the sales closing date.

Since sales closing dates precede the date on which farmers plant their
insured crop, MPCI coverage and related premiums are estimated by the Company
until the farmer subsequently submits his or her report on actual acreage
planted. The effect of changes in such estimated premiums are included in the
results of operations in the period in which the estimates are changed.

For crop hail insurance, service fees are recognized when the insurance
coverage is accepted by the insurance company, which is concurrent with the
completion of substantially all services required to be performed by the
Company. Direct costs such as agent commissions, loss adjusting and premium
taxes are recognized at the time service fees are recognized.

The Company recognizes service fees under the profit sharing provisions of
its agreements with third party insurance companies when a reasonable estimate
can be made. The Company generally recognizes profit sharing, if any, in the
third and fourth quarters.

SOFTWARE OPERATIONS

The Company's software operations revenues include sales of VisAg-TM-
software, mapping products, and hardware products. Costs include commissions on
software and mapping sales, mapping product development costs, hardware costs,
and other direct costs such as shipping, postage, and packaging. The VisAg-TM-
product is a PC-based map driven farm management system designed for use by
small family farms to large corporate operations. Mapping products are computer
generated geo-referenced maps which allow an agent or farmer to view an entire
agricultural operation on a single map. Hardware products represent various
hardware products manufactured by third parties sold to agents and other outside
customers. Revenues from the sale of VisAg-TM-, mapping products and hardware
are recognized upon shipment to the customer.

Sales of VisAg-TM- and other mapping products have not made a significant
contribution to revenues or earnings since their introduction. Management
continues to assess the VisAg-TM- product marketing and distribution strategy,
does not expect to achieve significant profitability in its software operations
in 1997 and will seek to manage these operations to a break even level. The
Company does, however, continue to believe map based technology is important in
supporting its crop insurance operations and will continue to develop products
or applications for use by its agency distribution network.

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INSURANCE OPERATIONS

The Company's insurance operations include premiums earned and losses
incurred on Buy-Up and Basic Coverages, crop hail, and farm and ranch insurance
coverages underwritten and retained by the Company's property and casualty
insurance company subsidiaries.

For the 1996 and 1997 crop years, the Company did not and will not retain
any MPCI premiums underwritten by its insurance company subsidiaries. For the
1996 crop hail season, the Company retained 15% of crop hail premiums
underwritten by Dawson. In 1995, Dawson retained a certain amount of risk on
premiums underwritten and reinsured prior to its acquisition by the Company in
excess of the Company's risk retention strategy.

INVESTMENT INCOME

Historically, the Company has derived investment income from interest
charged to policyholders who elect not to pay their MPCI premiums on the FCIC
established due date and from investments. Under the MPCI program, the FCIC
charges interest at a rate of 1.25% per month on overdue premiums and the
insurance company, which is responsible for payment of the policyholder's
premiums to the FCIC, passes such interest cost on to the policyholder.

The Company has agreed with its contracting insurance companies to assume
the responsibility for such payments to the FCIC and, therefore, receives
interest payments made by policyholders on deferred premiums. In the event of an
insured loss, the Company deducts premium payments and interest, if any, from
the claim payment to the farmer.

The Company also earns investment income on interest and dividends on
investment securities and excess cash invested at certain times of the year,
which typically occurs after MPCI and crop hail premiums are collected. Realized
gains and losses on the sale of investments are included in investment income.
Also included in investment income are income and losses on investments in
companies which are 50% or less owned by the Company, which are accounted for
under the equity method.

SEASONALITY

The Company's quarterly operating results vary substantially from quarter to
quarter as a result of various factors, including MPCI sales closing dates, crop
production cycles and recognition of underwriting gains, if any. The Company
recognizes the highest amount of service fees and related direct costs in the
first quarter because the sales closing date for the majority of spring crops is
March 15. The majority of these amounts are attributed to service fees related
to MPCI. Virtually all of the Company's service fees and direct costs related to
crop hail insurance are recognized in the second quarter. The Company generally
recognizes its second highest amount of revenues and related direct costs in the
third quarter because the MPCI sales closing date for the majority of fall crops
is September 30. In addition, the Company may recognize a portion of
underwriting gains or losses, if any, on the premiums it services or underwrites
in the third quarter. In the fourth quarter, the Company also recognizes
underwriting gains or losses, if any, on the premiums it services or
underwrites, most of the interest income on MPCI deferred premium financing and
service fees on MPCI premiums with sales closing dates occurring in the fourth
quarter. Crop Growers cannot predict whether MPCI sales closing dates will be
changed in the future, but any such change could have a material effect on the
Company's quarterly results of operations. Because the Company's business is
directly tied to the production cycle of crops, the Company expects that
seasonal patterns in its operating results will continue.

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RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1996 AND 1995

AGENCY OPERATIONS. Service fees in the year ended December 31, 1996
increased $19.6 million to $104.6 million from $85.0 million in the year ended
December 31, 1995. Although overall MPCI premiums serviced increased during
1996, the increase was primarily the result of the acquisition of Dawson and
FCIC established rate increases on MPCI premiums in the 1996 crop year. The
increase was partially offset by a loss of premiums written by certain agencies
who elected to have their premiums serviced by other insurance companies, a
reduction in the expense reimbursement paid by the FCIC from 31% in the 1996
crop year to 29% in the 1997 crop year and the impact of the dissolution of its
MPCI agreement with CNA. See "--Restructuring and Non-Core Expenses." Management
believes the Company's premiums in the first quarter of 1997 will continue to be
adversely impacted by certain factors including competitive pressures,
principally relating to commissions, and the dissolution of its MPCI agreement
with CNA.

Also included in service fees is $10.9 million in profit sharing revenue in
the year ended December 31, 1996 as compared to $9.1 million in the year ended
December 31, 1995. The increase in profit sharing was primarily the result of
the increase in premiums serviced in 1996 compared to 1995. Profit sharing
revenue as a percentage of premiums serviced decreased to 4.9% in 1996 from 5.8%
in 1995. The decrease was primarily attributed to less favorable underwriting
results on the premiums serviced in 1996 as compared with 1995.

In addition to profit sharing, the Company also recorded excess loss
adjusting expense reimbursement of $2.0 million in the year ended December 31,
1996 as compared to $3.3 million in the year ended December 31, 1995. Included
in the $3.3 million of excess loss adjusting expense reimbursement in 1995 was
$1.7 million of excess loss adjusting expense reimbursement associated with hold
harmless provisions on certain prevented planting claims specific to the 1995
crop year.

Agent commissions and other direct costs in the year ended December 31, 1996
increased by $18.5 million to $71.1 million from $52.6 million in the year ended
December 31, 1995. The increase in agent commissions and other direct costs was
primarily a result of the increased MPCI and crop hail premiums serviced. Agent
commissions increased as a percentage of premiums serviced in 1996 as compared
to 1995 due to competitive pressures which forced the Company to, in several
areas of the country, increase commissions offered to agents.

Also included in agent commissions and other direct costs in the year ended
December 31, 1996 were $3.2 million in charges related to the Company's
assessment of the adequacy of the allowance for uncollectible receivables.
Approximately $2.0 million of this charge was recognized in the fourth quarter
of 1996. These charges resulted from management's ongoing review and analysis of
the collectibility of outstanding receivables which were recorded primarily
during 1994, 1995 and 1996. The Company, through review of historical trends and
analysis, evaluates the adequacy of its allowance each quarter and charges to
the allowance are made at such date, if necessary, based on management's best
estimate of collectibility of the then outstanding receivables. In determining
the necessary allowance for uncollectible receivables at December 31, 1996, the
Company considered (i) the historical collection experience of receivables, (ii)
the collectibility of certain balances, and (iii) the growth in the volume of
premiums serviced. The Company also considered that collection efforts during a
portion of 1996 were not performed efficiently which increased the aging of the
receivables. The Company believes that collection efforts have been refocused,
but the increased agings have increased the Company's credit exposure on
historical balances thus resulting in the need for a larger allowance.
Additionally, the Company considered its decision to enforce the MPCI policy
cancellation provisions for non-payment of premiums by the insured. During 1996,
the Company implemented a policy whereby, virtually all uncollected policies
were canceled. This policy change should allow the Company to more quickly
determine potential uncollectible accounts. The short-term effect was additional
collection efforts and an increase in the amount of uncollectible accounts. The
long-term benefit is expected to be fewer bad debts related to ongoing policies
serviced. The Company

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does not believe that the decision to enforce the policy cancellation provision
will have a significant impact on its service fee revenues.

INSURANCE OPERATIONS. Premiums earned increased to $2.5 million in 1996
from $(182,000) in 1995. Losses incurred increased in 1996 to $1.3 million from
$(2.3) million. The increases were primarily due to crop hail premiums
underwritten and retained by Dawson in 1996. Dawson was not acquired until July
1995 which was after most crop hail premiums had been written for 1995.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 16.6% in the year ended December 31, 1996 to $33.7 million from $28.9
million in the year ended December 31, 1995. The increase was due primarily to
the increase in the number of employees hired to service increased MPCI premium
and crop hail premium volume and additional general and administrative costs
incurred as a result of the acquisitions made by the Company in 1995 as the
operations have now been included for a full year.

Depreciation and amortization expenses increased to $3.3 million in the year
ended December 31, 1996 from $2.4 million in the year ended December 31, 1995.
The increase was primarily a result of increased property and equipment
purchased in late 1995 and 1996 and an increase in the amortization of
intangible assets as a result of the acquisitions during 1995.

RESTRUCTURING AND NON-CORE EXPENSES. In 1996, as a result of management's
assessment of the Company's core operation and focus on improving the
consistency of its financial performance and improving shareholder returns, the
Company recorded costs related to the relocation of the Company's corporate
headquarters and main office to Overland Park, Kansas, of $2.0 million, write
downs and losses on assets to be disposed of consisting of real estate and
software mapping of $1.3 million, losses on the discontinuation of certain
non-core business operations of $2.0 million, and costs accrued as a result of
the cancellation of certain agreements and contracts with third parties of $1.1
million.

Additionally, as a result of the dissolution of its MPCI agreement with CNA,
the Company was required to request agents to cancel and rewrite MPCI policies
previously written on CNA paper to Fireman's Fund, or one of its insurance
subsidiaries paper. For other competitive factors, including significant
incentive fees being offered to agents by competitors to induce agents to
transfer their books of business, the Company offered incentive fees to agents
to compensate them for obtaining the necessary cancellation and rewrite forms
from policyholders. In the year ended December 31, 1996, the Company agreed to
pay approximately $300,000 relating to transferred business. The Company expects
to pay approximately $1.5 million to $1.8 million of additional incentive fees
in the first quarter of 1997 as part of the cancellation and rewrite process.
The Company anticipates accruing these amounts consistent with the Company's
revenue recognition method. The Company believes these costs are a one-time
expenditure.

LEGAL MATTERS. In the year ended December 31, 1996, the Company incurred
approximately $4.0 million in expenses, primarily legal fees, in connection with
indictments of the Company and certain of its former officers by the Independent
Counsel appointed to investigate matters relating to former Secretary of
Agriculture, Mike Espy. Included in this amount, are amounts advanced by the
Company pursuant to indemnification agreements between the former officers and
the Company for the defense of the case. In January 1997, the Company settled
this matter and agreed to pay $2.0 million. This amount, which is not tax
deductible, was accrued as an expense in 1996.

The Company also incurred approximately $200,000 in the year ended December
31, 1996 in connection with defending a shareholder class action lawsuit filed
in May 1995. In February 1997, the Company settled this matter and agreed to pay
$2.5 million, $1.22 million of which is payable by the Company and the remainder
of which is payable under the terms of a directors' and officers' insurance
policy. The $1.22 million was accrued as an expense in 1996.

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INTEREST EXPENSE. Interest expense increased to $1.5 million in the year
ended December 31, 1996 from $859,000 in the year ended December 31, 1995. The
increase in interest expense was a result of additional borrowings necessary to
finance operating expenses attributed to the increase in premium volumes as well
as MPCI deferred premiums in the 1996 crop year.

YEARS ENDED DECEMBER 31, 1995 AND 1994

AGENCY OPERATIONS. Service fees in the year ended December 31, 1995
increased $36.9 million to $85.0 million from $48.1 million in the year ended
December 31, 1994. The increase in service fees was primarily the result of an
increase in MPCI and crop hail premiums serviced, underwriting gains and
revenues from excess loss adjustment expense reimbursement. The increase in MPCI
premiums serviced was due, in part, to the overall increase in the Buy-Up
Coverage market as a result of the Reform Act, and the addition of Basic
Coverage beginning with the 1995 crop year. Actual premiums serviced by the
Company (including Dawson) during the 1995 crop year were $191.4 million and
$39.5 million for Buy-Up and Basic Coverage, respectively. During the 1995 crop
year, the FCIC made a one time change (in large part due to excess moisture
which delayed planting in certain states) to excess loss adjustment expense
reimbursement to allow companies to recover additional loss adjusting expenses
associated with adjusting prevented planting claims. The Company recognized $3.3
million in excess loss adjustment expense reimbursement from the FCIC
attributable to the 1995 crop year. A significant portion of this was related to
preventive planting claims. Crop hail premiums serviced increased as a result of
growth in the Company's business and as a result of the Dawson acquisition.

Service fees also increased as the Company recognized $9.1 million of
underwriting gains in the year ended December 31, 1995 compared to $3.1 million
in the year ended December 31, 1994. The increase in the Company's share of
underwriting gains was primarily a result of increased premiums serviced, the
fact that there was no loss carryforward remaining under its MPCI contract with
CNA and favorable underwriting results on premiums retained by Dawson.

Agent commissions and other direct costs increased by $22.1 million to $52.6
million for the year ended December 31, 1995 compared to $30.5 million for the
year ended December 31, 1994. The increase in agent commissions and other direct
costs was a result of the increased MPCI premiums serviced by the Company during
the year ended December 31, 1995 compared to the same period in 1994 and as a
result of the loss adjusting costs associated with adjusting of claims incurred
in prevented planting. These increases were partially offset by the agency
acquisitions completed during the year which had the effect of moving direct
costs to general and administrative expenses as these agents became employees.
In addition, overwrite fees payable to third party insurance companies decreased
slightly as Plains and Dawson underwrote a larger percentage of the premiums
serviced by the Company in the year ended December 31, 1995 compared to 1994. As
a percentage of service fees, related agent commissions and other direct costs
decreased to 62.5% in 1995 from 63.5% in 1994.

INSURANCE OPERATIONS. Premiums earned decreased in 1995 to $(182,000) from
$1.3 million in 1994. Losses incurred decreased in 1995 to $(2.3) million from
$1.3 million in 1994. The decreases were due primarily to the acquisition of
Dawson. In connection with the purchase of Dawson, at July 14, 1995, initial
estimates were made of premiums and losses related to the MPCI and crop hail
business underwritten by Dawson prior to the acquisition. The Company's practice
is to estimate a breakeven underwriting result until late in the third quarter,
when more information is available on the underwriting results of its premiums
serviced. Subsequent to the acquisition, the FCIC changed the MPCI program to
provide insurance companies relief for most of the prevented planting losses,
and as a result the level of loss reserves estimated at the acquisition date was
higher than the amount ultimately necessary. This reduction of loss reserves
along with other changes in estimates made as of the acquisition date, resulted
in the business acquired having an underwriting gain of approximately $2.3
million.

9
<PAGE>
INVESTMENT INCOME. Investment income increased $766,000 in the year ended
December 31, 1995 to $2.2 million from $1.4 million in the year ended December
31, 1994. The increase in investment income was due primarily to realized gains
on investment securities sold during 1995 to fund the Dawson acquisition.

INTEREST EXPENSE. The increase in interest expense was primarily due to
additional borrowings necessary to finance MPCI deferred premiums and operating
expenses attributed to the increase in premium volume as a result of the
extension by the FCIC of reporting deadlines for the 1995 crop year (which
delayed the Company's receipt of a portion of the expense reimbursement payable
to the Company on MPCI premiums) as well as additional long-term debt incurred
on the permanent financing of the Company's former headquarters in Great Falls,
Montana.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 150.6% to $28.9 million in the year ended December 31, 1995 from $11.5
million in the year ended December 31, 1994. The increase was due primarily to
the increase in the number of employees hired to service the increased MPCI
premium volume and additional general and administrative costs incurred as a
result of the acquisitions made by the Company in 1995. At December 31, 1995 the
Company had 524 employees, 142 of which were hired in 1995 as a result of
acquisitions, compared to 228 at December 31, 1994. The Company also incurred
significant start-up costs including development and marketing costs associated
with the initial release of VisAg-TM- in December 1995.

Depreciation and amortization expenses increased to $2.4 million in the year
ended December 31, 1995 from $1.0 million for the year ended December 31, 1994.
The increase was primarily a result of increased property and equipment
purchased to support the growth of the Company and an increase in the
amortization of intangible assets as a result of acquisitions.

INCOME TAXES. For the year ended December 31, 1994, the Company recognized
approximately $264,000 of a rehabilitation tax credit related to the renovation
of the Company's new office building which qualified as a historic structure.
This had the effect of reducing the Company's effective tax rate as compared to
the year ended December 31, 1995.

MINORITY INTEREST. Minority interest represents dividends accrued and the
accretion of discount on preferred stock issued in March of 1995, to fund the
Dawson acquisition. Also included in minority interest are earnings attributed
to minority shareholders.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES

Net cash provided by operating activities was $5.4 million and $2.9 million
during 1996 and 1994, respectively, compared with cash used by operating
activities of $16.0 million in 1995. The increase in cash provided by operating
activities in 1996 was primarily the result of the receipt of income tax refunds
in 1996 and the delay in payments of operating expenses until January 1997. In
1995, the FCIC extended the payment due dates for the 1995 crop year by one
month for policyholders which delayed policyholders payments to the Company for
MPCI premiums due. This had the effect of delaying the Company's receipt of a
portion of the expense reimbursement payable to the Company on MPCI premiums
serviced. This delay, which did not happen in 1994, nor reoccur in 1996,
substantially increased cash used for operations during 1995.

INVESTING ACTIVITIES

Cash provided by investing activities was $22.4 million and $699,000 for
1996 and 1995, respectively, compared with cash used by investing activities of
$37.3 million in 1994. Historically, most of the Company's cash flow has been
used to pay premiums due to the FCIC in the last quarter of the year on

10
<PAGE>
behalf of policyholders in order to earn the spread between the interest charged
to the policyholders, which is equal to the rate established by the FCIC, and
the Company's cost of funds. The increase in cash provided by investing
activities in 1996 was primarily a result of the Company not financing the
premiums payable to the FCIC on the 1996 crop year. In November 1996, Crop
Growers and Fireman's Fund amended their MPCI agreement pursuant to which
Fireman's Fund financed the premiums on behalf of the policyholders in exchange
for the interest charged on the deferred premiums. The Company continues to
administer the collection of the receivables and is ultimately responsible for
the collection of the balances. The Company receives a fee for administrative
costs related to the premiums financed. Deferred premiums financed at December
31, 1995, were $22.1 million compared to $27.6 million at December 31, 1994. The
portion of deferred premiums financed at December 31, 1995, was less than 1994,
due to less available funds to finance premiums, primarily as a result of the
Company's use of funds to finance the acquisition of Dawson and the delay in
receiving the excess loss adjusting expense reimbursement from the FCIC for
prevented planting until January, 1996.

The remaining investing activities of the Company have been primarily
purchases and sales of investment securities, acquisitions and purchases of
property and equipment needed as a result of the growth of the Company. During
1996, a portion of the proceeds from the $6.1 million sale of investment
securities were used by the Company to assist in funding operations during 1996
and early 1997. Additionally, during 1995, the Company used $9.1 million in
proceeds from the sale of investment securities to fund the acquisition of
Dawson. During 1994, the Company invested $13.5 million in investment
securities. This amount represented proceeds from the Company's two public
offerings pending the need for corporate use.

FINANCING ACTIVITIES

Cash used by financing activities was $25.4 million in 1996, compared with
cash provided by financing activities of $18.6 million and $34.1 million for
1995 and 1994, respectively. The primary source of cash during 1996 was $10
million from the issuance of redeemable preferred stock to Fireman's Fund. The
primary use of cash during 1996 was to repay amounts outstanding under the
Company's line of credit of $32.2 million. The primary sources of cash during
1995 and 1994 were from draws on the Company's line of credit to pay the
deferred premiums due to the FCIC on behalf of policyholders and $35.9 million
in 1994 of net proceeds received in the Company's two public offerings. The
Company also redeemed $3.5 million of subsidiary preferred stock during 1994.

In addition, during 1996, the Company repurchased $2.1 million of common
stock from employees and certain former executive officers under separation
agreements with the officers and employees. The Company purchased an additional
$85,000 of stock in January 1997 as the last required purchases under the
agreements. See Note 8 of Notes to Consolidated Financial Statements.

The Company paid $239,000 in dividends during 1996 relating to its preferred
stock issued to Fireman's Fund in July 1996. The Company has not paid dividends
on its common stock. The Company currently intends to retain earnings to finance
the growth and development of its business and does not currently anticipate
paying cash dividends on its common stock in the foreseeable future.

CAPITAL RESOURCES

Historically, the Company has maintained lines of credit to finance working
capital needs and premiums on behalf of policyholders who elect not to pay their
MPCI premiums on the FCIC established due date and to fund crop hail losses in
advance of reimbursement from the contracting insurance companies. These lines
of credit expired in October and November 1996 and were not renewed.

In connection with the March 1997 acquisition agreement between the Company
and Fireman's Fund, Fireman's Fund has agreed to provide the Company with a
working capital line of credit of up to $15 million subject to certain borrowing
base limitations in the event that the Company is not able to secure

11
<PAGE>
third party financing. The credit agreement includes restrictive covenants and
the requirement to maintain certain financial ratios and minimum net worth. The
commitment which will expire in March 1998, does not contain any loan or
commitment fees and borrowings bear interest at national bank's base rate. If
the Company were to terminate the acquisition agreement with Fireman's Fund, any
amounts then outstanding under the line of credit would become immediately due
and payable.

In addition, under the crop hail general agency agreement between the
Company and Fireman's Fund, Fireman's Fund will fund crop hail losses.
Accordingly, the Company will not need to finance crop hail losses in 1997.

The Company believes that the cash generated from operations and the
availability of borrowings under the Fireman's Fund commitment to provide
working capital will provide sufficient resources to finance the Company's
current operations and projected working capital needs for the next 12 months.

12
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... 14

Consolidated Financial Statements:

Statements of Operations for the years ended December 31, 1996, 1995 and 1994............................ 15

Balance Sheets as of December 31, 1996 and 1995.......................................................... 16

Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994.................. 17

Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994............................ 18

Notes to Consolidated Financial Statements................................................................. 19
</TABLE>

13
<PAGE>
INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Crop Growers Corporation:

We have audited the accompanying consolidated balance sheets of Crop Growers
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Crop Growers
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.

KPMG Peat Marwick LLP

Kansas City, Missouri
March 28, 1997

14
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Service fees..................................................... $ 104,602,376 $ 85,025,204 $ 48,100,395
Premiums earned and other income................................. 4,308,467 700,910 2,202,499
Investment income................................................ 2,255,324 2,162,613 1,396,713
-------------- ------------- -------------
Total revenues................................................. 111,166,167 87,888,727 51,699,607
Expenses:
Agent commissions and other direct costs......................... 71,082,490 52,611,960 30,475,468
Losses incurred and other expenses............................... 2,420,666 (2,012,311) 1,427,218
General and administrative expenses.............................. 33,698,919 28,885,688 11,525,930
Restructuring and non-core expenses.............................. 6,509,628 -- --
Legal matters.................................................... 7,458,044 -- --
Interest expense................................................. 1,477,595 858,640 394,167
-------------- ------------- -------------
Total expenses................................................. 122,647,342 80,343,977 43,822,783
-------------- ------------- -------------
(Loss) income before income taxes and minority interest.......... (11,481,175) 7,544,750 7,876,824
Income tax benefit (expense)................................... 3,345,732 (2,942,452) (2,273,435)
Minority interest.............................................. (67,227) (306,987) (279,819)
-------------- ------------- -------------
Net (loss) income................................................ (8,202,670) 4,295,311 5,323,570
Redeemable preferred stock dividend............................ (238,889) -- --
-------------- ------------- -------------
Net (loss) income attributable to common stock................... $ (8,441,559) $ 4,295,311 $ 5,323,570
-------------- ------------- -------------
-------------- ------------- -------------
Pro forma data (see Note 7):
Historic net income.............................................. $ -- $ -- $ 5,323,570
Pro forma provision for income taxes............................. -- -- (280,975)
-------------- ------------- -------------
Pro forma net income............................................. $ -- $ -- $ 5,042,595
-------------- ------------- -------------
-------------- ------------- -------------
Pro forma net income per common share.............................. $ -- $ -- $ 0.91
-------------- ------------- -------------
-------------- ------------- -------------
Net (loss) income per common share................................. $ (1.04) $ .51 $ --
-------------- ------------- -------------
-------------- ------------- -------------
Weighted average common shares outstanding......................... 8,108,600 8,352,837 5,562,374
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>

See accompanying notes to consolidated financial statements.

15
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities, held to maturity............................................. $ 1,308,439 $ 2,311,177
Fixed maturities, available for sale........................................... 5,199,708 5,838,391
Equity securities, available for sale.......................................... -- 1,757,540
-------------- --------------
Total investments............................................................ 6,508,147 9,907,108
Cash and cash equivalents--corporate funds....................................... 8,635,308 6,315,417
Cash and cash equivalents--restricted funds...................................... 7,496,818 665,153
Premiums receivable, net......................................................... 57,536,838 60,944,012
Underwriting gain receivable..................................................... 14,317,285 12,926,642
Reinsurance balances recoverable................................................. 32,625,869 31,779,006
Property and equipment, net...................................................... 5,242,447 11,687,066
Intangible assets, net........................................................... 9,857,238 10,528,630
Income tax recoverable........................................................... 4,949,064 5,434,737
Deferred tax asset............................................................... 1,861,640 --
Other assets..................................................................... 9,898,474 3,277,131
-------------- --------------
$ 158,929,128 $ 153,464,902
-------------- --------------
-------------- --------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Premiums payable................................................................. $ 29,504,825 $ 6,336,084
Commissions payable.............................................................. 16,239,692 14,142,811
Underwriting gain payable........................................................ 1,216,780 4,512,961
Deferred tax liability........................................................... -- 1,244,852
Accounts payable and accrued liabilities......................................... 12,253,886 4,259,312
Reinsurance balances payable..................................................... 17,010,461 17,787,551
Loss reserves.................................................................... 32,147,342 21,726,157
Deferred service fees............................................................ 3,513,445 2,678,871
Notes payable to bank............................................................ -- 32,245,539
Long-term debt................................................................... 3,290,672 4,188,540
-------------- --------------
115,177,103 109,122,678
Redeemable preferred stock....................................................... 10,000,000 --
Stockholders' equity
Common stock (par value $.01): 40,000,000 shares authorized; 7,970,251 and
8,172,581 shares issued and outstanding at December 31, 1996 and December 31,
1995, respectively........................................................... 79,702 81,726
Paid-in capital................................................................ 36,729,115 38,244,567
Accumulated (deficit)/retained earnings........................................ (3,086,499) 5,881,973
Unrealized appreciation of fixed maturity and equity investments, net of
taxes........................................................................ 54,707 208,958
Unearned compensation.......................................................... (25,000) (75,000)
-------------- --------------
Total stockholders' equity................................................... 33,752,025 44,342,224
Commitments and contingencies (Notes 11, 13 and 16)..............................
-------------- --------------
$ 158,929,128 $ 153,464,902
-------------- --------------
-------------- --------------
</TABLE>

See accompanying notes to consolidated financial statements.

16
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
UNREALIZED
ACCUMULATED APPRECIATION
COMMON STOCK (DEFICIT) (DEPRECIATION)
---------------------- PAID-IN INVESTED RETAINED OF UNEARNED
SHARES PAR VALUE CAPITAL CAPITAL EARNINGS INVESTMENTS COMPENSATION
--------- ----------- ---------- --------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993......... -- $ -- $ -- $ 643,191 $1,316,812 $ -- $ --
Net income........................ -- -- -- -- 5,323,570 -- --
Net contributions................. -- -- -- 29,130 -- -- --
Reorganization.................... 3,570,000 35,700 5,338,099 (672,321) (4,701,478) -- --
Change in unrealized appreciation
(depreciation) of fixed maturity
investments, net of taxes....... -- -- -- -- -- (71,734) --
Dividends and distributions....... -- -- (4,140,000) -- -- -- --
Issuance of common stock, net of
offering costs of $4,584,618.... 4,180,748 41,807 35,829,186 -- -- -- --
Issuance of restricted stock...... 20,000 200 149,800 -- -- -- (150,000)
Restricted stock compensation
earned.......................... -- -- -- -- -- -- 25,000
--------- ----------- ---------- --------- ------------ ------------- -------------
Balances, December 31, 1994......... 7,770,748 77,707 37,177,085 -- 1,938,904 (71,734) (125,000)
Restatement for immaterial pooling
of interests.................... 316,500 3,166 20,835 -- (352,242) -- --
--------- ----------- ---------- --------- ------------ ------------- -------------
Balances, December 31, 1994, as
restated.......................... 8,087,248 80,873 37,197,920 -- 1,586,662 (71,734) (125,000)
Net income........................ -- -- -- -- 4,295,311 -- --
Issuance of common stock in
conjunction with acquisition.... 46,933 469 759,031 -- -- -- --
Exercise of stock options......... 38,400 384 287,616 -- -- -- --
Restricted stock compensation
earned.......................... -- -- -- -- -- -- 50,000
Change in unrealized appreciation
(depreciation) of fixed maturity
and equity investments, net of
taxes........................... -- -- -- -- -- 280,692 --
--------- ----------- ---------- --------- ------------ ------------- -------------
Balances, December 31, 1995......... 8,172,581 81,726 38,244,567 -- 5,881,973 208,958 (75,000)
Net loss.......................... -- -- -- -- (8,202,670) -- --
Exercise of stock options......... 1,920 19 14,381 -- -- -- --
Repurchase of common stock........ (204,250) (2,043) (1,529,833) -- (526,913) -- --
Dividends paid on preferred
stock........................... -- -- -- -- (238,889) -- --
Restricted stock compensation
earned.......................... -- -- -- -- -- -- 50,000
Change in unrealized appreciation
(depreciation) of fixed maturity
and equity investments, net of
taxes........................... -- -- -- -- -- (154,251) --
--------- ----------- ---------- --------- ------------ ------------- -------------
Balances, December 31, 1996......... 7,970,251 $ 79,702 $36,729,115 $ -- $(3,086,499) $ 54,707 $ (25,000)
--------- ----------- ---------- --------- ------------ ------------- -------------
--------- ----------- ---------- --------- ------------ ------------- -------------

TOTAL
STOCKHOLDERS'
EQUITY
------------
<S> <C>
Balances, December 31, 1993......... $1,960,003
Net income........................ 5,323,570
Net contributions................. 29,130
Reorganization.................... --
Change in unrealized appreciation
(depreciation) of fixed maturity
investments, net of taxes....... (71,734)
Dividends and distributions....... (4,140,000)
Issuance of common stock, net of
offering costs of $4,584,618.... 35,870,993
Issuance of restricted stock...... --
Restricted stock compensation
earned.......................... 25,000
------------
Balances, December 31, 1994......... 38,996,962
Restatement for immaterial pooling
of interests.................... (328,241)
------------
Balances, December 31, 1994, as
restated.......................... 38,668,721
Net income........................ 4,295,311
Issuance of common stock in
conjunction with acquisition.... 759,500
Exercise of stock options......... 288,000
Restricted stock compensation
earned.......................... 50,000
Change in unrealized appreciation
(depreciation) of fixed maturity
and equity investments, net of
taxes........................... 280,692
------------
Balances, December 31, 1995......... 44,342,224
Net loss.......................... (8,202,670)
Exercise of stock options......... 14,400
Repurchase of common stock........ (2,058,789)
Dividends paid on preferred
stock........................... (238,889)
Restricted stock compensation
earned.......................... 50,000
Change in unrealized appreciation
(depreciation) of fixed maturity
and equity investments, net of
taxes........................... (154,251)
------------
Balances, December 31, 1996......... $33,752,025
------------
------------
</TABLE>

See accompanying notes to consolidated financial statements.

17
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income................................................... $ (8,202,670) $ 4,295,311 $ 5,323,570
Adjustments to reconcile net (loss) income to net cash provided
(used) by operating activities:
Depreciation........................................................ 1,758,218 1,249,632 485,046
Amortization........................................................ 1,583,216 1,165,840 550,385
Deferred taxes...................................................... (3,006,769) 835,679 275,534
Gain on sale of securities available for sale....................... (435,557) (371,237) --
Loss on restructuring charges....................................... 3,292,217 -- --
Other changes, net of effect from acquisitions:
Cash and cash equivalents, restricted funds....................... (6,831,665) (665,153) --
Premiums receivable, net.......................................... 3,407,174 59,074,738 (25,564,731)
Premiums payable.................................................. 2,369,733 (57,518,081) 14,010,143
Underwriting gain receivable/payable.............................. (4,686,823) (5,413,681) (3,000,000)
Commissions payable............................................... 2,096,881 (5,748,128) 4,261,797
Loss reserves..................................................... 10,421,185 (35,548,868) 5,609,411
Reinsurance balances recoverable.................................. (846,863) 14,485,003 (4,279,105)
Reinsurance balances payable...................................... (777,090) 13,508,446 4,279,105
Accounts payable and accrued liabilities.......................... 7,994,577 1,194,787 659,361
Income taxes...................................................... 485,613 (6,643,277) 287,605
Other............................................................. (3,230,408) 114,835 (2,010)
------------ ------------ ------------
Net cash provided (used) by operating activities...................... 5,390,969 (15,984,154) 2,896,111

INVESTING ACTIVITIES:
Change in company financed premiums................................. 20,799,008 5,504,598 (15,233,082)
Purchase of securities--available for sale.......................... (3,653,116) (11,865,698) (11,203,397)
Purchase of securities--held to maturity............................ -- -- (2,313,240)
Proceeds from sales and maturities of securities--available for
sale.............................................................. 6,271,260 19,397,918 35,000
Proceeds from maturities of securities--held to maturity............ 1,000,000 -- --
Sale of assets held for sale........................................ 1,430,000 -- --
Purchases of intangible assets, including sales of assets,
acquisitions of businesses, net of cash received.................. (1,124,331) (6,215,541) (2,140,338)
Purchases of property and equipment................................. (2,367,215) (6,122,241) (6,413,749)
------------ ------------ ------------
Net cash provided (used) by investing activities...................... 22,355,606 699,036 (37,268,806)

FINANCING ACTIVITIES:
Proceeds from issuance of common stock.............................. 14,400 288,000 35,870,993
Repurchase of common stock.......................................... (2,058,788) -- --
Preferred stock transactions........................................ 10,000,000 -- (3,529,819)
Change in notes payable to bank..................................... (32,245,539) 18,193,539 5,052,000
Proceeds from issuance of long-term debt............................ 30,264 2,350,864 1,731,511
Repayment of long-term debt......................................... (928,132) (2,207,231) (1,053,568)
Dividends and other distributions................................... (238,889) -- (3,957,072)
------------ ------------ ------------
Net cash (used) provided by financing activities...................... (25,426,684) 18,625,172 34,114,045
Net change in cash and cash equivalents--corporate funds............ 2,319,891 3,340,054 (258,650)
Cash and cash equivalents--corporate funds beginning in year.......... 6,315,417 2,975,363 3,234,013
------------ ------------ ------------
Cash and cash equivalents--corporate funds end of year................ $ 8,635,308 $ 6,315,417 $ 2,975,363
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

See accompanying notes to consolidated financial statements.

18
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996, 1995, AND 1994

(1) ORGANIZATION

Crop Growers Corporation and subsidiaries (the Company) markets and services
federal multi-peril crop insurance, crop hail and other insurance products on
behalf of insurance companies, including its wholly-owned subsidiaries, Plains
Insurance Company (Plains) and Dawson Hail Insurance Co. (Dawson). The Company
is also involved in development and marketing of proprietary software
applications for use in the agriculture industry by insurance agents and
farmers.

On March 5, 1997, Fireman's Fund and the Company entered into a definitive
agreement by which Fireman's Fund would acquire the Company in a cash merger at
$10.25 per share. The transaction is subject to, among other things, Company
stockholder approval, regulatory approval and other customary conditions.
Because of regulatory approvals and clearances, the transaction is not expected
to close until mid-1997.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

BASIS OF ACCOUNTING

The accompanying consolidated financial statements have been prepared on the
basis of generally accepted accounting principles ("GAAP") which, as to the
insurance company subsidiaries, vary from statutory accounting practices
prescribed or permitted by insurance regulatory authorities. The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.

REVENUE RECOGNITION

For multi-peril crop insurance, service fees are recognized based on
estimates of premium as of the sales closing date which is when coverage for a
crop must be applied for or renewed by the policyholder and when substantially
all required services, except for loss adjusting relating to placing the
insurance have been rendered. Actual premiums billed, which are based on actual
planted acreage, may vary from the original estimates made at the sales closing
date. The resulting adjustments are reflected in operations in the periods in
which they are determined. For crop hail insurance, service fees are recognized
when the insurance coverage is accepted by the insurance company, which is
concurrent with the completion of substantially all services required by the
Company. Direct costs such as agent commissions are recognized at the time
service fees are recognized.

Premiums associated with the underlying coverage are recognized as due from
the insured or agent and payable to the United States Department of
Agriculture's Federal Crop Insurance Corporation (FCIC), insurance company or
reinsurance company concurrent with the recognition of service fees. Premiums on
multi-peril and crop hail insurance written by Plains and Dawson are considered
earned when written. For multi-peril crop insurance, premiums are written based
on estimates of premium as of the sales closing date.

19
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company is entitled to additional income on certain business written for
or reinsured with third-party insurance companies based on specified loss
experience. This additional income is recognized as income when a reasonable
estimate can be made. The Company recognized $10.9 million, $9.1 million and
$3.1 million for the years ended 1996, 1995 and 1994, respectively, under
certain of these profit sharing provisions.

LOSS RESERVES

Loss reserves are based upon estimates for losses reported and estimates for
losses incurred but not yet reported. The estimate of losses incurred but not
yet reported, includes a provision for losses on multi-peril and crop hail
insurance based on the ultimate anticipated underwriting gain or loss by crop
year. Reinsurance recoverable is recorded at the same time for the portion of
losses not retained by the Company.

The liability for losses and the related estimation methods are continually
reviewed and revised to reflect current conditions and trends. The resulting
adjustments are reflected in operations in the periods in which they are
determined. While management believes the reserves for losses are adequate to
cover the ultimate liability, the actual ultimate loss costs may vary from
amounts provided.

REINSURANCE

Reinsurance recoverable on paid and unpaid losses are reported as assets,
instead of being netted with the related liabilities, since the Company is not
relieved of its legal liability to its policyholders.

DEFERRED SERVICE FEES

Deferred service fees which are initially established at sales closing date
represent management's estimate of such amounts needed for all Company loss
adjusting costs to settle claims incurred or to be incurred on policies for
which revenue has been recognized plus a provision for related gross profit. The
estimated deferred service fees are continuously reviewed and variances, if any,
in estimated versus actual amounts are reflected in current operations.

ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES

Under its agreements with third-party insurance companies, the Company is
generally responsible for billing and collecting premiums due from the insureds.
To the extent that premiums are not collected, the Company is responsible for
the uncollected balance. An allowance for uncollectible receivables has been
provided based on historical experience and management's best estimate. The
allowance was $3.1 million and $1.3 million at December 31, 1996 and 1995,
respectively. See note 19.

INVESTMENTS

The Company has classified its investments in fixed maturities as "held to
maturity" and "available for sale," and its marketable equity securities as
"available for sale." Investments classified as "held to maturity" are reported
at amortized cost. Investments classified as "available for sale" are reported
at estimated market value. Unrealized appreciation and depreciation on the
investments classified as "available for sale" are recorded in stockholders'
equity, net of deferred income taxes.

20
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Realized gains or losses on sales of investments are determined on the
specific-identification method and are included in investment income. Investment
income is recognized as earned and includes the accretion of bond discount and
amortization of bond premium.

PROPERTY AND EQUIPMENT

Property and equipment is carried at cost less accumulated depreciation.
Depreciation is computed primarily on a straight-line basis over the estimated
useful lives of the underlying assets from 3 to 10 years.

INTANGIBLE ASSETS

Intangible assets include contract rights, which represent costs assigned to
agency contracts and policyholder lists obtained in the acquisitions of "books
of business," non-compete agreements, software development costs, management and
services agreements, and insurance licenses. These assets are being amortized on
a straight-line basis over the following periods:

<TABLE>
<S> <C>
Software development costs................................... 3 years
Contract rights.............................................. 3 to 15 years
Non-compete agreements....................................... 3 to 5 years
Management and services agreements........................... 15 to 20
years
Insurance licenses........................................... 20 years
Other........................................................ 5 to 15 years
</TABLE>

The Company assesses the recoverability of its intangible assets whenever
adverse events or changes in circumstances or business climate indicate that
expected future cash flows may not be sufficient to support the recorded
intangible assets. To the extent the carrying value is in excess of the
recoverable value, the assets are written down to their estimated net realizable
value. There have been no significant write-downs of intangible assets during
1996, 1995 or 1994.

LONG-LIVED ASSETS

The Company adopted the Statement of Financial Accounting Standards (SFAS)
No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF, in the first quarter of 1996. SFAS No. 121 requires
that certain long-lived assets be reviewed for impairment when events or
circumstances indicate that the carrying amounts of the assets may not be
recoverable. If such review indicates that the carrying amount of an asset
exceeds the sum of its expected future cash flows, the asset's carrying value is
written down to fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or

21
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Amounts attributable to the Company's current year tax return are reflected as
current income taxes.

At December 31, 1993, all members of the consolidated group had elected S
Corporation status under Section 1362 of the Internal Revenue Code. Some members
joined the consolidated group as part of the Reorganization (see Note 8). At
that date their S Corporation status terminated. Additionally, prior to that
time certain of these members reported taxable income on the cash basis of
accounting. Upon joining the consolidated group, these members had to change
their method of reporting income to the accrual basis and incurred a tax expense
on the outstanding difference in income between the two methods of accounting.
Accordingly, there is no provision for income taxes in the consolidated
financial statements for all income in periods in which certain members of the
group were S Corporations since the income tax liability or benefit accrued to
the stockholders and not to the Company.

As discussed in Note 7, a pro forma provision for income taxes has been
reflected in the accompanying consolidated statement of operations in 1994.

SOFTWARE DEVELOPMENT COSTS

Certain software development costs are capitalized when incurred.
Capitalization of software development costs begins upon the establishment of
technological feasibility. The establishment of technological feasibility and
the ongoing assessment of recoverability of capitalized software development
costs requires considerable judgment by management with respect to certain
external factors, including, but not limited to, anticipated future revenues,
estimated economic life and changes in software technologies.

All software development costs are amortized on a straight-line basis over
the remaining estimated economic life. To date such costs have resulted from
engineering and development of new and existing products. All other research and
development costs are charged to expense in the period incurred.

STATEMENTS OF CASH FLOWS

Cash and cash equivalents include corporate funds and include highly liquid
debt instruments with original maturities of three months or less.

The Company may pay premiums which are due in advance of receipt of premium
payments from the policyholder. Such amounts are considered an investing
activity in the statements of cash flows.

The Company paid interest of $1.5 million, $852,000, and $398,000 in 1996,
1995, and 1994, respectively. The Company received income tax refunds of $4.3
million and paid income taxes of $3.5 million during 1996, and paid taxes of
$8.8 million and $1.8 million in 1995 and 1994, respectively.

PREMIUM TRUST FUNDS

Premiums collected from insureds but not yet remitted to insurance carriers
are restricted as to use by laws in certain states in which the Company
operates. These amounts are reported in the accompanying consolidated balance
sheets as "Cash and cash equivalents--restricted funds."

22
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

MINORITY INTEREST

Minority interest includes dividends accrued on the preferred stock of
subsidiaries and earnings attributed to minority shareholders on the
consolidated statements of operations.

PER SHARE INFORMATION

Net (loss) earnings per common share is computed based on the weighted
average number of common shares outstanding, including the effects of the
Reorganization (see Note 8).

When dilutive, stock options are included as stock equivalents using the
treasury stock method. There is not a material difference between primary and
fully diluted earnings per share.

RECLASSIFICATIONS

Certain reclassifications have been made to the 1994 and 1995 consolidated
financial statements to conform with the 1996 presentation.

(3) INVESTMENTS

The amortized cost, gross unrealized appreciation and depreciation, and
estimated market value of investments in fixed maturity and equity investments
are as follows:

DECEMBER 31, 1996

DECEMBER 31, 1995

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST APPRECIATION DEPRECIATION VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities................................ $ 2,311,177 $ 106,395 $ -- $ 2,417,572
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Available for sale:
Obligations of states and political subdivisions........ $ 5,630,639 $ 184,060 $ (887) $ 5,813,812
Corporate securities.................................... 24,901 -- (322) 24,579
------------ ------------ ------------ ------------
Total................................................. $ 5,655,540 $ 184,060 $ (1,209) $ 5,838,391
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Equity securities......................................... $ 1,597,865 $ 159,675 $ -- $ 1,757,540
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>

23
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(3) INVESTMENTS (CONTINUED)

The amortized cost and estimated market value of investments in fixed
maturities are shown below by contractual maturity. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without prepayment penalties.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
<S> <C> <C>
Held to maturity:
Due in 1 year or less........................................... $ -- $ --
Due after 1 year through 5 years................................ 400,209 403,876
Due after 5 years through 10 years.............................. -- --
Due after 10 years.............................................. 908,230 944,721
------------ ------------
$ 1,308,439 $ 1,348,597
------------ ------------
------------ ------------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
------------ ------------
<S> <C> <C>
Available for sale:
Due in 1 year or less........................................... $ 50,284 $ 50,686
Due after 1 year through 5 years................................ 1,997,337 2,027,157
Due after 5 years through 10 years.............................. 1,495,515 1,535,449
Due after 10 years.............................................. 1,567,562 1,586,416
------------ ------------
$ 5,110,698 $ 5,199,708
------------ ------------
------------ ------------
</TABLE>

At December 31, 1996, Plains and Dawson had fixed maturities with a carrying
value of $3.5 million on deposit with various regulatory agencies, as required
by law.

The following is a summary of investment income for the years ended December
31, 1996, 1995 and 1994:

<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Fixed maturity investments.......................... $ 492,654 $ 709,922 $ 151,870
Equity investments.................................. 32,298 27,681 --
Premium finance..................................... 1,134,603 899,347 945,923
Loss on 50% or less owned companies................. (257,938) (114,245) --
Other, including realized gains..................... 853,707 639,908 298,920
------------ ------------ ------------
$ 2,255,324 $ 2,162,613 $ 1,396,713
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

24
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(3) INVESTMENTS (CONTINUED)
Proceeds from the sale of available-for-sale securities and gross realized
gains and losses were as follows for the years ended December 31, 1996, 1995,
and 1994:

<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ---------
<S> <C> <C> <C>
Proceeds................................................ $ 6,136,261 $ 9,227,684 $ --
Gross realized gains.................................... 582,925 412,467 --
Gross realized losses................................... (101,111) (41,230) --
</TABLE>

(4) INTANGIBLE ASSETS

Intangible assets are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Contract rights................................................ $ 7,430,952 $ 7,430,952
Software development costs..................................... 1,293,363 943,319
Non-compete agreements......................................... 590,000 590,000
Management and services agreements............................. 883,982 972,492
Insurance licenses............................................. 1,275,000 1,388,529
Other.......................................................... 2,046,755 1,396,880
------------- -------------
13,520,052 12,722,172
Less accumulated amortization................................ 3,662,814 2,193,542
------------- -------------
$ 9,857,238 $ 10,528,630
------------- -------------
------------- -------------
</TABLE>

(5) REDEEMABLE PREFERRED STOCK

On July 10, 1996, Fireman's Fund Insurance Company purchased 10,000 shares
of a new series of preferred stock of the Company for $10 million. The preferred
stock is convertible into common stock at a price of $13.25 per share
(equivalent to 754,717 shares), subject to certain adjustments. The preferred
stock pays a quarterly dividend (on each January 1, April 1, July 1 and October
1 commencing October 1, 1996) of 5% per annum and is entitled to vote on all
matters brought before the common shareholders on an as-converted basis. The
preferred stock is redeemable at the option of the Company after July 8, 1997,
at $1,000 per share plus all dividends accumulated and unpaid on the date fixed
for redemption; however, the Company may not redeem the shares prior to July 9,
2001 unless the price of common stock exceeds a redemption threshold set forth
in the certificate of designation creating the preferred stock. The preferred
stock is subject to mandatory redemption on July 9, 2006.

25
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(6) LONG-TERM DEBT

Long-term debt is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
6.9% notes, payable in aggregate monthly installments of $14,443, including interest,
through January 2015, secured by building and office equipment...................... $ 1,734,155 $ 1,780,488
9% note, payable in aggregate monthly installments of $24,910 through November 15,
1999, secured by equipment.......................................................... 754,370 973,497
Bank base rate plus 1% notes, payable in aggregate annual installments of $223,796,
plus interest, through 1999; secured by crop insurance agency operations............ 671,389 895,186
Various notes with interest rates ranging from 2.9% to 9.5%, payable on demand or in
aggregate monthly installments of $13,161 including interest, maturing at various
dates through December 15, 1998; secured by vehicles and office equipment........... 130,758 539,369
------------ ------------
$ 3,290,672 $ 4,188,540
------------ ------------
------------ ------------
</TABLE>

The aggregate maturities of long-term debt for the next five years are as
follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
- ----------------------------------------------------------------------------------
<S> <C>
1997.............................................................................. $ 636,955
1998.............................................................................. 546,063
1999.............................................................................. 533,195
2000.............................................................................. 60,932
2001.............................................................................. 65,296
</TABLE>

At December 31, 1995, the Company had two revolving line of credit
agreements for $35,000,000 and $15,000,000, respectively. The $15,000,000 line
of credit was available solely to pay hail losses with respect to policies
issued by or through the Company or its subsidiaries. This line, which was not
utilized during 1996, matured on October 31, 1996 and was not renewed.
Historically, the Company has utilized the $35,000,000 line of credit to finance
working capital needs as well as MPCI premiums due to the FCIC which have not
yet been paid to the Company by the policyholder. This line matured on November
30, 1996 and was not renewed by the Company. See Note 14 for the financing of
MPCI premiums for 1996.

Fireman's Fund has agreed to provide the Company with a working capital line
of credit of up to $15,000,000 subject to certain borrowing base limitations.
The credit agreement includes restrictive covenants and the requirement to
maintain certain financial ratios and minimum net worth. The commitment, which
will expire in March 1998, does not contain any loan or commitment fees and
borrowings bear interest at a national bank's base rate. If the Company were to
terminate the acquisition agreement with Fireman's Fund, any amounts then
outstanding under the line of credit would become immediately due and payable.

26
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(7) INCOME TAXES

Income tax (benefit) expense consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal.......................................... $ (260,261) $ 1,650,050 $ 1,617,185
State............................................ (78,702) 456,723 380,716
Deferred:
Federal.......................................... (2,325,694) 652,744 224,343
State............................................ (681,075) 182,935 51,191
------------- ------------ ------------
$ (3,345,732) $ 2,942,452 $ 2,273,435
------------- ------------ ------------
------------- ------------ ------------
</TABLE>

The following is a reconciliation between federal income tax (benefit)
expense applicable to (loss) income before income taxes and minority interest
and the amount computed at the statutory federal income tax rate of 34%.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Federal income tax (benefit) expense at statutory
rate............................................. $ (3,903,600) $ 2,565,215 $ 2,678,120
S Corporation earnings prior to reorganization..... -- -- (424,319)
Change in tax status............................... -- 21,165 172,787
Rehabilitation tax credit.......................... -- (52,217) (264,000)
State taxes, net of federal benefit................ (501,453) 426,779 288,036
Tax exempt interest and dividends received......... (88,010) (170,502) --
Non-deductible payments............................ 760,747 -- --
Other, net......................................... 386,584 152,012 (177,189)
------------- ------------ ------------
$ (3,345,732) $ 2,942,452 $ 2,273,435
------------- ------------ ------------
------------- ------------ ------------
</TABLE>

27
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(7) INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are presented below:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts............................... $ 1,215,049 $ 434,392
Asset write downs............................................. 717,430 --
Nondeductible reserves........................................ 973,683 120,677
Other......................................................... 172,850 107,230
------------- -------------
3,079,012 662,299
------------- -------------
Deferred tax liabilities:
Differences in depreciation and amortization.................. (1,137,323) (1,294,877)
Unrealized appreciation of investments........................ (33,847) (133,566)
Difference in revenue recognition............................. -- (363,441)
Change in tax status.......................................... (46,202) (115,267)
------------- -------------
(1,217,372) (1,907,151)
------------- -------------
Net deferred tax asset (liability).......................... $ 1,861,640 $ (1,244,852)
------------- -------------
------------- -------------
</TABLE>

Based upon all available evidence including taxes paid during the carryback
period, the Company believes that no valuation allowance is necessary for its
deferred tax assets.

The following unaudited pro forma information provides a summary of income
taxes as if the Company had been subject to federal and state income taxes for
the year ended December 31, 1994 prior to the termination of the S Corporation
status:

<TABLE>
<S> <C>
Federal tax expense............................................... $ 251,532
State taxes, net of federal benefit............................... 29,443
---------
$ 280,975
---------
---------
</TABLE>

(8) STOCKHOLDERS' EQUITY

During 1996, the Company entered into separation agreements with its former
President and Chief Executive Officer John Hemmingson and its former Executive
Vice President and Chief Financial Officer Gary Black. Under the agreements, the
Company purchased 100,000 and 80,000 shares of its common stock from Hemmingson
and Black, respectively, at prices ranging from $10.00 to $6.65 during 1996. The
Company also purchased 8,000 and 4,000 shares at $6.50 per share from Hemmingson
and Black, respectively, in January 1997.

28
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(8) STOCKHOLDERS' EQUITY (CONTINUED)

On June 30, 1994, the Company completed an initial public offering of
2,780,748 shares of common stock at $7.50 per share. The net proceeds from the
offering totaled $18,096,107 and were used to purchase and capitalize Plains,
redeem preferred stock of certain subsidiaries, pay certain stockholders the
remaining contingent purchase price related to the acquisition of the Company's
software development subsidiary, make certain distributions to former S
Corporation stockholders, prepay the remaining amount owed under the noncompete
agreement with a former stockholder, reduce outstanding short-term borrowings
and for general corporate purposes, including working capital.

Prior to the Reorganization described below, the accompanying consolidated
financial statements represent the historical combined operations of Crop
Growers Insurance, Inc., Prairie Mountain Insurance, Inc., Cimarron Crop
Insurance Services, Inc., Wheat Growers General Agency, Inc., Crop Growers
Software, Inc. (formerly AgriPeril Software, Inc.) and Insurance Acquisition
Corporation, collectively referred to as the Entities.

In anticipation of the Company's initial public offering:

The board of directors of a newly formed Delaware corporation, and the
stockholders of the Entities entered into a Reorganization Agreement with
the Company. Pursuant to the Reorganization Agreement, the outstanding
common stock of the Entities were exchanged for 3,570,000 shares of the
Company's common stock and $3,010,000 of promissory notes with certain
stockholders. The transaction was accounted for as an exchange of interest
under common control, similar to a pooling of interest. All name references
in the consolidated financial statements and the notes thereto, have been
changed to reflect this Reorganization.

The Entities distributed to their stockholders $830,000 as a partial
distribution of accumulated S Corporation earnings. The status of any of the
Entities as S Corporations was terminated upon consummation of the
Reorganization. At the date of Reorganization, any remaining undistributed
earnings were transferred to paid-in capital as though the Company had
distributed such earnings to the stockholders and they had contributed the
amounts back to the Company. During the fourth quarter of 1994, the Company
distributed an additional $300,000 of dividends to cover tax liabilities of
certain former S Corporation stockholders relating to earnings of certain of
the S Corporations prior to the Reorganization. This amount has been
included in dividends and distributions in the accompanying consolidated
financial statements.

On December 6, 1994, the Company completed a second public offering of
1,400,000 shares of its common stock at $14.00 per share. The net proceeds
from this offering totaled $17,774,886 and were used to provide additional
capital to Plains, support additional product development efforts relating
to software systems and for general corporate purposes.

(9) STOCK OPTION AND OTHER INCENTIVE PLANS

The Company has a Stock Incentive Plan (Incentive Plan) which permits the
issuance of options, stock appreciation rights, restricted stock, restricted
stock units, performance awards, dividend equivalents and other stock based
awards to employees, officers, consultants or independent contractors providing
service to the Company.

29
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(9) STOCK OPTION AND OTHER INCENTIVE PLANS (CONTINUED)
A total of 1,500,000 shares of common stock have been reserved for the
granting of awards under the Incentive Plan. The Incentive Plan is administered
by a Committee of the Board of Directors.

Under the terms of the Incentive Plan, the exercise price determined by the
Committee, of any stock option may not be less than 100% of the fair market
value on the date of grant. The options vest in periods of three to five years.
Following is a summary of the stock option activity:

<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTION SHARES PER SHARE
------------- --------------
<S> <C> <C>
Outstanding, January 1, 1994.................................. -- $ --
Granted..................................................... 743,900 7.50 - 25.00
Forfeited................................................... (10,000) 7.50
Exercised................................................... -- --
------------- --------------
Outstanding, December 31, 1994................................ 733,900 7.50 - 25.00
Granted..................................................... 181,750 12.63 - 26.75
Forfeited................................................... (5,060) 7.50
Exercised................................................... (38,400) 7.50
------------- --------------
Outstanding, December 31, 1995................................ 872,190 7.50 - 26.75
Granted..................................................... 299,710 8.50 - 11.00
Forfeited................................................... (97,899) 7.50 - 19.50
Exercised................................................... (1,920) 7.50
------------- --------------
Outstanding, December 31, 1996................................ 1,072,081 7.50 - 19.50
------------- --------------
------------- --------------
Exercisable, December 31, 1996................................ 578,801 7.50 - 26.75
------------- --------------
------------- --------------
</TABLE>

In 1994, 20,000 shares of restricted stock were granted under the Incentive
Plan which vest over three years. The shares are considered issued when awarded,
but the recipient does not own and cannot sell the shares while they are
restricted.

At December 31, 1996, 254,640 shares remain eligible for future grant under
the Incentive Plan.

The Company accounts for stock options in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.

30
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(9) STOCK OPTION AND OTHER INCENTIVE PLANS (CONTINUED)

The per share weighted-average fair value of stock options granted during
1996 and 1995 was $4.23 and $8.43 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
1996--expected dividend yield 0%, risk-free interest rate of 8.0%, expected
volatility factor of 30%, and an expected life of 6 years; 1995--expected
dividend yield 0%, risk-free interest rate of 8.0%, expected volatility factor
of 30%, and an expected life of 6 years.

Since the Company applies APB Opinion No. 25 in accounting for its plan, no
compensation cost has been recognized for its stock options in the financial
statements. Had the Company recorded compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's net
(loss) income per share for 1996 and 1995 would have been ($1.11)and $.48 per
share, respectively. Pro forma net income reflects only options granted in 1996
and 1995. Compensation cost for options granted prior to January 1, 1995 is not
considered.

The Company has a Non-Employee Director Stock Option Plan (Director Plan),
which provides for automatic grants of options, which do not qualify as
incentive stock options, to non-employee directors of the Board of Directors. A
total of 50,000 shares of Common Stock have been reserved for the granting of
awards under the Director Plan at 100% of the fair market value at the grant
date. Under the terms of the Director Plan, options granted are exercisable in
full six months from the date of grant and expire ten years from such date. At
December 31, 1996, 18,000 options had been granted under the Director Plan at
prices ranging from $7.50 to $27.13 and 32,000 shares remain eligible for future
grants.

In May, 1996, the Board of Directors awarded 75,000 and 65,000 options to
the Chairman and Vice Chairman of the Board, respectively. The options, with
exercise prices of $11.00 per share, vested 30 days after issuance.

In March 1996, a Management Compensation Plan ("Plan") was authorized by the
Board of Directors. The Plan provides annual and long-term incentives for
officers and certain key employees of the Company. Under the annual plan, for
the year ended December 31, 1996, certain required performance goals under the
Plan were achieved and accordingly, the Company recorded approximately $100,000
in compensation expense. Under the long-term portion of the plan, performance
units for potential cash incentives and 10 year stock options may be awarded.
Performance units are earned over a three-year performance period between 1996
to 1998, based on the degree of attainment of performance objectives. The cash
target value of the performance units at December 31, 1996 was approximately
$151,000. Options are awarded at the discretion of the board during the
three-year performance period and vest in thirds over the three year period
following the option grant date. As of December 31, 1996, 188,710 options had
been granted; none were exercisable.

The Company has a 401(k) plan covering substantially all of its employees
who have met specific age and service requirements. Benefits under the plan vest
after varying periods of plan participation. Contributions to the plan are at
the sole discretion of the Board of Directors. Contributions to the plan for
1996, 1995 and 1994 were $381,001, $208,182, and $134,610, respectively.

(10) STATUTORY ACCOUNTING PRACTICES

Plains and Dawson are domiciled in Kansas and North Dakota, respectively,
and prepare their statutory-basis financial statements in accordance with
accounting practices prescribed or permitted by the

31
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(10) STATUTORY ACCOUNTING PRACTICES (CONTINUED)
Kansas and North Dakota Insurance Departments, respectively. "Prescribed"
statutory accounting practices include state laws, regulations and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners ("NAIC"). Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices may differ from state to state, may differ from company to company
within a state, and may change in the future. Plains and Dawson have no
significant permitted accounting practices that vary from prescribed accounting
practices, except as noted below.

Stockholder's equity and net income, as reported to the domiciled state
insurance departments in accordance with its prescribed or permitted statutory
accounting practices, for the Company's insurance subsidiaries, are summarized
as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Stockholder's equity:
Plains......................................................... $ 7,134,453 $7,447,433
Dawson......................................................... 8,806,867 8,204,035
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ ----------
<S> <C> <C> <C>
Net income:
Plains.............................................. $ 187,020 $ 375,152 $ 262,131
Dawson.............................................. 1,053,259 2,793,067 --
</TABLE>

On a statutory accounting basis, Dawson recognizes premiums earned,
commission income and the related direct costs such as agent commissions,
premium taxes and other underwriting expenses based on the FCIC crop year. This
accounting practice was approved by the North Dakota Insurance Department as a
permitted accounting practice.

The payment of stockholder dividends by insurance companies without the
prior approval of regulators is limited to surplus determined in accordance with
statutory accounting practices, and requires that the capital and surplus
following such dividends be reasonable in relation to its outstanding
liabilities, and adequate to meet its financing needs. The maximum amount
available for the payment of dividends by Plains and Dawson to the Company
during 1997 without prior approval with the regulatory authorities is $213,000.
During 1996, Plains and Dawson paid dividends, to the Company, of $500,000 and
$2.5 million, respectively, from earned surplus.

The NAIC has adopted minimum risk based capital requirements to evaluate the
adequacy of statutory capital and surplus in relation to an insurance company's
risks. Regulatory compliance of risk based capital requirement is defined by a
ratio of a company's regulatory total adjusted capital to its to its authorized
control level risk based capital, as defined by the NAIC. At December 31, 1996,
Plains and Dawson exceed the minimum risk based capital requirements.

32
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(11) REINSURANCE

Plains and Dawson are each a party to a Quota Share Standard Reinsurance
Agreement with Fireman's Fund pursuant to which they cede all multi-peril crop
insurance premiums they underwrite to Fireman's Fund. In 1996, Plains and Dawson
entered into reinsurance agreements with non-affiliated insurance companies
under which Plains ceded 100% and Dawson ceded 85% of the crop hail premiums.

Dawson has entered into a reinsurance agreement with a non-affiliated
insurance company under which Dawson assumed 100% of the multi-peril crop
insurance and losses written by the non-affiliated insurance company in the
State of Kansas. Dawson has currently ceded all of this business to Fireman's
Fund. This agreement was not renewed for the 1997 crop year.

During 1995, Plains entered into a reinsurance agreement with non-affiliated
insurance companies. With respect to this agreement, additional commissions
predicated on loss experience with respect to MPCI business were $1,249,200 at
December 31, 1995. This agreement was terminated in 1996.

The effect of these reinsurance transactions on premiums earned and losses
incurred are as follows:

YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
LINE OF BUSINESS
------------------------------------------------------------
MULTI-PERIL CROP HAIL OTHER TOTAL
-------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Premiums earned:
Direct............................................ $ 79,090,253 $ 29,909,731 $ 793,820 $ 109,793,804
Assumed........................................... 8,624,632 -- -- 8,624,632
Ceded............................................. (87,714,885) (27,554,476) (642,377) (115,911,738)
-------------- -------------- ----------- ---------------
Net............................................. $ -- $ 2,355,255 $ 151,443 $ 2,506,698
-------------- -------------- ----------- ---------------
-------------- -------------- ----------- ---------------
</TABLE>

<TABLE>
<CAPTION>
LINE OF BUSINESS
------------------------------------------------------------
MULTI-PERIL CROP HAIL OTHER TOTAL
-------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Losses incurred:
Direct............................................ $ 73,829,342 $ 18,325,770 $ 585,158 $ 92,740,270
Assumed........................................... 15,157,666 -- -- 15,157,666
Ceded............................................. (88,987,008) (17,137,583) (469,401) (106,593,992)
-------------- -------------- ----------- ---------------
Net............................................. $ -- $ 1,188,187 $ 115,757 $ 1,303,944
-------------- -------------- ----------- ---------------
-------------- -------------- ----------- ---------------
</TABLE>

YEAR ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
LINE OF BUSINESS
------------------------------------------------------------
MULTI-PERIL CROP HAIL OTHER TOTAL
-------------- -------------- ----------- ---------------
<S> <C> <C> <C> <C>
Premiums earned:
Direct............................................ $ 20,754,807 $ 7,704,421 $ 204,320 $ 28,663,548
Decrease in estimate made subsequent to Dawson
acquisition..................................... (754,519) -- -- (754,519)
Assumed........................................... 6,730,063 6,311,616 -- 13,041,679
Ceded............................................. (27,211,238) (13,748,473) (172,837) (41,132,548)
-------------- -------------- ----------- ---------------
Net............................................. $ (480,887) $ 267,564 $ 31,483 $ (181,840)
-------------- -------------- ----------- ---------------
-------------- -------------- ----------- ---------------
</TABLE>

33
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(11) REINSURANCE (CONTINUED)

<TABLE>
<CAPTION>
LINE OF BUSINESS
---------------------------------------------------------
MULTI-PERIL CROP HAIL OTHER TOTAL
-------------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Losses incurred:
Direct.............................................. $ 16,818,192 $ 3,333,423 $ 78,752 $ 20,230,367
Decrease in estimate made subsequent to Dawson
acquisition....................................... (3,829,691) -- -- (3,829,691)
Assumed............................................. 6,730,063 3,996,560 -- 10,726,623
Ceded............................................... (21,990,215) (7,395,354) (63,171) (29,448,740)
-------------- ------------- ---------- --------------
Net............................................... $ (2,271,651) $ (65,371) $ 15,581 $ (2,321,441)
-------------- ------------- ---------- --------------
-------------- ------------- ---------- --------------
</TABLE>

YEAR ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
LINE OF BUSINESS
---------------------------------------------------------
MULTI-PERIL CROP HAIL OTHER TOTAL
-------------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Premiums earned:
Direct.............................................. $ 4,529,509 $ 5,905,422 $ 438 $ 10,435,369
Ceded............................................... 3,199,208 5,905,422 350 9,104,980
-------------- ------------- ---------- --------------
Net............................................... $ 1,330,301 $ -- $ 88 $ 1,330,389
-------------- ------------- ---------- --------------
-------------- ------------- ---------- --------------
</TABLE>

<TABLE>
<CAPTION>
LINE OF BUSINESS
---------------------------------------------------------
MULTI-PERIL CROP HAIL OTHER TOTAL
-------------- ------------- ---------- --------------
<S> <C> <C> <C> <C>
Losses incurred:
- ------------------------------------------------------
Direct.............................................. $ 4,529,509 $ 3,206,714 $ -- $ 7,736,223
Ceded............................................... 3,199,208 3,206,714 -- 6,405,922
-------------- ------------- ---------- --------------
Net............................................... $ 1,330,301 $ -- $ -- $ 1,330,301
-------------- ------------- ---------- --------------
-------------- ------------- ---------- --------------
</TABLE>

During 1996, 1995 and 1994, Plains and Dawson underwrote approximately $40.4
million, $12.4 million and $3.3 million, respectively, of imputed premium for
basic catastrophic and buy up coverage which is included in direct and ceded
multi-peril premiums earned. These premiums are fully subsidized by the FCIC and
any related losses are fully recoverable from the FCIC, except to the extent
Plains and Dawson elect to participate in the overall underwriting gain or loss
relating to such business.

The Company continuously reviews and monitors the financial condition of its
reinsurers. To the extent that a reinsurer does not meet the obligations under
its reinsurance agreement, Plains and Dawson remain liable.

In connection with the purchase of Dawson at July 14, 1995, initial
estimates were made of premiums and losses related to the MPCI and crop hail
business underwritten by Dawson prior to the acquisition. Subsequent to the
acquisition, the FCIC changed the MPCI program to provide insurance companies
relief for most of the prevented planting losses, and as a result the level of
loss reserves estimated at the acquisition date was higher than the amount
ultimately necessary.

34
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(12) FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of financial instruments presented in the applicable notes
to the Company's consolidated financial statements are estimates of the fair
values at a specific point in time using available market information and
appropriation valuation methodologies. These estimates are subjective in nature
and involve uncertainties and significant judgment in the interpretation of
current market data. Therefore, the fair values presented are not necessarily
indicative of amounts the Company could realize or settle currently. The Company
does not necessarily intend to dispose of or liquidate such instruments prior to
maturity. Fair values of these financial instruments have been determined as
follows:

Cash, short-term investments and accrued investment income and notes payable
to bank--these financial instruments are short-term in nature; therefore,
the carrying value and fair value are approximately the same.

Fixed maturity and equity securities--fair value for fixed maturity and
equity securities are based on quoted market prices from major pricing
services, where available; for securities that are not actively traded,
estimated fair values are based on values of issues of comparable yield and
quality.

Debt--the fair values are based on the interest rates that are currently
available to the Company for issuance of debt with similar terms and
remaining maturities.

The following are the estimated fair values of the Company's financial
instruments:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1996 1995
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturity securities......................... $ 6,508,147 $ 6,548,305 $ 8,149,568 $ 8,255,963
Equity securities................................. -- -- 1,757,540 1,757,540
Cash and cash equivalents......................... 16,132,126 16,132,126 6,980,570 6,980,570

Financial liabilities:
Notes payable to bank............................. -- -- 32,245,539 32,245,539
Debt.............................................. 3,290,672 3,187,694 4,188,540 4,019,315
</TABLE>

The Company does not have derivative financial instruments.

(13) COMMITMENTS

The Company has several operating leases for office space that expire at
various dates over the next five years. Total rental expense was $1,079,042,
$767,253, and $391,818 for the years ended December 31, 1996, 1995, and 1994,
respectively.

35
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(13) COMMITMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases for the
next five years are as follows:

<TABLE>
<CAPTION>
AGGREGATE NET
MINIMUM SUBLEASE MINIMUM
YEARS ENDING DECEMBER 31, LEASE PAYMENTS PAYMENTS LEASE PAYMENTS
- ------------------------------------------------- -------------- ---------- --------------
<S> <C> <C> <C>
1997............................................. $ 1,280,555 $ (92,145) $ 1,118,410
1998............................................. 1,163,476 (83,520) 1,079,956
1999............................................. 985,608 (20,880) 964,728
2000............................................. 911,370 -- 911,370
2001............................................. 721,591 -- 721,591
</TABLE>

(14) SIGNIFICANT RELATIONSHIPS

FEDERAL MPCI PROGRAM

The majority of the Company's revenues since inception have been derived
from servicing multi-peril crop insurance. The Company expects that at least a
majority of its revenue will continue to be derived from its multi-peril crop
insurance business for the foreseeable future. Therefore, the Company's results
of operations and financial condition are substantially dependent upon the
multi-peril crop insurance program. Insurance companies that are involved in the
multi-peril crop insurance program, including Fireman's Fund, Plains, and
Dawson, are subject to periodic review by the FCIC for, among other things, the
availability of adequate capital and surplus and compliance with underwriting,
loss adjustment, and other requirements of the multi-peril crop insurance
program. In addition, as a part of the FCIC's review process, the Company, as a
servicer on behalf of Fireman's Fund, Plains and Dawson, is periodically
reviewed for its compliance with FCIC rules and regulations. A failure to comply
with such rules could result in the FCIC choosing not to allow the Company,
Fireman's Fund, Plains or Dawson to participate in the MPCI program.

INSURANCE COMPANIES

In connection with the marketing and servicing of multi-peril crop
insurance, crop hail and other named peril insurance, a significant amount of
the premiums serviced are underwritten by CNA and Fireman's Fund. During 1996,
1995 and 1994, 40.2%, 59.9%, and 84.5% respectively, of the Company's service
fee revenues were derived from premiums underwritten by CNA and 21.0% and 11.6%
of the Company's service fee revenues were derived from premiums underwritten by
Fireman's Fund. No premiums were serviced by the Company for Fireman's Fund in
1994.

The Company and CNA terminated their existing agreements effective for the
1997 crop year in the case of multi-peril crop insurance and the 1997 year for
crop hail insurance.

The Company and Fireman's Fund entered into an agreement in November 1996,
whereby Fireman's Fund agreed to finance the premiums due to the FCIC in
exchange for the interest charged on the deferred premiums. The Company
continues to administer the collection of the receivables and is ultimately
responsible for the collection of the balances. The Company receives an
administrative fee from Fireman's Fund for administrative costs related to the
premiums financed. This financing arrangement has been reflected as premiums
payable in the accompanying consolidated balance sheet.

36
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(15) ACQUISITIONS

On March 14, 1995, the Company acquired the agency operations of Dawson and
on July 14, 1995, the Company acquired all of the outstanding common stock of
Dawson. The purchase price for Dawson was approximately $7,900,000 in cash and a
contingent payment of up to $3,400,000, payable over up to 12 years (subject to
an annual cap of $700,000), based on a percentage of the Company's future net
profit sharing, if any, on its crop insurance book of business. In connection
with the recognition of underwriting gains in 1996 and 1995, the Company
recognized contingent consideration of $700,000 in both of those years (which is
reflected as an additional acquisition cost of Dawson). The Company also
contributed $1,500,000 to the capital of Dawson to repay a surplus note.

The Dawson transactions have been accounted for as purchases and,
accordingly, the purchase prices have been allocated to the assets and
liabilities of the agency operations and Dawson based on their relative fair
values at the dates of acquisition. The Company's results of operations include
the results of the agency operations and Dawson from the respective dates of
acquisition.

In conjunction with the Dawson acquisitions, the allocation of the purchase
price consisted of the following:

<TABLE>
<S> <C>
Fair value of assets acquired, excluding intangible assets.... $118,968,335
Intangible assets............................................. 4,431,940
Liabilities assumed........................................... 115,549,195
-----------
Total purchase price........................................ $ 7,851,080
-----------
-----------
</TABLE>

The following unaudited pro forma information represents the consolidated
results of operations as if the acquisitions had occurred at the beginning of
the periods presented below after giving effect to certain adjustments,
including amortization of intangible assets acquired and related income tax
effects.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Total revenues................................................. $ 97,932,000 $ 68,255,000
Net income..................................................... 6,124,000 5,417,000
Net income per common share.................................... .73 .97
Weighted average common shares outstanding..................... 8,352,837 5,562,374
</TABLE>

The pro forma information above does not purport to be indicative of the
results of operations that would have occurred had the transactions taken place
at the beginning of 1994 or of future results of operations.

During 1995, the Company also acquired several additional crop insurance
agency operations. Certain acquisitions were accounted for on the
pooling-of-interests method of accounting. The consolidated financial statements
were not restated, as the acquisitions were not material. The remaining
acquisitions were accounted for on the purchase method of accounting. The
consolidated results of operations would not have been materially different had
these acquisitions been completed on January 1, 1995.

37
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(15) ACQUISITIONS (CONTINUED)
On October 14, 1994, the Company acquired Plains. The purchase price was
approximately $3,800,000 of which $975,000 represented the value of Plains'
licenses and $2,800,000 represented Plains' statutory capital and surplus at the
date of closing. The acquisition was accounted for as a purchase and,
accordingly, the consolidated statements of operations include Plains' results
of operations since the date of acquisition. The consolidated results of
operations would not have been materially different had this acquisition been
completed on January 1, 1994.

(16) LEGAL MATTERS

For the year ended December 31, 1996, the Company incurred approximately
$4.0 million in expenses, primarily legal fees, in connection with indictments
of the Company and certain of its former officers by the Independent Counsel
appointed to investigate matters relating to former Secretary of Agriculture,
Mike Espy. On January 21, 1997, the court accepted the Company's plea of NOLO
CONTENDERE to two charges. Pursuant to an agreement with the Independent
Counsel, the Company also agreed to pay a fine of $2.0 million. The settlement
concludes matters between the Company and the I.C. The entire amount of the
settlement which is not deductible for tax purposes has been accrued at December
31, 1996.

By its terms, the Company's agreement with the IC does not compromise or
preclude civil actions by other governmental regulatory authorities, such as the
Federal Election Commission, Securities and Exchange Commission, the USDA, or
state or federal regulatory authorities, or shareholders as a result of the
allegations made by the IC and the Company's NOLO CONTENDERE plea. No assurance
can be given as to what action a regulatory authority might take in response to
the Company's plea and its agreement with the IC.

The Company also incurred approximately $200,000 in the year ended December
31, 1996 in connection with defending a shareholder class action lawsuit filed
in May 1995. In February 1997, the Company settled this matter and agreed to pay
$2.5 million, $1.22 million of which is payable by the Company and the remainder
is to be paid out under the terms of a directors' and officers' insurance
policy. The $1.22 million was accrued as an expense in 1996. The terms of the
settlement are subject to court approval.

(17) RESTRUCTURING AND NON-CORE EXPENSES

On March 28, 1996, the Company announced it would take steps to relocate its
corporate headquarters and main office to Overland Park, Kansas. The relocation
efforts began in April 1996 and were substantially completed by December 1996.
In addition, as part of the Company's consolidation efforts and focus on
improving the consistency of its financial performance and improving shareholder
returns, management reviewed the Company's core operations which were the
servicing of the multi-peril crop insurance and crop hail insurance business,
and recorded restructuring charges related to write downs and losses on assets
to be disposed of, loss on discontinuation of non-core operations, and contract
termination

38
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(17) RESTRUCTURING AND NON-CORE EXPENSES (CONTINUED)

costs. These restructuring and non-core charges began in April 1996 and are
expected to be completed by September 1997, which is when the Company expects it
will complete its evaluation of each regional office location and complete
implementation of its long-term business strategy.

The following table provides a summary of these costs for the year ended
December 31, 1996.

<TABLE>
<S> <C>
Relocation Costs.................................. $ 1,994,853
Write down on assets to be disposed of............ 1,306,517
Loss on discontinuation of non-core operations.... 2,037,830
Contract termination costs........................ 1,076,427
Other............................................. 94,001
------------
$ 6,509,628
------------
------------
</TABLE>

Relocation costs consist of charges related specifically to the relocation
of the Company's corporate headquarters and main office to Overland Park,
Kansas. These costs include severance paid to employees not relocating and
moving costs incurred by employees relocating, including closing and maintenance
costs of employee homes and house hunting trips.

Included in the write down on assets to be disposed of are charges related
specifically to management's review and analysis of the anticipated net
realizable value on certain assets which are currently held for sale. Management
utilized appraisals or current market data, where available, to assist in the
evaluation process. The planned disposals relate to management's assessment and
realignment of the Company's focus on core operations and consist primarily of
buildings, land, and retail software inventory.

At December 31, 1996, the Company had $6.4 million recorded as assets to be
disposed of which are included in other assets. The Company had recorded a
valuation allowance of $1.8 million on the assets to be disposed of. The Company
anticipates selling these assets over the next twelve months.

Included in the loss on discontinuation of non-core operations are charges
for severance costs and write downs of assets related to the elimination of
certain non-core business operations which included a travel agency, graphic
design division, employee leasing company, and an investment advisory firm.
Approximately $1.0 million of these charges are related to the Company's
investment in and advances to Coelho Associates LLC, a joint venture between the
Company, a former director of the Company, and other parties. These changes
represent the write off of the entire amount outstanding as of December 31,
1996.

Contract termination costs include charges related to the termination of
certain consulting contracts, costs associated with the cancellation of certain
leased facilities contracts and cancel rewrite fees associated with the
dissolution of its MPCI agreement with CNA. Management reviewed certain
consulting and employment contracts and as a result terminated certain
agreements which were not part of the Company's continued core operations. As
part of the relocation of the Company's corporate headquarters and main office,
certain facilities were abandoned and the related costs associated with
terminating or subleasing these facilities were accrued.

39
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(17) RESTRUCTURING AND NON-CORE EXPENSES (CONTINUED)

At December 31, 1996, the Company had paid substantially all of the costs
relating to the relocation and contract termination costs.

Management believes that cash generated from the sale of assets to be
disposed of and continuing core operations will be adequate to cover the
estimated cash requirements related to the relocation, restructuring and
non-core expenses.

(18) QUARTERLY RESULTS

In the fourth quarter of 1996, the Company revised certain amounts and
recorded certain adjustments as a result of its review of estimates made on MPCI
premiums and the related revenues and direct costs and its assessment of the
adequacy of certain reserves and allowances. These amounts are summarized in the
table below and are included in service fees or agent commissions and other
direct costs for the year ended December 31, 1996.

<TABLE>
<S> <C>
Service fees:
Profit sharing revenue...................................... $ 4,214,000
Excess loss adjusting reimbursement......................... 1,283,000
Reductions for late acreage reporting....................... (753,000)
Change in MPCI revenue estimate............................. (427,000)
-----------
Total increase to service fees............................ $ 4,317,000
-----------
-----------
Agent commissions and other direct costs:
Change in MPCI commission estimate.......................... $ 1,916,000
Roll bonuses on MPCI premiums............................... 1,040,000
Additional allowance for uncollectible receivables.......... 2,025,000
Additional deferred service fees............................ 1,222,000
-----------
Total increase to agent commissions and other direct
costs................................................... $ 6,203,000
-----------
-----------
</TABLE>

Profit sharing revenue and excess loss adjusting reimbursement are generally
recorded in the third and fourth quarter of the fiscal year, which is when the
amounts can be reasonably estimated. In the third quarter, the Company estimated
the ultimate underwriting gain and excess loss adjusting reimbursement based on
actual losses incurred and estimated losses remaining to be incurred. In the
fourth quarter, management reviewed this estimate and revised the estimate based
on the development of the estimated losses.

Certain commission amounts previously estimated were revised in the fourth
quarter to reflect the Company's estimated and recorded commission obligation to
its agents. Commissions are originally estimated in connection with the revenue
and premium estimate. As the original estimate on premiums, revenues and direct
costs developed, the amounts reflect the actual commission obligation. The
increase in actual expenses as compared to estimated was primarily due to
competitive pressures which forced the Company to pay higher than expected
commissions and incentive (roll) fees to agents to retain and attract premiums.

40
<PAGE>
CROP GROWERS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996, 1995, AND 1994

(18) QUARTERLY RESULTS (CONTINUED)
The charge to the allowance for doubtful accounts of $2.0 million was made
in the fourth quarter as a result of management's ongoing review and analysis of
the collectibility of outstanding receivables. The charge resulted from an
increase in the volume of premium and policies serviced by the Company which
increased the outstanding receivable and related allowance.

In the fourth quarter the Company recorded $4.6 million of costs associated
with settling legal matters as discussed in Note 16. In the fourth quarter the
Company recorded $2.0 million of restructuring and non-core expenses, $1.5
million of which was related to the loss on discontinuation of non-core
operations as discussed in Note 17.

(19) VALUATION AND QUALIFYING ACCOUNTS

The Company's allowance for doubtful accounts is summarized as follows:

<TABLE>
<CAPTION>
BALANCE ADDITIONS/ DEDUCTIONS/ BALANCE,
JANUARY 1, PROVISION WRITE-OFFS DECEMBER 31,
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
1996.................................... 1,320,000 3,700,000 (1,919,000) 3,101,000
1995.................................... 614,000 1,330,000 (624,000) 1,320,000
1994.................................... 205,000 412,000 (3,000) 614,000
</TABLE>

The Company's reserve for assets to be disposed of is summarized as follows:

<TABLE>
<CAPTION>
BALANCE ADDITIONS/ DEDUCTIONS/ BALANCE,
JANUARY 1, PROVISION WRITE-OFFS DECEMBER 31,
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
1996.................................... -- 1,780,000 -- 1,780,000
1995.................................... -- -- -- --
1994.................................... -- -- -- --
</TABLE>

41
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Dated: July 15, 1997 CROP GROWERS CORPORATION

By /s/ DAVID E. HILL
------------------------------------------
David E. Hill
CHIEF FINANCIAL OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

NAME POSITION DATE
- ------------------------------ -------------------------- -------------------

* Chief Executive Officer
- ------------------------------ (principal executive July 15, 1997
Lawrence T. Martinez officer) and Director

/s/ DAVID E. HILL Chief Financial Officer
- ------------------------------ (principal financial and July 15, 1997
David E. Hill accounting officer)

*
- ------------------------------ Director July 15, 1997
Paul T. Horn

*
- ------------------------------ Director July 15, 1997
John M. Meuschke

*
- ------------------------------ Director July 15, 1997
Manuel Sanchez

*
- ------------------------------ Director July 15, 1997
Thomas M. Vertin

/s/ DAVID E. HILL
- ------------------------------ Attorney-in-Fact July 15, 1997
*By: David E. Hill