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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-K
ANNUAL REPORT

(Mark one)

For the fiscal year ended December 31, 2001

or

For the transition period from                              to                             

Commission file number 0-8804

THE SEIBELS BRUCE GROUP, INC.
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (803) 748-2000

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

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

Common stock, par value $1.00 per share
(Title of class)

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant 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. o

        The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of March 15, 2002, based on the closing sale price of the registrant's common stock, par value $1.00 per share, as reported on the National Association of Securities Dealers Over-the-Counter Bulletin Board on such date: $21,928,732.

        The number of shares outstanding of the registrant's common stock as of March 15, 2002: 7,831,690.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's proxy statement in connection with the annual meeting of shareholders to be held May 8, 2002 are incorporated by reference into Part III.

Table of Contents

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ABBREVIATIONS

        The following abbreviations used in the text have the meaning set forth below unless the context requires otherwise:

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Part I

Item 1. Business

CORPORATE PROFILE AND DEVELOPMENT OF BUSINESS
(dollars in thousands except per share amounts)

        Tracing its roots to 1869, The Seibels Bruce Group, Inc. (the "Company"), a South Carolina corporation, is a provider of a wide range of services to the insurance industry, as well as a provider of automobile, flood and other property and casualty insurance products. The Company is committed to providing quality customer service, building strong relationships with its customers, developing and capitalizing on territorial knowledge, and fostering the creativity and innovation of its associates. The Company's headquarters is located at 1501 Lady Street, Columbia, South Carolina 29201 and its telephone number is (803) 748-2000.

        The Company conducts business in two primary categories: fee-for-service operations and traditional insurance operations. Its fee-for-service operations include the activities of Insurance Network Services, Inc. ("INS"), its flood operations, and its operations as a servicing carrier for the South Carolina Reinsurance Facility ("SC Facility") and the South Carolina Associated Auto Insurers Plan ("SCAAIP"). INS provides a variety of claims-related management and adjudication services to the insurance industry, including claims handling, networked glass claims handling and automobile appraisals. The Company's flood unit is a leading provider, and is an original participant, in the National Flood Insurance Program ("NFIP"), a flood insurance program administered by the federal government. In this capacity, the Company writes flood insurance for the NFIP in 46 states, and offers excess flood insurance through Lloyd's of London and Wilshire National Corporation. As such, the Company receives commissions and fees from the NFIP, Lloyd's of London and Wilshire National Corporation, but retains no underwriting risk. The Company's flood operations also offers flood zone determinations and flood compliance tracking services through its subsidiary, America's Flood Services, Inc. ("AFS"). The Company is a servicing carrier for the SC Facility and the SCAAIP. Under both of these pools, the Company issues policies and adjusts claims for a fee. The SC Facility is currently in runoff; however, the Company was permitted to cede premiums to the SC Facility through March 1, 2002, at which time final runoff of the SC Facility commenced. The Company is required to continue to adjudicate claims it ceded to the SC Facility during the final runoff, for which it will be paid a fee. The SCAAIP became effective in March 1999 and will survive the SC Facility. Although the SCAAIP offers the Company access to additional fee-based revenue with no underwriting risk, thus far into the runoff of the SC Facility, the Company has not experienced significant activity in the SCAAIP.

        The Company's traditional insurance operations include its North Carolina nonstandard automobile subsidiary, Universal Insurance Company ("UIC"), and its commercial lines operations. UIC writes nonstandard automobile insurance primarily in the state of North Carolina. UIC cedes substantially all of its liability premiums to the North Carolina Reinsurance Facility ("NC Facility") and adjusts the related claims for the NC Facility for a fee. Substantially all of UIC's retained risk operations is on physical damage policies, which are minimum limit policies partially reinsured through a quota share reinsurance agreement. The Company also writes commercial lines insurance, which includes business owner's policies, commercial package policies and commercial automobile policies. These "main street" policies are sold primarily to small businesses. The Company reinsures the retained risk operations of UIC and its commercial lines operations through quota share, facultative, excess of loss, catastrophe and umbrella reinsurance agreements.

        The Company seeks to balance its fee-based operations with selective risk underwriting to increase the Company's value for its shareholders, agents and employees by pursuing maximum growth with limited risk exposure.

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        The Company returned to profitability in 2001 after posting substantial net losses in 2000 and 1999 resulting primarily from the Nashville and South Carolina automobile components of its automobile segment. In June 2000, the Company announced the discontinuation of its Nashville operations under its subsidiary, Graward General Companies, Inc. ("Graward") and recorded $16,421 in special items charges in the second quarter of 2000. In July 2000, the Company announced its withdrawal from the South Carolina voluntary nonstandard automobile insurance market. In the fourth quarter of 2000, the Company recorded special items gains totaling $8,283 resulting from the settlement of purchase price disputes and the settlement of assumed liabilities, both of which were associated with the acquisition of Graward. During 2001, the Company continued its emphasis on fee-based operations begun in the third quarter of 2000, carefully balancing them with the risk-bearing business of its commercial and North Carolina automobile operations. Without the significant strain on earnings of the Nashville and South Carolina automobile operations, all of the Company's continued operations posted a profit for 2001. Although the All Other segment, which includes the Company's environmental, workers' compensation and general liability runoff operations, experienced a net loss for the year, the loss was substantially attributable to a strengthening of loss and loss adjustment expense ("LAE") reserves associated with the Company's environmental exposures. As these exposures near completion of runoff, management's estimation of the Company's ultimate liability and required loss and LAE reserves becomes less variable. Though management believes all of the Company's insurance reserves are adequate, establishing reserves is still an estimation process and adverse developments of its existing reserves in future years may occur and would be recorded in the year so determined.

        The following is a brief description of each of the Company's business segments:

Automobile

        The Automobile segment includes UIC's retained risk nonstandard automobile and premium finance operations, the runoff of the Company's Nashville and South Carolina automobile operations, and the fee-based NC Facility, SC Facility and SCAAIP operations.

UIC Operations

        UIC writes nonstandard automobile insurance (principally liability and physical damage coverages) primarily in the state of North Carolina. UIC cedes substantially all of its liability premiums, and the related claims, to the NC Facility, a state-sponsored plan for insuring North Carolina drivers outside of the voluntary market. UIC receives underwriting and claims commissions equal to approximately 28% and 14%, respectively, of premiums written in the NC Facility. Substantially all of UIC's retained risk operations is on physical damage policies, which are minimum limit policies partially reinsured through a quota share reinsurance agreement. In February 2001, a new management team with extensive experience in the North Carolina nonstandard automobile market was hired to oversee the Company's North Carolina operations and charged with the tasks of: 1) increasing the operation's direct written premium; 2) reducing the loss ratio on the operation's retained risk physical damage program; and 3) lowering the operation's operating costs and expenses. As a result, UIC's operations showed substantial improvements in 2001 as compared to 2000. As a result of improved agent relations, customer service and overall business performance measures implemented by the new management team, coupled with the relative lack of severe weather in the state of North Carolina in 2001 as compared to 2000, the loss ratio of the UIC operations improved from approximately 75% during 2000 to approximately 55% during 2001. In the second quarter of 2001, the Company consolidated its policy and claims processing systems in North Carolina into its primary processing and claims systems located in the Company's Columbia, SC corporate headquarters. This move, coupled with a host of additional expense reduction initiatives instituted by new management, resulted in substantial reductions of UIC's other operating costs and expenses in 2001 over 2000.

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        The majority of UIC's written premium has traditionally been financed through the Company's premium finance subsidiary, Premium Budget Plan, Inc. ("PBP"). PBP receives interest income from insureds on premiums it finances, as well as a variety of set up and maintenance fees associated with the related premium finance contracts. While PBP has proved to be an effective sales and marketing tool to facilitate premium growth for UIC over the years, management has continually struggled with the challenge of limiting the volume of bad debt expenses associated with its operations. As a result of PBP's operating losses and reassessments of its core competencies, the Company entered into a management contract with an unaffiliated company effective June 1, 2001 to manage the operations of PBP. In December 2001, UIC introduced an installment billing program to its insureds and PBP was placed into runoff. Additionally, UIC continues to offer premium finance alternatives to its insureds through a number of unaffiliated premium finance companies.

Nashville Operations

        During 2000, the Company discontinued its Nashville operations and placed all of this business into runoff. Due to high loss ratios and an extremely high expense structure, this operation had suffered substantial operating losses in 1998 and 1999, with indications that the losses would continue throughout 2000 without expectation that it could become profitable in the foreseeable future. In the second quarter of 2000, the Company took a special items charge to earnings of $16,421, $15,678 of which were non-cash items, including impairment of goodwill associated with the Graward acquisition of $14,915. Other special items charges associated with exiting the operation included the write-down of certain fixed and operating assets, accrual of closure costs and accrual of severance and other personnel-related costs. On August 1, 2000, the Company moved all remaining business of the operation to its South Carolina headquarters to complete the runoff of this book of business.

South Carolina Nonstandard Automobile Operations

        The Company has been a servicing carrier for the SC Facility, a state-sponsored plan for insuring South Carolina drivers outside of the voluntary market, since its creation in 1974 and has historically generated significant amounts of fee-based income in this capacity. The Company receives underwriting and claims commissions equal to approximately 11% of premiums written in the SC Facility and paid losses ceded to the SC Facility, respectively. The SC Facility began its three-year run off March 1, 1999. The Company ceased ceding premiums to the SC Facility March 1, 2002; however, it is required to adjudicate claims related to policies ceded to the SC Facility during the final runoff for which it will receive commissions. The Company also issues nonstandard automobile policies and adjusts the related claims for the SCAAIP, a joint underwriting association ("JUA") formed to replace the SC Facility. The Company is one of two servicing carriers for the SCAAIP. Although the SCAAIP offers the Company access to additional fee-based revenue with no underwriting risk, thus far into the runoff of the SC Facility the Company has not experienced significant activity in the SCAAIP. During 1997, in contemplation of the runoff of the SC Facility, the Company introduced a voluntary nonstandard automobile program in South Carolina. By the end of 1999, direct written premium volume under this voluntary program had escalated to approximately $28,288. Such rapid growth customarily strains earnings and results in higher than average loss ratios; however, the operation continued to experience substantial losses and substantially higher than acceptable loss ratios well into 2000, with no indication of reprieve. In July 2000, the Company concluded that the operation could not generate profits in the foreseeable future and, therefore, placed the business into runoff. The combined operations of the South Carolina voluntary nonstandard automobile program, the SC Facility and the SCAAIP posted net income in 2001 of $594 as a result of the same factors discussed above that lead to the 2001 net income of the Company's Nashville operations.

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Flood

        The Company's flood product line includes flood insurance, excess flood insurance, flood zone determinations, claims processing and flood compliance tracking services. The Company's basic flood insurance product is ceded entirely to the NFIP, a federal government program that establishes premium rates and coverage limits, bears all risk of loss and pays claims. Working through its independent agents located across the United States, the Company issues policies and processes claims on behalf of the NFIP. In this capacity, the Company receives commissions for the policies it processes and the related claims it services of 31% of direct premiums written and 3.3% of direct incurred losses, respectively. NFIP policies only cover losses up to $250 for residential buildings and $100 for contents. Further, the NFIP commercial coverage is limited to $500 for both buildings and contents. The Company's excess flood insurance product provides a level of protection above the NFIP's limits for residential and commercial properties. The Company, as broker, receives commissions for placing this business. The Company also believes that offering the excess flood product allows it to improve its relationships with its agency force by offering them a broader product portfolio. During 2001, the Company's NFIP written premium once again increased at a rate that surpassed that of the total NFIP, due primarily to obtaining several large books of flood business from independent insurance agents across the United States. This was facilitated by expanding the Company's product offering to independent agents and the introduction of new technology to its agency force, including internet-based policy rating and flood zone determination services.

        Claims processing for the NFIP has been a substantial source of revenues and earnings for the Company over the past several years and is a weather-dependent component of its flood operations. Whereas most property and casualty insurance companies suffer losses during hurricanes and floods, the Company benefits strongly as a fee-based processor of claims for the NFIP. Due to the relatively quiet 2000 and 2001 hurricane seasons, the revenue generated from flood claims handling is down significantly from prior years. AFS provides the Company a presence for flood claims processing on both coasts, an important element of diversification and scale for weather-dependent operations.

        The Company, through AFS, offers the additional flood-related services of flood zone determinations and flood zone mapping services to customers located throughout the United States. These services are provided primarily to mortgage originators to determine whether or not homes are located in flood zones and, therefore, require flood insurance. These services allow the Company to offer a more complete flood portfolio to both agents and financial institutions, provide the Company with a stronger presence in the flood market and expand the channels of distribution for the Company's complementary products. AFS' revenues can be substantially affected by increasing or decreasing general market interest rates due to the impact these fluctuations have on the mortgage industry.

Commercial

        The Company reentered the risk-bearing commercial lines market in February 1998 when it converted a substantial amount of premiums written in a Managing General Agent ("MGA") capacity for another insurance carrier to retained risk premiums. Since that time, the Company has capitalized on the long-standing relationships of its commercial lines agents and benefited from the experience of its qualified underwriters. The Company's commercial lines have historically been reinsured primarily through quota share reinsurance agreements. From April 1, 1999 through March 31, 2000 the Company's commercial lines were subject to a 90% quota share reinsurance agreement. Effective April 1, 2000, the 90% quota share reinsurance agreement was amended to become a 70% quota share reinsurance agreement, and the amended agreement was terminated at the Company's request effective April 1, 2001. The Company's commercial lines are presently reinsured through facultative, excess of loss, catastrophe and umbrella coverages. Retaining a larger portion of its book of business had a positive impact on the operation's earnings in 2001 and was the primary reason for its turnaround over

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2000. Further enhancing the results of the Company's commercial operations in 2001 was the introduction of a new technology initiative. This initiative centered on a web-based rating and underwriting system that allows the Company's agents to provide real time quotes on commercial business owners' policies, store those quotes and then submit the policy over the internet. During 2002, the Company looks to expand the use of this technology to other lines of its commercial operations.

Adjusting Services

        The Company's premium concentration in the catastrophe-heavy Southeast led to the 1996 creation of INS to manage the Company's internal claims. INS currently offers a wide array of services: automobile appraisals, automobile liability claims handling, catastrophe claims handling, claims administration, direct reporting, general liability claims handling, glass claims handling, property claims handling, subrogation and recovery and total loss claims handling. These services expand the Company's business opportunities by allowing it to offer services to other insurance companies. The Company's experience in processing flood claims led to the award of two statewide Wind and Hail Association contracts, a strong indication of its growing presence in the catastrophe claims handling market. INS is an important part of the Company's corporate structure. It has over 50 unaffiliated customers and can accommodate claims services requests from anywhere in the United States. INS claims representatives are differentiated from their counterparts at traditional claims adjusting companies by having an insurance company background, an important characteristic when equitably settling claims.

        Effective January 21, 2000, three of the Company's insurance subsidiaries made a combined investment totaling $4,900 in the common stock of QualSure Holding Corporation ("QualSure Holding"), representing a combined ownership interest of 30.625%. QualSure Holding owns 100% of the issued and outstanding stock of QualSure Insurance Corporation ("QualSure"), a homeowners take out insurance company domiciled in the state of Florida, and QualSure Underwriting Agencies, Inc., an MGA for QualSure. QualSure was formed to take out approximately 44,000 homeowners policies from the Florida Windstorm Underwriting Association and approximately 40,000 homeowners policies from the Florida Residential Property & Casualty Joint Underwriting Association. In connection with this investment, INS entered into a Claims Administration Services Agreement with QualSure to adjudicate all of its claims for a fee based upon subject earned premium. This investment capitalizes upon its considerable experience in claims adjudication and provides a substantial source of fee-based income to supplement its risk-bearing operations.

        The two most significant components of the segment's revenues are its Claims Administration Services Agreement with QualSure and the loss adjusting services provided in connection with the SC Facility. The SC Facility began its planned runoff effective March 1, 1999, at which time no new business was accepted into the SC Facility. Effective October 1, 1999, voluntary renewals were no longer accepted by the SC Facility. However, servicing carriers were able to cede renewals to the SC Facility until March 1, 2002, at which time final runoff of the SC Facility commenced. Commission and service income from these two components of the adjusting services segment represent approximately 54% and 62% of the segment's total commission and service income in 2001 and 2000, respectively.

All Other

        The Company continues to maintain reserves and pay significant claims with respect to its runoff operations. These operations consist primarily of general liability policies that include contractors' liability and environmental coverages primarily in California and commercial (including workers' compensation) and personal lines policies in the Southeast. The runoff of claims on these policies has resulted in substantial losses to the Company over the past 10 years. In addition, the Company's runoff segment contains the management of runoff reserves from prior business in the 1980's and runoff from a nonstandard homeowners MGA book of business in Kentucky and Tennessee entered into in early

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1997. The Company discontinued writing new business in this MGA book of business in October of 1998. Approximately 66% and 50% of the Company's total net reserves for losses and LAE at December 31, 2001 and 2000, respectively, relate to these runoff operations.

Reinsurance

        The Company utilizes reinsurance in certain business segments to reduce its exposure and to provide protection against large catastrophic occurrences. Reinsurance contracts do not relieve the Company of its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities or economic characteristics of the reinsurer to minimize its exposure to significant losses from reinsurer insolvency.

        The Company currently reinsures its North Carolina-based UIC nonstandard automobile business through a quota share reinsurance agreement with Scandinavian Re that became effective July 1, 2000. Under this arrangement, UIC cedes 75% of its risk-bearing premiums to the reinsurer, net of a ceding commission, and collects the same portion of claims payments from the reinsurer. This type of reinsurance is designed to increase a company's capacity to write new and renewal business.

        From April 1, 1999 through March 31, 2000 the Company's commercial lines were subject to a 90% quota share reinsurance agreement with Erie Insurance Exchange. Effective April 1, 2000, the 90% quota share reinsurance agreement was amended to become a 70% quota share reinsurance agreement, and the amended agreement was terminated at the Company's request effective April 1, 2001. The Company's commercial lines are presently reinsured through facultative, excess of loss, catastrophe and umbrella coverages.

        The Company issues a substantial number of automobile and flood insurance policies for, and fully reinsures those risks with, the NC Facility, the SC Facility and the NFIP. While the amount of reinsurance recoverable under these arrangements is significant, the Company believes the balances due from the NC Facility, the SC Facility and the NFIP are fully collectable due to the governmental agency's ability to assess policyholders and member companies for deficiencies.

Investment and Investment Results

        The Company's investment portfolio is managed by the Investment Committee of its Board of Directors. In addition to complying with regulatory guidelines, the Company's investment policy stresses preservation of capital, market liquidity and diversification of risk. The Company's cash and investments are as follows at December 31:

        Asset values represent market values at December 31, 2001 and 2000, respectively. Effective January 21, 2000, three of the Company's insurance subsidiaries made a combined investment totaling $4,900 in the common stock of QualSure Holding, representing a combined ownership interest of 30.625%. QualSure Holding owns 100% of the issued and outstanding stock of QualSure, a

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homeowners take out insurance company domiciled in the state of Florida formed to take out approximately 44,000 homeowners policies from the Florida Windstorm Underwriting Association and approximately 40,000 homeowners policies from the Florida Residential Property & Casualty Joint Underwriting Association. During the fourth quarter of 1997, the Company invested $854 in Sunshine State Holding Corporation for an ownership interest of 21.49%. Sunshine State Holding Corporation owns 100% of the issued and outstanding stock of Sunshine State Insurance Company, a Florida-based writer of homeowners insurance. As each of these investments exceeds 20% of the equity of each respective company, the Company's equity in the undistributed earnings of the unconsolidated affiliates, using a computed equity method, are included in current earnings.

        The following table sets forth the consolidated investment results for the three years ended December 31:

(1)

Average of the aggregate invested amounts (market values) as of the beginning of the year, March 31, June 30, September 30, and year-end.

Regulation

        State Regulation.    Insurance companies are subject to supervision and regulation in the jurisdictions in which they transact business. Such supervision and regulation relate to numerous aspects of an insurance company's business and financial condition. The primary purpose of such supervision and regulation is the protection of policyholders. The extent of such regulation varies but generally derives from state statutes which delegate regulatory, supervisory and administrative authority to state insurance departments. Accordingly, the state insurance departments have the authority to establish standards of solvency that must be met and maintained by insurers to license insurers and agents and to approve policy forms. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies.

        Most states have enacted legislation that regulates insurance holding company systems, including acquisitions, dividends, the terms of surplus notes, the terms of affiliate transactions and other related matters. Three of the Company's insurance subsidiaries are domiciled in the state of South Carolina and are principally regulated by the South Carolina Department of Insurance ("SCDOI"). UIC is domiciled in North Carolina and is principally regulated by the North Carolina Department of Insurance ("NCDOI"). A fifth insurance company, Investors National Life Insurance Company of South Carolina ("Investors"), was dissolved effective December 1, 2000. Investors had been in runoff for several years and, effective October 1, 2000, executed a portfolio assumption agreement with an unaffiliated company for all remaining policy liabilities. Upon completion of the portfolio assumption agreement, and receiving approval from the SCDOI, Investors issued a liquidating dividend to its parent, South Carolina Insurance Company ("SCIC"), and returned its insurance license to the SCDOI.

        Insurance companies are required to file detailed annual statements with the state insurance regulators in each of the states in which they conduct business. Their business and accounts are subject to examination by such regulators at any time. In addition, these insurance regulators periodically examine the insurer's financial condition, adherence to statutory accounting principles and compliance with insurance department rules and regulations. South Carolina and North Carolina law, rather than

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federal bankruptcy law, would apply to the liquidation or reorganization of any of the Company's insurance companies. An examination by the SCDOI of SCIC and its subsidiary companies, Consolidated American Insurance Company ("CAIC"), Catawba Insurance Company ("Catawba") and Investors, as of December 31, 1998 was completed during 1999 with no material findings. An examination by the NCDOI of UIC as of December 31, 2000 was begun in the fourth quarter of 2001 and has not yet been completed.

        Effective January 1, 2001, both the North and South Carolina Departments of Insurance adopted the Codification of Statutory Accounting Principles ("Codification") as the prescribed basis of accounting for insurance companies domiciled in their respective states. Accordingly, all of the Company's statutory subsidiaries adopted Codification effective January 1, 2001. Adoption of Codification did not have a material effect on the financial statements of any of the Company's statutory subsidiaries.

        Since before the Company's acquisition of UIC in 1997, UIC has operated, and continues to operate, under the Regulatory Action Division ("RAD") of the NCDOI. Under the requirements of the RAD, UIC is required to submit monthly financial statements to the NCDOI.

        NAIC Guidelines.    The National Association of Insurance Commissioners ("NAIC") has adopted Risk-Based Capital ("RBC") requirements for property and casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that may be inadequately capitalized. Compliance is determined by the ratio of the Company's regulatory total adjusted capital to its company action level RBC (as defined by the NAIC). Companies which fall below the company action level RBC are required to disclose plans to remedy the situation. As of December 31, 2001, all of the insurance subsidiaries have ratios in excess of the level which would prompt regulatory action.

Regulation of Dividends and Other Payments from Insurance Subsidiaries

        The Company is a legal entity separate and distinct from its subsidiaries. As a holding company, the primary sources of cash needed to meet its obligations, including the redemption of its special stock and principal and interest payments on its outstanding debt, are dividends and other permitted payments, including management fees, from its subsidiaries and affiliates.

        Except in limited circumstances, South Carolina and North Carolina insurance laws and regulations require a domestic insurer to report any action authorizing distributions to shareholders and material payments from subsidiaries and affiliates at least 30 days prior to distribution or payment. Additionally, those laws and regulations provide the SCDOI and the NCDOI the right to disapprove and prohibit distributions meeting the definition of an "Extraordinary Dividend" under applicable statutes and regulations.

        The South Carolina Insurance Holding Company Regulatory Act provides that, without prior approval of the Commissioner of Insurance of the State of South Carolina, dividends within any 12-month period may not exceed the greater of (i) 10% of a domestic insurer's surplus as regarding policyholders as shown in the insurer's most recent annual statement or (ii) the net income, not including realized capital gains or losses as shown in the insurer's most recent annual statement. Furthermore, dividends may only be paid out of positive earned surplus unless approved by the Commissioner. As of December 31, 2001, SCIC had an accumulated deficit.

        The North Carolina Insurance Holding Company System Regulatory Act provides that, without prior approval of the Commissioner of Insurance of the State of North Carolina, dividends within any 12-month period may not exceed the lessor of (i) 10% of a domestic insurer's surplus as regarding

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policyholders as of the preceding December 31 or (ii) the net income, not including realized capital gains, for the 12-month period ending the preceding December 31. For 2002, dividends of approximately $522 are available from UIC to the Company.

        Payment of cash dividends by the Company is at the discretion of its Board of Directors and is based on its earnings, financial condition, capital requirements and other relevant factors. If the ability of the Company's insurance subsidiaries to pay dividends or make other payments to the Company is materially restricted by regulatory or Credit Facility requirements, it could affect the Company's ability to service its debt and special stock and/or pay dividends. In addition, no assurance can be given that North Carolina or South Carolina will not adopt statutory provisions more restrictive than those currently in effect.

Required Participation

        State Residual Market Plans.    Most states in which the Company's property and casualty insurance subsidiaries write business have collective pools, underwriting associations, reinsurance facilities, assigned risk plans and/or other types of residual market plans, the largest being the NC Facility and the SC Facility, pursuant to which coverages not normally available in the voluntary market are shared by all companies writing that type of business in that state. Participation is usually based on the ratio of the Company's share of the voluntary market in a given state.

        South Carolina Automobile.    The SC Facility is an unincorporated, non-profit administrative state-sponsored plan. The SC Facility provides a mechanism for insurance companies conducting business in the state of South Carolina to cede mandated, high-risk coverages under automobile policies to the SC Facility and to share the cost of those coverages ceded. Every insurer authorized to write automobile liability insurance in South Carolina is required to participate in the SC Facility. When policyholders whose premiums have been ceded to the SC Facility incur a loss, the member company that issued the policy adjusts the loss and subsequently is reimbursed by the SC Facility for the loss and LAE incurred by the member company. The SC Facility has also created a pool of "Designated Agents," which are agencies usually comprised of a single independent agent who had lost his or her access to the voluntary automobile market. Designated Agents are assigned to one of the SC Facility's servicing carriers. Prior to October 1, 1996, the cession or retention of physical damage coverage was dictated by whether or not the risk was "pointed" or "clean." Prior to that date only clean risk physical damage could be ceded to the SC Facility. Effective October 1, 1996, however, physical damage was removed from the mandate and the SC Facility agreed to accept any physical damage, pointed or clean, provided that the SC Facility-filed premium rates were used.

        In 1997, the South Carolina General Assembly passed legislation that transforms the SC Facility into the SCAAIP, a JUA, effective March 1, 1999. As of March 1, 1999, insurance companies could no longer cede new business to the SC Facility. Non-servicing carriers continued to cede renewals to the SC Facility until October 1, 1999 and servicing carriers are permitted to cede renewals to the SC Facility until March 1, 2002. All renewals ceded after March 1, 1999 must be ceded at the rate level approved for the SC Facility. The SCAAIP began accepting business on March 1, 1999. The initial rate level for the JUA was approximately 150% of the then current SC Facility rate. The legislation also allowed the current Designated Agents of the SC Facility to receive voluntary contracts without jeopardizing their Designated Agent status.

        National Flood Insurance Program.    FEMA's Federal Insurance Administration manages the NFIP. The NFIP regulations established the Financial Assistance/Subsidy Arrangement pursuant to which the NFIP Administrator and private sector insurers participate in the Write-Your-Own Program. Under the Write Your Own Program, insurers that are party to a Financial Assistance/Subsidy Arrangement may issue, in the NFIP name, a Standard Flood Insurance Policy, the form and substance of which is approved by the NFIP Administrator. Insurers are responsible for all aspects of service, including policy

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issuance, endorsements and renewals of policies and the adjudication of claims brought under the policies, while the NFIP Administrator monitors the performance levels of all insurers participating in the Write Your Own Program. The Company is required to furnish FEMA such summaries and analyses of information, including claims information, as may be necessary to carry out the purposes of the National Flood Insurance Act of 1968, as amended.

Competition and Other Factors

        The Company operates in highly competitive industry markets. Many of its competitors have greater financial resources and are rated by A. M. Best. The Company has elected not receive a rating from A.M. Best. In general, the Company competes with both large national writers and smaller regional companies in each state in which it operates. These competitors include other companies that, like the Company, serve the agency market as well as companies that sell insurance directly to policyholders. Direct writers may have certain competitive advantages over agency writers, including increased name recognition, increased customer base loyalty and, potentially, reduced acquisition costs.

        Nonstandard Automobile Insurance Business.    The Company competes in North Carolina with the major carriers for nonstandard voluntary automobile insurance business. The nonstandard automobile insurance business is price sensitive and certain competitors of the Company have, from time to time, decreased their prices in an apparent attempt to gain market share. Although the Company's pricing is inevitably influenced to some degree by that of its competitors, management believes that it is generally not in its best interest to match such price decreases; choosing instead to compete on the basis of underwriting criteria and superior service to its agents and insureds. Competition in the North Carolina market is driven not only by price, but also by premium financing. The North Carolina market is sensitive to the down payment required on a nonstandard automobile policy. For this reason, the Company offered premium financing through PBP, its premium finance company, through mid December 2001. In December 2001, the Company placed PBP into runoff and introduced an installment bill program directly administered by UIC. Under the program, UIC bills the insured monthly for premiums due and collects from the insured an installment fee. Additionally, UIC continues to offer premium finance alternatives to its insureds through a number of unaffiliated premium finance companies.

        Flood Program.    Factors influencing the choice of a competitor over the Company include ability to offer homeowners or other property products to agents, ability to increase commission rates and on-line policy issuance capability. The Company has been impacted by not having a homeowners product to complement its flood insurance, especially in Florida. Thus, the Company entered into a joint marketing agreement with Sunshine State Insurance Company, in which the Company has an equity ownership interest of 21.49%, that gives the Company's agents access to a homeowners product. In addition, the competitive nature of the flood insurance market prompted the Company to introduce new technology to its agency force, including internet-based policy rating and flood zone determination services.

        Adjusting Services.    INS operates in an intensely competitive environment. Many of its competitors sustain regional, multi-regional and national operations capable of servicing claims for all lines of insurance coverage. INS' continuing challenge is to provide customer service superior to that of its competitors in order to retain its existing customer base and attract new customers. Further, revenues in INS' catastrophe adjusting operations are substantially dependent upon unpredictable coastal weather-related events. Therefore, INS must look to diversify and expand its catastrophe operations beyond its current concentration in the Atlantic and Gulf coastal regions of the United States into the interior and western regions of the country, which are prone to a variety of additional weather-related catastrophes such as tornadoes, hailstorms, earthquakes and floods.

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        Commercial Lines.    The Company continues to focus on small businesses in developing its "Main Street" book of business, but competition in this market is intense. The Company competes with large national and regional carriers, many with higher A.M. Best ratings than the Company, which influences the decisions of many commercial insurance customers. In addition, companies offering workers' compensation coverage may hold some competitive advantage over the Company as the Company does not offer this coverage. The Company is reinsuring its book of business with A rated carriers in an attempt to minimize the effects of not having its own A.M. Best rating. The Company is also investigating certain niche markets in which it believes the competition will be less and the lack of an A.M. Best rating will have little impact.

Employees

        At December 31, 2001 and 2000, the Company and its subsidiaries employed a total of 296 and 329 employees, respectively. The Company believes that its relationship with its employees is good.

Item 2. Properties

        The Columbia, South Carolina headquarters, containing approximately 126,000 square feet of occupied space, is owned by Charles H. Powers, the Company's majority shareholder and Chairman of the Board of Directors, and leased by the Company through 2003 for its property and casualty insurance and claims operations. The Winston-Salem, North Carolina office is the base of UIC's operations. That office contains approximately 18,000 square feet and is leased through 2005. AFS is located in Rancho Cordova, California. AFS leases approximately 5,300 square feet, with the lease expiring in 2002. Some additional premises are leased by the Company in other locations in which it operates. Management believes that these facilities are sufficient for the Company's current and foreseeable future needs.

Item 3. Legal Proceedings

        (a) Litigation was initiated in the United States District Court for the Middle District of Florida, Tampa Division in November 2001 by QualSure Holding, a Florida property and casualty insurance holding company that was formerly known as Magna Holding Corporation, and involves three of the Company's wholly-owned subsidiaries—SCIC, Catawba, and CAIC, who are the three defendants to the litigation and who collectively own 30.625% of the stock of QualSure Holding. There are five plaintiffs—QualSure Holding; QualSure and QualSure Underwriting Agencies, Inc., which are subsidiaries of QualSure Holding; and Fenelon Ventures II LLC and N.E.M. (West Indies) Insurance Ltd., two stockholders of QualSure Holding. The eight entities involved in the litigation are all parties to a January 20, 2000 Securities Purchase Agreement concerning the purchase of QualSure Holding stock, a January 21, 2000 Stockholders Agreement that governs the rights of the stockholders in, among other things, disposing of their stock in QualSure Holding, and numerous other documents that provide for the management and control of QualSure Holding.

        In or about June 2001, SCIC, Catawba, and CAIC entered into negotiations to sell their investments in QualSure Holding to an unrelated third party. On November 2, 2001, the plaintiffs initiated the litigation against SCIC, Catawba, and CAIC by filing a Complaint, a motion for a preliminary injunction, and a motion for expedited discovery. Plaintiffs filed their First Amended Complaint on December 13, 2001; the allegations in the First Amended Complaint are substantially similar to the allegations in the original Complaint. The First Amended Complaint alleges that SCIC, Catawba and CAIC improperly divulged confidential information belonging to QualSure Holding in their negotiations with the third party. Plaintiffs generally allege that defendants' dissemination of certain information regarding QualSure Holding's policyholders and QualSure Holding's calculations of "Probable Maximum Loss" injured QualSure Holding in its efforts to obtain reinsurance for 2002. The First Amended Complaint alleges claims for breach of contract (based on a confidentiality provision in

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the Stockholders' Agreement), breach of fiduciary duties (for defendants' alleged dissemination of the confidential information), and misappropriation of confidential and proprietary information and trade secrets (under Florida's Uniform Trade Secrets Act). Plaintiffs seek compensatory damages in excess of $75, punitive damages, and preliminary and permanent injunctive relief.

        Defendants filed a motion to disqualify plaintiffs' lead law firm, which was representing the Company in certain matters at the time the plaintiffs initiated the litigation. The Court granted the motion on December 13, 2001. In addition, defendants filed a motion to dismiss the First Amended Complaint on December 14, 2001, on the ground that the First Amended Complaint fails to state claims against SCIC, Catawba, and CAIC upon which relief may be granted. That motion is now fully briefed and is pending a decision. Meanwhile, each side has propounded and responded to written discovery requests. SCIC, Catawba and CAIC have not as yet filed their answers to the First Amended Complaint, nor have they filed their response to plaintiffs' motion for a preliminary injunction.

        Management believes SCIC, Catawba and CAIC have meritorious defenses to the foregoing action and it will be vigorously contested.

        (b) In February 2002, litigation was initiated in the District Court of Shelby County, Texas, in a lawsuit styled Mary Masterson, individually and on behalf of all others similarly situated, vs. America's Flood Service, Inc., et al. The litigation involves both the Company and its wholly-owned subsidiary, AFS, and is in its very earliest stages, with appearances and responsive pleadings due by early April. The pleadings allege that a putative class of persons in Texas received facsimile advertisements in violation of the federal Telephone Consumer Protection Act ("TCPA"). The plaintiffs seek statutory minimum damages of five hundred dollars per fax, plus additional damages of up to one thousand five hundred dollars per fax for allegedly knowingly violating the TCPA.

        (c) The Company and its subsidiaries are parties to various other lawsuits generally arising in the normal course of their insurance and ancillary businesses. The Company does not believe that the eventual outcome of such suits will have a material effect on the financial condition or results of operations of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

        No matter was submitted to a vote of security holders by the Company during the fourth quarter of 2001.

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PART II

Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters

        (a) Market Information

        The Company's common stock is quoted and traded on the National Association of Securities Dealers Over-the-Counter Bulletin Board ("OTC Bulletin Board") under the symbol "SBIG." In November 2000, the Company announced that it had been delisted from the National Association of Security Dealers Automated Quotation System ("NASDAQ") for failing to meet the minimum bid price, market value of public float and net tangible asset requirements set forth in NASDAQ Marketplace Rules. The following table sets forth the range of high and low closing bid prices as reported on either NASDAQ or the OTC Bulletin Board. Such bid prices represent inter-dealer quotations, without retailer mark-up, mark-down or commission and may not necessarily represent actual transactions. On March 15, 2002 the last reported bid price of the Company's common stock on the OTC Bulletin Board was $2.80 per share.

        (b) Holders

        There were approximately 4,381 shareholders of record as of March 15, 2002.

        (c) Dividends

        There have been no dividends declared by the Company on its common stock during the past 5 years, and the Board of Directors does not presently intend to pay any cash dividends on common stock in the foreseeable future. The Company is a legal entity separate and distinct from its subsidiaries. As a holding company, the primary sources of cash needed to meet its obligations, including the redemption of its special stock and principal and interest payments on its outstanding debt, are dividends and other permitted payments, including management fees, from its subsidiaries and affiliates. The Company's insurance subsidiaries are regulated as to their payment of dividends by their respective state of domicile's insurance laws. The Company's payment of cash dividends is at the discretion of the Board of Directors and is based on its earnings, financial condition, capital requirements, and other relevant factors.

        The Company has 50,000 shares of $0.625 Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock and 209,000 shares of $0.620 Cumulative, Convertible, Redeemable, Nonvoting Special Preferred Stock issued and outstanding at December 31, 2001. These obligations pay quarterly dividends at an annual rate of $0.625 per share and $0.62 per share, respectively. The Company paid a

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total of $161, $168 and $168 in dividends on these obligations in 2001, 2000 and 1999, respectively. Each issue of the Special Stock has a redemption date of August 15, 2002.

        On March 28, 2002, the Company issued 800,000 shares of $10 par value Adjustable Rate Cumulative Nonvoting Preferred Special Stock to its majority shareholder and Chairman of the Board of Directors for an aggregate purchase price of $8,000. The proceeds from the transaction were used to repay the outstanding balance of the Credit Facility. The Adjustable Rate Cumulative Nonvoting Preferred Special Stock will pay quarterly dividends at an annual adjustable rate of a pre-determined spread over LIBOR. The Adjustable Rate Cumulative Nonvoting Preferred Special Stock was issued in a transaction exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

Item 6. Selected Financial Data

        The following selected historical financial data for each of the five years ended December 31, 2001 is derived from the Company's audited consolidated financial statements. The selected data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7) and the consolidated financial statements and accompanying notes (Item 8) included elsewhere herein.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

        The selected financial data and consolidated financial statements and related notes thereto should be read in conjunction with the following discussion as they contain important information for evaluation of the Company's financial condition and operating results.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be

15

reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management has identified the following policies as critical in understanding and evaluating the Company's reported financial results:

Revenue Recognition

        The Company derives a substantial portion of its income through commissions received as a servicing carrier and claims adjuster for the NFIP, the NC Facility, the SC Facility and various other customers. Commission income related to producing and underwriting the business is recognized in the period in which the business is written. Service income and fees related to claims processing and the Company's other fee-based services are recognized on an accrual basis as earned.

        Property and casualty premiums are reflected in income when earned as computed on a monthly pro-rata basis. Written premiums and earned premiums have been reduced by reinsurance placed with other companies, including amounts related to business produced through the NC Facility, the SC Facility and the NFIP.

        Other interest income includes interest received on reinsurance balances withheld, agents' balances receivable, balances due from the SC Facility and the SCAAIP, and financing of premium notes receivable. Other interest income is recognized on an accrual basis as earned.

Policy Acquisition Costs

        Policy acquisition costs attributable to property and casualty operations represent the portion of the cost of writing business that varies with, and is primarily related to, the production of business. Such costs are deferred and charged against income as the premiums are earned. The deferral of policy acquisition costs is subject to the application of recoverability tests to each primary line or source of business based on past and anticipated underwriting results. The deferred policy acquisition costs that are not recoverable from future policy revenues, if any, are expensed. The Company considers anticipated investment income in determining whether premium deficiencies exist.

Property and Casualty Unpaid Loss and LAE Reserves

        The liability for property and casualty unpaid losses and LAE includes:

(1)

An accumulation of case estimates for losses reported prior to the close of the accounting period.



(2)

Estimates of incurred-but-not-reported losses based upon past experience and current circumstances.



(3)

Estimates of allocated, as well as unallocated, LAE liabilities determined by applying percentage factors to the unpaid loss reserves, with such factors determined on a by-line basis based on past results of paid loss expenses to paid losses.



(4)

The deduction of estimated amounts recoverable from salvage, subrogation, and second injury funds.



(5)

Estimated losses for reinsurance ceded and assumed.

        Management, in conjunction with the Company's consulting actuaries, performs a complete review of the above components of the Company's loss reserves to evaluate the adequacy of such reserves. Management believes the reserves, which approximate the amount determined by independent actuarial reviews, are sufficient to prevent prior years' losses from adversely affecting future periods; however,

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establishing reserves is an estimation process and adverse developments in future years may occur and would be recorded in the year so determined.

Legal Contingencies

        The Company and its subsidiaries are parties to various lawsuits generally arising in the normal course of their insurance and ancillary businesses. The Company does not believe that the eventual outcome of such suits will have a material effect on the financial condition or results of operations of the Company. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company's assumptions, or the effectiveness of its strategies, related to legal proceedings. Management consults with the Company's legal counsel in developing estimates of ranges of potential loss and in estimating any required legal reserves.

Allowance for Uncollectable Accounts

        The Company routinely evaluates the collectability of its premiums and agents' balances receivable and its premium notes receivable based upon past experience and known economic trends or conditions and establishes reserves for estimated uncollectable accounts. The Company believes its current estimated allowances for doubtful accounts are adequate. However, it is possible that the accuracy of the estimation process could be materially impacted as current economic trends or conditions change or develop.

Goodwill

        Goodwill is the excess of the amount paid to acquire a company over the fair value of its net assets, reduced by amortization and any subsequent valuation adjustments. Goodwill is continually evaluated to determine if any portion of the remaining balance may not be recoverable. If circumstances suggest that its value may be impaired and the write-down would be material, an assessment of recoverability is performed and any impairment is recorded through a valuation allowance with a corresponding charge recorded in the statements of operations. Effective January 1, 2002, the Company will cease to amortize $4,513 of goodwill in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". In lieu of amortization, management is required to perform an initial impairment review of the Company's goodwill in 2002 and an annual impairment review thereafter. Management expects to complete its initial impairment review prior to June 30, 2002, but does not expect to record an impairment charge. However, there can be no assurance that at the time the review is completed a material impairment charge will not be recorded.

Income Taxes

        Over the last 10 to 15 years the Company has generated substantial net operating losses, which have resulted in a sizeable federal tax operating loss carryforwards and capital loss carryforwards of $103,921. In addition, the Company has experienced three "change in ownership" events since June 1998, which limit the Company's ability to fully utilize the benefit of these carryforwards. Due to its history of unprofitable operations and uncertainties surrounding its current operations, the Company has placed a full valuation reserve against its net deferred tax asset at December 31, 2001. Subsequent revisions to the net realizeable value of the net deferred tax asset could cause the Company's provision for income taxes to vary significantly from period to period, although its cash tax payments would remain unaffected until the benefit of the federal net operating loss carryforward expires or is utilized.

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Other

        The above listing is not intended to be a comprehensive list of all of the Company's accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States with no need for management's judgement in their application. There are also areas in which management's judgement in selecting any available alternative would not produce a materially different result. See Item 8 for the Company's audited consolidated financial statements and notes thereto which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.

OVERVIEW

        The Company conducts business in two primary categories: fee-for-service operations and traditional insurance operations. Its fee-for-service operations include the activities of INS, its flood operations, and its operations as a servicing carrier for the SC Facility and the SCAAIP. INS provides a variety of claims-related management and adjudication services to the insurance industry, including claims handling, networked glass claims handling and automobile appraisals. The Company's flood unit is a leading provider, and is an original participant, in the NFIP, a flood insurance program administered by the federal government. In this capacity, the Company writes flood insurance for the NFIP in 46 states, and offers excess flood insurance through Lloyd's of London. As such, the Company receives commissions and fees from the NFIP and Lloyd's of London, but retains no underwriting risk. The Company's flood operations also offers flood zone determinations and flood compliance tracking services through its subsidiary, AFS. The Company is a servicing carrier for the SC Facility and the SCAAIP. Under both of these pools, the Company issues policies and adjusts claims for a fee. The SC Facility is currently in runoff; however, the Company was permitted to cede premiums to the SC Facility through March 1, 2002, at which time final runoff of the SC Facility commenced. The Company is required to continue to adjudicate claims it ceded to the SC Facility during the final runoff, for which it will be paid a fee. The SCAAIP became effective in March 1999 and will survive the SC Facility. Although the SCAAIP offers the Company access to additional fee-based revenue with no underwriting risk, thus far into the runoff of the SC Facility, the Company has not experienced significant activity in the SCAAIP.

        The Company's traditional insurance operations include its North Carolina nonstandard automobile subsidiary, UIC, and its commercial lines operations. UIC writes nonstandard automobile insurance primarily in the state of North Carolina. UIC cedes substantially all of its liability premiums to the NC Facility and adjusts the related claims for the NC Facility for a fee. Substantially all of UIC's retained risk operations is on physical damage policies, which are minimum limit policies partially reinsured through a quota share reinsurance agreement. The Company also writes commercial lines insurance, which includes business owner's policies, commercial package policies and commercial automobile policies. These "main street" policies are sold primarily to small businesses. The Company reinsures the retained risk operations of UIC and its commercial lines operations through quota share, facultative, excess of loss, catastrophe and umbrella reinsurance agreements.

        The Company seeks to balance its fee-based operations with selective risk underwriting to increase the Company's value for its shareholders, agents and employees by pursuing maximum growth with limited risk exposure.

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        The Company's net income (loss) by business segment for 2001 and 2000 is as follows:

*

2000 includes a net special items charge of $8,138 related to the discontinuation of the Company's Nashville operations and the settlement of related preacquisition liabilities.

        The Company returned to profitability in 2001 after posting substantial net losses in 2000 and 1999 resulting primarily from the Nashville and South Carolina automobile components of its automobile segment. In June 2000, the Company announced the discontinuation of its Nashville operations under its subsidiary, Graward and recorded $16,421 in special items charges in the second quarter of 2000. In July 2000, the Company announced its withdrawal from the South Carolina voluntary nonstandard automobile insurance market. In the fourth quarter of 2000, the Company recorded special items gains totaling $8,283 resulting from the settlement of purchase price disputes and the settlement of assumed liabilities, both of which were associated with the acquisition of Graward. During 2001, the Company continued its emphasis on fee-based operations begun in the third quarter of 2000, carefully balancing them with the risk-bearing business of its commercial and North Carolina automobile operations. Without the significant strain on earnings of the Nashville and South Carolina automobile operations, all of the Company's continued operations posted a profit for 2001. Although the all other segment, which includes the Company's environmental, workers' compensation and general liability runoff operations, experienced a net loss for the year, the loss was substantially attributable to a strengthening of loss and LAE reserves associated with the Company's environmental exposures. As these exposures near completion of runoff, management's estimation of the Company's ultimate liability and required loss and LAE reserves becomes less variable. Though management believes all of the Company's insurance reserves are adequate, establishing reserves is still an estimation process and adverse developments of its existing reserves in future years may occur and would be recorded in the year so determined.

        The following table sets forth the sources of the Company's direct and net written premiums for the years ended December 31, 2001 and 2000:

        During 2001, the Company's primary sources of direct written premium were its fee-based NC Facility, SC Facility and NFIP operations and its risk-based commercial and UIC operations. During

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2000, additional sources of significant direct written premium included the Company's Nashville and South Carolina automobile risk-bearing operations that were discontinued in the second and third quarters of 2000, respectively. The increase in net written premiums of the Company's commercial lines segment, despite a decrease in direct written premiums, is due to the cancellation of the operation's 70% quota share reinsurance agreement effective April 1, 2001. The Company's commercial lines operations are now reinsured through facultative, excess of loss, catastrophe and umbrella reinsurance agreements.

Automobile

        The Automobile segment includes UIC's retained risk nonstandard automobile and premium finance operations, the runoff of the Company's Nashville and South Carolina automobile operations, and the fee-based NC Facility, SC Facility and SCAAIP operations.

UIC Operations

        Of the $2,332 net income posted by the automobile segment in 2001, approximately $1,990 is attributable to the North Carolina nonstandard automobile operations of UIC, including its fee-based NC Facility operations. This represents a substantial improvement over its loss of approximately $714 in 2000. In February 2001, a new management team with extensive experience in the North Carolina nonstandard automobile market was hired to oversee the Company's North Carolina operations and charged with the tasks of: 1) increasing the operation's direct written premium; 2) reducing the loss ratio on the operation's retained risk physical damage program; and 3) lowering the operation's operating costs and expenses. As a result, UIC recorded direct written premium during 2001 of approximately $42,613, an increase of approximately $5,639 over 2000. Further, approximately 58% of these premiums were ceded to the NC Facility, a state-sponsored plan for insuring North Carolina drivers outside of the voluntary market. UIC receives underwriting and claims commissions equal to approximately 28% and 14%, respectively, of premiums written in the NC Facility. As a result of improved agent relations, customer service and overall business performance measures implemented by the new management team, coupled with the relative lack of severe weather in the state of North Carolina in 2001 as compared to 2000, the loss ratio of the UIC operations improved from approximately 75% during 2000 to approximately 55% during 2001. In the second quarter of 2001, the Company consolidated its policy and claims processing systems in North Carolina into its primary processing and claims systems located in the Company's Columbia, SC corporate headquarters. This move, coupled with a host of additional expense reduction initiatives instituted by new management, resulted in substantial reductions of UIC's other operating costs and expenses in 2001 over 2000.

        The majority of UIC's written premium has traditionally been financed through the Company's premium finance subsidiary, PBP. PBP receives interest income from insureds on premiums it finances, as well as a variety of set up and maintenance fees associated with the related premium finance contracts. While PBP has proved to be an effective sales and marketing tool to facilitate premium growth for UIC over the years, management has continually struggled with the challenge of limiting the volume of bad debt expenses associated with its operations. Included in the $2,332 net income posted by the automobile segment in 2001 are losses of approximately $1,868 attributable to PBP. As a result of PBP's operating losses and reassessments of its core competencies, the Company entered into a management contract with an unaffiliated company effective June 1, 2001 to manage the operations of PBP. In December 2001, UIC introduced an installment billing program to its insureds and PBP was placed into runoff. Additionally, UIC continues to offer premium finance alternatives to its insureds through a number of unaffiliated premium finance companies.

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Nashville operations

        During 2000, the Company discontinued its Nashville operations and placed all of this business into runoff. Due to high loss ratios and an extremely high expense structure, this operation had suffered substantial operating losses in 1998 and 1999, with indications that the losses would continue throughout 2000 without expectation that it could become profitable in the foreseeable future. In the second quarter of 2000, the Company took a special items charge to earnings of $16,421, $15,678 of which were non-cash items, including impairment of goodwill associated with the Graward acquisition of $14,915. Other special items charges associated with exiting the operation included the write-down of certain fixed and operating assets, accrual of closure costs and accrual of severance and other personnel-related costs. On August 1, 2000, the Company moved all remaining business of the operation to its South Carolina headquarters to complete the runoff of this book of business. In the fourth quarter of 2000, the Company recorded special items gains totaling $8,283 resulting from the settlement of purchase price disputes and the settlement of assumed liabilities, both of which were associated with the acquisition of Graward. Direct written premiums associated with the Nashville operations during 2001 were insignificant; however, earned premiums associated with Graward as a result of running off the unearned premiums existing at December 31, 2000 amounted to approximately $1,026. Further, the operation experienced insignificant incurred losses during 2001 primarily as a result of effective reserving practices at December 31, 2000 and the minimal claims activity experienced during 2001. Finally, as the Nashville operations were in runoff for the full year of 2001, the operating costs and expenses experienced substantial reductions over 2000. As a result of these factors, the Nashville operations posted net income of $1,616 in 2001.

South Carolina Nonstandard Automobile Operations

        The Company has been a servicing carrier for the SC Facility, a state-sponsored plan for insuring South Carolina drivers outside of the voluntary market, since its creation in 1974 and has historically generated significant amounts of fee-based income in this capacity. The Company receives underwriting and claims commissions equal to approximately 11% of premiums written in the SC Facility and paid losses ceded to the SC Facility, respectively. The SC Facility began its three-year run off March 1, 1999. The Company ceased ceding premiums to the SC Facility March 1, 2002; however, it is required to adjudicate claims related to policies ceded to the SC Facility during the final runoff for which it will receive commissions. The Company also issues nonstandard automobile policies and adjusts the related claims for the SCAAIP, a JUA formed to replace the SC Facility. The Company is one of two servicing carriers for the SCAAIP. Although the SCAAIP offers the Company access to additional fee-based revenue with no underwriting risk, thus far into the runoff of the SC Facility the Company has not experienced significant activity in the SCAAIP. During 1997, in contemplation of the runoff of the SC Facility, the Company introduced a voluntary nonstandard automobile program in South Carolina. By the end of 1999, direct written premium volume under this voluntary program had escalated to approximately $28,288. Such rapid growth customarily strains earnings and results in higher than average loss ratios; however, the operation continued to experience substantial losses and substantially higher than acceptable loss ratios well into 2000, with no indication of reprieve. In July 2000, the Company concluded that the operation could not generate profits in the foreseeable future and, therefore, placed the business into runoff. The combined operations of the South Carolina voluntary nonstandard automobile program, the SC Facility and the SCAAIP posted net income in 2001 of $594 as a result of the same factors discussed above that lead to the 2001 net income of the Company's Nashville operations.

Flood

        The Company's flood product line includes flood insurance, excess flood insurance, flood zone determinations, claims processing and flood compliance tracking services. The Company's basic flood

21

insurance product is ceded entirely to the NFIP, a federal government program that establishes premium rates and coverage limits, bears all risk of loss and pays claims. Working through its independent agents located across the United States, the Company issues policies and processes claims on behalf of the NFIP. In this capacity, the Company receives commissions for the policies it processes and the related claims it services of 31% of direct premiums written and 3.3% of direct incurred losses, respectively. NFIP policies only cover losses up to $250 for residential buildings and $100 for contents. Further, the NFIP commercial coverage is limited to $500 for both buildings and contents. The Company's excess flood insurance product provides a level of protection above the NFIP's limits for residential and commercial properties. The Company, as broker, receives commissions for placing this business. The Company also believes that offering the excess flood product allows it to improve its relationships with its agency force by offering them a broader product portfolio. During 2001, the Company's NFIP written premium once again increased at a rate that surpassed that of the total NFIP, due primarily to obtaining several large books of flood business from independent insurance agents across the United States. This was facilitated by expanding the Company's product offering to independent agents and the introduction of new technology to its agency force, including internet-based policy rating and flood zone determination services. The Company's NFIP written premium amounted to approximately $44,724 in 2001, an increase of $6,413 (16.7%) over 2000. As a result of its premium growth and the retention of its NFIP book of business, the Company received a marketing bonus from the NFIP of $553 in March 2001. Such bonuses are unpredictable and are not guaranteed.

        Claims processing for the NFIP has been a substantial source of revenues and earnings for the Company over the past several years and is a weather-dependent component of its flood operations. Whereas most property and casualty insurance companies suffer losses during hurricanes and floods, the Company benefits strongly as a fee-based processor of claims for the NFIP. Due to the relatively quiet 2000 and 2001 hurricane seasons, the revenue generated from flood claims handling is down significantly from prior years. AFS provides the Company a presence for flood claims processing on both coasts, an important element of diversification and scale for weather-dependent operations.

        The Company, through AFS, offers the additional flood-related services of flood zone determinations and flood zone mapping services to customers located throughout the United States. These services are provided primarily to mortgage originators to determine whether or not homes are located in flood zones and, therefore, require flood insurance. These services allow the Company to offer a more complete flood portfolio to both agents and financial institutions, provide the Company with a stronger presence in the flood market and expand the channels of distribution for the Company's complementary products. AFS' revenues can be substantially affected by increasing or decreasing general market interest rates due to the impact these fluctuations have on the mortgage industry.

Commercial

        The Company reentered the risk-bearing commercial lines market in February 1998 when it converted a substantial amount of premiums written in an MGA capacity for another insurance carrier to retained risk premiums. Since that time, the Company has capitalized on the long-standing relationships of its commercial lines agents and benefited from the experience of its qualified underwriters. The Company's commercial lines have historically been reinsured primarily through quota share reinsurance agreements. From April 1, 1999 through March 31, 2000 the Company's commercial lines were subject to a 90% quota share reinsurance agreement. Effective April 1, 2000, the 90% quota share reinsurance agreement was amended to become a 70% quota share reinsurance agreement, and the amended agreement was terminated at the Company's request effective April 1, 2001. The Company's commercial lines are presently reinsured through facultative, excess of loss, catastrophe and umbrella coverages. Retaining a larger portion of its book of business had a positive impact on the operation's earnings in 2001 and was the primary reason for its turnaround over 2000. Further

22

enhancing the results of the Company's commercial operations in 2001 was the introduction of a new technology initiative. This initiative centered on a web-based rating and underwriting system that allows the Company's agents to provide real time quotes on commercial business owners' policies, store those quotes and then submit the policy over the internet. During 2002, the Company looks to expand the use of this technology to other lines of its commercial operations.

Adjusting Services

        The Company's premium concentration in the catastrophe-heavy Southeast led to the 1996 creation of INS to manage the Company's internal claims. INS currently offers a wide array of services: automobile appraisals, automobile liability claims handling, catastrophe claims handling, claims administration, direct reporting, general liability claims handling, glass claims handling, property claims handling, subrogation and recovery and total loss claims handling. These services expand the Company's business opportunities by allowing it to offer services to other insurance companies. The Company's experience in processing flood claims led to the award of two statewide Wind and Hail Association contracts, a strong indication of its growing presence in the catastrophe claims handling market. INS is an important part of the Company's corporate structure. It has over 50 unaffiliated customers and can accommodate claims services requests from anywhere in the United States. INS claims representatives are differentiated from their counterparts at traditional claims adjusting companies by having an insurance company background, an important characteristic when equitably settling claims.

        Effective January 21, 2000, three of the Company's insurance subsidiaries made a combined investment totaling $4,900 in the common stock of QualSure Holding, representing a combined ownership interest of 30.625%. QualSure Holding owns 100% of the issued and outstanding stock of QualSure, a homeowners take out insurance company domiciled in the state of Florida, and QualSure Underwriting Agencies, Inc., an MGA for QualSure. QualSure was formed to take out approximately 44,000 homeowners policies from the Florida Windstorm Underwriting Association and approximately 40,000 homeowners policies from the Florida Residential Property & Casualty Joint Underwriting Association. In connection with this investment, INS entered into a Claims Administration Services Agreement with QualSure to adjudicate all of its claims for a fee based upon subject earned premium. This investment capitalizes upon its considerable experience in claims adjudication and provides a substantial source of fee-based income to supplement its risk-bearing operations.

        Though still profitable in 2001, the adjusting services segment experienced a significant decline in profitablity over 2000. The two most significant components of the segment's revenues are its Claims Administration Services Agreement with QualSure and the loss adjusting services provided in connection with the SC Facility. Commission and service income earned by INS under its Claims Administration Services Agreement with QualSure amounted to $3,915 and $3,458 in 2001 and 2000, respectively. QualSure experienced a full twelve months of operations during 2001 as compared to approximately eleven months of operations in 2000. Commission and service income generated by the adjusting services segment through the SC Facility was approximately $1,065 and $2,277 in 2001 and 2000, respectively. The SC Facility began its planned runoff effective March 1, 1999, at which time no new business was accepted into the SC Facility. Effective October 1, 1999, voluntary renewals were no longer accepted by the SC Facility. However, servicing carriers were able to cede renewals to the SC Facility until March 1, 2002, at which time final runoff of the SC Facility commenced. Commission and service income from these two components of the adjusting services segment represent approximately 54% and 62% of the segment's total commission and service income in 2001 and 2000, respectively. The decline in profitability experienced by the adjusting services segment in 2001 is a direct result of the net decrease in revenues generated through QualSure and the SC Facility.

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All Other

        The Company continues to maintain reserves and pay significant claims with respect to its runoff operations. These operations consist primarily of general liability policies that include contractors' liability and environmental coverages primarily in California and commercial (including workers' compensation) and personal lines policies in the Southeast. The runoff of claims on these policies has resulted in substantial losses to the Company over the past 10 years. In addition, the Company's runoff segment contains the management of runoff reserves from prior business in the 1980's and runoff from a nonstandard homeowners MGA book of business in Kentucky and Tennessee entered into in early 1997. The Company discontinued writing new business in this MGA book of business in October of 1998. Approximately 66% and 50% of the Company's total net reserves for losses and LAE at December 31, 2001 and 2000, respectively, relate to these runoff operations.

RESULTS OF OPERATIONS

Years Ended December 31, 2001 and 2000

Commission and Service Income

        Commission and service income increased $382 or 1.1%, to $36,272 for the year ended December 31, 2001 from $35,890 for the year ended December 31, 2000. The flood segment accounted for an increase of $2,193, posting commission and service income of $16,984 for the year ended December 31, 2001, versus $14,791 for the same period of 2000. As a servicing carrier for the NFIP, the Company recognizes income for the policies it processes and the related claims it services in the amount of 31.0% of gross written premium and 3.3% of gross incurred losses, respectively. During the year ended December 31, 2001, the Company's NFIP written premium has increased at a rate that surpassed that of the total NFIP, due primarily to obtaining several large books of flood business from independent insurance agents across the United States. This was facilitated by expanding the Company's product offering to independent agents and the introduction of new technology to its agency force, including internet-based policy rating and flood zone determination services. The Company's NFIP written premium for the years ended December 31, 2001 and 2000 amounted to $44,724 and $38,348, respectively, an increase of $6,376, or 16.6%. Further, as a result of its premium growth and the retention of its NFIP book of business, the Company received an unanticipated marketing bonus from the NFIP of $553 in March 2001. No such bonus was received during 2000.

        The commercial segment accounted for a further increase of $35, posting commission and service income of $689 for the year ended December 31, 2001, versus $654 for the same period of 2000. The overall increase is substantially attributable to the net effect of two factors. First, in accordance with a mandate from the NCDOI, the Company ceased writing new risk-bearing commercial business in the state of North Carolina at the beginning of the third quarter of 2000. Though the Company may, however, continue renewing existing risk-bearing commercial business at its discretion, any new commercial business generated is ceded to the NC Facility. Commission and service income generated through the NC Facility amounted to $371 and $298 for the years ended December 31, 2001 and 2000, respectively, an increase of $73. Second, commission and service income generated through the SC Facility amounted to $318 and $356 for the years ended December 31, 2001 and 2000, respectively, a decrease of $38. The SC Facility has been in runoff since March 1, 1999 and entered the final stage of runoff effective March 1, 2002.

        Commission and service income for the automobile segment was $10,089 for the year ended December 31, 2001, versus $11,194 for the same period of 2000, a decrease of $1,105. The decrease is substantially the result of the continuing runoff of the SC Facility, a residual market for automobile insurance in the state of South Carolina. Effective March 1, 1999, no new policies could be ceded to the SC Facility, and no voluntary renewals could be ceded to the SC Facility after September 1999. Designated agents, such as the Company, are able to renew business in the SC Facility through

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March 1, 2002. Commission and service income generated through the SC Facility and the SCAAIP amounted to $3,146 for the year ended December 31, 2001 and $4,019 for the year ended December 31, 2000, a decrease of $873. The operations of the Company's North Carolina domiciled subsidiary, UIC, accounted for another $220 decrease in commission and service income, resulting entirely from business ceded to the NC Facility. Though the Company experienced an increase in premium writings within the NC Facility during the year ended December 31, 2001 versus the same period of 2000, claims commissions earned from the NC Facility actually decreased. This is attributable to a reduction in losses ceded to the NC Facility resulting from much lower weather-related claims activities during 2001 as compared to 2000. The remaining $12 decrease in commission and service income came from the Company's Nashville and South Carolina nonstandard automobile operations, which began runoff in the second and third quarters of 2000, respectively.

        Commission and service income for the adjusting services segment was $8,435 for the year ended December 31, 2001, versus $9,249 for the same period of 2000, a decrease of $814. The overall decrease is substantially attributable to the net effect of two factors. First and foremost, commission and service income generated from the SC Facility amounted to $1,065 and $2,284 for the years ended December 31, 2001 and 2000, respectively, a decrease of $1,219. The SC Facility has been in runoff since March 1, 1999 and entered the final stage of runoff effective March 1, 2002. Second, in connection with the Company's $4,900 investment in QualSure Holding, INS entered into a Claims Administration Services Agreement with QualSure to adjudicate all of its claims for a fee based upon subject earned premium. Commission and service income earned under this agreement amounted to $3,915 and $3,458 for the years ended December 31, 2001 and 2000, respectively, an increase of $457. The remaining decrease of $52 came from the other activities of the adjusting services segment.

        The remaining $73 increase in commission and service income came from all other operations.

Property and Casualty Premiums Earned

        Net premiums earned decreased $10,704, or 42.6%, to $14,433 for the year ended December 31, 2001 from $25,137 for the year ended December 31, 2000. The automobile segment accounted for $14,930 of the overall decrease, posting premiums earned of $7,004 for the year ended December 31, 2001 versus $21,934 for the same period of 2000. The overall decrease is the result of three factors. First, in the second and third quarters of 2000, respectively, the Company announced the discontinuation of its Nashville operations and its withdrawal from the voluntary nonstandard automobile market in South Carolina. Premiums earned from these operations for the year ended December 31, 2001 amounted to $2,722, a decrease of $12,952 over the $15,674 earned for the same period of 2000. Second, in June 2000 the Company began running off its Second Tier rating program in North Carolina. This program was the only book of the Company's business not subject to a quota share reinsurance agreement. As the Second Tier business came up for renewal during the runoff period, prevailing rates of UIC were offered to the insureds. Accepted renewals were subject to UIC's 75% quota share reinsurance agreement. Therefore, UIC's year ended December 31, 2001 included a significant amount of premiums that were subject to its 75% quota share reinsurance agreement that were not subject to the agreement for the same period of 2000. Premiums earned from UIC's operations for the year ended December 31, 2001 amounted to $4,393, a decrease of $1,155 over the $5,548 earned for the same period of 2000. The third factor in the decrease in premiums earned by the automobile segment was the $823 reduction in premiums earned from business the Company is required to assume from the SC Facility. The SC Facility has been in runoff since March 1, 1999 and entered the final stage of runoff effective March 1, 2002.

        Premiums earned by the commercial segment amounted to $7,379 for the year ended December 31, 2001, versus $3,040 for the same period of 2000, an increase of $4,339. The Company's commercial lines have been reinsured primarily through quota share reinsurance agreements since December 31, 1999. For the year ended December 31, 2000, the Company's commercial lines were

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subject to a 90% quota share reinsurance agreement. Effective April 1, 2000, the 90% quota share reinsurance agreement was amended to become a 70% quota share reinsurance agreement, and the amended agreement was terminated at the Company's request effective April 1, 2001. Premiums ceded to reinsurers by the commercial segment amounted to $2,067 for the year ended December 31, 2001 versus $10,525 for the same period of 2000, a decrease of $8,458. Retaining a larger portion of its commercial book of business had a positive impact on the Company's premiums earned for the year ended December 31, 2001 over the same period of 2000. Partially offsetting this increase was the impact of a decrease in direct commercial writings of $1,276 for the year ended December 31, 2001 over the same period of 2000. In accordance with a mandate from the NCDOI, the Company ceased writing new risk-bearing commercial business in the state of North Carolina at the beginning of the third quarter of 2000. The Company may, however, continue renewing existing risk-bearing commercial business at its discretion.

        The remaining $113 decrease in premiums earned came from all other operations.

Net Investment Income

        Net investment income decreased $160, or 6.0%, to $2,500 for the year ended December 31, 2001 from $2,660 for the year ended December 31, 2000. The principal cause of the decrease was the gradual decrease throughout 2001 of the general level of market interest rates. For the year ended December 31, 2001, the Company's investment portfolio yielded an average return of 5.2%, a slight deterioration over the 5.6% averaged for the same period of 2000.

Other Interest Income, Net

        Net other interest income decreased $566, or 28.8%, to $1,401 for the year ended December 31, 2001 from $1,967 for the year ended December 31, 2000. The decrease is substantially due to the net effect of two factors. First, net other interest income was unusually high in 2000 as a result of the Company's recording $800 from the SC Facility related to the time value of money consideration on recoupment premiums the Company writes for the SC Facility. The Company's mandatory participation in the numerous residual market pools and associations of the 46 states in which the Company's insurance subsidiaries are licensed, including the SC Facility, is calculated by and communicated to the Company on a quarterly basis by a centralized statistical processing agency. Second, and partially offsetting this decrease, there was an increase in net other interest income earned by the Company's North Carolina premium financing company, PBP. Because the majority of UIC's written premium is financed through PBP, interest income associated with PBP's premium financing activities will fluctuate with the premium volume of UIC. Beginning in January 2001, the Company implemented an initiative designed on growing its book of business written through UIC. As a result of that initiative, UIC's direct written premium increased 15.3% for the year ended December 31, 2001 over the same period of 2000, driving similar increases in interest income on premiums financed by PBP. Partially offsetting PBP's increase in interest income related to UIC's premium growth was the effect of a reduction in UIC premiums financed through PBP and toward unrelated finance companies that began in the third quarter of 2001 and culminated in December 2001 with the Company placing PBP in runoff. This transition was initiated for a variety of reasons, including the operating losses generated by PBP and overall reassessments of the Company's core competencies. Other interest income realized by PBP as a result of this net growth was $1,132 for the year ended December 31, 2001 versus $779 for the same period of 2000, an increase of $353. The Company also experienced decreases in net other interest income from the Nashville and South Carolina nonstandard automobile components of its automobile segment of $48 as a result of the runoff of these operations which began in the second and third quarters of 2000. The remaining decrease of $71 came from all other operations.

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Net Realized Gain (Loss)

        Net realized losses amounted to $211 for the year ended December 31, 2001 due to $301 of losses realized on the sale of certain automobiles no longer required for operations and the disposal of certain obsolete data processing equipment and software partially offset by $90 in gains realized on the liquidation of a portion of the Company's bond portfolio to fund its operations. Sales of fully depreciated property and equipment during the year ended December 31, 2000 resulted in realized gains of $11, while realized losses on the sale of investments amounted to $236 and resulted from the liquidation of a portion of the Company's investment portfolio to fund its operations and investment in QualSure Holding.

        In December 2000, the Company sold its corporate headquarters to its majority shareholder and Chairman of the Board of Directors for a gain of $1,892. Concurrent with this transaction, the Company leased the property back for a fixed period of three years without an option for renewal. The gain resulting from this transaction was deferred and is being amortized into income evenly over the term of the related leaseback (see Policy Fees and Other Income).

Policy Fees and Other Income

        Policy fees and other income decreased $1,780, or 37.9%, to $2,913 for the year ended December 31, 2001 from $4,693 for the year ended December 31, 2000. This overall decrease is the net result of several significant factors. The Company's primary source of policy fees revenues is its Nashville nonstandard automobile and PBP premium finance operations. The Nashville nonstandard automobile operations were placed into runoff in June 2000. As a result of this action, direct premiums written through the Nashville operation declined to a balance of $(13) for the year ended December 31, 2001 from a balance of $8,129 for the same period in 2000. Because policy fees are directly correlated to premium writings, the operation's policy fees decreased $1,340 to a balance of $41 for the year ended December 31, 2001 versus $1,381 for the same period in 2000. Further, PBP receives a variety of set up, maintenance and other policy-related fees associated with the premiums it finances for insureds of UIC. As a result of PBP's operating losses and reassessments of its core competencies, the Company entered into a management contract with an unaffiliated company effective June 1, 2001 to manage the operations of PBP. Under the contract, all policy related fees previously retained by PBP now belong to the vendor. Policy fees associated with PBP's operations decreased $161 to a balance of $697 for the year ended December 31, 2001 versus $858 for the same period in 2000.

        Also contributing to the overall decrease in policy fees and other income was the Company's net $615 decrease in equity in earnings of its unconsolidated subsidiaries, Sunshine State Holding Corporation and QualSure Holding from income of $129 for the year ended December 31, 2000 to a loss of $486 for the same period in 2001. The Company invested $854 and $4,900 in Sunshine State Holding Corporation and QualSure Holding, respectively, for ownership interests of 21.49% and 30.625%, respectively. As each of these investments exceeds 20% of the equity of each respective company, the Company's equity in the undistributed earnings of the unconsolidated affiliates, using a computed equity method, are included in current earnings.

        Further contributing to the overall decrease in policy fees and other income was a decrease of $371 associated with a division of the adjusting services segment. The division posted policy fees and other income of $1,657 for the year ended December 31, 2001 versus $2,028 for the same period of 2000. The decrease is attributable to a general decrease in business volumes within the division's primary market of South Carolina resulting from the runoff of the SC Facility, the Company's withdrawal of its voluntary operations in the state, and the withdrawal of other key customers' automobile programs in the state.

        In December 2000, the Company sold its corporate headquarters to its majority shareholder and Chairman of the Board of Directors for a gain of $1,892. Concurrent with this transaction, the

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Company leased the property back for a fixed period of three years without an option for renewal. The gain resulting from this transaction was deferred and is being amortized into income evenly over the term of the related leaseback. Included in policy fees and other income for the year ended December 31, 2001 is $631 of amortized gain.

        The remaining net increase in policy fees and other income of $76 came from all other operations.

Losses and Loss Adjustment Expenses

        Losses and LAE decreased $16,705, or 68.3%, to $7,740 for the year ended December 31, 2001 from $24,445 for the year ended December 31, 2000. The automobile segment accounted for $18,255 of the overall decrease, posting incurred losses and LAE of $2,928 for the year ended December 31, 2001 versus $21,183 for the same period of 2000. The largest component of this decrease is the $15,737 combined decrease resulting from the aforementioned discontinuation of the Company's Nashville operations and its withdrawal from the voluntary nonstandard automobile market in South Carolina. Further, as previously mentioned, UIC's year ended December 31, 2000 included certain risk-bearing business that was not subject to its 75% quota share reinsurance agreement while all risk-bearing business during the year ended December 31, 2001 was subject to its 75% quota share reinsurance agreement. This situation largely accounted for the $1,739 decrease in losses and LAE incurred by UIC for the year ended December 31, 2001 versus the same period of 2000. Finally, the Company experienced a $779 reduction in losses and LAE related to business the Company is required to assume from the SC Facility, which has been in runoff since March 1, 1999 and entered the final stage of runoff effective March 1, 2002.

        Partially offsetting the overall decrease in losses and LAE was the $1,472 increase posted by the commercial segment. As previously discussed, the Company's commercial lines have been reinsured primarily through quota share reinsurance agreements since December 31, 1999. For the year ended December 31, 2000, the Company's commercial lines were subject to a 90% quota share reinsurance agreement. Effective April 1, 2000, the 90% quota share reinsurance agreement was amended to become a 70% quota share reinsurance agreement, and the amended agreement was terminated at the Company's request effective April 1, 2001. By retaining a larger portion of its commercial book of business, the Company's commercial operations experienced an increase in losses and LAE for the year ended December 31, 2001 over the same period of 2000. However, somewhat offsetting this increase was the impact of a decrease in commercial writings for the year ended December 31, 2001 over the same period of 2000. In accordance with a mandate from the NCDOI, the Company ceased writing new risk-bearing commercial business in the state of North Carolina at the beginning of the third quarter of 2000. The Company may, however, continue renewing existing risk-bearing commercial business at its discretion.

        The remaining net increase of $78 came from all other operations.

Policy Acquisition Costs

        Policy acquisition costs decreased $1,841, or 7.4%, to $23,162 for the year ended December 31, 2001 from $25,003 for the year ended December 31, 2000. Fluctuations in policy acquisition costs are directly correlated to fluctuations in direct written premium of each of the Company's business segments. Direct written premium for the year ended December 31, 2001 amounted to $112,282, a $12,736, or 10.2%, decrease from the $125,018 written during the same period in 2000. See Premiums Earned for discussion concerning the decrease in premium volume for the year ended December 31, 2001 versus the same period of 2000.

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Interest Expense

        Interest expense was $728 and $1,436 for the years ended December 31, 2001 and 2000, respectively, a decrease of $708. The Company's Credit Facility bears interest at a pre-determined spread over LIBOR or the prime interest rate of the lending institution, at the Company's discretion. The decrease in interest expense for the year ended December 31, 2001 as compared to the same period of 2000 is due to lower average interest rates in 2001 versus 2000, coupled with interest saved through the pay down of debt. The average interest rate of the Company's debt was 6.89% between December 31, 2000 and December 31, 2001 versus 9.24% between December 31, 1999 and December 31, 2000. Further, at December 31, 2001, the outstanding balance of the Credit Facility was $7,721, a $2,438 decrease over the balance existing at December 31, 2000.

Other Operating Costs and Expenses

        Other operating costs and expenses decreased $5,023, or 19.0%, to $21,438 for the year ended December 31, 2001 from $26,461 for the year ended December 31, 2000. The most significant causes of the overall decrease are expense reductions directly associated with the Company's discontinuation of its Nashville operations and its withdrawal from the voluntary nonstandard automobile market in South Carolina in the second and third quarters of 2000, respectively. Most notably, the Company experienced reductions in force between December 31, 2000 and 2001 that led to consolidated salary and benefit expense savings of $4,309. In addition, when announcing the discontinuation of its Nashville operations in September 2000, the Company recorded goodwill and fixed asset impairment charges for assets associated with that operation. This was the leading cause of reduced goodwill amortization and fixed asset depreciation charges of $1,259 for the year ended December 31, 2001 over the same period of 2000. The Company has also experienced a wide array of other expense reductions directly associated with the Company's decreasing premium volume, including reduced licensing fees ($123); data processing costs ($158); premium taxes ($264); telephone expenses ($164); and postage costs ($305). Also contributing to the overall decrease in other operating costs and expenses was the decrease in settlement costs related to a lawsuit involving Wells Fargo Financial Resources, Inc. (Wells Fargo) (formerly known as Norwest Financial Resources, Inc.). During the second quarter of 2001, the Company reduced its estimated settlement amount associated with this lawsuit by $370. Effective July 31, 2001, the Company settled the lawsuit at the revised estimated settlement amount.

        Partially offsetting these expense reductions were $852 in increased salary and benefits expenses associated with the Company's accrual of obligations under a newly approved incentive compensation plan for certain members of its management team. Further offsetting the overall reduction in other operating costs and expenses between periods were increased municipal tax expenses during the year ended December 31, 2001 over the same period of 2000. In March 2000, the Company settled a claim with the Municipal Association of South Carolina which claimed it had a potential deficiency of certain South Carolina municipality taxes. The claim was settled for $1,525, resulting in a reduction in expense of $902 that was recorded as an offset to municipal tax expense for the year ended December 31, 2000. In addition, on December 21, 2000, the Company sold its corporate headquarters to its majority shareholder and Chairman of the Board of Directors. Concurrent with this transaction, the Company leased the property back for a fixed period of three years without an option for renewal. Lease expense incurred under this related party lease amounted to $458 and $13 for the years ended December 31, 2001 and 2000, respectively, an increase of $445. Finally, as a result of PBP's operating losses and reassessments of its core competencies, the Company entered into a management contract with an unaffiliated company effective June 1, 2001 to manage the operations of PBP. Management fees paid to the vendor amounted to $669 for the year ended December 31, 2001. No such fees were incurred for the same period of 2000.

        Though the Company's bad debt expenses remained relatively consistent for the years ended December 31, 2001 and 2000, the sources of the expenses did not. Of the $1,716 total bad debt expense

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incurred for the year ended December 31, 2000, approximately $1,148 related to the operations of PBP, $266 related to the rest of the automobile segment, and $302 related to all other operations combined. Of the $1,835 total bad debt expense incurred for the year ended December 31, 2001, approximately $2,666 related to the operations of PBP, a recovery of $678 related to the rest of the automobile segment, and a recovery of $153 related to all other operations combined. The bad debt expenses experienced by the PBP operation was the primary factor leading to the aforementioned PBP management contract and eventual discontinuation of the operation. The significant recovery of bad debt expense by the other components of the automobile segment came substantially from the Nashville operation and resulted from policy cancellations during 2001 related to fully reserved receivables at December 31, 2000. Neither of the sources of the Company's unusual bad debt expense results (PBP and Nashville) are expected to be material in the Company's future operations.

Special Items

        During the quarter ended June 30, 2000, the Company recorded a special items charge in the amount of $16,421 associated with the discontinuation of its Nashville operations and the impairment of long-lived assets associated with those operations. As of December 31, 2001, the restructuring plan associated with the restructuring charge has been completed, resulting in a final revision of the initial estimate of $156 that was taken into income in September 2001.

Years Ended December 31, 2000 and 1999

Commission and Service Income

        Commission and service income for the year ended December 31, 2000 decreased $9,762, or 21.4%, to $35,890 from $45,652 for the year ended December 31, 1999. The automobile and commercial reporting segments accounted for $14,109 and $425 of the overall net decrease, respectively, posting commission and service income of $11,194 and $654, respectively, for the year ended December 31, 2000, versus $25,303 and $1,079, respectively, for the same period of 1999. These decreases are substantially the result of a decrease in the number of policies in the SC Facility, a residual market for automobile insurance in the state of South Carolina. Effective March 1, 1999, no new policies could be ceded to the SC Facility, and no voluntary renewals could be ceded to the SC Facility after September 1999. Designated agents are able to renew in the SC Facility through March 1, 2002. The new SCAAIP provides insurance to drivers unable to obtain coverage in the voluntary market. Although the Company is one of two servicing carriers for the SCAAIP, there has been very little activity to date.

        Offsetting these decreases in commission and service income was the $5,010 increase posted by the adjusting services reporting segment. Over the last fifteen months, the adjusting services reporting segment has focussed on attracting and retaining external customers and, as a result, now boasts more than 50 unaffiliated customers. In addition, concurrent with the Company's January 21, 2000 investment in QualSure Holding Corporation, the Company's adjusting services reporting segment entered into a Claims Administration Services Agreement with QualSure to adjudicate all of its claims for a fee-based upon subject earned premium. Revenues, net of deferrals, under this arrangement amounted to $3,458 for the year ended December 31, 2000.

        The remaining $238 decrease in commission and service income came from the Company's flood and runoff operations.

Property and Casualty Premiums Earned

        Property and casualty premiums earned for the year ended December 31, 2000 decreased $28,207, or 52.9%, to $25,137 from $53,344 for the year ended December 31, 1999. The automobile reporting segment accounted for $28,050 of the overall decrease, posting premiums earned of $21,934 for the

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year ended December 31, 2000 versus $49,984 for the same period of 1999. The primary reason for the decrease centers on the Company's 75% quota share reinsurance agreement that was effective December 31, 1999. Under the agreement, 75% of all automobile premiums written between January 1, 2000 and June 30, 2000 were ceded to the reinsurers. No such reinsurance arrangement was in effect during 1999. Secondarily, in May of 2000, the Company performed a critical profitability review of its automobile book of business that resulted in a reduction of authorized independent agents, more stringent underwriting guidelines and the discontinuation of its Nashville operations as well as its withdrawal from the retained risk nonstandard automobile market in South Carolina. These events had a substantial negative impact on premiums written, particularly over the last six months of 2000. Finally, during the quarter ended September 30, 2000, premium refunds totaling $344 were issued by the Company as required under a settlement between the NCDOI and the North Carolina Rate Bureau (the "Bureau"). On certain policies issued or renewed during the period January 1, 1995 through January 14, 1997, the Bureau established insurance rates higher than rates approved by the NCDOI. The refunds represent the difference between the rates approved by the NCDOI and those originally charged as allowed by the Bureau.

        The commercial reporting segment accounted for $132 of the overall decrease, posting premiums earned of $3,040 for the year ended December 31, 2000 versus $3,172 for the same period of 1999. Effective March 31, 1999, the Company entered into a 90% quota share reinsurance agreement that remained in place through March 31, 2000. Effective April 1, 2000, the 90% quota share reinsurance agreement was amended to become a 70% quota share reinsurance agreement. The amendment was made to capitalize upon the favorable underwriting results of the commercial book of business. Retaining a larger portion of its commercial book of business had a positive impact on the Company's earned premium for the year ended December 31, 2000. However, more than offsetting this increase in earned premium was the decrease in commercial writings over the last six months of 2000. In accordance with a mandate from the NCDOI, the Company ceased writing new commercial business in the state of North Carolina at the beginning of the third quarter of 2000. The Company may, however, continue renewing existing commercial business at its discretion.

        The remaining $25 decrease in premiums earned came from the Company's flood and runoff operations.

Credit Life Premiums Earned

        The Company's credit life premiums earned have been a product of its life and accident subsidiary, Investors. Investors had been in runoff for several years and, effective October 1, 2000, executed a portfolio assumption agreement with an unaffiliated company for all remaining policy liabilities. Upon completion of the portfolio assumption agreement, and receiving approval from the SCDOI, Investors issued a liquidating dividend to its parent, SCIC, and returned its insurance license to the SCDOI. There were no credit life premiums earned for the year ended December 31, 2000.

Net Investment and Other Interest Income

        Net investment and other interest income for the year ended December 31, 2000 increased $407, or 9.6%, to $4,627 from $4,220 for the year ended December 31, 1999. During the fourth quarter of 2000, the Company received approximately $800 from the SC Facility related to the time value of money consideration on recoupment premiums the Company writes for the SC Facility. This activity is calculated by the SC Facility and communicated to its servicing carriers on an irregular basis. The Company records all normal interest income on a monthly basis from the SC Facility. Partially offsetting this increase in net investment and other interest income was lower investment income earned on the Company's cash and investments. Total cash and investments decreased $10,907 from December 31, 1999 to December 31, 2000, primarily to fund the acquisition of QualSure, to settle liabilities created through the 75% quota share reinsurance agreement for the Company's automobile

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operations, and to fund the Company's operations. However, substantially all of the overall decrease in total cash and investments came from the lower yielding cash and short-term investments rather than from the higher yielding bond portfolio. Therefore, the impact on net investment and other interest income from the sharp decrease in total cash and investments was somewhat mitigated.

Net Realized (Loss) Gain

        Realized losses for the year ended December 31, 2000 consisted of $236 in losses resulting from the liquidation of a portion of the Company's bond portfolio. Partially offsetting these losses were gains of $11 associated with the disposition of certain property and equipment. Furthermore, in December 2000, the Company sold its corporate headquarters with a net book value of $2,589 to its majority shareholder and Chairman of the Board of Directors for $4,500, resulting in a gain of $1,892. Expenses incurred in connection with the sale were $19. Concurrent with this transaction, the Company leased the property back for a fixed period of three years without an option for renewal. The gain resulting from this transaction has been deferred and will be amortized into income evenly over the term of the leaseback.

Policy Fees and Other Income

        Policy fees and other income for the year ended December 31, 2000 decreased $86, or 1.8%, to $4,693 from $4,779 for the year ended December 31, 1999. While the net decrease is not significant, the components of the net decrease are. The most significant source of policy fees for the Company is derived from Graward and is directly correlated with its premium writings. During the third quarter of 1999, the Company implemented significant cost control measures at Graward in an attempt to make the operation profitable. Concurrent with these measures, the Company began a critical profitability review of Graward's book of business that resulted in a reduction of authorized independent agents and more stringent underwriting guidelines. Additional underwriting measures were implemented in the first quarter of 2000. Finally, in June 2000 it was announced that the Graward operation would be discontinued. As Graward's written premium fell throughout 2000, particularly during the last six months of 2000, policy fees and other income followed suit. Graward's policy fees and other income was $1,380 for the year ended December 31, 2000 versus $2,901 for the same period in 1999, a decrease of $1,521.

        Significantly offsetting this decrease were the policy fees and other income generated by a division of the adjusting services reporting segment. This division was formed in the third quarter of 1999 and has experienced rapid growth with a customer base containing both affiliated and unaffiliated companies. Policy fees and other income generated by this unit amounted to $2,028 for the year ended December 31, 2000, an increase of $1,054 over the $974 generated for the same period of 1999. Also offsetting the overall decrease in policy fees and other income is the Company's $129 of equity in earnings of its unconsolidated subsidiaries, Sunshine State Holding Corporation and QualSure Holding Corporation.

        The remaining increase in policy fees and other income of $252 came from all other operations and includes the recovery of unclaimed property from various states and additional other income generated through the growth of other divisions of the adjusting services reporting segment.

Losses and Loss Adjustment Expenses

        Property and casualty losses and LAE for the year ending December 31, 2000 decreased $21,565, or 46.9%, to $24,445 from $46,010 for the year ended December 31, 1999. The automobile reporting segment accounted for $27,091 of the overall decrease, posting incurred losses and LAE of $20,665 for the year ended December 31, 2000 versus $47,756 for the same period of 1999. The primary reason for the decrease centers on the Company's 75% quota share reinsurance agreement that was effective

32

December 31, 1999. Under the agreement, 75% of losses incurred between January 1, 2000 and June 30, 2000 were ceded to the reinsurers. No such reinsurance arrangement was in effect during 1999. Further driving the decrease in losses and loss adjustment expenses was the discontinuation of Graward's operations and the withdrawal from the retained risk nonstandard automobile market in South Carolina (see prior discussion).

        Substantially offsetting the overall decrease in losses and LAE of the automobile reporting segment was the $4,924 increase relating to the Company's runoff operations due to adverse loss development and general reserve strengthening. The remaining increase of $602 came from all other operations.

Policy Acquisition Costs

        Policy acquisition costs decreased $8,718 for the year ended December 31, 2000 compared to 1999, or 25.9%. Fluctuations in policy acquisition costs are directly correlated to fluctuations in direct written premium. Direct written premium for the year ended December 31, 2000 amounted to $125,018, a $43,588, or 25.9%, decrease from the $168,606 written during the same period in 1999. See Premiums Earned for discussion concerning the decrease in premium volume for the year ended December 31, 2000 versus the same period of 1999.

Other Operating Costs and Expenses

        Other operating costs and expenses for the year ended December 31, 2000 decreased $8,424, or 24.1%, to $26,461 from $34,885 for the year ended December 31, 1999. The largest causes of the decrease result from a wide array of expense reductions directly associated with the cost savings initiatives begun in the third quarter of 1999 and continuing through the end of 2000, the decision to discontinue the Nashville operations and the decision to withdraw from the retained risk nonstandard automobile market in South Carolina. Expense reductions from reductions in force associated with these initiatives and decisions amounted to over $3,222 for the year ended December 31, 2000 as compared to the same period of 1999. The Company also experienced significant general expense reductions associated with the greatly reduced business volume in 2000 as compared to 1999, including postage ($375), premium and municipality taxes ($1,828), printing and supplies ($504), survey and underwriting reports ($475), telephone ($420), and travel and temporary help ($652). Approximately $902 of the reduction in premium and municipality taxes resulted from the Company's settlement of disputed municipality taxes due the Municipal Association of South Carolina. Amortization expense of the Company's goodwill decreased $197 for the year ended December 31, 2000 as compared to the same period of 1999 due to the impairment of the goodwill associated with the Graward acquisition taken in the second quarter of 2000. The Company also experienced a significant decrease ($2,310) in its bad debts expense. 1999's level of bad debts expense was extraordinarily high as a result of bad experience in the Company's nonstandard premium financing activities. During 2000, the Company implemented intense collections initiatives to reduce the expense to more normal levels. Further, the discontinuation of the Nashville operations and the withdrawal from the retained risk nonstandard automobile market in South Carolina had a substantial negative impact on premiums written over the last six months of 2000, correlating to a decrease in the likelihood of bad debts expense for the year. Finally, in connection with the premium refunds issued as required under a settlement between the NCDOI and the Bureau, the Company was able to recoup $136 of accounts previously charged off. Partially offsetting these expense reductions were legal expense increases of $928 associated with the resolution and expected resolution of a significant number of the Company's disputes.

Special Items

        The Company's results of operations for the year ended December 31, 2000 include $8,138 in special items charges associated with the discontinuation of its Nashville operations and the resolution

33

of preacquisition liabilities assumed upon the acquisition of Graward. In June 2000, the Company's Board of Directors approved and the Company announced a restructuring plan centering on the discontinuation of its Nashville operations. The restructuring plan included approximately $16,421 in special items charges related primarily to the impairment of long-lived assets associated with the operation, employee severance, and the cancellation of contractual commitments. Of the $16,421 total special items charges, $15,678 related to the impairment of long-lived assets, including $14,915 of goodwill, $580 of fixed assets directly associated with the Nashville operation and $183 of deferred financing costs. In December 2000, the estimated cost of the restructuring plan was adjusted downward by $56.

        On November 29, 2000, the Company reached a settlement with the sellers of Graward related to certain purchase price adjustments. In the settlement, the sellers of Graward agreed to cancel four Subordinated Purchase Notes dated May 1, 1998 in the aggregate face amount of $2,700. The Company in turn agreed to dismiss a pending motion and an arbitration demand. Additionally, the Company agreed to issue to the sellers of Graward warrants to purchase 25,000 shares of its common stock at a price of $3.00 per share and an additional 25,000 shares of its common stock at a price of $7.00 per share. The settlement of these purchase price disputes resulted in a special items gain of $2,700.

        Effective February 19, 2001, the Company reached a settlement with respect to liabilities assumed upon the acquisition of Graward recorded in the amount of $6,527 which were discharged in exchange for $1,000 in cash and the issuance of warrants to purchase 75,000 shares of the Company's common stock at $1.00 per share and an additional 75,000 shares of the Company's common stock at $2.00 per share (see Note 15). The resolution and ultimate quantification of these preacquisition liabilities resulted in a special items gain of $5,527.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

        Loss and LAE reserves are estimates at a given point in time of the amount of claims that the insurer expects to pay claimants plus investigation and litigation costs, based on facts and circumstances then known. It can be expected that the ultimate liability in each case will differ from such estimates. During the loss settlement period, additional facts regarding individual claims may become known and, consequently, it becomes necessary to refine and adjust existing estimates of liability.

        The liability for losses on direct business is determined using case-basis evaluations and statistical projections. The liabilities determined under these procedures are reduced, for GAAP reporting purposes, by an estimated amount to be received through salvage and subrogation. The resulting liabilities represent the Company's estimate of the net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates may be affected by the frequency and/or severity of future claims. These estimates are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary.

        The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. While anticipated price increases due to inflation are considered, an increase in average severity of claims may be caused by a number of factors that vary with the individual type of policy written. Future average severity is projected based on historical trends as adjusted for changes in underwriting standards, policy provisions, and general economic trends. These anticipated trends are monitored based on actual developments and are modified as necessary. The Company does not discount its reserves for unpaid losses and LAE.

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        The following table presents, on a GAAP basis, a three-year analysis of losses and LAE, net of ceded reinsurance recoverable, with the net liability reconciled to the gross liability as reported in the Company's financial statements:

        The ceded reinsurance recoverable on paid and unpaid losses and LAE, classified as an asset, includes $39,383, $46,160 and $66,371 at December 31, 2001, 2000 and 1999, respectively, of balances recoverable from the SC Facility, the NC Facility and the NFIP.

        The difference between the year-end net liability for losses and LAE reported in the accompanying consolidated financial statements in accordance with GAAP and that reported in accordance with Statutory Accounting Principles ("SAP") was as follows for the years ended December 31:

35

        The following table reflects the loss and LAE balances and development for 2001 and 2000 on a GAAP basis:

        The following analysis reflects loss and LAE development, net of ceded reinsurance recoverable, for a ten year period for retained business only for year ended December 31 (in millions):

        The preceding table presents the development of balance sheet liabilities on a GAAP basis for 1991 through 2001. The top line of the preceding table shows the initial estimated liability for each accident year. This liability represents the estimated amount of losses and LAE for claims arising in past and current years that are unpaid as of each balance sheet date, including losses that have been incurred but not yet reported. The next portion of the table reflects the cumulative payments made subsequent to and for each of the indicated years as they have developed through time.

36

        In evaluating this information, it should be noted each amount includes the effects of all changes in amounts for prior periods. This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.

        A part of the Company's reserve for losses and LAE is set aside for environmental, pollution, and toxic tort claims. These claims relate to business written by the Company's previously owned West Coast operation prior to 1986. On June 7, 1994, the Company settled a dispute related to approximately 400 of these claims. Any future liability on these claims is limited to 50% of the direct loss and LAE paid. The Company's obligation does not begin until the other company involved in the settled dispute pays, subsequent to the settlement date, a total of $20 million in losses and LAE. As of December 31, 2001 and 2000, $15.0 million and $14.3 million, respectively, of claims payments have been made by the other company since the settlement date.

        Of the remaining environmental, pollution and toxic tort claims, the following activity took place during 2001 and 2000:

        The policies corresponding to these claims were written on a direct basis. The Company has excess of loss reinsurance with company retention through 1980 of $100 and between $250 and $500 thereafter. The claims are reserved as follows as of December 31, 2001 and 2000:

        The claims involve four Superfund sites, eight asbestos or toxic claims, four underground storage tanks and twenty-two miscellaneous clean-up sites. For this direct business there are usually several different insurers participating in the defense and settlement of claims made against the insured. Costs and settlements are pro-rated by either time on the risk or policy limits.

        In estimating the liability for reported and estimated losses and LAE related to environmental and construction defect claims, management considers facts currently known along with current laws and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy and management can reasonably estimate its liability. In exposures on both known and unasserted claims, estimates of the liabilities are reviewed and updated continually. The potential development of losses is restricted by policy limits.

        Because only thirty-eight claims remain open as of December 31, 2001, the exposure to significant additional development is less than when the claims were less mature. In addition, the likelihood of new claims being asserted for construction liability is lessened by the expiration of statutes of limitations since the last policy expired over ten years ago.

37

LIQUIDITY AND CAPITAL RESOURCES

Overview

        Liquidity relates to the Company's ability to produce sufficient cash to fulfill its contractual obligations. In addition to payments for its routine and recurring operating expenses, the Company's principal contractual obligations include the payment of liabilities to its policyholders for unpaid losses, LAE and unearned premiums, the repayment of its Credit Facility, the redemption of its special stock in August 2002, and the future lease payments under its various operating leases. The Company is not party to, or contingently liable for, any off balance sheet financing arrangements or guarantees of any related or unaffiliated third party debt.

        The Company's principal sources of liquidity include the collection of commission and service fees, including substantial amounts received from the NFIP, NC Facility, SC Facility and QualSure; premium collections on insurance policies issued; the collection of policy fees and interest income on insurance policies financed; collections of balances due from its reinsurers; and the collection of net investment income and proceeds received from the sale or maturity of investments. The SC Facility began its planned runoff effective March 1, 1999, at which time no new business was accepted into the SC Facility. Effective October 1, 1999, voluntary renewals were no longer accepted by the SC Facility. However, servicing carriers were able to cede renewals to the SC Facility until March 1, 2002, at which time final runoff of the SC Facility commenced. Though the Company may no longer cede premiums to the SC Facility after March 1, 2002, it is required to adjudicate claims ceded to the SC Facility during the final runoff. The Company's cash outflows can vary greatly because of the uncertainties regarding settlement dates for liabilities for unpaid losses and LAE and because of the potential for large losses. Accordingly, the Company maintains investment and reinsurance programs generally intended to avoid the forced sale of investments to meet claims obligations.

        The Company is a legal entity separate and distinct from its subsidiaries. As a holding company, the primary sources of cash needed to meet its obligations, including the redemption of its special stock and principal and interest payments on its outstanding debt, are dividends and other permitted payments, including management fees, from its subsidiaries and affiliates.

        The Company believes that its existing sources of funds are adequate to enable it to conduct its business as described in this Annual Report on Form 10-K for the foreseeable future.

Sources and Uses of Cash Flows

Operating Activities

        Net cash used in operations was $90 for 2001, compared to net cash used of $13,797 in 2000. Net income for the year ended December 31, 2001 amounted to $4,366 (see "Results of Operations"). Other significant sources of cash include the net collection of reinsurance recoverable on paid and unpaid losses and LAE of $12,965 and the $4,449 reduction in reinsurance premiums prepaid to the Company's reinsurers. As previously discussed, in the second and third quarters of 2000, respectively, the Company announced the discontinuation of its Nashville operations and its withdrawal from the voluntary nonstandard automobile market in South Carolina. As this business continued its runoff during the year ended December 31, 2001, collections on reinsurance recoverable on paid and unpaid losses and LAE outstanding at December 31, 2000 surpassed new recoverables being generated through this business. Similarly, with substantially less business being subjected to reinsurance, the Company experienced a reduction in the level of reinsurance premiums it had to prepay to the reinsurers. Further, effective April 1, 2001, the 70% quota share reinsurance agreement for the Company's commercial lines operations was cancelled at the Company's request. With no quota share reinsurance agreement in place for the entire second quarter of 2001, the Company experienced a net collection of

38

reinsurance recoverable on paid and unpaid losses and LAE and a reduction of reinsurance premiums prepaid under the agreement.

        Another significant source of cash was the $1,592 net decrease in premium notes receivable. As a result of PBP's operating losses and reassessments of its core competencies, the Company entered into a management contract with an unaffiliated company effective June 1, 2001 to manage the operations of PBP. In December 2001, UIC introduced an installment billing program to its insureds and PBP was placed into runoff.

        Significant uses of cash flows from operating activities include reductions in the liability for losses and LAE of $18,958 and the liability for unearned premiums of $3,389. The primary cause of these reductions is the discontinuation of the Company's Nashville operations and its withdrawal from the voluntary nonstandard automobile market in South Carolina. As the Nashville and South Carolina voluntary programs continued runoff during the year ended December 31, 2001, the liabilities for losses and LAE and unearned premiums are being paid down and earned. Partially offsetting the reductions in the liability for losses and LAE and unearned premiums are increases in the liabilities associated with the cancellation of the 70% quota share reinsurance agreement on the Company's commercial lines operations. With no quota share reinsurance agreement in place for the final three quarters of 2001, the Company retained more reserves for losses and LAE and unearned premiums.

        Another significant use of cash was the $1,220 net decrease in balances due other insurance companies. Effective February 19, 2001, the Company resolved certain arbitration claims with Generali-U.S. Branch relating to the Company's acquisition of its Nashville operations. As a result of the settlement, preacquisition liabilities assumed by the Company in the acquisition were discharged in exchange for $1,000 in cash and the issuance of warrants to purchase 75,000 shares of the Company's common stock at $1.00 per share and an additional 75,000 shares of the Company's common stock at $2.00 per share. The resolution and ultimate quantification of these preacquisition liabilities resulted in a special items gain of $5,527, which was recorded in the fourth quarter of 2000.

Investing Activities

        Investing activities for the year ended December 31, 2001 used cash in the amount of $1,346. Net cash expended in the purchase and sale of fixed assets amounted to $581. Approximately $311 of the expenditures related to the purchase of a document imaging system and an upgraded telephone switch, both of which have provided increased policy and claims processing efficiency and customer service effectiveness. The remaining fixed asset purchases related to leasehold improvements associated with the Company's corporate headquarters, which is leased from its majority shareholder and Chairman of the Board of Directors, and the routine replacement of obsolete computer equipment and software. Cash expended in the net acquisition of the Company's debt securities portfolio amounted to $765 for the year ended December 31, 2001, primarily as a result of the Company's net income for the year.

        In its investment strategy, the Company attempts to match the average duration of its investment portfolio with the approximate duration of its liabilities. Total cash and investments at December 31, 2001 and 2000 were $45,874 and $48,707, respectively. All debt securities are considered available for sale and are carried at market value as of December 31, 2001 and 2000. The weighted-average maturity of the fixed income investments as of December 31, 2001 was approximately 2.17 years. Average net investment yields on the Company's cash and investments were 5.2% in 2001 and 5.6% in 2000.

Financing Activities

        Financing activities for the year ended December 31, 2001 used $2,599 as a result of the repayment of debt ($2,438) and the payment of dividends on the Company's special stock ($161).

39

Restrictions on Dividends and Distributions

        Except in limited circumstances, South Carolina and North Carolina insurance laws and regulations require a domestic insurer to report any action authorizing distributions to shareholders and material payments from subsidiaries and affiliates at least 30 days prior to distribution or payment. Additionally, those laws and regulations provide the SCDOI and the NCDOI the right to disapprove and prohibit distributions meeting the definition of an "Extraordinary Dividend" under applicable statutes and regulations.

        The South Carolina Insurance Holding Company Regulatory Act provides that, without prior approval of the Commissioner of Insurance of the State of South Carolina, dividends within any 12-month period may not exceed the greater of (i) 10% of a domestic insurer's surplus as regarding policyholders as shown in the insurer's most recent annual statement or (ii) the net income, not including realized capital gains or losses as shown in the insurer's most recent annual statement. Furthermore, dividends may only be paid out of positive earned surplus unless approved by the Commissioner. As of December 31, 2001, SCIC had an accumulated deficit.

        The North Carolina Insurance Holding Company System Regulatory Act provides that, without prior approval of the Commissioner of Insurance of the State of North Carolina, dividends within any 12-month period may not exceed the lessor of (i) 10% of a domestic insurer's surplus as regarding policyholders as of the preceding December 31 or (ii) the net income, not including realized capital gains, for the 12-month period ending the preceding December 31. For 2002, dividends of approximately $522 are available from UIC to the Company.

        Payment of cash dividends by the Company is at the discretion of its Board of Directors and is based on its earnings, financial condition, capital requirements and other relevant factors. If the ability of the Company's insurance subsidiaries to pay dividends or make other payments to the Company is materially restricted by regulatory or Credit Facility requirements, it could affect the Company's ability to service its debt and special stock and/or pay dividends. In addition, no assurance can be given that North Carolina or South Carolina will not adopt statutory provisions more restrictive than those currently in effect.

        The volume of premiums that the property and casualty insurance subsidiaries may prudently write is based in part on the amount of statutory net worth as determined in accordance with applicable insurance regulations. The NAIC has adopted RBC requirements for property and casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, asset and liability matching, loss reserve adequacy, and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that are potentially inadequately capitalized. Compliance is determined by the ratio of the Company's regulatory total adjusted capital to its company action level RBC (as defined by the NAIC). Companies which fall below the company action level RBC are required to disclose plans to remedy the situation. As of December 31, 2001, all of the insurance subsidiaries have ratios in excess of the level that would prompt regulatory action.

40

TRANSACTIONS WITH RELATED PARTIES

        Effective January 21, 2000, three of the Company's insurance subsidiaries made a combined investment totaling $4,900 in the common stock of QualSure Holding, representing a combined ownership interest of 30.625%. QualSure Holding owns 100% of the issued and outstanding stock of QualSure, a homeowners take out insurance company domiciled in the state of Florida, and QualSure Underwriting Agencies, Inc., an MGA for QualSure. QualSure was formed to take out approximately 44,000 homeowners policies from the Florida Windstorm Underwriting Association and approximately 40,000 homeowners policies from the Florida Residential Property & Casualty Joint Underwriting Association. In connection with this investment, INS entered into a Claims Administration Services Agreement with QualSure to adjudicate all of its claims for a fee based upon subject earned premium. During the fiscal years ended December 31, 2001 and 2000, INS recorded commission and service income of $3,915 and $3,458, respectively, in connection with its Claims Administration Services Agreement with QualSure.

        The Company's majority shareholder and Chairman of the Board of Directors is an owner and operator of SADISCO Corporation ("SADISCO"), a provider of salvage and disposal services for the Company. During the fiscal years ended December 31, 2001, 2000 and 1999, the Company paid a total of $242, $225 and $350, respectively, to SADISCO.

        In December 2000, the Company sold its corporate headquarters to its majority shareholder and Chairman of the Board of Directors for a gain of $1,892. Concurrent with this transaction, the Company leased the property back for a fixed period of three years without an option for renewal. The gain resulting from this transaction was deferred and is being amortized into income evenly over the term of the related leaseback. Included in policy fees and other income for the year ended December 31, 2001 is $631 of amortized gain. Lease expense incurred under this related party lease amounted to $458 and $13 in 2001 and 2000, respectively.

        During the years ended December 31, 2001, 2000 and 1999, the Company paid a total of $61, $110 and $2 to FHI, Inc. ("FHI"), respectively, for services related to the settlement of certain outstanding litigation. A member of the Company's Board of Directors is the owner of FHI. For this Director's personal services related to the settlement of certain outstanding litigation, the Company paid FHI an additional $373 in 2001.

        On March 28, 2002, the Company issued 800,000 shares of $10 par value Adjustable Rate Cumulative Nonvoting Preferred Special Stock to its majority shareholder and Chairman of the Board of Directors for an aggregate purchase price of $8,000. The proceeds from the transaction were used to repay the outstanding balance of the Credit Facility. The Adjustable Rate Cumulative Nonvoting Preferred Special Stock will pay quarterly dividends at an annual adjustable rate of a pre-determined spread over LIBOR.

UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS

        The Company has unused tax operating loss carryforwards and capital loss carryforwards of $103,921 for income tax purposes. However, due to "change in ownership" events that occurred in June 1998, January 1997, and January 1995, the Company's use of the net operating loss carryforwards are subject to maximum limitations in future years of approximately $2,200 per year. Net operating loss carryforwards available for use in 2002 are approximately $12,177 due to losses incurred after the June 1998 change in ownership event occurred and the carryover of previous years' unused limitations. The Company has determined, based on its recent earnings history, that a valuation allowance should be maintained against the deferred tax asset at December 31, 2001 and 2000.

41

SAFE HARBOR STATEMENT UNDER THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

        Some of the statements discussed or incorporated by reference in this annual report on Form 10-K are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding management's current knowledge, expectations, estimates, beliefs and assumptions. All forward-looking statements included in this document or incorporated by reference are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Results may differ materially because of both known and unknown risks and uncertainties which the Company faces. Factors which could cause results to differ materially from our forward-looking statements include, but are not limited to:

•

the possibility that the Company will be unable to meet its cash flow requirements; the Company has suffered losses in recent years and the Company may continue to experience losses in the future;



•

the availability of new or additional sources of financing on acceptable terms to replace existing facilities and satisfy maturing obligations related to the Company's Special Stock;



•

the ability to secure additional sources of revenue;



•

the ability to secure and maintain long-term relationships with customers and agents;



•

the effects of economic conditions and conditions which affect the market for property and casualty insurance, including, but not limited to, interest rate fluctuations and flood zone determination services;



•

the effects and impact of laws, rules and regulations which apply to insurance companies;



•

the effects if estimated reserves for losses and LAE established by the Company are deficient;



•

geographic concentrations of loss exposure, causing revenues and profitability to be subject to prevailing regulatory, demographic and other conditions in the area in which the Company operates;



•

the availability of reinsurance and the ability of the Company's reinsurance arrangements to balance the geographical concentrations of the Company's risks;



•

the impact of competition from new and existing competitors, which competitors may have superior financial and marketing resources than the Company;



•

the continuing impact of the decisions to exit the Nashville and South Carolina nonstandard automobile operations;



•

the risk that current initiatives may not be successful;



•

restrictions on the Company's ability to declare and pay dividends;



•

the fact that the Company has experienced, and can be expected in the future to experience, storm and weather-related losses, which may result in a material adverse effect on the Company's results of operations, financial condition and cash flows;



•

the uncertainty associated with estimating loss reserves, and the adequacy of such reserves, capital resources and other financial items;



•

the costs of defending pending litigation and administrative proceedings and the risk of material adverse outcomes of pending and potential litigation and administrative proceedings involving the Company;

42

•

control of the Company by a principal shareholder, which shareholder has the ability to exert significant influence over the policies and affairs of the Company;



•

risks the Company faces in diversifying the services it offers and entering new markets, including risks associated with the Company's development and deployment of new management information systems to develop and deploy new strategies; and



•

other risk factors listed from time to time in the Company's Securities and Exchange Commission filings.

        Accordingly, there can be no assurance that the actual results will conform to the forward-looking statements discussed or incorporated by reference in this annual report on Form 10-K.

Item 7a. Market Risk

        A substantial portion of the Company's cash and investments is comprised of investments in market-rate sensitive debt securities. The amortized costs and estimated market values of these market-rate sensitive investments as of December 31, 2001 and 2000 are as follows:

        The market values of these investments can fluctuate greatly according to changes in the general level of market interest rates. For example, a one percentage point increase (decrease) in the general level of market interest rates would (decrease) increase the total estimated market value of the Company's debt securities by approximately $(898) and $902, respectively, as of December 31, 2001. In its investment strategy, the Company attempts to match the average duration of its investment portfolio with the approximate duration of its liabilities. All debt securities are considered available for sale and are carried at market value as of December 31, 2001 and 2000. The weighted-average maturity of the fixed income investments as of December 31, 2001 was approximately 2.17 years.

        The Company incurs interest expense on its Credit Facility based upon the LIBOR or the prime interest rate, as described in Note 5 of Item 8 in Part II.

Item 8. Financial Statements and Supplementary data (continued on following page).

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Seibels Bruce Group, Inc.:

        We have audited the accompanying consolidated balance sheets of The Seibels Bruce Group, Inc. (the Parent Company—a South Carolina corporation) and subsidiaries (collectively the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

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

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Seibels Bruce Group, Inc. and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

        Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedules I, II, III, IV, V and VI listed in Part IV, Item 14 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements, and in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Columbia, South Carolina,
March 7, 2002, except for Note 17, as to
        which the date is March 28, 2002.

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

As of December 31,
(Dollars shown in thousands)