SEIBELS BRUCE GROUP INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-K
ANNUAL REPORT

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-8804

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

SOUTH CAROLINA 57-0672136
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)

1501 LADY STREET (P.O. BOX 1) COLUMBIA, S.C. 29201(2)
(Address of principal executive offices) (Zip code)

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)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

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

Indicate by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act. Yes / / No /X/

The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant as of the most recently completed second
fiscal quarter (quotation date of June 28, 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: $18,012,887.

The number of shares outstanding of the registrant's common stock as of
March 10, 2003: 7,831,690.

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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's proxy statement in connection with the annual
meeting of shareholders to be held May 7, 2003 are incorporated by reference
into Part III.

TABLE OF CONTENTS

Table of Contents....................................................... i

Abbreviations........................................................... ii

PART I

Item 1. Business.................................................... 2

Item 2. Properties.................................................. 14

Item 3. Legal Proceedings........................................... 14

Item 4. Submission of Matters to a Vote of Security Holders......... 16

PART II

Item 5. Market for the Registrant's Common Stock and Related
Security Holder Matters................................... 17

Item 6. Selected Financial Data..................................... 18

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19

Item 8. Financial Statements and Supplementary Data................. 55

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 101

PART III

Item 10. Directors, Executive Officers, Promoters and Control Persons
of the Registrant......................................... 102

Item 11. Executive Compensation...................................... 103

Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 104

Item 13. Certain Relationships and Related Transactions.............. 104

Item 14. Controls and Procedures..................................... 104

PART IV

Item 15. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K.................................................. 105

Signatures.............................................................. 109

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ABBREVIATIONS

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

AFS........................ America's Flood Services, Inc.
Catawba.................... Catawba Insurance Company
CAIC....................... Consolidated American Insurance Company
FEMA....................... Federal Emergency Management Administration
GAAP....................... Generally Accepted Accounting Principles
Graward.................... Graward General Companies, Inc.
INS........................ Insurance Network Services, Inc.
JUA........................ Joint Underwriting Association
LAE........................ Loss Adjustment Expenses
MGA........................ Managing General Agent
NC Facility................ North Carolina Reinsurance Facility
NAIC....................... National Association of Insurance Commissioners
NASDAQ..................... National Association of Securities Dealers Automated
Quotation System
NCDOI...................... North Carolina Department of Insurance
NFIP....................... National Flood Insurance Program
Norwest.................... Norwest Financial Resources, Inc.
OTC Bulletin Board......... National Association of Securities Dealers
Over-the-Counter Bulletin Board
PBP........................ Premium Budget Plan, Inc.
Premium.................... Premium Service Corporation of Columbia
QualSure................... QualSure Insurance Corporation
QualSure Holding........... QualSure Holding Corporation
RAD........................ Regulatory Action Division
RBC........................ Risk-Based Capital
SAP........................ Statutory Accounting Principles
The Company................ The Seibels Bruce Group, Inc.
The Hartford............... The Hartford Financial Services Group, Inc.
SBC........................ Seibels, Bruce & Company
SCAAIP..................... South Carolina Associated Auto Insurers Plan
SCDOI...................... South Carolina Department of Insurance
SCIC....................... South Carolina Insurance Company
SC Facility................ South Carolina Reinsurance Facility
SFAS....................... Statement of Financial Accounting Standards
UIC........................ Universal Insurance Company

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PART I

FORWARD LOOKING STATEMENTS

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 Seibels
Bruce Group, Inc. (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 previously incurred net operating losses and
the Company may experience net operating losses in the future;

- 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;

- the continuing impact of the South Carolina Department of Insurance's
Administrative Supervision of South Carolina Insurance Company, Catawba
Insurance Company and Consolidated American Insurance Company;

- the impact of exiting the National Flood Insurance Program;

- the ability to satisfy dividend obligations related to the Company's
Adjustable Rate Cumulative Nonvoting Preferred 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 loss adjustment expenses
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 areas 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, many of which
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;

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- 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 risk of loss of one or more key managing general agent relationships
and the related risk that such agent could not be replaced;

- 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 1. BUSINESS

(dollars in thousands except per share amounts)

CORPORATE PROFILE AND OVERVIEW OF OPERATIONS

Tracing its roots to 1869, 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-based property
and casualty insurance operations and risk-bearing property and casualty
insurance operations. Its fee-based property and casualty insurance operations
include the following:

- CLAIMS ADJUSTING AND MANAGEMENT SERVICES

The Company's premium concentration in the catastrophe-heavy Southeast led
to the creation of its subsidiary, Insurance Network Services, Inc.
("INS"), to manage the Company's internal claims activity. INS has since
grown into a full service claims organization offering an array of
capabilities to the insurance industry, including all-lines claim
handling, automobile appraisals, catastrophe claim adjusting and glass
claim services. INS is an important part of the Company's corporate
structure and can accommodate claims services requests from anywhere in
the United States.

Effective January 21, 2000, three of the Company's insurance subsidiaries
made a combined investment 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., a managing general agent ("MGA")
for QualSure. In connection with this

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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. Effective October 3, 2002, the combined ownership interest
in QualSure Holding was redeemed by QualSure Holding. Under the terms of
the underlying redemption agreement, INS continues to provide claim
administration services to QualSure under an amended contract at a reduced
rate for terms that expire from October 4, 2005 through January 21, 2010.
The most significant component of INS' revenues is the fees earned under
its Claims Administration Services Agreement with QualSure, accounting for
over 56%, 38% and 30% of its total revenues for the years ended
December 31, 2002, 2001 and 2000, respectively.

INS also generates a substantial portion of its income from the loss
adjusting services provided in connection with the South Carolina
Reinsurance Facility ("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. INS' fees earned from the
loss adjusting services provided in connection with the SC Facility
amounted to 6%, 10% and 20% of its total revenues for the years ended
December 31, 2002, 2001 and 2000, respectively.

In the fourth quarter of 2002, the Company undertook a profitability and
viability analysis of each of INS' service lines. As a result, INS has
begun a process of discontinuing certain of its service lines and
eliminating the related expenses. INS' continuing operations are centered
on its Claims Administration Services Agreement with QualSure and
complemented by its network glass claims handling, all-lines claims
administration and catastrophe claims administration services. Though INS'
revenues may be lower in 2003 as compared to 2002, management believes it
will be more profitable as a result of its initiatives.

- NATIONAL FLOOD INSURANCE PROGRAM ("NFIP")

Through its subsidiaries, South Carolina Insurance Company ("SCIC") and
Catawba Insurance Company ("Catawba"), the Company participated in the
NFIP, a flood insurance program administered by the federal government. In
this capacity, SCIC and Catawba were responsible for all aspects of policy
administration over the term of the policies, including underwriting,
processing and statistical reporting, subject to administration guidelines
of the NFIP. The companies were also responsible for all aspects of claims
administration associated with claims reported under the business they
produce. SCIC and Catawba received commission and service income from the
NFIP for these policy and claims administration services, but retained no
underwriting risk on any of the business produced because all of the
premiums and associated losses were fully ceded to the NFIP. These
commissions amounted to approximately 31% of direct premiums written for
policy administration and 3.3% of direct incurred losses for claims
administration.

On September 12, 2002, the Company announced that it had received notice
from the Federal Emergency Management Agency ("FEMA") that FEMA did not
intend to offer SCIC and Catawba a Financial Assistance/Subsidy
Arrangement with the Federal Insurance and Mitigation Administration for
the fiscal year beginning October 1, 2002, effectively terminating their
participation in the NFIP. FEMA's decision was the result of the Order
Imposing Administrative Supervision and Appointing Supervisor (see further
discussion immediately following "Workers' Compensation"). The Company
made numerous attempts to change FEMA's decision, but FEMA would not
reconsider the decision as a result of an unsatisfactory underwriting
operation review of the Company's NFIP policies. Though the Company's
numerous efforts to change FEMA's decision were unsuccessful, it obtained
an extension of the existing arrangement for

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renewal business only through December 31, 2002, at which time the inforce
policies were to be transitioned to the NFIP, or to another carrier in the
NFIP, and the Company's servicing carrier status would be terminated. On
November 15, 2002, the Company received approval from both FEMA and the
South Carolina Department of Insurance ("SCDOI") and then announced that
it had completed a transaction with The Hartford Financial Services
Group, Inc. ("The Hartford") under which The Hartford acquired the right
to renew or assume all of SCIC and Catawba's in-force NFIP business.

- NORTH CAROLINA REINSURANCE FACILITY ("NC FACILITY")

The NC Facility is a state-sponsored plan for assuring the availability of
motor vehicle liability insurance to all North Carolina drivers outside of
the voluntary market. Two of the Company's subsidiaries, SCIC and
Universal Insurance Company ("UIC"), cede business to the NC Facility. In
this capacity, each company is responsible for all aspects of policy
administration over the term of the policies, including underwriting,
processing and statistical reporting, subject to administration guidelines
of the NC Facility. The companies are also responsible for all aspects of
claims administration associated with claims reported under the business
they produce. SCIC and UIC receive commission and service income from the
NC Facility for these policy and claims administration services, but
retain no underwriting risk on any of the business produced because all of
the premiums and associated losses are fully ceded to the NC Facility.
While UIC currently cedes substantially all of its motor vehicle liability
premiums to the NC Facility, SCIC's NC Facility operations have been in
runoff since the third quarter of 2000.

UIC writes nonstandard automobile insurance (principally liability and
physical damage coverages) primarily in the state of North Carolina.
Approximately 57% and 59% of its total direct written premium in 2002 and
2001, respectively, are premiums for liability coverage, substantially all
of which are ceded to the NC Facility. UIC receives underwriting and
claims commissions for the premiums and related claims it cedes to the NC
Facility equal to approximately 27% and 14%, respectively, of premiums
written in the NC Facility.

- SOUTH CAROLINA REINSURANCE FACILITY ("SC FACILITY")

Catawba is one of three servicing carriers for the SC Facility, a
state-sponsored plan for insuring South Carolina drivers outside of the
voluntary market. In its capacity as a servicing carrier, Catawba is
responsible for all aspects of policy administration over the term of the
policies, including underwriting, processing and statistical reporting,
subject to administration guidelines of the SC Facility. Catawba is also
responsible for all aspects of claims administration associated with
claims reported under the business it produces. Catawba receives
commission and service income from the SC Facility for these policy and
claims administration services, but retains no underwriting risk on any of
the business produced because all of the premiums and associated losses
are fully ceded to the SC Facility. These commissions amount to
approximately 11% of premiums written in the SC Facility for policy
administration and approximately 11% of paid losses ceded to the SC
Facility for claims administration. 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 renewal business to the SC Facility until March 1, 2002, at
which time final runoff of the SC Facility commenced. The South Carolina
Associated Automobile Insurers Program (the "SCAAIP") became effective in
March 1999 and survived 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. Effective March 1, 2003,
the SCAAIP began its planned runoff.

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- FLOOD ZONE DETERMINATIONS AND FLOOD ZONE MAPPING TRACKING SERVICES

The Company's subsidiary, America's Flood Services, Inc. ("AFS") offers
flood zone determinations and flood zone mapping services to customers
located throughout the United States. These services are provided
primarily to real estate lenders to determine whether or not homes are
located in flood zones and, therefore, require flood insurance for loan
closing. As a complementary product, AFS also offers flood insurance as an
agent through servicing carriers of the NFIP. As a result, AFS' revenues
can be affected by increasing or decreasing general market interest rates
due to the impact these fluctuations have on the number of new real estate
loans. In recognition of this fact, AFS has been actively working to
expand its agency operations in an effort to balance the cyclical nature
of its flood zone determination and flood mapping services. Commissions
and fees from AFS' flood zone determinations and flood zone mapping
services accounted for approximately 58%, 67% and 86% of its total
revenues during 2002, 2001 and 2000, respectively, while commissions and
fees from its agency operations accounted for approximately 41%, 33% and
11% of its total revenues for the same periods, respectively.

- PREMIUM FINANCING SERVICES

Until December 2001, a substantial portion of UIC's written premium had
traditionally been financed through the Company's premium finance
subsidiary, Premium Budget Plan, Inc. ("PBP"). Under this arrangement, PBP
received interest income from insureds on premiums it financed, as well as
a variety of set up and maintenance fees associated with the related
premium finance contracts. While PBP had proved to be an effective sales
and marketing tool to facilitate premium growth for UIC over the years,
management 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. At December 31, 2002, the runoff of PBP was
substantially complete.

- MANAGING GENERAL AGENCY SERVICES

Effective July 1, 2002, one of the Company's subsidiaries, Seibels,
Bruce & Company ("SBC"), entered into an agreement with a Florida
domiciled insurance company to serve as managing general agent for that
company's low-value dwelling homeowners' insurance program in the state of
Florida until such time as that program is runoff. Runoff began
January 1, 2003; therefore, SBC will not earn significant revenue related
to the agreement after December 31, 2002. In its capacity as managing
general agent, SBC is responsible for policy issuance and administration,
customer service and claims administration. SBC's claims administration
responsibilities are fulfilled through a Claims Administration Services
Agreement with INS.

The Company seeks to balance its fee-based operations with selective risk
underwriting in an effort to increase the Company's value for its shareholders,
agents and employees by pursuing growth with an element of limited risk
exposure. The Company's risk-bearing property and casualty insurance operations
include the following:

- NONSTANDARD AUTOMOBILE

Substantially all of UIC's retained risk nonstandard automobile operations
relate to its physical damage coverage, which are minimum limit policies
partially reinsured through quota share reinsurance agreements. North
Carolina is a "consent to rate" state for physical damage coverage premium
charged by insurance companies. As such, UIC is not required to file its
physical damage coverage premium rates with the North Carolina Department
of Insurance

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("NCDOI") prior to making them effective, as long as those rates are
within statutorily defined limits of rates established by the North
Carolina Rate Bureau. This provides UIC with the ability to quickly
respond to developing trends in its marketplace and the underwriting
results of its operations.

Through its nonowners automobile program, Catawba provides supplemental
automobile insurance coverage policies in South Carolina to employee
drivers of company owned, operated and insured vehicles.

During 2000, the Company discontinued its Nashville operations and placed
all of this business into runoff, resulting in a special items charge to
earnings of $16,365 for the year ended December 31, 2000. For the year
ended December 31, 2002, there were no written premiums associated with
this operation. Furthermore, as of December 31, 2002, only 149 claims with
total net reserves for losses and loss adjustment expenses ("LAE") of
$1,586 remained on this book of business.

In contemplation of the runoff of the SC Facility, the Company introduced
a voluntary nonstandard automobile program in South Carolina during 1997.
In July 2000, the Company concluded that the operation could not generate
profits in the foreseeable future and, therefore, placed the business into
runoff. For the year ended December 31, 2002, there were no written
premiums associated with this operation. Furthermore, as of December 31,
2002, only 64 claims with total net reserves for losses and LAE of $559
remained on this book of business.

- COMMERCIAL LINES

SCIC 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. Under
this program SCIC offered commercial package, business owners and garage
liability policies primarily to small businesses in the states of South
Carolina, North Carolina, Tennessee, Georgia and Kentucky. In April 1999,
Catawba began offering a nonstandard tiered commercial automobile program
in the state of South Carolina to capitalize upon the planned runoff of
the SC Facility. Since that time SCIC and Catawba have capitalized on the
long-standing relationships of their commercial lines agents and benefited
from the experience of its qualified underwriters.

- WORKERS' COMPENSATION

Effective January 1, 2002, the Company, through SCIC and Consolidated
American Insurance Company ("CAIC"), issued two workers' compensation
insurance master policies to Human Dynamics Corporation ("HDC") and
included as named insureds Infinet Holdings, Inc. and HDC Financial
Services Corporation (collectively with HDC, the "HDC Group"). Significant
matters related to these policies were litigated and mediated (see Item 3.
Legal Proceedings). Pursuant to proceedings of the Arizona Superior Court,
it was ordered that the HDC workers' compensation program (the "HDC
Program") is to function as a large deductible workers' compensation
program with HDC being responsible for all losses and LAE of the program
up to $1,000 per occurrence (the "deductible"). Coverage for losses and
LAE in excess of the deductible is provided by the Company, subject to its
reinsurance for losses and LAE of $15,000 in excess of $5,000 per
occurrence.

On August 21, 2002, the SCDOI issued an Order Imposing Administrative
Supervision and Appointing Supervisor (the "Order") that placed SCIC, Catawba
and CAIC under administrative supervision for at least six months as a result of
the disputes associated with the HDC Program of SCIC and CAIC. Provisions of the
Order provided for SCIC, Catawba and CAIC to immediately cease writing
risk-bearing business and for SCIC and CAIC to immediately cease renewal of
existing risk-bearing business. On August 23, 2002, SCIC and Catawba submitted
to the SCDOI a request to

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permit Catawba (1) to continue to write its existing risk-bearing business and
(2) to renew, in all states in which Catawba is also licensed, the risk-bearing
commercial lines business previously written through SCIC. On September 4, 2002,
the SCDOI notified Catawba that this request had been approved (the "Approval").
The Approval permits Catawba to continue to write new and renewal premiums in
its risk-bearing automobile business and allows it to renew the risk-bearing
commercial lines business previously written through SCIC in the states of South
Carolina, Georgia and Tennessee. A subsequent request of, and approval from, the
SCDOI and the Georgia Department of Insurance permits Catawba to also write new
commercial lines business in South Carolina and Georgia. On September 12, 2002,
SCIC and UIC submitted to the North Carolina Department of Insurance (the
"NCDOI") a request to permit UIC to renew the risk-bearing commercial lines
business previously written through SCIC in the state of North Carolina. This
request was granted on November 25, 2002, and UIC subsequently began renewing
the North Carolina commercial lines business of SCIC. The only other state in
which SCIC wrote risk-bearing commercial lines business is Kentucky. Catawba's
application to the Kentucky Department of Insurance to write this business was
withdrawn and this business is being runoff. The Order had a negative impact on
the Company's operations during the third and fourth quarters of 2002 (see
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations). The Company cannot reasonably estimate the effects of the Order
on its future operations.

The Company's fee-based property and casualty insurance operations and
risk-bearing property and casualty insurance operations discussed above are
reported under the following segments:

- AUTOMOBILE

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

- FLOOD

The Flood segment contains the fee-based NFIP operations of SCIC and
Catawba, the fee-based flood zone determinations and flood zone mapping
services of AFS, and the fee-based flood insurance agency operations of
AFS.

- COMMERCIAL

The Commercial segment includes the runoff retained risk commercial
operations of SCIC, the retained risk commercial operations of Catawba and
UIC, and the fee-based commercial automobile activity for the NC Facility
and SC Facility.

- ADJUSTING SERVICES

The Adjusting Services segment contains all of the fee-based operations of
INS.

- ALL OTHER

The All Other segment contains the runoff risk-bearing environmental and
general liability operations from the 1980's, primarily written in the
state of California. The segment also includes the Company's runoff
risk-bearing workers' compensation operations primarily written in the
state of Florida in the early 1990's. Approximately 68% and 66% of the
Company's total net reserves for losses and LAE at December 31, 2002 and
2001, respectively, relate to these long tail runoff operations.

The All Other segment also contains the runoff risk-bearing workers'
compensation program written by SCIC and CAIC through the HDC Group and
the fee-based managing general agency services of SBC. The workers'
compensation program written by SCIC and CAIC through the HDC Group was
effective January 1, 2002 and terminated December 31, 2002. The

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fee-based managing general agency services of SBC began July 1, 2002 and
entered into runoff effective December 31, 2002.

Financial information about the Company's business segments is set forth in
Item 7 of this Form 10-K and in Note 13 to the consolidated financial statements
included in this Form 10-K.

The Company's operations as it enters 2003 are substantially different than
they were when it entered 2002. As a result of the SCDOI Order and the sale of
its NFIP book of business, the runoff of its managing general agent operations,
the final runoff of the SC Facility and the SCAAIP, and the loss of its
commercial lines business in the state of Kentucky, the Company has been forced
to scale back its operations accordingly and is exploring opportunities for
additional sources of revenue:

- On January 20, 2003 Catawba requested permission from the SCDOI to begin
writing a new risk-bearing nonstandard automobile program in the state of
South Carolina. The SCDOI approved Catawba's request on February 6, 2003.
The new program is expected to be implemented in the second quarter of
2003 and is expected to generate approximately $2,000 in direct written
premium during 2003.

- On January 20, 2003 Catawba requested permission from the SCDOI to begin
writing a new risk-bearing homeowners program in the state of South
Carolina. The SCDOI approved Catawba's request on February 6, 2003. The
new program is expected to be effective in the third quarter of 2003 but
is not expected to have a significant impact on the Company's operations
in 2003.

- On March 7, 2003 UIC requested permission from the NCDOI to write new
fee-based commercial automobile business through the NC Facility. This
request is currently pending.

- UIC plans to submit a request to the NCDOI in the second quarter of 2003
to allow it to begin writing new commercial lines risk-bearing business in
the state of North Carolina.

Though the Company believes it can successfully implement each of the above
initiatives and develop a presence in the South Carolina nonstandard automobile
and homeowners markets, as well as recover its market share in the North
Carolina commercial lines market, no guaranty can be provided as to their
success. Therefore, the Company also believes it is very important to place
heavy emphasis on maintaining or growing its continuing operations from 2002:
the risk-bearing nonstandard automobile and nonowners operations of UIC (North
Carolina) and Catawba (South Carolina), respectively; the risk-bearing
commercial lines operations of UIC (North Carolina) and Catawba (South Carolina,
Georgia, and Tennessee); UIC's fee-based NC Facility operations (North
Carolina); and the multi state fee-based operations of INS and AFS.

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.

From December 31, 1999 through June 30, 2002, UIC reinsured its physical
damage coverage through 75% quota share reinsurance agreements with unaffiliated
reinsurers. Effective July 1, 2002, the 75% quota share reinsurance agreement
was replaced with a 60% quota share reinsurance agreement. Quota share
reinsurance is designed to increase a company's capacity to write new and
renewal business. Under its 60% quota share reinsurance agreement, UIC cedes 60%
of its risk-bearing premiums, net of a ceding commission, as well as 60% of its
incurred losses, to the reinsurer. The

8

agreement provides for a loss corridor between 69% and 80% in which UIC retains
all risk of loss. The reinsurer accepts 60% of the incurred losses above 80%.

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.

In connection with the workers' compensation program written by SCIC and
CAIC through the HDC Group, SCIC and CAIC are party to catastrophe excess of
loss reinsurance agreements that provide coverage amounting to $15,000 in excess
of $5,000 per occurrence. In addition, as a large deductible workers'
compensation program, estimated deductibles recoverable from the insured have
reduced the Company's direct reserves for losses and LAE. The Company, in
consultation with its consulting actuary, has estimated that the deductibles
recoverable from the insured may be as much as $9,800 as of December 31, 2002.
Approximately $4,300 of these recoverables has been collateralized as of the
filing of this document as a result of various Court proceedings related to the
program.

The Company has issued a substantial number of automobile and flood
insurance policies for, and fully reinsured 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
applicable governmental agency's backing and/or ability to assess policyholders
and member companies for deficiencies.

INVESTMENTS 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:

The Company's investment in debt securities are considered
available-for-sale securities and reported at fair value at December 31, 2002
and 2001.

At December 31, 2001, the Company's equity securities consisted of its
investments in Sunshine State Holding Corporation ("Sunshine State") and
QualSure Holding. During 1997, the Company invested $854 in Sunshine for an
ownership interest of 21.49%. Sunshine owns 100% of the issued and outstanding
stock of Sunshine State Insurance Company, a Florida-based writer of homeowners
insurance. Effective January 21, 2000, three of the Company's insurance
subsidiaries collectively acquired a 30.625% equity ownership interest in
QualSure Holding for $4,900. QualSure Holding is the holding company parent of
QualSure, a homeowners take-out insurance company domiciled in the State of
Florida. As each of these equity investments exceeds 20% of the equity of each
respective

9

company, the Company's equity in the undistributed earnings of the
unconsolidated affiliates, using the equity method, are included in current
earnings.

Effective October 3, 2002, the Company's ownership interest in QualSure
Holding, with a carrying value of $4,143, was redeemed by QualSure Holding for
$4,775.

At December 31, 2001, the Company owned 32,676 shares of common stock of
Insurance Services Offices, Inc. ("ISO") which it had received in 1997 as a
result of ISO converting from a mutual organization to a stock company. Since
the equity security received in connection with the conversion was not
marketable, the Company had historically valued the investment at cost ($0). In
February 2002, ISO offered, and the Company accepted, to repurchase the
Company's shares of ISO for a price of $64.80 per share, resulting in a realized
investment gain of $2,117.

Short-term investments are carried at cost, which approximates fair value.

The weighting of the Company's overall cash and investments shifted towards
cash and short-term investments as of December 31, 2002, as compared to
December 31, 2001 as a result of the redemption of the Company's investment in
QualSure and the sale of the renewal rights to its NFIP book of business to The
Hartford. These transactions provided cash totaling $8,575 in the fourth quarter
of 2002, a substantial portion of which had not been invested in longer term
securities as of December 31, 2002.

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

- ------------------------

(1) Average of the aggregate invested amounts reported as of January 1,
March 31, June 30, September 30, and December 31 as reported in the
Company's applicable Forms 10-Q and 10-K.

Declining levels of general market interest rates over the last 24 months
have had a significant negative impact on the Company's average yield. Further,
the shift in weighting of the Company's overall cash and investments towards
lower yielding cash and short-term investments as of December 31, 2002, as
compared to December 31, 2001 had a negative impact on the Company's average
yield.

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.

10

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, SCIC, Catawba and CAIC, are domiciled in the
state of South Carolina and are principally regulated by the SCDOI. UIC is
domiciled in the state of North Carolina and is principally regulated by the
NCDOI.

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 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, CAIC and Catawba, as of December 31, 1998 was completed in
December 1999 with no material findings. An examination by the NCDOI of UIC as
of December 31, 2000 was completed in September 2002 with no material findings.
During 2002, the SCDOI has performed targeted examination procedures and has
informed the Company that it will conduct an examination of SCIC, CAIC and
Catawba as of December 31, 2002 beginning in 2003. In addition, the NCDOI has
notified the Company that it will conduct a limited market conduct examination
of SCIC in August 2003.

Effective January 1, 2001, both the NCDOI and the SCDOI 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.

On August 21, 2002, the SCDOI issued an Order Imposing Administrative
Supervision and Appointing Supervisor that placed SCIC, Catawba and CAIC under
administrative supervision for at least six months as a result of the disputes
associated with the HDC Program of SCIC and CAIC. Provisions of the Order
provided for SCIC, Catawba and CAIC to immediately cease writing risk-bearing
business and for SCIC and CAIC to immediately cease renewal of existing
risk-bearing business. On August 23, 2002, SCIC and Catawba submitted to the
SCDOI a request to permit Catawba (1) to continue to write its existing
risk-bearing business and (2) to renew, in all states in which Catawba is also
licensed, the risk-bearing commercial lines business previously written through
SCIC. On September 4, 2002, the SCDOI notified Catawba that this request had
been approved. The Approval permits Catawba to continue to write new and renewal
premiums in its risk-bearing automobile business and allows it to renew the
risk-bearing commercial lines business previously written through SCIC in the
states of South Carolina, Georgia and Tennessee. A subsequent request of, and
approval from, the SCDOI and the Georgia Department of Insurance permits Catawba
to also write new commercial lines business in South Carolina and Georgia. On
September 12, 2002, SCIC and UIC submitted to the NCDOI a request to permit UIC
to renew the risk-bearing commercial lines business previously written through
SCIC in the state of North Carolina. This request was granted on November 25,
2002, and UIC subsequently began renewing the North Carolina commercial lines
business of SCIC. The only other state in which SCIC wrote risk-bearing
commercial lines business is Kentucky. Catawba's application to the Kentucky
Department of Insurance to write this business was withdrawn and this business
is being runoff.

NAIC GUIDELINES. The National Association of Insurance Commissioners
("NAIC") has adopted Risk-Based Capital ("RBC") requirements for property and
casualty insurance companies to evaluate

11

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, 2002, 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. See
Item 5 of this Form 10-K for a discussion of regulatory restrictions on the
payment of dividends and other payments from insurance subsidiaries.

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 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.

SC FACILITY. The SC Facility is an unincorporated, non-profit
administrative state-sponsored plan for insuring South Carolina drivers outside
of the voluntary market. The SC Facility provided 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 was required to participate in 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 renewal business to the SC
Facility until March 1, 2002, at which time final runoff of the SC Facility
commenced. The SCAAIP became effective in March 1999 and survived the SC
Facility. Effective March 1, 2003, the SCAAIP began its planned runoff.

NFIP. FEMA's Federal Insurance and Mitigation 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 name of FEMA, 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 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 higher ratings by A.M. Best. As
a result of the Order, SCIC, CAIC and Catawba are currently rated "E--Under
Regulatory Supervision" by A.M. Best. UIC currently has been assigned a rating
of "C+--Marginal" by 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

12

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. Further, diversity of product offerings may be a meaningful
factor in maintaining an advantage over competitors. Many of the Company's
competitors offer a broader array of products and services and may, therefore,
hold a competitive advantage.

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. The nonowners automobile market in South Carolina is a limited market
with limited possibilities for significant increases in market share. While this
business is somewhat price sensitive, customer service and agent relations are
more crucial in maintaining market share.

FLOOD PROGRAM. With respect to the continuing flood operations of AFS,
factors influencing the choice of a competitor over AFS include pricing,
automation of the flood zone determination process, service and size and
financial resources of competitors relative to AFS. AFS' flood zone
determination and flood insurance agency operations are not marketed toward
larger financial institutions and insurance agencies, but rather are focused on
small to medium sized operations. This niche that AFS has developed serves to
reduce the amount of competitive pressures faced by AFS from larger competitors
that may have greater financial resources than AFS.

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, 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.

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,
with the continuing runoff of the SC Facility, INS' revenues are concentrated in
its Claims Administration Services Agreement with QualSure. The loss of this
agreement would have a material adverse impact on the operations of the
Adjusting Services segment. The ideal method of growth within INS is to obtain
similar contracts with other insurance carriers. However, such opportunities are
very infrequent and typically are associated with equity or some other type of
investment in the customer. Many of INS' competitors have greater financial
resources to quickly capitalize on such opportunities as they arise.

13

EMPLOYEES

At December 31, 2002, the Company and its subsidiaries employed a total of
264 employees. The Company believes that its relationship with its employees is
good.

ITEM 2. PROPERTIES

The Columbia, South Carolina headquarters, containing approximately 125,000
square feet, is owned by Charles H. Powers, the Company's majority shareholder,
Chairman of the Board of Directors and Chief Executive Officer, and leased by
the Company through 2003 for the property and casualty insurance and claims
operations of SCIC, CAIC, Catawba and INS, as well as the managing general agent
operations of SBC. The Winston-Salem, North Carolina office is the base for the
operations of UIC and PBP. 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 May 2005.
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

(dollars in thousands)

(a) Litigation was initiated in the United States District Court for the
Middle District of Florida, Tampa Division in November 2001 by QualSure, 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 owned 30.625% of the stock of QualSure until
October 3, 2002. Effective October 3, 2002, the ownership interest in QualSure
held by SCIC, Catawba and CAIC was redeemed by QualSure. A condition of the
redemption was that the litigation would be dismissed with prejudice. On
October 17, 2002, the litigation was dismissed with prejudice.

(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 being filed in July 2002. 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. AFS has filed a third-party claim against DeBroux Marketing Co.
("DeBroux") for fraud and indemnity stemming from DeBroux's transmission of the
faxes at issue. Settlement discussions are ongoing, but the Company does not
believe final resolution of the litigation will have a material impact on its
financial statements.

(c) Litigation was initiated in the Maricopa County Superior Court, State of
Arizona on March 25, 2002 by Du Pre Insurance Services, Inc., a California
corporation, Infinet Holdings, Inc., an Arizona corporation, Human Dynamics
Corporation, a California corporation and HDC Financial Services Corporation, an
Arizona corporation. The litigation names as defendants the Company, SCIC and
CAIC. Effective January 1, 2002, the Company, through SCIC and CAIC, issued two
workers' compensation insurance master policies to HDC and included as named
insureds Infinet and HDC Financial (collectively, the "HDC Group"). The HDC
Group is a professional employment organization. SCIC and CAIC did not obtain
the approval of the SCDOI prior to issuing the master policies and, therefore,
subsequently canceled them. Litigation was initiated in the Superior Court of
the State of Arizona on March 25, 2002 by the HDC Group against the Company,
alleging that the Company wrongfully terminated workers compensation coverage,
breached its implied duty of good

14

faith and fair dealing by unilaterally rescinding HDC's workers compensation
coverage and that the Company breached its contract with the HDC Group to
provide workers compensation coverage. HDC claims its entitlement to punitive
damages in an unspecified amount. On July 9, 2002, an Arizona Superior Court
Judge ruled that the policies are in effect from January 1, 2002 through
December 31, 2002. The Company intends to appeal the decision.

In September 2002, the Company and the HDC Group mediated several outstanding
issues which resulted in an Interim Agreement between the parties that was
approved by the Court in October 2002. In accordance with the court-approved
Interim Agreement, the HDC Group is responsible for funding all losses of the
HDC 2002 workers' compensation program. Reinsurance coverage for the HDC Program
was obtained on October 21, 2002 effective for losses incurred between
January 1, 2002 and December 31, 2002 and amounting to $15,000 in excess of
$5,000 per occurrence. The Company, upon receiving approval from the SCDOI,
elected to retain the risk for losses amounting to $4,000 in excess of $1,000
per occurrence for premiums prescribed in the court-approved Interim Agreement.
In addition, the Company received or is to receive fees equal to 4% of collected
premium equivalents under the HDC Program as well as reimbursement for actual
boards, bureaus, assessments and premium taxes incurred for the insurance
policies. All premiums not remitted to the reinsurers or to the Company were
retained by the HDC Group.

In subsequent Court proceedings it was ordered that the HDC Program is to
function as a large deductible workers' compensation program with HDC being
responsible for all losses and LAE of the program up to $1,000 per occurrence
(the "deductible"). Coverage for losses and LAE in excess of the deductible is
provided by the Company, subject to its reinsurance for losses and LAE of
$15,000 in excess of $5,000 per occurrence. The Court has ordered HDC to retain
an independent actuary to estimate the unpaid losses and LAE of the HDC Program,
subject to the deductible, as of December 31, 2002, and has ordered HDC to
deposit funds in an equivalent amount in a Court-restricted commercial checking
account to serve as the funds from which losses of the HDC Program are to be
paid. The actuary retained by HDC has issued a report estimating HDC's liability
for the deductibles to be $4,300 as of December 31, 2002 and HDC has deposited
funds totaling $4,300 into a Court-restricted commercial checking account to
serve as the funds from which losses are to be paid. Pursuant to the court
order, the Company has retained an actuary to review the work of the actuary
retained by HDC. The actuary retained by the Company has raised questions
regarding aspects of the methodology used by the actuary retained by HDC and has
not received a response to those questions. The Company, in consultation with
its consulting actuary, has estimated that HDC's liability for the deductibles
may be as much as $9,800 as of December 31, 2002. Whether the actuaries will be
able to agree on an amount representing HDC's estimated liability for the
deductibles at December 31, 2002 cannot be determined at this time.

With respect to punitive damages claimed by HDC, the Company intends to
vigorously defend this matter and is considering filing a counterclaim. The
ultimate outcome of this litigation cannot be reasonably determined at this
time.

(d) On August 21, 2002, the SCDOI issued the Order that placed SCIC, Catawba
and CAIC under administrative supervision for at least six months as a result of
the disputes associated with the HDC Program of SCIC and CAIC. Provisions of the
Order provided for SCIC, Catawba and CAIC to immediately cease writing
risk-bearing business and for SCIC and CAIC to immediately cease renewal of
existing risk-bearing business. On August 23, 2002, SCIC and Catawba submitted
to the SCDOI a request to permit Catawba (1) to continue to write its existing
risk-bearing business and (2) to renew, in all states in which Catawba is also
licensed, the risk-bearing commercial lines business previously written through
SCIC. On September 4, 2002, the SCDOI notified Catawba that this request had
been approved. The Approval permits Catawba to continue to write new and renewal
premiums in its risk-bearing automobile business and allows it to renew the
risk-bearing commercial lines business previously written through SCIC in the
states of South Carolina, Georgia and Tennessee. A subsequent

15

request of, and approval from, the SCDOI and the Georgia Department of Insurance
permits Catawba to also write new commercial lines business in South Carolina
and Georgia. On September 12, 2002, SCIC and UIC submitted to the NCDOI a
request to permit UIC to renew the risk-bearing commercial lines business
previously written through SCIC in the state of North Carolina. This request was
granted on November 25, 2002, and UIC subsequently began renewing the North
Carolina commercial lines business of SCIC. The only other state in which SCIC
wrote risk-bearing commercial lines business is Kentucky. Catawba's application
to the Kentucky Department of Insurance to write this business was withdrawn and
this business is being runoff.

(e) 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 2002.

16

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS

(dollars in thousands except per share amounts)

(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." The following table sets forth the range of high and
low closing bid prices as reported on the OTC Bulletin Board. Such bid prices
represent inter-dealer quotations, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions. On March 10,
2003 the last reported bid price of the Company's common stock on the OTC
Bulletin Board was $1.50 per share.

(b) Holders

There were approximately 3,939 shareholders of record as of March 10, 2003.

(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 lease payments on its corporate headquarters and the dividend payments
associated with the Adjustable Rate Cumulative Nonvoting Preferred Special Stock
held by its majority shareholder, Chairman of the Board of Directors and Chief
Executive Officer, 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. 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.

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.

17

The South Carolina Insurance Holding Company Regulatory Act requires that
all non-extraordinary dividends be approved by the SCDOI prior to payment.
Extraordinary dividends are defined as dividends within a 12-month period that
exceed the lesser of (i) 10% of an insurer's surplus as regards policyholders as
shown in the insurer's most recent Annual Statement, or (ii) net income, not
including realized capital gains or losses, as shown in the insurer's most
recent Annual Statement. Extraordinary dividends must be approved by the
Commissioner of the SCDOI, or his designee, prior to payment.

The North Carolina Insurance Holding Company System Regulatory Act allows
payment of non-extraordinary dividends without prior approval of the
Commissioner of the NCDOI provided that, in the Commissioner's judgment, the
dividends do not impair the financial soundness of the company or are not
detrimental to its policyholders. Extraordinary dividends are defined as
dividends within a 12-month period that exceed the lesser of (i) 10% of an
insurer's surplus as regards policyholders as of the preceding December 31, or
(ii) net income, not including realized capital gains, for the 12-month period
ending the preceding December 31. In determining whether a dividend or
distribution is extraordinary, an insurer other than a life insurer may carry
forward net income from the previous two calendar years that has not already
been paid out as dividends. Extraordinary dividends must be approved by the
Commissioner of the NCDOI prior to payment.

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 requirements, it could affect the Company's
ability to service its Adjustable Rate Cumulative Nonvoting Preferred 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.

At December 31, 2001 and during a portion of 2002, the Company had 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. These
obligations paid quarterly dividends at an annual rate of $0.625 per share and
$0.62 per share, respectively. The Company paid a total of $101, $161 and $168
in dividends on these obligations in 2002, 2001 and 2000, respectively. Each
issue of the Special Stock was redeemed on August 15, 2002 for cash.

On March 28, 2002, the Company issued 800,000 shares of Adjustable Rate
Cumulative Nonvoting Preferred Special Stock to its majority shareholder,
Chairman of the Board of Directors and Chief Executive Officer in a transaction
exempt from registration under Section 4(2) of the Securities Act of 1933, as
amended, and Regulation D promulgated thereunder. The Adjustable Rate Cumulative
Nonvoting Preferred Special Stock is nonconvertible and nonredeemable and pays
quarterly dividends at an annual adjustable rate of 3.5% plus LIBOR (4.9% at
December 31, 2002). The Company paid $329 in dividends related to this
obligation in 2002.

(d) Equity Compensation Plan Information

The information required by Item 201(d) of Regulation S-K is set forth in
Item 12 of this Form 10-K.

ITEM 6. SELECTED FINANCIAL DATA

(dollars in thousands except per share amounts)

The following selected historical financial data for each of the five years
ended December 31 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

18

Operations (Item 7) and the consolidated financial statements and accompanying
notes (Item 8) included elsewhere herein.

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

(dollars in thousands except per share amounts)

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.

19

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 reasonable under
the circumstances, the results of which form the basis for making judgments
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:

VALUATION OF INVESTMENTS

The Company's debt securities are reported at fair values in the
consolidated balance sheets. Fair values are generally based on quoted market
prices. The impact of changes in the reported values of the Company's debt
securities is recorded through accumulated other comprehensive income, a
separate component of shareholders' equity.

At December 31, 2002, the Company's equity securities consist of its
investments in Sunshine State, representing an ownership interest of 21.49%. As
the investment exceeds 20% of Sunshine State's equity, the Company's equity in
the undistributed earnings of the unconsolidated affiliate, using the equity
method, are included in current earnings.

If any decline in value of an investment is considered to be other than
temporary, a write down of the investment through a charge to current earnings
is required. Factors the Company considers in evaluating whether a decline in
value is other than temporary include: 1) the Company's intent and ability to
hold the investment long enough to allow for an expected recovery in value;
2) the duration and extent to which the fair value has been less than cost; and
3) the financial condition, operating environment and forecasted operations of
the issuer.

ASSET VALUATION RESERVES AND IMPAIRMENT

The Company routinely evaluates the collectability of its agents' balances
receivable and premium notes receivable based upon historical aging analyses,
past experience, and known economic trends or conditions and has established
reserves for estimated uncollectable accounts amounting to $2,681 and $3,763 at
December 31, 2002 and 2001, respectively, representing 43.2% and 37.5%,
respectively, of gross agents' balances receivable and premium notes receivable.
The large reserve estimate is a direct result of the continuing runoff of the
Company's Nashville operation begun in June 2000, the runoff of its premium
finance operation begun in December 2001, and UIC's retention of receivables
previously financed. Though the Company believes its current estimated
allowances for doubtful accounts are adequate and not excessive, it is possible
that the accuracy of the estimation process could be materially impacted as
current economic trends or conditions change or develop.

The Company has recorded reinsurance recoverables on paid and unpaid losses
and LAE amounting to $38,075 and $51,078 at December 31, 2002 and 2001,
respectively, from a variety of reinsurers. 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. Therefore, the Company
routinely evaluates the collectability of these recoverables by monitoring the
financial condition of the reinsurer, primarily through the use of A.M. Best
ratings and reports. For recoverables from the SC Facility, the NC Facility and
the NFIP, aggregating to $29,690 and $39,383 at December 31, 2002 and 2001,
respectively, the Company believes that any collections risk is mitigated due to
each governmental

20

agency's backing and/or ability to assess policyholders and member companies for
funding deficiencies. For recoverables from all other reinsurers, the Company
has no reason to believe that the amounts will not be recovered in full.

In accordance with the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets," goodwill and intangible assets with indefinite useful lives
are no longer subject to periodic amortization. Rather they are subject to
impairment tests that are required to be performed on at least an annual basis.
These impairment tests require, among other things, the estimation of a fair
market value of reporting units associated with a company's goodwill. The
Company has unamortized goodwill totaling $4,513 associated with its
November 1997 and March 1998 purchases of The Innovative Company (former 100%
owner of UIC and PBP) and AFS, respectively. In estimating the fair value of
these business units, the Company employs both an income-based approach and a
market-based approach. Significant judgments and estimates involved in this
estimation process include forecasts of future sustainable operations, the
selection of appropriate discount rates and the identification of appropriate
comparable companies and multiples of earnings.

DEFERRED POLICY ACQUISITION COSTS

The Company defers costs that are attributable to, and vary with, the
production of insurance premiums to the extent that these costs are considered
recoverable from future profits. These deferred policy acquisition costs (DPAC)
amounted to $1,168 and $1,200 at December 31, 2002 and 2001, respectively, and
are being amortized into income evenly over the life of the underlying insurance
contracts. Periodic recoverability tests, including estimates of sustainable
loss and operating expense ratios, are performed on the DPAC and estimated
unrecoverable amounts are charged to earnings during the period in which they
are deemed unrecoverable.

PROPERTY AND CASUALTY UNPAID LOSSES AND LAE

The Company's 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.

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

(5) Estimated losses for reinsurance assumed.

Management, in conjunction with the Company's consulting actuary, performs a
complete review of the Company's recorded reserves for unpaid losses and LAE to
evaluate the adequacy of such reserves. Management believes the reserves, which
approximate the amount determined by independent actuarial reviews, are
adequate. However, establishing reserves is an estimation process and the
ultimate liability may be in excess of or less than the amount recorded. Changes
in estimated loss reserves are recorded in the year so determined. For example,
for the years ended December 31, 2002, 2001 and 2000, the Company experienced
development in its December 31, 2001, 2000 and 1999 unpaid losses and LAE of
$970, $23, and $2,355, respectively. The development was recorded during the
years ended December 31, 2002, 2001 and 2000, the periods in which the
development was determined.

Premiums and losses of the HDC Program are recorded on the books of SCIC and
CAIC as direct insurance activity and ceded as applicable to reinsurers. SCIC
and CAIC, in consultation with their consulting actuary, have established
reserves for estimated unpaid losses and LAE, including estimates

21

of incurred but not reported claims. Except for the layer of losses retained by
SCIC and CAIC ($4,000 in excess of $1,000 per occurrence), changes in the
estimated liability for losses and LAE for the program are not expected to have
a net impact on SCIC and CAIC results of operations. The estimated recoveries
under this program related to the first $1,000 per occurrence, and reinsurance
recoverable related to $15,000 in excess of $5,000 per occurrence, are expected
to vary by the same amount as any change in the estimated reserves for losses
and LAE in those layers, offsetting any impact on operations. Due to limited
historical loss experience for the population of insureds participating in the
HDC Program, estimates of the liability for losses and LAE and the related
deductibles and reinsurance recoverable may vary significantly from amounts
recorded at December 31, 2002. Additionally, estimated deductibles recoverable
from the insured have reduced the Company's direct reserves for losses and LAE.
The Company, in consultation with its consulting actuary, has estimated that the
deductibles recoverable from the insured may be as much as $9,800 as of
December 31, 2002. Approximately $4,300 of these recoverables has been
collateralized as of the filing of this document as a result of various Court
proceedings related to the program.

LEGAL CONTINGENCIES

The Company is party to significant litigation with respect to the HDC
Program. The ultimate outcome of this litigation cannot be reasonably determined
at this time.

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. 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.

INCOME TAXES

Over the last 10 to 15 years the Company has generated substantial net
operating losses, which have resulted in sizeable federal tax operating loss
carryforwards and capital loss carryforwards of $92,198. 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 lack of consistent earnings, the Company has placed a
full valuation reserve against its net deferred tax asset at December 31, 2002
and 2001. Subsequent revisions to the net realizable 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.

REVENUE DEFERRAL

One of AFS' product offerings is a "life of loan" flood zone determination
whereby AFS agrees to update the zoning status of the subject property
throughout the life of the original underlying loan. Therefore, AFS defers a
portion of the revenues associated with this product and amortizes it into
income over the estimated life of the original underlying loan. Significant
estimates AFS must make in determining the estimated annual amortization of this
deferred revenue include rates of loan amortization and loan prepayment. Loan
prepayment rates are materially impacted by the general level of mortgage
interest rates. For example, higher loan prepayment rates will be experienced
during periods of falling mortgage interest rates and lower prepayment rates
will be experienced during periods of rising mortgage interest rates. The higher
the loan prepayment rate, the faster AFS' deferred revenues will amortize into
income.

22

Under its Claims Administration Services Agreements with QualSure Holding
and similar agreements with other customers, INS records service income and fees
over the period in which the claims adjusting, file management and settlement
services are performed. The most significant estimate INS must make in recording
this income is the settlement status of individual claims within the monthly
total portfolio of reported claims for each month in which fees were received.
Simply stated, the faster INS is able to close these claims, the faster its
deferred revenue will be amortized into income.

Included in other liabilities and deferred items as of December 31, 2002 and
2001 is $1,046 and $368, respectively, of deferred revenue for services to be
performed in the future.

On November 15, 2002, the Company received approval from both FEMA and the
SCDOI and then announced that it had completed a transaction with The Hartford
under which The Hartford acquired the right to renew or assume all of SCIC and
Catawba's in-force NFIP business. The purchase price of the renewal rights was
$3,800 in cash at closing, plus up to $1,000 to be paid on November 15, 2003, if
certain retention thresholds on the book of business are achieved. Provisions of
the underlying sales agreement, as approved by FEMA, provide that The Hartford
administer and report the Company's business to the NFIP over the transition
period that ends September 30, 2003. As a result of the Company's continuing
involvement with the book of business during the transition period, the gain on
the transaction of $3,499 (purchase price of $3,800 less expenses of sale of
$301) has been deferred and will be recognized evenly over the transition
period. It is uncertain whether the Company will meet the retention thresholds
to qualify for the additional $1,000. Any such additional amounts will only be
reflected in revenue if and when the retention thresholds and related
requirements are achieved. Included in other liabilities and deferred items as
of December 31, 2002 is $3,149 of deferred revenue associated with this
transaction.

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 judgment
in their application. There are also areas in which management's judgment 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.

23

OVERVIEW

The Company conducts its business in two primary categories, fee-based
property and casualty insurance operations and risk-bearing property and
casualty insurance operations, and reports its operations through five distinct
business segments. Following is a summary of the Company's reporting segments
with indications of whether the supporting operating segments are risk-bearing
or fee-based operations, whether the supporting operating segments are ongoing
operations or in runoff, and the supporting operating segment's total revenues
in 2002, 2001 and 2000:

- --------------------------

(1) At December 31, 2001, the Company owned 32,676 shares of common stock of ISO
which it had received in 1997 as a result of ISO converting from a mutual
organization to a stock company. Since the equity security received in
connection with the conversion was not marketable, the Company had
historically valued the investment at cost ($0). In February 2002, ISO
offered, and the Company accepted, to repurchase the Company's shares for a
price of $64.80 per share, resulting in a realized investment gain of $2,117
allocated as follows:

Nashville and SC automobile................................. $1,191
Commercial operations....................................... 807
UIC nonstandard automobile.................................. 119
------
$2,117
======

(2) Includes SCIC's commercial operations in the state of Kentucky, which is
currently in runoff. Direct premiums earned by SCIC in the state of Kentucky
amounted to $2,471, $1,968 and $1,812 in 2002, 2001, and 2000, respectively.

(3) The Company is the beneficiary of several key man life insurance policies
maintained on certain former directors or officers of the Company. During
the three months ended June 30, 2002, the Company recorded a gain on the
settlement of one of these policies of $294.

24

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

AUTOMOBILE

The Automobile segment includes UIC's retained risk nonstandard automobile
and runoff premium finance operations, Catawba's retained risk nonowners
automobile program, the runoff of the Company's retained risk 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.
Approximately 57% and 59% of its total direct written premium in 2002 and 2001,
respectively, are premiums for liability coverage, substantially all of which
are ceded to the NC Facility. The NC Facility is a state-sponsored plan for
assuring the availability of motor vehicle liability insurance to all North
Carolina drivers outside of the voluntary market. UIC derives commission and
service income from the NC Facility for writing and administering the premiums
and servicing the related claims, but it retains no underwriting risk. UIC
receives underwriting and claims commissions for the premiums and related claims
it cedes to the NC Facility equal to approximately 27% and 14%, respectively, of
premiums written in the NC Facility.

Substantially all of UIC's retained risk nonstandard automobile operations
relate to its physical damage coverage, which are minimum limit policies
partially reinsured through quota share reinsurance agreements. From
December 31, 1999 through June 30, 2002, UIC reinsured its physical damage
coverage through 75% quota share reinsurance agreements with unaffiliated
reinsurers. Effective July 1, 2002, the 75% quota share reinsurance agreement
was replaced with a 60% quota share reinsurance agreement. North Carolina is a
"consent to rate" state for physical damage coverage premium charged by
insurance companies. As such, UIC is not required to file its physical damage
coverage premium rates with the NCDOI prior to making them effective, as long as
those rates are within statutorily defined limits of rates established by the
North Carolina Rate Bureau. This provides UIC with the ability to quickly
respond to developing trends in its marketplace and the underwriting results of
its operations.

A substantial portion of UIC's written premium has traditionally been
financed through the Company's premium finance subsidiary, PBP. Under this
arrangement, PBP received interest income from insureds on premiums it financed,
as well as a variety of set up and maintenance fees associated with the related
premium finance contracts. While PBP had proved to be an effective sales and
marketing tool to facilitate premium growth for UIC over the years, management
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

25

through a number of unaffiliated premium finance companies. At December 31, 2002
the runoff of PBP was substantially complete.

NONOWNERS AUTOMOBILE PROGRAM

Through its nonowners automobile program, Catawba provides supplemental
automobile insurance coverage policies in South Carolina to employee drivers of
company owned, operated and insured vehicles. The nonowners automobile market in
South Carolina is a limited market with limited possibilities for significant
increases in market share. While this business is somewhat price sensitive,
customer service and agent relations are more crucial in maintaining market
share.

NASHVILLE AND SOUTH CAROLINA AUTOMOBILE OPERATIONS

During 2000, the Company discontinued its Nashville operations and placed
all of this business into runoff, resulting in a special items charge to
earnings of $16,365 for the year ended December 31, 2000. For the year ended
December 31, 2002 there were no written premiums associated with this operation.
Furthermore, as of December 31, 2002 only 149 claims with total net reserves for
losses and LAE of $1,586 remained on this book of business.

In contemplation of the runoff of the SC Facility, the Company introduced a
voluntary nonstandard automobile program in South Carolina during 1997. In
July 2000, the Company concluded that the operation could not generate profits
in the foreseeable future and, therefore, placed the business into runoff. For
the year ended December 31, 2002 there were no written premiums associated with
this operation. Furthermore, as of December 31, 2002 only 64 claims with total
net reserves for losses and LAE of $559 remained on this book of business.

All of the revenues reported for these operations for the year ended
December 31, 2002 result from allocated realized gain from the sale of the
Company's equity investment in ISO and allocated investment income associated
with the operation's portfolio of outstanding losses and LAE.

SC FACILITY AND SCAAIP OPERATIONS

Catawba is one of three servicing carriers for the SC Facility, a
state-sponsored plan for insuring South Carolina drivers outside of the
voluntary market. In its capacity as a servicing carrier, Catawba receives
commission and service income from the SC Facility for writing and administering
the premiums and servicing the related claims, but retains no underwriting risk
because all of the premiums and losses are fully ceded to the SC Facility. These
commissions amount to approximately 11% of premiums written in the SC Facility
for policy administration and approximately 11% of paid losses ceded to the SC
Facility for claims administration. 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 renewal
business to the SC Facility until March 1, 2002, at which time final runoff of
the SC Facility commenced. The SCAAIP became effective in March 1999 and
survived 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. Effective March 1, 2003, the SCAAIP began its planned runoff.

FLOOD

The Flood segment contains the runoff fee-based NFIP operations of SCIC and
Catawba, the fee-based flood zone determinations and flood zone mapping services
of AFS, and the fee-based flood insurance agency operations of AFS.

26

NFIP

Through SCIC and Catawba, the Company participated in the NFIP, a flood
insurance program administered by the federal government. In this capacity, SCIC
and Catawba received commissions and service income from the NFIP for writing
and administering the premiums and servicing the related claims, but retained no
underwriting risk because all of the premiums and losses were fully ceded to the
NFIP. These commissions amount to approximately 32% (during 2002) and 31%
(during 2001) of direct premiums written for policy administration and 3.3% of
direct incurred losses for claims administration.

During 2002 and 2001, the Company's NFIP written premium 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 geographic expansion and the introduction of new
technology to its agency force, including internet-based policy rating and flood
zone determination services. As a result of its premium growth and the retention
of its NFIP book of business, the Company received marketing bonuses from the
NFIP of $615 and $553 in March 2002 and 2001, respectively.

On September 12, 2002, the Company announced that it had received notice
from FEMA that FEMA did not intend to offer SCIC and Catawba a Financial
Assistance/Subsidy Arrangement with the Federal Insurance and Mitigation
Administration for the fiscal year beginning October 1, 2002, effectively
terminating their participation in the NFIP. FEMA's decision was the result of
the Order Imposing Administrative Supervision and Appointing Supervisor. The
Company made numerous attempts to change FEMA's decision, but FEMA would not
reconsider the decision as a result of an unsatisfactory underwriting operation
review of the Company's NFIP policies. Though the Company's numerous efforts to
change FEMA's decision were unsuccessful, it obtained an extension of the
existing arrangement for renewal business only through December 31, 2002, at
which time the inforce policies were to be transitioned to the NFIP, or to
another carrier in the NFIP, and the Company's servicing carrier status would be
terminated. On November 15, 2002, the Company received approval from both FEMA
and the SCDOI and then announced that it had completed a transaction with The
Hartford under which The Hartford acquired the right to renew or assume all of
SCIC and Catawba's in-force NFIP business. The purchase price of the renewal
rights was $3,800 in cash at closing, plus up to $1,000 to be paid on
November 15, 2003, if certain retention thresholds on the book of business are
achieved. Provisions of the underlying sales agreement, as approved by FEMA,
provide that The Hartford administer and report the Company's business to the
NFIP over the transition period that ends September 30, 2003. As a result of the
Company's continuing involvement with the book of business during the transition
period, the gain on the transaction of $3,499 (purchase price of $3,800 less
expenses of sale of $301) has been deferred and will be recognized evenly over
the transition period. It is uncertain whether the Company will meet the
retention thresholds to qualify for the additional $1,000. Any such additional
amounts will only be reflected in revenue if and when the retention thresholds
and related requirements are achieved.

FLOOD ZONE DETERMINATIONS AND FLOOD ZONE MAPPING TRACKING SERVICES

The Company's subsidiary, AFS offers flood zone determinations and flood
zone mapping services to customers located throughout the United States. These
services are provided primarily to real estate lenders to determine whether or
not homes are located in flood zones and, therefore, require flood insurance for
loan closing. As a complementary product, AFS also offers flood insurance as an
agent through servicing carriers of the NFIP. As a result, AFS' revenues can be
affected by increasing or decreasing general market interest rates due to the
impact these fluctuations have on the number of new real estate loans. In
recognition of this fact, AFS has been actively working to expand its agency
operations in an effort to balance the cyclical nature of its flood zone
determination and flood mapping services. Commissions and fees from AFS' flood
zone determinations and flood zone mapping services

27

accounted for approximately 58%, 67% and 86% of its total revenues during 2002,
2001 and 2000, respectively, while commissions and fees from its agency
operations accounted for approximately 41%, 33% and 11% of its total revenues
for the same periods, respectively.

One of AFS' product offerings is a "life of loan" flood zone determination
whereby AFS agrees to update the zoning status of the subject property
throughout the life of the original underlying loan. Therefore, AFS defers a
portion of the revenues associated with this product and amortizes it into
income over the estimated life of the original underlying loan. As of and for
the year ended December 31, 2002, AFS has deferred approximately $500 of
revenues associated with its "life of loan" product offering.

COMMERCIAL

The Commercial segment includes the runoff retained risk commercial
operations of SCIC, the retained risk commercial operations of Catawba and UIC,
and the fee-based commercial automobile activity for the NC Facility and SC
Facility.

SCIC 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. Under this program SCIC
offers commercial package, business owners and garage liability policies
primarily to small businesses in the states of South Carolina, North Carolina,
Tennessee, Georgia and Kentucky. In April 1999, Catawba began offering a
nonstandard tiered commercial automobile program in the state of South Carolina
to capitalize upon the planned runoff of the SC Facility. Since that time SCIC
and Catawba have capitalized on the long-standing relationships of their
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.

On August 21, 2002, the SCDOI issued an Order Imposing Administrative
Supervision and Appointing Supervisor that placed SCIC, Catawba and CAIC under
administrative supervision for at least six months as a result of the disputes
associated with the HDC Program of SCIC and CAIC. Provisions of the Order
provided for SCIC, Catawba and CAIC to immediately cease writing risk-bearing
business and for SCIC and CAIC to immediately cease renewal of existing
risk-bearing business. On August 23, 2002, SCIC and Catawba submitted to the
SCDOI a request to permit Catawba (1) to continue to write its existing
risk-bearing business (the nonowners automobile program) and (2) to renew, in
all states in which Catawba is also licensed, the risk-bearing commercial lines
business previously written through SCIC. On September 4, 2002, the SCDOI
notified Catawba that this request had been approved. The Approval permits
Catawba to continue to write new and renewal premiums in its risk-bearing
automobile business and allows it to renew the risk-bearing commercial lines
business previously written through SCIC in the states of South Carolina,
Georgia and Tennessee. A subsequent request of, and approval from, the SCDOI and
the Georgia Department of Insurance permits Catawba to also write new commercial
lines business in South Carolina and Georgia. On September 12, 2002, SCIC and
UIC submitted to the NCDOI a request to permit UIC to renew the risk-bearing
commercial lines business previously written through SCIC in the state of North
Carolina. This request was granted on November 25, 2002 and UIC subsequently
began renewing the North Carolina commercial lines business of SCIC. The only
other state in which SCIC wrote risk-bearing commercial lines business is
Kentucky. Catawba's application to the Kentucky Department of Insurance to write
this business was withdrawn and this business is being runoff. The Order had a
negative impact

28

on the Company's operations during the third and fourth quarters of 2002 (see
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations). The Company cannot reasonably estimate the effects of the Order
on its future operations.

ADJUSTING SERVICES

The Adjusting Services segment contains all of the fee-based operations of
INS. 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 premium concentration
in the catastrophe-heavy Southeast led to the creation of this subsidiary to
manage the Company's internal claims activity. Currently, INS is a full service
claims organization offering an array of capabilities to the insurance industry,
including all-lines claim handling, automobile appraisals, catastrophe claim
adjusting and glass claim services. INS is an important part of the Company's
corporate structure and can accommodate claims services requests from anywhere
in the United States.

Effective January 21, 2000, three of the Company's insurance subsidiaries
made a combined investment 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. 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.
Effective October 3, 2002, the combined ownership interest in QualSure Holding
was redeemed by QualSure Holding. Under the terms of the underlying redemption
agreement, INS continues to provide claim administration services to QualSure
under an amended contract at a reduced rate for terms that expire from
October 4, 2005 through January 21, 2010. The most significant component of INS'
revenues is the fees earned under its Claims Administration Services Agreement
with QualSure, accounting for over 56%, 38% and 30% of its total revenues for
the years ended December 31, 2002, 2001 and 2000, respectively.

INS also generates a substantial portion of its income from 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. INS' fees earned from the loss
adjusting services provided in connection with the SC Facility amounted to 6%,
10% and 20% of its total revenues for the years ended December 31, 2002, 2001
and 2000, respectively.

In the fourth quarter of 2002, the Company undertook a profitability and
viability analysis of each of INS' service lines. As a result, INS has begun a
process of discontinuing certain of its service lines and eliminating the
related expenses. INS' continuing operations are centered on its Claims
Administration Services Agreement with QualSure and complemented by its network
glass claims handling, all-lines claims administration and catastrophe claims
administration services. Though INS' revenues may be lower in 2003 as compared
to 2002, management believes it will be more profitable as a result of its
initiatives.

ALL OTHER

The All Other segment contains the runoff risk-bearing environmental and
general liability operations from the 1980's, primarily written in the state of
California. The segment also includes the Company's runoff risk-bearing workers'
compensation operations primarily written in the state of Florida in the early
1990's.

29

The All Other segment also contains the runoff risk-bearing workers'
compensation program written by SCIC and CAIC through the HDC Group and the
fee-based managing general agency services of SBC. The workers' compensation
program written by SCIC and CAIC through the HDC Group was effective January 1,
2002 and terminated December 31, 2002. The fee-based managing general agency
services of SBC began July 1, 2002 and entered into runoff effective
December 31, 2002.

RUNOFF ENVIRONMENTAL, GENERAL LIABILITY AND WORKERS COMPENSATION

The Company continues to maintain reserves and pay significant claims with
respect to these runoff operations, which have resulted in substantial losses to
the Company over the past 15 years. During 2002, the Company experienced
significant development related to these reserves amounting to approximately
$1,272. The development resulted from a sharp increase in the trend of new
claims associated with this business alleging that the Company was liable for
damages. Though the Company was found not to be liable in all cases, the LAE
incurred in connection with defending the Company, as well as the strengthening
of LAE reserves as a result of the change in trends, resulted in substantial
adverse development during 2002. Approximately 68% and 66% of the Company's
total net reserves for losses and LAE at December 31, 2002 and 2001,
respectively, relate to these long tail runoff operations.

HDC PROGRAM

Effective January 1, 2002, the Company, through SCIC and CAIC, issued two
workers' compensation insurance master policies to the HDC Group. The HDC Group
is a professional employment organization. SCIC and CAIC did not obtain the
approval of the SCDOI prior to issuing the master policies and, therefore,
subsequently canceled them. Litigation was initiated in the Superior Court of
the State of Arizona on March 25, 2002 by the HDC Group against the Company,
alleging that the Company wrongfully terminated workers compensation coverage,
breached its implied duty of good faith and fair dealing by unilaterally
rescinding HDC's workers compensation coverage and that the Company breached its
contract with the HDC Group to provide workers compensation coverage. HDC claims
its entitlement to punitive damages in an unspecified amount. On July 9, 2002,
an Arizona Superior Court Judge ruled that the policies are in effect from
January 1, 2002 through December 31, 2002. The Company intends to appeal the
decision.

In September 2002, the Company and the HDC Group mediated several
outstanding issues which resulted in an Interim Agreement between the parties
that was approved by the Court in October 2002. In accordance with the
court-approved Interim Agreement, the HDC Group is responsible for funding all
losses of the HDC 2002 workers' compensation program. Reinsurance coverage for
the HDC Program was obtained on October 21, 2002 effective for losses incurred
between January 1, 2002 and December 31, 2002 and amounting to $15,000 in excess
of $5,000 per occurrence. The Company, upon receiving approval from the SCDOI,
elected to retain the risk for losses amounting to $4,000 in excess of $1,000
per occurrence for premiums prescribed in the court-approved Interim Agreement.
In addition, the Company received or is to receive fees equal to 4% of collected
premium equivalents under the HDC Program as well as reimbursement for actual
boards, bureaus, assessments and premium taxes incurred for the insurance
policies. All premiums not remitted to the reinsurers or to the Company were
retained by the HDC Group.

In subsequent Court proceedings it was ordered that the HDC Program is to
function as a large deductible workers' compensation program with HDC being
responsible for all losses and LAE of the program up to $1,000 per occurrence
(the "deductible"). Coverage for losses and LAE in excess of the deductible is
provided by the Company, subject to its reinsurance for losses and LAE of
$15,000 in excess of $5,000 per occurrence. The Court has ordered HDC to retain
an independent actuary to estimate the unpaid losses and LAE of the HDC Program,
subject to the deductible, as of

30

December 31, 2002, and has ordered HDC to deposit funds in an equivalent amount
in a Court-restricted commercial checking account to serve as the funds from
which losses of the HDC Program are to be paid. The actuary retained by HDC has
issued a report estimating HDC's liability for the deductibles to be $4,300 as
of December 31, 2002 and HDC has deposited funds totaling $4,300 into a
Court-restricted commercial checking account to serve as the funds from which
losses are to be paid. Pursuant to the court order, the Company has retained an
actuary to review the work of the actuary retained by HDC. The actuary retained
by the Company has raised questions regarding aspects of the methodology used by
the actuary retained by HDC and has not received a response to those questions.
The Company, in consultation with its consulting actuary, has estimated that
HDC's liability for the deductibles may be as much as $9,800 as of December 31,
2002. Whether the actuaries will be able to agree on an amount representing
HDC's estimated liability for the deductibles at December 31, 2002 cannot be
determined at this time.

A summary of the impact of the HDC Program on the Company as of and for the
year ended December 31, 2002 is as follows:

Income Statement:
Direct written and earned premium......................... $1,544
Ceded written and earned premium.......................... (964)
------
Net earned premium...................................... 580
Net incurred losses and loss adjusting expenses........... (580)
Fee income................................................ 802
------
Net results............................................. $ 802
======
Balance Sheet:
Receivable from HDC (Other assets)*....................... $ 94
======
Reserves: Losses and LAE.................................. $ 580
======
Accrued Liabilities: Premium taxes........................ $ 65
Boards, bureaus and assessments.......... 33
------
Total accrued liabilities................ $ 98
======

- ------------------------

* Net of $4 previously paid.

HDC reported that it collected $20,054 in premium equivalents and that it
paid losses amounting to $1,292 under its 2002 program. All reserve and accrual
amounts are management's best estimates of ultimate liability at this time and
these estimates are subject to change as more information becomes available.
Estimated reserves for losses and LAE for claims arising under the HDC Program
have been established by the Company net of the deductible that HDC is required
to pay under order of the Court. The Company has a potential off-balance sheet
credit risk associated with such deductibles if the Company were required to
fund the deductibles in the event that HDC cannot pay the deductible.

MANAGING GENERAL AGENT SERVICES

Effective July 1, 2002, one of the Company's subsidiaries, SBC, entered into
an agreement with a Florida domiciled insurance company to serve as managing
general agent for that company's low-value dwelling homeowners' insurance
program in the state of Florida until such time as that program is runoff.
Runoff began January 1, 2003; therefore, SBC will not earn significant revenue
related to the agreement after December 31, 2002. In its capacity as managing
general agent, SBC is responsible for policy issuance and administration,
customer service and claims administration. SBC's claims

31

administration responsibilities are fulfilled through a Claims Administration
Services Agreement with INS.

OUTLOOK

The Company's operations as it enters 2003 are substantially different than
they were when it entered 2002. As a result of the SCDOI Order and the sale of
the renewal rights to its NFIP book of business, the runoff of its managing
general agent operations, the final runoff of the SC Facility and the SCAAIP,
and the loss of its commercial lines business in the state of Kentucky, the
Company has been forced to scale back its operations accordingly and is
exploring opportunities for additional sources of revenue:

- On January 20, 2003 Catawba requested permission from the SCDOI to begin
writing a new risk-bearing nonstandard automobile program in the state of
South Carolina. The SCDOI approved Catawba's request on February 6, 2003.
The new program is expected to be implemented in the second quarter of
2003 and is expected to generate approximately $2,000 in direct written
premium during 2003.

- On January 20, 2003 Catawba requested permission from the SCDOI to begin
writing a new risk-bearing homeowners program in the state of South
Carolina. The SCDOI approved Catawba's request on February 6, 2003. The
new program is expected to be effective in the third quarter of 2003 but
is not expected to have a significant impact on the Company's operations
in 2003.

- On March 7, 2003 UIC requested permission from the NCDOI to write new
fee-based commercial automobile business through the NC Facility. This
request is currently pending.

- UIC plans to submit a request to the NCDOI in the second quarter of 2003
to allow it to begin writing new commercial lines risk-bearing business in
the state of North Carolina.

Though the Company believes it can successfully implement each of the above
initiatives and develop a presence in the South Carolina nonstandard automobile
and homeowners markets, as well as recover its market share in the North
Carolina commercial lines market, no guaranty can be provided as to their
success. Therefore, the Company also believes it is very important to place
heavy emphasis on maintaining or growing its continuing operations from 2002:
the risk-bearing nonstandard automobile and nonowners operations of UIC (North
Carolina) and Catawba (South Carolina), respectively; the risk-bearing
commercial lines operations of UIC (North Carolina) and Catawba (South Carolina,
Georgia, and Tennessee); UIC's fee-based NC Facility operations (North
Carolina); and the multi state fee-based operations of INS and AFS.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2002 AND 2001

COMMISSION AND SERVICE INCOME

Commission and service income decreased $2,419 or 6.7%, to $33,853 for the
year ended December 31, 2002 from $36,272 for the year ended December 31, 2001.
The automobile segment accounted for a decrease of $3,235, reporting commission
and service income of $6,854 for the year ended December 31, 2002, versus
$10,089 for the same period of 2001. The decrease is substantially the result of
the continuing runoff of the SC Facility, which has been in runoff since
March 1, 1999 but began its final stage of runoff effective March 1, 2002.
Commission and service income generated through the SC Facility and the related
SCAAIP amounted to $1,075 for the year ended December 31, 2002 and $3,146 for
the year ended December 31, 2001, a decrease of $2,071. The operations of the
Company's North Carolina domiciled subsidiary, UIC, accounted for another $1,164
decrease in

32

commission and service income, resulting entirely from business ceded to the NC
Facility. The decrease is primarily the result of pricing and other competitive
initiatives effected by certain of UIC's competitors in an effort to increase
premium volume, the effects of which were intensified as a result of the SCDOI's
order placing UIC's affiliates, SCIC, Catawba and CAIC, under administrative
supervision. UIC generally does not engage in pricing competitions with its
competitors. Rather, UIC relies on its superior customer service, long standing
agency relationships and proven commitment to the North Carolina marketplace to
maintain or grow its premium volume.

Commission and service income for the adjusting services segment was $7,233
for the year ended December 31, 2002, versus $8,435 for the same period of 2001,
a decrease of $1,202. The SC Facility began its planned runoff effective
March 1, 1999 and entered its final state of runoff effective March 1, 2002.
Commission and service income generated from the SC Facility amounted to $454
and $1,065 for the years ended December 31, 2002 and 2001, respectively, a
decrease of $611. Another $614 of the overall net decrease related to decreased
commissions associated with the continuing runoff of claims associated with the
Company's Nashville and South Carolina automobile programs, which began runoff
in the second and third quarters of 2000. Another $405 of the overall net
decrease resulted from INS' catastrophe claims operation, primarily as a result
of a less active catastrophe season across the nation during 2002 as compared to
2001. In addition, that operation experienced some turnover in key management
early in the third quarter of 2002, resulting in the loss of certain customers.
Partially offsetting these decreases in commission and service income was an
increase of $693 related to INS' Claims Administration Services agreement with
QualSure. Under this agreement, INS administers the claims of QualSure for a fee
based upon subject earned premium. QualSure's premium volume has been increasing
throughout 2002 as compared to 2001. The remaining net decrease of $265 came
from all other activities of the adjusting services segment and is reflective of
the Company's profitability and viability analysis of each of INS' service
lines. As a result, INS has begun a process of discontinuing certain of its
service lines and eliminating the related expenses. INS' continuing operations
are centered on its Claims Administration Services Agreement with QualSure and
complemented by its network glass claims handling, all-lines claims
administration and catastrophe claims administration services.

The commercial segment accounted for a further decrease of $222, reporting
commission and service income of $467 for the year ended December 31, 2002,
versus $689 for the same period of 2001. The decrease is substantially
attributable to the continuing runoff of the SC Facility. No commission and
service income was earned through the SC Facility for the year ended
December 31, 2002 as compared to the $318 that was earned for the same period of
2001. Partially offsetting this decrease was a $96 increase in commission and
service income earned through the NC Facility as a result of increased premiums
ceded to the NC Facility for the year ended December 31, 2002 as compared to the
same period of 2001. 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 was
allowed to renew existing risk-bearing commercial business at its discretion,
the only new commercial business permitted was that which would be ceded to the
NC Facility. The mandate was issued as a result of the deteriorated financial
condition of SCIC that resulted from the discontinuation of the Company's
Nashville operations in the second quarter of 2000. Until the SCDOI Order issued
in August 2002, SCIC had been recovering portions of its NC Facility book lost
during 2001 and the last six months of 2000.

Commission and service income for the flood segment was $17,152 for the year
ended December 31, 2002, versus $16,984 for the same period of 2001, an increase
of $168. The NFIP operations component of the flood segment accounted for $542
of the overall increase, reporting commission and service income of $15,035 for
the year ended December 31, 2002 and $14,493 for the same period of 2001.
Throughout 2001 and continuing through the nine months ended September 30, 2002,
the Company's NFIP written premium demonstrated significant growth, due
primarily to obtaining several large books of flood business from independent
insurance agents across the United

33

States. This was facilitated by geographic expansion and the introduction of new
technology to its agency force, including internet-based policy rating and flood
zone determination services. Through September 30, 2002, as compared to the same
period of 2001, the Company's NFIP written premium had increased $1,730. During
the fourth quarter of 2002, however, the Company's NFIP written premium
decreased substantially over the same period of 2001 as a result of FEMA's
decision not to offer SCIC and Catawba a Financial Assistance/Subsidy
Arrangement with the Federal Insurance and Mitigation Administration for the
fiscal year beginning October 1, 2002 and the Company's subsequent transaction
with The Hartford under which The Hartford acquired the renewal rights to the
Company's NFIP business. As a result, the Company's NFIP written premium for the
years ended December 31, 2002 and 2001 amounted to $44,603 and $44,724,
respectively. Though the Company's NFIP written premium was somewhat constant
between years, the operation experienced increased commission and service income
as a result of the higher commission rate in effect for the entire year of 2002.
Further, as a result of its premium growth and the retention of its NFIP book of
business, the Company received marketing bonuses from the NFIP of $615 in
March 2002 and $553 in March 2001, an increase of $62. Largely offsetting the
NFIP operation's increase in commission and service income was the decrease
reported by AFS. For the year ended December 31, 2002, AFS reported commission
and service income of $2,117, a decrease of $374 over the $2,491 reported for
the same period of 2001. AFS actually experienced continued growth in volume
during 2002 as a result of increased volume stemming from continually declining
mortgage interest rates. However, AFS must defer a portion of the revenues
associated with its "life of loan" product offering and amortize it into income
over the estimated life of the original underlying loan. As of and for the year
ended December 31, 2002, AFS' deferred approximately $500 of revenues.

Commission and service income reported by the all other segment was $2,147
and $75 for the years ended December 31, 2002 and 2001, respectively, an
increase of $2,072. Approximately $1,349 of the overall increase resulted from
the MGA operations of SBC that began in July 2002. This program began runoff
effective December 31, 2002 and will not have a material impact on the Company's
future results of operations. An additional $802 of the overall increase
resulted from the fees earned under the HDC Program that was effective
January 1, 2002. This program ended December 31, 2002 and will not be a
recurring source of revenue for the Company. The remaining $79 decrease in
commission and service income reported by the all other segment came from all of
the segment's other runoff operations.

PROPERTY AND CASUALTY PREMIUMS EARNED

Net premiums earned increased $1,228, or 8.5%, to $15,661 for the year ended
December 31, 2002 from $14,433 for the year ended December 31, 2001. Premiums
earned by the commercial segment amounted to $9,290 for the year ended
December 31, 2002 as compared to the 7,379 earned for the same period of 2001,
an increase of $1,911. As a result of the issuance of the SCDOI Order, the
Company lost portions of its commercial lines book of business in the states of
South Carolina, North Carolina, Georgia and Tennessee and is running off its
complete commercial lines book of business in the state of Kentucky. Direct
premiums written for the years ended December 31, 2002 and 2001 amounted to
$11,870 and $12,578, respectively, a decrease of 5.6%. As a result of a
decreasing premium volume, the unearned premium reserve is amortizing into
income more rapidly than it is being increased by new and renewal writings.
Further contributing to the commercial segment's increase in premiums earned,
though to a much lesser extent, was the positive effect of retaining a larger
portion of its commercial operations during the first quarter of 2002 as
compared to the same period of 2001. From April 1, 2000 through March 31, 2001,
the Company's commercial lines were reinsured primarily through a 70% quota
share reinsurance agreement. Effective April 1, 2001, the agreement was
cancelled at the Company's request to capitalize upon the favorable underwriting
results of the commercial book of business.

Premiums earned reported by the all other segment was $606 and $49 for the
years ended December 31, 2002 and 2001, respectively, an increase of $557.
Approximately $580 the overall increase resulted from the premiums earned under
the HDC Program that was effective January 1, 2002. Direct premiums written and
earned under the HDC Program amounted to $1,544 and ceded premiums written and
earned amounted to $964 for the year ended December 31, 2002. This program ended
December 31, 2002 and will not be a recurring source of revenue for the Company.
The remaining $23 decrease in premiums earned reported by the all other segment
came from all of the segment's other runoff operations.

34

The automobile segment accounted for a decrease of $1,240, reporting
premiums earned of $5,764 for the year ended December 31, 2002 as compared to
$7,004 for the same period of 2001. The overall decrease primarily resulted from
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, 2002
amounted to $8, a decrease of $1,665 over the $1,673 earned for the same period
of 2001. Second, premiums earned through the nonstandard automobile risk-bearing
operations of Catawba amounted to $774 and $1,049 for the years ended
December 31, 2002 and 2001, respectively, a decrease of $275 that resulted from
business lost as a result of the SCDOI's Order placing Catawba under
administrative supervision. Third, premiums earned by UIC amounted to $4,929 for
the year ended December 31, 2002 versus $4,393 for the same period of 2001, an
increase of $536. As previously discussed, UIC experienced a marked decrease in
premium volume for the year ended December 31, 2002 as compared to the same
period of 2001 primarily as a result of pricing and other competitive
initiatives effected by certain of UIC's competitors. However, since
approximately 57% of UIC's automobile premium volume for the year was ceded to
the NC Facility the decreasing premium volume did not have as dramatic an impact
on premiums earned. More than offsetting the decrease in premiums earned
resulting from a decrease in premium volume was the effect of a change in UIC's
reinsurance program. From December 31, 1999 until July 1, 2002, UIC's
retained-risk automobile business had been subject to a 75% quota share
reinsurance agreement. Effective July 1, 2002, the existing 75% quota share
reinsurance agreement was canceled in favor of a 60% quota share reinsurance
agreement. Retaining more premium under the new quota share reinsurance
agreement had a favorable impact on UIC's premiums earned for the year ended
December 31, 2002. The remaining $164 increase in premiums earned by the
automobile segment came from business the Company is required to assume from the
SC Facility and mostly was assumed in the first and second quarters of 2002.

NET INVESTMENT INCOME

Net investment income decreased $317, or 12.7%, to $2,183 for the year ended
December 31, 2002 from $2,500 for the year ended December 31, 2001. The
principal cause of the decrease was the continually decreasing general level of
market interest rates. For the year ended December 31, 2002, the Company's
investment portfolio yielded an average return of 4.6%, a deterioration over the
5.2% averaged for the same period of 2001. Though the Company's cash and
invested asset base increased substantially between December 31, 2001 and
December 31, 2002, the majority of the increase occurred in the fourth quarter
of 2002 and has been retained in lower yielding commercial paper investments
until quality long-term investments could be located.

OTHER INTEREST INCOME, NET

Net other interest income decreased $1,342 or 95.8%, to $59 for the year
ended December 31, 2002 from $1,401 for the year ended December 31, 2001. The
decrease is substantially due to a reduction in UIC premiums financed through
PBP as a result of the implementation of UIC's installment billing program. A
substantial portion of UIC's written premium has traditionally been financed
through the Company's premium finance subsidiary, PBP. PBP received interest
income from insureds on premiums it financed, 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. Net other interest income realized by PBP was $37
for the year ended

35

December 31, 2002 versus $1,132 for the same period of 2001, a decrease of
$1,095. Another $227 of the decrease in other interest income was attributable
to the continued runoff of the SC Facility, which began its final stage of
runoff effective March 1, 2003. The remaining $20 decrease in net other interest
income came from all other operations.

NET REALIZED GAIN (LOSS)

Net realized gains amounted to $3,084 for the year ended December 31, 2002.
At December 31, 2001, the Company owned 32,676 shares of common stock of ISO
that it had received in 1997 as a result of ISO converting from a mutual
organization to a stock company. Since the equity security received in
connection with the conversion was not marketable, the Company has historically
valued the investment at cost ($0). In February 2002, ISO offered, and the
Company accepted, to repurchase the Company's shares for a price of $64.80 per
share, resulting in a realized investment gain of $2,117. In addition, the
Company is the beneficiary of several key man life insurance policies maintained
on certain former directors or officers of the Company. During the three months
ended June 30, 2002, the Company recorded a gain on the settlement of one of
these policies of $294. Effective October 3, 2002, the Company's combined
ownership interest in QualSure Holding was redeemed by QualSure Holding for
$4,775 resulting in a realized gain of $632. Another $68 in net gains were
realized from the sale of investments. Finally, in connection with the sale of
the renewal rights to its NFIP business to The Hartford, the Company impaired
certain data processing equipment and software used in that operation, resulting
in a realized loss of $27.

Net realized losses amounted to $211 for the year ended December 31, 2001
due to $301 of losses realized on the sale of automobiles no longer required for
operations and the disposal of 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.

EQUITY IN (LOSS) EARNINGS OF UNCONSOLIDATED AFFILIATES

The Company's loss in earnings of its unconsolidated subsidiaries amounted
to $72 and $485 for the years ended December 31, 2002 and relates to investments
in Sunshine State (21.49% interest) and QualSure Holding (formerly 30.625%
interest). As each of these equity investments exceeds 20% of the equity of each
respective company, the Company's equity in the undistributed earnings of the
unconsolidated affiliates, using the equity method, are included in current
earnings. Effective October 3, 2002, the Company's combined ownership interest
in QualSure Holding was redeemed by QualSure Holding. Therefore, the Company no
longer records equity in the undistributed earnings of QualSure Holding.

OTHER INCOME

Other income decreased $1,020, or 30.0%, to $2,378 for the year ended
December 31, 2002 from $3,398 for the year ended December 31, 2001.
Historically, the Company's primary source of policy fees revenue was its
Nashville nonstandard automobile operations and its premium financing operations
of PBP, which were placed into runoff in June 2000 and December 2001,
respectively. As a result, virtually no premiums were written through the
Nashville operation or financed through PBP for the year ended December 31,
2002. Because the policy fees associated with each of these operations are
directly correlated to premium writings and financing, they decreased $737 to a
balance of $1 for the year ended December 31, 2002 versus $738 for the same
period in 2001. Partially offsetting these decreases in other income was the
$238 increase in other income earned by UIC associated with fees it is allowed
to charge on the installment billing program that began in December 2001.

Further contributing to the overall decrease in other income was a decrease
of $766 associated with a division of the adjusting services segment. The
division posted other income of $891 for the year

36

December 31, 2002 versus $1,657 for the same period of 2001. 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
and the withdrawal of key customers' automobile programs in the state. In
addition, in December 2002 the division refunded approximately $150 of fees
charged to and paid by UIC in excess of fees approved by the NCDOI.

Effective July 1, 2002, one of the Company's subsidiaries, SBC, entered into
an agreement with a Florida domiciled insurance company to serve as managing
general agent for that company's low-value dwelling homeowners' insurance
program in the state of Florida until such time as that program is runoff.
Therefore, the Company does not expect to recognize significant revenue related
to the agreement after December 31, 2002. In its capacity as managing general
agent SBC earned policy fees of $71, which are included in the all other
segment.

On November 15, 2002, the Company received approval from both FEMA and the
SCDOI and then announced that it had sold the right to renew or assume all of
SCIC and Catawba's in-force NFIP business to The Hartford for $3,800 in cash at
closing, plus up to $1,000 to be paid on November 15, 2003, if certain retention
thresholds on the book of business are achieved. Provisions of the underlying
sales agreement, as approved by FEMA, provide that The Hartford administer and
report the Company's business to the NFIP over the transition period that ends
September 30, 2003. As a result of the Company's continuing involvement with the
book of business during the transition period, the gain on the transaction of
$3,499 (purchase price of $3,800 less expenses of sale of $301) has been
deferred and will be recognized evenly over the transition period. Included in
other income for the year ended December 31, 2002 is $350 of amortized gain.

The remaining decrease in other income of $176 came from all other
operations.

LOSSES AND LOSS ADJUSTMENT EXPENSES

Losses and LAE increased $1,694 or 21.9%, to $9,434 for the year ended
December 31, 2002 from $7,740 for the year ended December 31, 2001. Included in
the losses and LAE incurred is $970 and $23 incurred for the years ended
December 31, 2002 and 2001, respectively, related to the change in estimated
unpaid losses and LAE of prior years ("development"), an increase of $947. The
largest components of the unfavorable development are the Company's runoff
environmental and general liability operations and its continuing commercial
operations, which are partially offset by the net favorable development reported
by the various components of its automobile operations. Certain components of
the overall unfavorable development reported for the year ended December 31,
2002 are discussed in the following paragraphs.

Approximately $580 of the increase is attributable to the net losses and LAE
incurred under the HDC Program. Incurred losses and LAE of the HDC Program are
recorded on the Company's books as direct insurance activity and ceded as
applicable to reinsurers. As a large deductible workers' compensation program,
HDC is responsible for all losses and LAE of the HDC Program up to a deductible
of $1,000 per occurrence, at which point coverage is provided by the Company
subject to its reinsurance that amounts to $15,000 in excess of $5,000 per
occurrence.

Furthering the overall increase in losses and LAE was the $1,576 increase
reported by the commercial segment. During the year ended December 31, 2002, the
Company experienced unfavorable development related to its loss and LAE reserves
of prior accident years amounting to $870 as a result of a reserve
reconciliation project initiated by the Company's recently hired commercial
lines claims manager. Furthermore, the Company incurred a significant commercial
lines loss in the second quarter of 2002 that crossed into its excess of loss
reinsurance agreement. The Company's retention for this claim was $250. Finally,
from April 1, 2000 through March 31, 2001, the Company's commercial lines were
reinsured primarily through a 70% quota share reinsurance agreement. Effective
April 1, 2001, the agreement was cancelled at the Company's request to
capitalize upon the favorable underwriting

37

results of the commercial book of business. Retaining a larger portion of its
commercial book of business had a negative impact on the Company's losses and
LAE for the year ended December 31, 2002 over the same period of 2001.

The automobile segment accounted for another $25 of the overall increase,
reporting losses and LAE of $2,953 for the year ended December 31, 2002 versus
$2,928 for the same period of 2001. The overall increase primarily resulted from
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.
Losses and LAE associated with these operations for the year ended December 31,
2002 amounted to $30, an increase of $514 over the $(484) incurred for the same
period of 2001. The favorable development experienced in 2001 resulted from the
more precise estimation of ultimate losses and LAE as a result of the furthering
runoff of those programs. Second, losses and LAE incurred through the
nonstandard automobile risk-bearing operations of Catawba amounted to $3 and $41
for the years ended December 31, 2002 and 2001, respectively, a decrease of $38
that resulted from the re-estimation of reserves from the 2001 accident year as
a result of new information obtained during 2002. Third, losses and LAE incurred
by UIC amounted to $2,789 for the year ended December 31, 2002 versus $3,141 for
the same period of 2001, a decrease of $352. As previously discussed, from
December 31, 1999 until July 1, 2002, UIC's retained-risk automobile business
had been subject to a 75% quota share reinsurance agreement. Effective July 1,
2002, the existing 75% quota share reinsurance agreement was canceled in favor
of a 60% quota share reinsurance agreement. Retaining more premium under the new
quota share reinsurance agreement had an unfavorable impact on UIC's losses and
LAE incurred for the year ended December 31, 2002. However, the effect of the
change of the quota share reinsurance agreement was substantially mitigated by
the decreased premium volume discussed in PREMIUMS EARNED. Furthermore, in
December 2002 a division of the adjusting services segment that performs certain
loss adjudication services for UIC refunded approximately $150 of fees charged
to and paid by UIC in excess of fees approved by the NCDOI. The remaining $99
decrease in losses and LAE incurred by the automobile segment came from business
the Company is required to assume from the SC Facility.

Partially offsetting the overall increase in losses and LAE was the $102
decrease posted by the Company's runoff environmental and general liability
operations. During the year ended December 31, 2001, the Company was engaged in
a general strengthening of its reserves for these runoff operations. As a
result, the operation posted losses and LAE incurred of $1,388. While no broad
policy of reserve strengthening was employed during the year ended December 31,
2002, additional environmental reserves were incurred during the period as a
result of the recent insolvency of Reliance Insurance Company. As a result of
this insolvency, the Company was notified that all reinsurers who shared
liability exposure with Reliance Insurance Company are required to absorb that
company's share of loss exposure. Furthermore, the Company experienced a sharp
increase in the trend of new claims associated with its runoff environmental and
general liability business written in the 1980's alleging that the Company was
liable for damages. Though the Company was found not to be liable in all cases,
the LAE incurred in connection with defending the Company, as well as the
strengthening of LAE reserves as a result of the change in trends, resulted in
substantial adverse development during 2002. As a result of these factors, the
runoff operations reported additional adverse development of $1,286 for the year
ended December 31, 2002.

The remaining decrease in losses and LAE of $385 resulted from the Company's
runoff flood operations. On November 15, 2002, the Company received approval
from both FEMA and the SCDOI and then announced that it had sold the right to
renew or assume all of SCIC and Catawba's in-force NFIP business to The
Hartford.

38

POLICY ACQUISITION COSTS

Policy acquisition costs decreased $348, or 1.5%, from a balance of $23,162
for the year ended December 31, 2001 to a balance of $22,814 for the same period
of 2002. Fluctuations in policy acquisition costs are directly correlated to
fluctuations in, and the relative mix of, segmental direct written premium.
Policy acquisition costs as a percentage of direct written premium was 23.2% and
20.6% for the years ended December 31, 2002 and 2001, respectively. The higher
percentage of acquisition costs is primarily attributable to the decreasing
premium volume of the SC Facility and NC Facility components of the automobile
segment, as they pay much lower agent commissions than the other components of
the Company's operations.

INTEREST EXPENSE

Interest expense was $180 and $728 for the years ended December 31, 2002 and
2001, respectively, a decrease of $548. On March 28, 2002, the Company issued
800,000 shares of Adjustable Rate Cumulative Nonvoting Preferred Special Stock
to its majority shareholder, Chairman of the Board of Directors and Chief
Executive Officer in exchange for $8,000. The Adjustable Rate Cumulative
Nonvoting Preferred Special Stock is nonconvertible and nonredeemable and pays
quarterly dividends at an annual adjustable rate of 3.5% plus LIBOR (4.9% at
December 31, 2002). The Company used the proceeds from the transactions to fully
repay the outstanding balance of its credit facility.

OTHER OPERATING COSTS AND EXPENSES

Other operating costs and expenses decreased $2,813, or 13.1%, to $18,625
for the year ended December 31, 2002 from $21,438 for the year ended
December 31, 2001. In addition to the wide array of general expense reductions
that would normally be associated with a decreasing revenue base there were
certain other noteworthy fluctuations:

- INS experienced significant reductions in revenue for the year ended
December 31, 2002 as compared to the same period of 2001 for a variety of
reasons previously discussed. Associated with this decrease in revenues
are corresponding reductions in other operating costs and expenses. Most
notably, claims adjusting expenses incurred decreased $1,059 between
periods.

- A substantial portion of UIC's written premium has traditionally been
financed through the Company's premium finance subsidiary, PBP. While PBP
had proven to be an effective sales and marketing tool to facilitate
premium growth for UIC over the years, management 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. Management fee expenses incurred for the years ended December 31,
2002 and 2001 were $24 and $669, respectively, a decrease of $645.

At the time PBP was placed into runoff, management established substantial
additional reserves for uncollectable premium notes receivable based upon
its historical experience with PBP's operations, its business environment
and the fact that the business was moving into runoff. However, as a
result of significant receivables monitoring and collections efforts by
both the Company's internal collections department and the unaffiliated
management company, PBP's actual and final bad debt exposure was
substantially less than historically experienced or expected. Therefore,
for the year ended December 31, 2002, PBP's allowance for uncollectable
premium notes receivable was reduced by approximately $300 through a
credit to earnings.

39

Finally, as a result of PBP's runoff, which was substantially complete at
December 31, 2002, the Company has experienced a reduction in its other
operating costs and expenses incurred (excluding recovery of bad debts and
management fee expenses incurred discussed above) of approximately $2,586
for the year ended December 31, 2002 as compared to the same period of
2001.

- In September 2001, the Compensation Committee of the Company's Board of
Directors recommended, and the Board of Directors approved, the adoption
of an incentive compensation program covering certain members of
management. The program was terminated by the Company's Board of Directors
on October 31, 2002. Expenses under the program for the years ended
December 31, 2002 and 2001 were $0 and $852, respectively.

- As compensation for personal services rendered in connection with the
settlement of certain then-outstanding litigation, the Company incurred
$433 in consulting expenses to a member of its Board of Directors during
the year ended December 31, 2001. Consulting services to this Board member
amounted to $150 for the corresponding period of 2002.

- Effective May 1, 2002, the Company changed service providers related to
the statistical processing and reporting of its flood business written
through the NFIP in order to capitalize on a more efficient fee structure
charged for these services. Further, as a result of FEMA's decision not to
offer the Company Financial Assistance/Subsidy Agreement for the fiscal
year beginning October 1, 2002 and the subsequent sale of the renewal
rights to the Company's NFIP business, the Company's NFIP written premium
decreased $121 during 2002 as compared to 2001. As a result, the Company's
processing and reporting expenses for its flood operations decreased $288
for the year ended December 31, 2002 as compared to the same period of
2001.

- On December 21, 2000, the Company sold its corporate headquarters to its
majority shareholder, Chairman of the Board of Directors and Chief
Executive Officer. Concurrent with this transaction, the Company leased
the property back for a fixed period of three years without an option for
renewal. Monthly lease expense is calculated annually at a predetermined
spread over the Prime Lending Rate. Lease expense for the year ended
December 31, 2002 was $290, a decrease of $168 over the expense incurred
for the same period of 2001.

- Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 requires an entity to separate its
goodwill, intangible assets with definite useful lives and intangible
assets with indefinite useful lives. Goodwill and intangible assets with
indefinite useful lives are no longer subject to periodic amortization.
Rather they are subject to impairment tests that are required to be
performed on at least an annual basis. As a result of adopting SFAS
No. 142, other operating costs and expenses for the year ended
December 31, 2002 did not include goodwill amortization of $125.

- On March 28, 2002, the Company repaid all amounts outstanding on its
credit facility. In connection with this transaction, the unamortized
portion of the deferred loan origination fees were expensed. As a result,
other operating costs and expenses for the year ended December 31, 2002
includes additional amortization expense of $72 as compared to the same
period of 2001.

- The Company or its subsidiaries were party to three primary pieces of
litigation during the year ended December 31, 2002 (see Item 3. Legal
Proceedings and the Notes to Financial Statements). As a result, legal
expenses for the year ended December 31, 2002 are approximately $791
higher than for the corresponding period of 2001.

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

40

of long-lived assets associated with those operations. As of December 31, 2001,
the restructuring plan associated with the restructuring charge was completed,
resulting in a final revision of the initial estimate of $156 that was taken
into income in September 2001.

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. The mandate was issued as a result of the deteriorated
financial condition of SCIC that resulted from the discontinuation of the
Company's Nashville operations in the second quarter of 2000. 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 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

41

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 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

42

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 mandate was issued as a result of the deteriorated financial
condition of SCIC that resulted from the discontinuation of the Company's
Nashville operations in the second quarter of 2000.

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.

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 automobiles no longer required for
operations and the disposal of 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

43

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, Chairman of the Board of Directors and Chief Executive
Officer 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 OTHER
INCOME).

OTHER INCOME

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 other income was the Company's
net $615 decrease in equity in earnings of its unconsolidated subsidiaries,
Sunshine State 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 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 other income was a decrease
of $371 associated with a division of the adjusting services segment. The
division posted 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, Chairman of the Board of Directors and Chief Executive
Officer 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
other income for the year ended December 31, 2001 is $631 of amortized gain.

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

44

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 mandate was issued as a
result of the deteriorated financial condition of SCIC that resulted from the
discontinuation of the Company's Nashville operations in the second quarter of
2000.

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 Property and Casualty Premiums Earned for discussion concerning the
decrease in premium volume for the year ended December 31, 2001 versus the same
period of 2000.

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 bore
interest at a pre-determined spread over LIBOR. 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.

45

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, Chairman of the
Board of Directors and Chief Executive Officer. 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 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.

46

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.

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. Management, in conjunction
with the Company's consulting actuary, performs a complete review of the
Company's recorded reserves for unpaid losses and LAE to evaluate the adequacy
of such reserves. Management believes the reserves, which approximate the amount
determined by independent actuarial reviews, are adequate. However, establishing
reserves is an estimation process and the ultimate liability may be in excess of
or less than the amount recorded. Changes in estimated loss reserves are
recorded in the year so determined.

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.

47

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 unpaid losses and LAE, classified as an
asset, includes $23,473, $31,369 and $37,318 at December 31, 2002, 2001 and
2000, 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:

48

The following table presents an analysis of loss and LAE development (all
amounts are in millions):

- ------------------------------

* In 1993 the Company adopted Statement of Financial Accounting Standards
No. 113, "Accounting and Reporting of Short-Duration and Long-Duration
Contracts". In accordance with the provisions of the statement, the Company
began presenting its liability for unpaid losses and LAE on a gross basis.

The above table presents the development of balance sheet liabilities for
1992 through 2001. The top portion of the table shows a reconciliation of the
direct and net estimated liabilities for unpaid losses and LAE recorded at the
balance sheet date for each of the indicated years. The next section of the
table shows the cumulative amount paid with respect to the previously recorded
liability as of the end of each succeeding year. The following portion of the
table shows the re-estimated amount of the previously recorded liability based
on experience as of the end of each succeeding year. The estimate is increased
or decreased as more information about the claims becomes known for individual
years. For example, as of December 31, 2002 the companies had paid $126,000 of
the currently estimated $149,000 of losses and LAE that had been incurred
through the end of 1992. Thus an estimated $23,000 of losses incurred during
1992 remain unpaid as of the current financial statement date. The next portion
of the table represents the aggregate change in the original reserve estimates
over all subsequent years through December 31, 2002. For example, the 1992
liability has developed unfavorably by $31,000 over the ensuing ten years.

49

The final section of the above table presents the re-estimated direct
liability for unpaid losses and LAE, with separate disclosure of the
re-estimated reinsurance recoverables thereon.

In evaluating the above information, it should be noted that 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 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. Current third party actuarial estimates indicate
that the other company involved in the settled dispute will not reach the
threshold at which the Company must begin sharing the liability.

Of the remaining environmental, pollution and toxic tort claims, the
following activity took place during 2002 and 2001:

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, 2002 and 2001:

The claims involve four Superfund sites, nine asbestos or toxic claims,
seven underground storage tanks and ten 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 claims remain open as of December 31, 2002, the exposure
to significant additional development is less than when the claims were less
mature. In addition, the likelihood of

50

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.

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 payment of dividends on its Adjustable Rate
Cumulative Nonvoting Preferred Special Stock, and the future lease payments
under its various operating leases. The Company's direct reserves for losses and
LAE under the HDC Program have been reduced by estimated deductibles recoverable
of $9,800. The Company is contingently liable for reserves for unpaid losses and
LAE of the HDC Program, gross of the estimated deductibles recoverable, with the
deductible recoverable representing an off balance-sheet credit risk to the
Company. To mitigate these risks, the Company relies on the Court-Ordered
Interim Agreement that clearly and specifically states that HDC is responsible
for funding all claims of the large deductible program. Furthermore, the Court
has required HDC to place funds totaling approximately $4,300 in a
Court-restricted commercial checking account at an Arizona financial institution
to serve as the funds from which losses of the HDC Program are to be
paid--effectively collateralizing a significant portion of the Company's
estimated ultimate off balance sheet credit risk for deductible recoverables.
The Court has further required HDC to obtain an independent actuarial review of
the HDC Program and to share the results of that review with the Company's
actuary for the purpose of agreeing upon estimated ultimate losses and loss
adjustment expenses of the HDC Program and for adjusting the balance of the
Court-restricted commercial checking account. The appointed actuary for HDC has
submitted a report that is the basis for the $4,300 deposit. The report is
currently being reviewed by the Company's actuary. The Company currently
believes that, should additional depository funding be ordered by the Court in
response to actuarial findings, HDC will provide such funds. The Company is not
party to, or contingently liable for, any other off balance sheet financing
arrangements or guarantees of any related or unaffiliated third party debt.

The Company's principal sources of liquidity during 2003 include the
collection of commission and service fees, including substantial amounts
received from the NC 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 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 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 provided by operations was $7,898 for the year ended December 31,
2002 on net income of $6,123 (see "Results of Operations"). Included in the net
income for the year is a gain on sale of previously nonmarketable equity
securities of $2,117 as well as a $632 gain on the redemption of the Company's
combined ownership interest in QualSure Holding by QualSure Holding (see
INVESTING ACTIVITIES below). In addition, the Company is the beneficiary of
several key man life insurance policies

51

maintained on certain former directors or officers of the Company. Included in
the net income for the year is a $294 gain on the settlement of one of these
policies. Cash provided by the settlement amounted to $848.

On November 15, 2002, the Company received approval from both FEMA and the
SCDOI and then announced that it had completed a transaction with The Hartford
under which The Hartford acquired the right to renew or assume all of SCIC and
Catawba's in-force NFIP business. The purchase price of the renewal rights was
$3,800 in cash at closing, plus up to $1,000 to be paid on November 15, 2003, if
certain retention thresholds on the book of business are achieved. Provisions of
the underlying sales agreement, as approved by FEMA, provide that The Hartford
administer and report the Company's business to the NFIP over the transition
period that ends September 30, 2003. As a result of the Company's continuing
involvement with the book of business during the transition period, the gain on
the transaction of $3,499 (purchase price of $3,800 less expenses of sale of
$301) has been deferred and will be recognized evenly over the transition
period.

Effective July 1, 2002 SBC entered into an agreement with a Florida
domiciled insurance company to serve as managing general agent for that
company's low-value dwelling homeowners' insurance program in the state of
Florida until such time as that program is runoff. SBC collected cash in the
amount of $897 related to this program for the year ended December 31, 2002.

In connection with the large deductible workers' compensation program
written through the HDC Group, SCIC and CAIC collected cash from HDC amounting
to $1,386 for the year ended December 31, 2002 for reinsurance premiums for the
retained-risk layers of $4,000 in excess of $1,000 and fees.

Other significant sources of cash from operations include the net collection
of reinsurance recoverable on paid and unpaid losses and LAE of $13,003 and the
$6,324 reduction in reinsurance premiums prepaid to the Company's reinsurers.
The reduction is attributable to continued runoff of the Company's Nashville and
South Carolina automobile operations, the continued runoff of the SC Facility,
and the curtailment of its commercial operations in the third and fourth
quarters of 2002 as a result of the SCDOI Order. Further, the Company sold the
renewal rights to its NFIP business to The Hartford in November 2002, thus
beginning the runoff of that operation. As a result of these factors,
collections on reinsurance recoverable on paid and unpaid losses and LAE
outstanding at December 31, 2001 surpassed new recoverables being generated
through continuing operations. Finally, effective July 1, 2002, the existing 75%
quota share reinsurance agreement on UIC's retained-risk nonstandard automobile
program was canceled in favor of a 60% quota share reinsurance agreement.
Retaining more risk on the program resulted in fewer premiums being prepaid to
reinsurers and fewer ceded losses and LAE to recover from reinsurers.

Another significant source of cash was the $4,378 in collections on PBP's
premium notes receivable. A substantial portion of UIC's written premium has
traditionally been financed through PBP. In December 2001, UIC introduced an
installment billing program to its insureds and PBP was placed into runoff. At
the time PBP was placed into runoff, management established substantial
additional reserves for uncollectable premium notes receivable based upon its
historical experience with PBP's operations, its business environment and the
fact that the business was moving into runoff. However, as a result of
significant receivables monitoring and collections efforts by both the Company's
internal collections department and the unaffiliated management company, PBP's
actual and final bad debt exposure was substantially less than historically
experienced or expected. Therefore, during the year ended December 31, 2002,
PBP's allowance for uncollectable premium notes receivable was reduced by
approximately $300 through credits to earnings.

Significant uses of cash flows from operating activities include reductions
in the liability for losses and LAE of $13,165 and the liability for unearned
premiums of $6,306. The primary cause of these reductions is the continued
runoff of the Company's environmental, workers compensation, Nashville

52

and South Carolina nonstandard automobile programs, as well as the sale of the
Company's renewal rights of its NFIP business to The Hartford in November 2002.

Another significant use of cash was the $888 net increase in premiums and
agents' balances receivable. The majority of UIC's written premium has
traditionally been financed through PBP. In December 2001, UIC introduced an
installment billing program to its insureds and PBP was placed into runoff. As
such, premiums historically paid in full by PBP to UIC are now being billed and
collected by UIC.

In September 2001, the Compensation Committee of the Company's Board of
Directors recommended, and the Board of Directors approved, the adoption of an
incentive compensation program covering certain members of management. The
program was terminated by the Company's Board of Directors on October 31, 2002.
Expenses under the program for the years ended December 31, 2002 and 2001 were
$0 and $852, respectively.

INVESTING ACTIVITIES

Investing activities for the year ended December 31, 2002 used cash in the
amount of $1,109. Cash expended for the purchase of fixed assets amounted to
$655 as the Company upgraded certain obsolete computer equipment, installed a
backup generator at its corporate headquarters, and made leasehold improvements
to its corporate headquarters. In connection with the sale of the renewal rights
to its NFIP business to The Hartford, the Company impaired certain data
processing equipment and software used in that operation, resulting in a
realized loss of $27. Cash expended in the net acquisition of investments
amounted to $454 for the period primarily as a result of the Company's
profitable operations.

At December 31, 2001, the Company owned 32,676 shares of common stock of ISO
which it had received in 1997 as a result of ISO converting from a mutual
organization to a stock company. Since the equity security received in
connection with the conversion was not marketable, the Company has historically
valued the investment at cost ($0). In February 2002, ISO offered, and the
Company accepted, to repurchase the Company's shares for a price of $64.80 per
share, resulting in a realized investment gain of $2,117.

Effective October 3, 2002, the Company's ownership interest in QualSure
Holding with a carrying value of $4,143 was redeemed by QualSure Holding for
$4,775. Under the terms of the underlying redemption agreement, INS continues to
provide claim administration services to QualSure under an amended contract at a
reduced rate for terms that expire from October 4, 2005 through January 21,
2010.

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, 2002 and December 31,
2001 was $49,639 and $45,874, respectively. All debt securities are considered
available-for-sale and are carried at fair value as of December 31, 2002 and
2001. The weighted-average maturity of the fixed income investments as of
December 31, 2002 and 2001 was approximately 2.14 and 2.17 years, respectively.
The average net investment yield on the Company's investment portfolio was 4.6%
and 5.2% for the years ended December 31, 2002 and 2001, respectively.

FINANCING ACTIVITIES

Financing activities for the year ended December 31, 2002 used cash in the
amount of $2,741. On March 28, 2002, the Company issued 800,000 shares of
Adjustable Rate Cumulative Nonvoting Preferred Special Stock to its majority
shareholder, Chairman of the Board of Directors and Chief Executive Officer for
an aggregate purchase price of $8,000. The proceeds from the transaction were
used to repay the outstanding balance of the Credit Facility and for general
corporate purposes. The

53

Adjustable Rate Cumulative Nonvoting Preferred Special Stock is nonconvertible
and nonredeemable and pays quarterly dividends at an annual adjustable rate of
3.5% plus LIBOR (amounting to 4.9% at December 31, 2002). On August 15, 2002,
the Company redeemed its Special Stock and AFS Special Stock at a price of
$10.00 per share, using cash in the amount of $2,590. Dividends paid on the
Company's Special Stock, AFS Special Stock and Adjustable Rate Cumulative
Nonvoting Preferred Special Stock amounted to $430 for the year ended
December 31, 2002.

OFF-BALANCE SHEET ARRANGEMENTS

Under the HDC Program, estimated reserves for losses and LAE for claims
arising under the HDC Program have been established by the Company net of the
deductible that HDC is required to pay under order of the Court. The Company has
a potential off-balance sheet credit risk associated with such deductibles if
the Company were required to fund the deductibles in the event that HDC cannot
pay the deductible.

The Court has ordered HDC to retain an independent actuary to estimate the
HDC program unpaid losses and LAE, subject to the deductible, as of
December 31, 2002, and has ordered HDC to deposit funds in an equivalent amount
in accounts collateralizing HDC's liabilities under the deductible program. The
actuary retained by HDC has issued a report estimating HDC's liability for such
deductibles at December 31, 2002 to be $4,300. HDC has deposited funds totaling
$4,300 into a Court-restricted commercial checking account ($3,000 on
January 29, 2003 and $1,300 on February 21, 2003. Pursuant to court order, the
Company has retained an actuary to review the work of the actuary retained by
HDC. The actuary retained by the Company has raised questions regarding aspects
of the methodology used by the actuary retained by HDC. As of March 26, 2003,
the Company has not received a response to those questions. The Company, in
consultation with its consulting actuary, has estimated that HDC's liability for
such deductibles as of December 31, 2002 may be as much as $9,800.

UTILIZATION OF NET OPERATING LOSS CARRYFORWARDS

The Company has unused tax operating loss carryforwards and capital loss
carryforwards of $92,198 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 $2,205 per year. Net operating loss
carryforwards available for use in 2003 are approximately $6,428 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, 2002 and 2001.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

(dollars in thousands)

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 fair values of these market-rate sensitive investments as of
December 31, 2002 and 2001 are as follows:

54

The fair 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 fair value of the Company's
debt securities by approximately $(934) and $735, respectively, as of
December 31, 2002. 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 fair value as of December 31, 2002 and 2001. The weighted-average
maturity of the fixed income investments as of December 31, 2002 and 2001 was
approximately 2.14 and 2.17 years, respectively.

The Company pays dividends on its Adjustable Rate Cumulative Nonvoting
Preferred Special Stock at a rate of 3.5% plus LIBOR (4.9% at December 31,
2002).

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED ON FOLLOWING
PAGE).

(a) Financial Statements

(b) Supplementary Data (Unaudited)

55

REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Shareholders
The Seibels Bruce Group, Inc.:

We have audited the consolidated balance sheet of The Seibels Bruce
Group, Inc. and subsidiaries (collectively the "Company") as of December 31,
2002, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year then ended. 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 audit. The Company's
consolidated balance sheet as of December 31, 2001 and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
each of the two years in the period ended December 31, 2001, were audited by
other auditors whose dual dated opinion of March 7 and March 28, 2002 expressed
an unqualified opinion on those financial statements and also indicated that the
schedules listed in Part IV, Item 15 are fairly stated in all material respects
in relation to the December 31, 2001 financial statements taken as a whole.

We conducted our audit 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 audit provides 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, 2002 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.

Our audit was 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 15 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 for the year
ended December 31, 2002, 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.

JOHNSON LAMBERT & CO.

Raleigh, North Carolina,
March 26, 2003

56

THIS IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND IT
HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

REPORT OF INDEPENDENT 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.

57

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31,

(DOLLARS SHOWN IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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

58

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31,

(DOLLARS AND WEIGHTED AVERAGE SHARES OUTSTANDING SHOWN IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)

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

59

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31,

(DOLLARS SHOWN IN THOUSANDS)

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

60

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31,

(DOLLARS SHOWN IN THOUSANDS)

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

61

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
The Seibels Bruce Group, Inc. and its wholly-owned subsidiaries (collectively,
the "Company") and have been prepared in conformity with accounting principles
generally accepted in the United States ("GAAP") pursuant to the rules and
regulations of the Securities and Exchange Commission. All significant
intercompany balances and transactions have been eliminated in consolidation.

DESCRIPTION OF THE BUSINESS

The Company conducts business in two primary categories: fee-based property
and casualty insurance operations and risk-bearing property and casualty
insurance operations. Its fee-based property and casualty insurance operations
include the following:

- CLAIMS ADJUSTING AND MANAGEMENT SERVICES

The Company's subsidiary, Insurance Network Services, Inc. ("INS"),
provides a variety of claims-related management and adjudication services
to the insurance industry, including all-lines claims administration,
networked glass claims administration and catastrophe claims services.
Approximately 13.6%, 10.8% and 9.6% of the Company's commission and
service income for the years ended December 31, 2002, 2001 and 2000,
respectively, was earned from INS' largest customer, QualSure Insurance
Corporation (see Note 2).

- NATIONAL FLOOD INSURANCE PROGRAM ("NFIP")

Through its subsidiaries, South Carolina Insurance Company ("SCIC") and
Catawba Insurance Company ("Catawba"), the Company participated in the
NFIP, a flood insurance program administered by the federal government. In
this capacity, SCIC and Catawba were responsible for all aspects of policy
administration over the term of the policies, including underwriting,
processing and statistical reporting, subject to administration guidelines
of the NFIP. The companies were also responsible for all aspects of claims
administration associated with claims reported under the business they
produce. SCIC and Catawba received commission and service income from the
NFIP for these policy and claims administration services, but retained no
underwriting risk on any of the business produced because all of the
premiums and associated losses were fully ceded to the NFIP. Approximately
44.9%, 41.2% and 34.5% of the Company's commission and service income for
the years ended December 31, 2002, 2001 and 2000, respectively, was earned
from the NFIP.

On November 15, 2002, the Company received approval from both FEMA and the
SCDOI and then announced that it had completed a transaction with The
Hartford Financial Services Group, Inc. ("The Hartford") under which The
Hartford acquired the right to renew or assume all of SCIC and Catawba's
in-force NFIP business (see TRANSACTION WITH THE HARTFORD).

- NORTH CAROLINA REINSURANCE FACILITY ("NC FACILITY")

The NC Facility is a state-sponsored plan for assuring the availability of
motor vehicle liability insurance to all North Carolina drivers outside of
the voluntary market. Two of the Company's subsidiaries, SCIC and
Universal Insurance Company ("UIC"), cede business to the NC Facility.

62

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In this capacity, each company is responsible for all aspects of policy
administration over the term of the policies, including underwriting,
processing and statistical reporting, subject to administration guidelines
of the NC Facility. The companies are also responsible for all aspects of
claims administration associated with claims reported under the business
they produce. SCIC and UIC receive commission and service income from the
NC Facility for these policy and claims administration services, but
retain no underwriting risk on any of the business produced because all of
the premiums and associated losses are fully ceded to the NC Facility.
While UIC currently cedes substantially all of its motor vehicle liability
premiums to the NC Facility, SCIC's NC Facility operations have been in
runoff since the third quarter of 2000. Approximately 18.5%, 20.2% and
20.8% of the Company's commission and service income for the years ended
December 31, 2002, 2001 and 2000, respectively, was earned through the NC
Facility.

- SOUTH CAROLINA REINSURANCE FACILITY ("SC FACILITY")

Catawba is one of three servicing carriers for the SC Facility, a
state-sponsored plan for insuring South Carolina drivers outside of the
voluntary market. In its capacity as a servicing carrier, Catawba is
responsible for all aspects of policy administration over the term of the
policies, including underwriting, processing and statistical reporting,
subject to administration guidelines of the SC Facility. Catawba is also
responsible for all aspects of claims administration associated with
claims reported under the business it produces. Catawba receives
commission and service income from the SC Facility for these policy and
claims administration services, but retains no underwriting risk on any of
the business produced because all of the premiums and associated losses
are fully ceded to the SC Facility. The SC Facility began its planned
runoff effective March 1, 1999 and entered its final stage of runoff
effective March 1, 2002. The South Carolina Associated Automobile Insurers
Program (the "SCAAIP") became effective in March 1999 and survived the SC
Facility. Although the SCAAIP offered 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. Effective March 1, 2003, the SCAAIP began its planned runoff.
Approximately 4.5%, 12.7% and 18.6% of the Company's commission and
service income for the years ended December 31, 2002, 2001 and 2000,
respectively, was earned through the SC Facility and the SCAAIP.

- FLOOD ZONE DETERMINATIONS AND COMPLIANCE TRACKING SERVICES

The Company's subsidiary, America's Flood Services, Inc. ("AFS") offers
flood zone determinations and flood zone mapping services to customers
located throughout the United States. These services are provided
primarily to real estate lenders to determine whether or not homes are
located in flood zones and, therefore, require flood insurance for loan
closing. As a complementary product, AFS also offers flood insurance as an
agent through servicing carriers of the NFIP. The operations of AFS are
not dependent upon any single customer or class of customers.

- MANAGING GENERAL AGENCY SERVICES

Effective July 1, 2002, one of the Company's subsidiaries, Seibels,
Bruce & Company ("SBC"), entered into an agreement with a Florida
domiciled insurance company to serve as managing general agent for that
company's low-value dwelling homeowners' insurance program in the state

63

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of Florida until such time as that program is runoff. Runoff began
January 1, 2003; therefore, SBC will not earn significant revenue related
to the agreement after December 31, 2002. In its capacity as managing
general agent, SBC is responsible for policy issuance and administration,
customer service and claims administration. SBC's claims administration
responsibilities are fulfilled through a Claims Administration Services
Agreement with INS. SBC earned commission and service income amounting to
5.7% of total commission and service income for the year ended
December 31, 2002 through this managing general agency agreement.

The Company's risk-bearing property and casualty insurance operations
include the following:

- NONSTANDARD AUTOMOBILE

The Company's North Carolina domiciled insurance subsidiary, UIC, provides
nonstandard automobile insurance coverage to insureds located primarily in
the state of North Carolina. In this capacity, UIC retains the risk of
loss for the physical damage coverage components of the policy and cedes
substantially all of the liability coverage components of the policy to
the NC Facility as discussed above.

Through its nonowners automobile program, Catawba provides supplemental
automobile insurance coverage policies in South Carolina to employee
drivers of company owned, operated and insured vehicles (see ORDER
IMPOSING ADMINISTRATIVE SUPERVISION AND APPOINTING SUPERVISOR).

- COMMERCIAL LINES

SCIC, Catawba and UIC offer various commercial lines insurance products to
its insureds, including commercial automobile, commercial package,
business owners policies and garage liability policies. This business is
marketed primarily to small businesses in the states of South Carolina,
North Carolina, Tennessee, Georgia and Kentucky (see ORDER IMPOSING
ADMINISTRATIVE SUPERVISION AND APPOINTING SUPERVISOR).

- WORKERS' COMPENSATION

SCIC and Consolidated American Insurance Company ("CAIC") have issued
workers' compensation insurance master policies to a professional
employment organization headquartered in Mesa, Arizona to provide workers'
compensation insurance for that organization's client companies located in
California (SCIC) and Arizona (CAIC), providing coverage for the period
January 1, 2002 through December 31, 2002 (see HDC WORKERS' COMPENSATION
PROGRAM and Note 14).

ORDER IMPOSING ADMINISTRATIVE SUPERVISION AND APPOINTING SUPERVISOR

On August 21, 2002, the South Carolina Department of Insurance (the "SCDOI")
issued an Order Imposing Administrative Supervision and Appointing Supervisor
(the "Order") that placed SCIC, Catawba and CAIC under administrative
supervision for at least six months as a result of the disputes associated with
the workers' compensation program of SCIC and CAIC (see HDC WORKERS'
COMPENSATION PROGRAM and Note 14). Provisions of the Order provided for SCIC,
Catawba and CAIC to immediately cease writing risk-bearing business and for SCIC
and CAIC to immediately cease renewal of existing risk-bearing business. On
August 23, 2002, SCIC and Catawba submitted to the

64

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SCDOI a request to permit Catawba (1) to continue to write its existing
risk-bearing business (the nonowners automobile program) and (2) to renew, in
all states in which Catawba is also licensed, the risk-bearing commercial lines
business previously written through SCIC. On September 4, 2002, the SCDOI
notified Catawba that this request had been approved (the "Approval"). The
Approval permits Catawba to continue to write new and renewal premiums in its
risk-bearing automobile business and allows it to renew the risk-bearing
commercial lines business previously written through SCIC in the states of South
Carolina, Georgia and Tennessee. A subsequent request of, and approval from, the
SCDOI and the Georgia Department of Insurance permits Catawba to also write new
commercial lines business in South Carolina and Georgia. On September 12, 2002,
SCIC and UIC submitted to the NCDOI a request to permit UIC to renew the
risk-bearing commercial lines business previously written through SCIC in the
state of North Carolina. This request was granted on November 25, 2002 and UIC
subsequently began renewing the North Carolina commercial lines business of
SCIC. The only other state in which SCIC wrote risk-bearing commercial lines
business is Kentucky. Catawba's application to the Kentucky Department of
Insurance to write this business was withdrawn and this business is being
runoff.

TRANSACTION WITH THE HARTFORD

On September 12, 2002, the Company announced that it had received notice
from the Federal Emergency Management Agency ("FEMA") that FEMA did not intend
to offer SCIC and Catawba a Financial Assistance/Subsidy Arrangement with the
Federal Insurance and Mitigation Administration for the fiscal year beginning
October 1, 2002, effectively terminating their participation in the NFIP. The
Company obtained an extension of the existing arrangement for renewal business
only through December 31, 2002, at which time the inforce policies were to be
transitioned to the NFIP, or to another carrier in the NFIP, and the Company's
servicing carrier status would be terminated. On November 15, 2002, the Company
received approval from both FEMA and the SCDOI and then announced that it had
completed a transaction with The Hartford under which The Hartford acquired the
right to renew or assume all of SCIC and Catawba's in-force NFIP business. The
purchase price of the renewal rights was $3,800 in cash at closing, plus up to
$1,000 to be paid on November 15, 2003, if certain retention thresholds on the
book of business are achieved. Provisions of the underlying sales agreement, as
approved by the SCDOI and FEMA, provide that The Hartford administer and report
the Company's business to the NFIP over the transition period that ends
September 30, 2003. As a result of the Company's continuing involvement with the
book of business during the transition period, the gain on the transaction of
$3,499 (purchase price of $3,800 less expenses of sale of $301) has been
deferred and will be recognized evenly over the transition period. Included in
the Other Income line item of the accompanying Statements of Operations for the
year ended December 31, 2002 is $350 of amortized gain associated with the
Company's transaction with The Hartford. It is uncertain whether the Company
will meet the retention thresholds to qualify for the additional $1,000. Any
such additional amounts will only be reflected in revenue if and when the
retention thresholds and related requirements are achieved.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of debt securities are disclosed in Note 2 and were
determined from nationally quoted market rates if available and, alternatively,
from Bloomberg or Hub Market Data quotations.

65

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The fair values of cash and short-term investments approximate carrying
values (cost) due to the short-term nature of those instruments.

Premiums and agents' balances receivable and premium notes receivable are
carried at historical cost which approximates fair value as a result of timely
collections and evaluations of recoverability with a provision for uncollectable
amounts. Premium notes receivable are generally short-term in nature, with a
duration of approximately six months.

CASH AND SHORT-TERM INVESTMENTS

Cash and short-term investments consists of cash on hand, time deposits and
commercial paper. Short-term investments have an original maturity of three
months or less and are considered to be cash equivalents.

INVESTMENTS

Investments in debt securities and marketable equity securities are
classified as either held-to-maturity, available for sale or trading. All of the
Company's debt securities are classified as available-for-sale and are reported
at estimated fair value. Changes in fair value are reflected as unrealized
investment gains and losses, net of tax, and are credited or charged directly to
accumulated other comprehensive income included in shareholders' equity. The
Company owned no marketable equity securities at December 31, 2002 or 2001.

Investments in equity securities exceeding 20% of the equity of the investee
company, but short of the ownership required for consolidation, are accounted
for using the equity method. Under the equity method, the Company's equity in
the undistributed earnings of the unconsolidated affiliates is included in
current earnings and the Company's equity in the unrealized gains and losses of
the unconsolidated affiliates is credited or charged directly to accumulated
other comprehensive income included in shareholders' equity. From the
acquisition date of its equity method investees through December 31, 2000, 2001
and 2002, the Company has recorded equity in the undistributed net earnings of
the investees amounting to $577, $92 and $20.

Investment in non marketable equity securities not qualifying for the equity
method are reflected at cost.

Realized gains and losses on investments included in the results of
operations are determined using the identified cost method.

When, in the opinion of management, a decline in the estimated fair value of
an investment is considered to be "other than temporary", the investment is
written down to its estimated fair value. The determination of an "other than
temporary" decline in estimated fair value includes, in addition to other
relevant factors, a presumption that if the estimated fair value is
significantly below cost for an extended period of time, a write down is
necessary. Any such write downs are reported as net realized losses on
investments. No write downs for other than temporary impairment were recorded
for the years ended December 31, 2002, 2001 and 2000.

66

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMIUM NOTES RECEIVABLE

PBP has historically offered premium financing arrangements to the insureds
of UIC. Under these arrangements, UIC received full payment of its premiums
receivable from PBP who, in turn, collected a down payment from the insureds and
financed the remaining premium balance over a six month term. PBP received
interest income from insureds on premiums it financed, as well as a variety of
set-up and maintenance fees associated with the related premium finance
contracts. Beginning in December 2001, UIC initiated an installment billing
program for its insureds as an alternative to PBP's premium financing
arrangements and PBP began runoff. At December 31, 2002 the runoff of PBP was
substantially complete.

REINSURANCE RECOVERABLE

The Company utilizes reinsurance to reduce its exposure and to provide
protection against large catastrophic occurrences. A significant portion of the
Company's direct business is ceded to the SC Facility, the NC Facility and the
NFIP; therefore, the Company retains no risk of loss related to this business.
Reinsurance recoverable is estimated using assumptions consistent with those
used to estimate the liability for unpaid losses and loss adjustment expenses
("LAE") (see Property and Casualty Unpaid Losses and LAE). Changes in estimated
reinsurance recoverable are recorded in the year so determined.

ALLOWANCE FOR UNCOLLECTABLE ACCOUNTS

The Company routinely evaluates the collectability of receivables and has
established an allowance for uncollectable accounts for agents' balances and
direct billed balances receivable and premium notes receivable in the amount of
approximately $2,681 and $3,763 at December 31, 2002 and 2001, respectively. For
the years ended December 31, 2002, 2001 and 2000, bad debt expense, net of
recoveries was $5, $1,839 and $1,773. Included in 2002 bad debt expense is a
credit (reduction in bad debt expense) of approximately $300 related to a change
in estimated uncollectible amounts related to notes receivable of PBP which was
placed in runoff in December 2001. PBP's actual bad debt exposure in runoff was
less than historically experienced or expected.

PROPERTY AND EQUIPMENT

Property and equipment is stated at cost and, for financial reporting
purposes, depreciated on a straight-line basis over the estimated useful lives
of the assets. For income tax purposes, accelerated depreciation methods are
used. Maintenance and repairs costs are charged to expense as incurred.

GOODWILL

Effective January 1, 2002, the Company adopted the provisions of Statement
on Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 establishes accounting and reporting standards
for acquired goodwill and other intangible assets and supersedes APB Opinion
No. 17, "Intangible Assets." It requires an entity to separate its goodwill,
intangible assets with definite useful lives and intangible assets with
indefinite useful lives. Goodwill and intangible assets with indefinite useful
lives are no longer subject to periodic amortization. Rather

67

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
they are subject to impairment tests that are required to be performed on at
least an annual basis. At December 31, 2002 and 2001, the Company had
unamortized goodwill totaling $4,513 associated with its November 1997 and
March 1998 purchases of The Innovative Company (former 100% owner of UIC and
PBP) and AFS, respectively. Annual amortization of goodwill, which ceased to be
recorded effective January 1, 2002 upon the adoption of SFAS No. 142, was $125.
Had the Company not incurred amortization expenses associated with its goodwill
during 2001 and 2000, its basic and diluted earnings per share would have been
$0.55 and $(1.94), respectively. The Company determined that there was no
impairment to either component of the goodwill as a result of adopting SFAS
No. 142.

KEY MAN LIFE INSURANCE POLICIES

The Company is the beneficiary of several key man life insurance policies
maintained on certain former directors or officers of the Company. In
June 2002, the Company recorded a gain on the settlement of one of these
policies of $294. As of December 31, 2002 and 2001, the net cash value of the
policies was $311 and $851, respectively, and is included in other assets.

PROPERTY AND CASUALTY UNPAID LOSS AND LAE

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.

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

(5) Estimated losses for reinsurance assumed.

Management, in conjunction with the Company's consulting actuary, performs a
complete review of the Company's recorded reserves for unpaid losses and LAE to
evaluate the adequacy of such reserves. Management believes the reserves, which
approximate the amount determined by independent actuarial reviews, are
adequate. However, establishing reserves is an estimation process and the
ultimate liability may be in excess of or less than the amount recorded. Changes
in estimated loss reserves are recorded in the year so determined.

INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. This method also requires the
recognition of future tax benefits such as net operating loss carryforwards to
the extent that realization of such benefits is more likely than not. Deferred
tax assets and liabilities are measured using enacted tax rates expected

68

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that includes
the enactment date.

COMMISSION AND SERVICE INCOME

Commission and service income is predominately derived from servicing
carrier, managing general agent, claims processing activities and flood zone
determination and mapping services. The commission income related to producing
and underwriting the business is recognized in the period in which the business
is written. Service income is earned over the period in which the related
services are performed. Included in other liabilities and deferred items as of
December 31, 2002 and 2001 is $1,046 and $368, respectively, of deferred revenue
for services to be performed in the future.

PROPERTY AND CASUALTY PREMIUMS 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.

HDC WORKERS' COMPENSATION PROGRAM

Effective January 1, 2002, the Company, through SCIC and CAIC, issued two
workers' compensation insurance master policies to Human Dynamics Corporation
("HDC") and included as named insureds Infinet Holdings, Inc. and HDC Financial
Services Corporation (collectively, the "HDC Group") (the "HDC Program").
Certain significant matters related to these policies have been litigated and
mediated (see Note 14). Pursuant to proceedings of the Arizona Superior Court,
it was ordered that the HDC Program is to function as a large deductible
workers' compensation program with HDC being responsible for all losses and LAE
of the HDC Program up to $1,000 per occurrence (the "deductible"). Coverage for
losses and LAE in excess of the deductible is provided by the Company, subject
to its reinsurance for losses and LAE of $15,000 in excess of $5,000 per
occurrence. As a large deductible workers' compensation program, estimated
reserves for losses and LAE for claims arising under the HDC Program have been
established by the Company net of the deductible that HDC is required to pay
under order of the Court.

The Company received or is to receive commissions equal to 4% of total
premium equivalents collected by HDC from participants in the HDC Program as
well as full reimbursement for actual boards, bureaus, assessments and premium
taxes incurred by the Company under the HDC Program. For the year ended
December 31, 2002, the Company recorded commission and service income amounting
to $802 under the HDC Program.

POLICY ACQUISITION COSTS

Policy acquisition costs attributable to property and casualty operations
represent that 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

69

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.

OTHER INTEREST INCOME

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.

MANAGEMENT COMPENSATION PROGRAM

During 2001, the Compensation Committee of the Company's Board of Directors
recommended, and the Board of Directors approved, the adoption of an incentive
compensation program covering certain members of management. Awards under the
plan were payable each March and were based upon the Company's performance
during the prior year ended December 31. The provisions of the plan required
recipients to achieve a designated market value based ownership level in the
Company to be eligible to participate in the plan. The Company had accrued $852
for its obligations under the plan at December 31, 2001 and paid these
obligations in March 2002. On October 3, 2002, the Plan was terminated by the
Company's Board of Directors.

EARNINGS PER SHARE

In accordance with SFAS No. 128, "Earnings Per Share", the Company measures
earnings per share at two levels: basic earnings per share and diluted earnings
per share. Basic per share data is calculated by dividing income (loss)
allocable to common stockholders by the weighted average number of shares
outstanding during the year. Diluted per share data is calculated by dividing
income (loss) allocable to common stockholders by the weighted average number of
shares outstanding during the year, as adjusted for the potentially dilutive
effects of stock options, warrants and/or convertible preferred stock, unless
common equivalent shares are antidilutive.

USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and 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. Actual results could differ from those
estimates.

RECLASSIFICATIONS

Certain prior year balances have been reclassified to conform with the
current year presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical
Corrections." This statement will require gains

70

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and losses on extinguishments of debt for fiscal years beginning after May 15,
2002 to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required. The Company does not believe this
statement will have a material impact on its consolidated financial position and
results of operations.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities. SFAS
No. 146 is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company is in the process of evaluating the impact that
the adoption of SFAS No. 146 will have on its consolidated financial position
and results of operations.

NOTE 2 INVESTMENTS

The amortized cost and estimated fair values of investments in debt
securities were as follows:

Excluding investments in the U.S. Government, government agencies and
authorities, there were no investments at December 31, 2002 that exceeded 10% of
shareholders' equity.

There were no non-income producing debt securities for the 12 months ended
December 31, 2002, 2001 and 2000. Debt securities with an amortized cost of
$17,112 at December 31, 2002 and $16,648 at December 31, 2001 were on deposit
with regulatory authorities.

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 2 INVESTMENTS (CONTINUED)
Actual maturities of debt securities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without penalties. The amortized cost and estimated fair value of debt
securities at December 31, 2002, by contractual maturity, are as follows:

At December 31, 2001, the Company's equity securities included its
investments in Sunshine State Holding Corporation ("Sunshine") and QualSure
Holding Corporation ("QualSure"). As each of these investments exceeds 20% of
the equity of each respective company, the Company follows the equity method of
accounting for these investments. During 1997, the Company invested $854 in
Sunshine for an ownership interest of 21.49%. Sunshine owns 100% of the issued
and outstanding stock of Sunshine State Insurance Company, a Florida-based
writer of homeowners insurance. Effective January 21, 2000, three of the
Company's insurance subsidiaries collectively acquired a 30.625% equity
ownership interest in QualSure for $4,900. QualSure is the holding company
parent of QualSure Insurance Corporation, a homeowners take-out insurance
company domiciled in the State of Florida. Effective October 3, 2002, the
Company's ownership interest in QualSure with a carrying value of $4,143 was
redeemed by QualSure for $4,775.

At December 31, 2001, the Company owned 32,676 shares of common stock of
Insurance Services Offices, Inc. ("ISO") which it had received in 1997 as a
result of ISO converting from a mutual organization to a stock company. Since
the equity security received in connection with the conversion was not
marketable, the Company had historically valued the investment at cost ($0). In
February 2002, ISO offered, and the Company accepted, to repurchase the
Company's shares for a price of $64.80 per share, resulting in a realized
investment gain of $2,117.

The Company's net realized gain (loss) and the change in its net unrealized
gain (loss) on investments are summarized as follows:

72

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 2 INVESTMENTS (CONTINUED)
Proceeds from sales of debt and equity securities and the related realized
gains and losses are as follows:

Unrealized gains and losses at December 31 are as follows:

The Company's share of the net unrealized gain on the debt securities of
Sunshine was $19 at December 31, 2002 and the Company's share of the net
unrealized gain on the debt securities of Sunshine and QualSure was $103 and
$(37) at December 31, 2001 and 2000, respectively.

Net investment income consists of the following:

Accretion of bond discount, net of amortization of bond premium, increased
the Company's net investment income by $44, $55 and $50 for the years ended
December 31, 2002, 2001 and 2000.

NOTE 3 PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31 is as follows:

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 3 PROPERTY AND EQUIPMENT (CONTINUED)

Depreciation expense charged to operations was $442 in 2002, $390 in 2001,
and $1,451 in 2000.

In December 2000, the Company sold its corporate headquarters with a net
book value of $2,589 to its majority shareholder, Chairman of the Board of
Directors and Chief Executive Officer 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 is being amortized into income evenly over the term of the
leaseback. Included in the Other Income line item of the accompanying Statements
of Operations for the years ended December 31, 2002 and 2001 is $631 of
amortized gain associated with this transaction.

In connection with the sale of the renewal rights to its NFIP business to
The Hartford, the Company determined that certain data processing equipment and
software used in that operation had been impaired resulting in a realized loss
of $27. Such assets are no longer in use by the Company and are not readily
marketable.

NOTE 4 DEFERRED POLICY ACQUISITION COSTS

Policy acquisition costs incurred and amortized to income on property and
casualty business were as follows:

NOTE 5 REINSURANCE

A reconciliation of direct to net premiums, on both a written and an earned
basis is as follows:

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 5 REINSURANCE (CONTINUED)
A significant portion of the Company's direct business is ceded to the SC
Facility, the NC Facility and the NFIP. Therefore, the Company retains no risk
of loss related to this business. Each of these programs is guaranteed by the
applicable state or the Federal government. In the event that premiums charged
for the business are not sufficient to cover the individual program's
liabilities, the applicable state or the Federal government has the ability to
increase premium rates, assess member companies and charge premium surcharges to
the insureds. The Company is subject to periodic examination by the state or the
Federal government to ensure its compliance with the guidelines of the servicing
carrier operation.

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. Amounts
due from reinsurance companies for prepaid reinsurance premiums, unpaid losses
and LAE, and paid losses and LAE are as follows:

A summary of the Company's reinsurance recoverable on paid and unpaid losses
and LAE, as well as its prepaid reinsurance premiums at December 31, 2002 is as
follows:

"N/A" designates that the company is not rated.

The Company believes that the balances due from the NC Facility, the SC
Facility and the NFIP are fully collectable due to the applicable governmental
agency's backing and/or ability to assess policyholders and member companies for
deficiencies. The remaining recoverables due from nonaffiliated reinsurance
companies are also considered fully collectable by the Company.

75

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 6 PROPERTY AND CASUALTY UNPAID LOSSES AND LAE

The following table summarizes net property and casualty losses and LAE
incurred:

Direct losses and LAE incurred have been reduced by recoveries made and
estimated to be made from reinsurers based on projected ultimate losses. Such
amounts also include substantial amounts related to the business produced as a
servicing carrier for the SC Facility, the NC Facility and the NFIP.

Activity in the liability for unpaid losses and LAE is summarized as
follows:

The ceded reinsurance recoverable on unpaid losses and LAE, classified as an
asset, includes $23,473, $31,369 and $37,318 at December 31, 2002, 2001 and
2000, respectively of balances recoverable from the SC Facility, the NC Facility
and the NFIP.

Incurred losses for the years ended December 31, 2002, 2001 and 2000,
include changes in estimates of unpaid losses and LAE for claims occurring in
prior years of $970, $23 and $2,355. The Company's runoff environmental and
general liability business (see discussion to follow) is the primary source of
the unfavorable development of reserves from prior accident years. During 2000,
the development resulted from general reserve strengthening in response to
unexpectedly high loss and LAE payments during the year. While there was no
significant development of these reserves during

76

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 6 PROPERTY AND CASUALTY UNPAID LOSSES AND LAE (CONTINUED)
2001, additional environmental reserves for prior accident years were recorded
during 2002 as a result of the Company receiving notification that it would be
required to assume a proportionally larger share of liability for claims shared
with the insolvent Reliance Insurance Company. Furthermore, the Company
experienced a sharp increase in the trend of new claims associated with its
runoff environmental and general liability business during 2002. The LAE
incurred in connection with defending the Company, as well as the strengthening
of LAE reserves as a result of the change in trends, resulted in additional
adverse development.

A part of the Company's reserve for losses and LAE is 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
$20,000 in losses and LAE. Current third party actuarial estimates indicate that
the other company involved in the settled dispute will not reach the threshold
at which the Company must begin sharing the liability.

Of the remaining environmental, pollution and toxic tort claims, the
following activity took place during 2002 and 2001:

The (benefit) provision for income taxes on income from operations consists
of current income taxes resulting from the effects of alternative minimum tax.
The change in deferred amounts has been offset by the valuation allowance.

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 8 INCOME TAXES (CONTINUED)
Deferred tax liabilities and assets at December 31, 2002 and 2001 are
comprised of the following:

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, 2002 and 2001.

The Company has unused tax operating loss carryforwards and capital loss
carryforwards of $92,198 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 $2,205 per year. Net operating loss
carryforwards available for use in 2003 are approximately $6,428 due to losses
incurred after the June 1998 change in ownership event occurred and the
carryover of previous years' unused limitations.

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 8 INCOME TAXES (CONTINUED)
The years of expiration of the tax carryforwards are as follows:

NOTE 9 SPECIAL STOCK

On December 1, 1997, the Company issued 220,000 shares of Cumulative,
Convertible, Redeemable, Nonvoting Special Preferred Stock ("Special Stock") in
connection with an acquisition. The Company determined the value of the Special
Stock at the issuance date to be $2,200. The Special Stock paid quarterly
dividends at an annual rate of $0.62 per share. In January 2001, the holders of
the Special Stock surrendered, and the Company cancelled, 11,000 shares of the
Special Stock to settle a dispute between the Company and the holders. The
Company paid $81, $130 and $137 in special stock dividends for the years ended
December 31, 2002, 2001, and 2000, respectively. On August 15, 2002, the Company
redeemed the Special Stock at a price of $10.00 per share.

On March 31, 1998, the Company issued 50,000 shares of Cumulative,
Convertible, Redeemable, Nonvoting Special Preferred Stock ("AFS Special Stock")
in connection with its acquisition of AFS. The Company determined the value of
the AFS Special Stock at the issuance date to be $500. The AFS Special Stock
paid quarterly dividends at an annual rate of $0.625 per share. The Company paid
$20, $31 and $31 in special stock dividends for the years ended December 31,
2002, 2001 and 2000, respectively. On August 15, 2002, the Company redeemed the
AFS Special Stock at a price of $10.00 per share.

On March 28, 2002, the Company issued 800,000 shares of Adjustable Rate
Cumulative Nonvoting Preferred Special Stock to its majority shareholder,
Chairman of the Board of Directors and Chief Executive Officer for an aggregate
purchase price of $8,000. The proceeds from the transaction were used to repay
the outstanding balance of the Company's Credit Facility and for general
corporate purposes. The Adjustable Rate Cumulative Nonvoting Preferred Special
Stock is nonconvertible and nonredeemable and pays quarterly dividends at an
annual adjustable rate of 3.5% plus LIBOR (4.9% at December 31, 2002). The
Company paid $329 in preferred special stock dividends for the year ended
December 31, 2002.

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 10 EARNINGS PER SHARE

The following table shows the computation of the Company's income (loss) per
share:

Options and warrants to purchase shares of common stock that were
outstanding during the year but not included in the computation of diluted EPS
because their effect would be antidilutive is summarized as follows:

NOTE 11 DIVIDEND RESTRICTIONS AND STATUTORY REPORTING

The Seibels Bruce Group, Inc. 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 lease payments on its corporate headquarters
and the dividend payments associated with the Adjustable Rate Cumulative
Nonvoting Preferred Special Stock held by its majority shareholder, Chairman of
the Board

81

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 11 DIVIDEND RESTRICTIONS AND STATUTORY REPORTING (CONTINUED)
of Directors and Chief Executive Officer, are dividends and other permitted
payments, including management fees, from its subsidiaries and affiliates.

SCIC, Catawba and CAIC are regulated by the SCDOI. The South Carolina
Insurance Holding Company Regulatory Act requires that all non-extraordinary
dividends be approved by the SCDOI prior to payment. Extraordinary dividends are
defined as dividends within a 12-month period that exceed the lesser of (i) 10%
of an insurer's surplus as regards policyholders as shown in the insurer's most
recent Annual Statement, or (ii) net income, not including realized capital
gains or losses, as shown in the insurer's most recent Annual Statement.
Extraordinary dividends must be approved by the Commissioner of the SCDOI, or
his designee, prior to payment.

UIC is regulated by the NCDOI. The North Carolina Insurance Holding Company
System Regulatory Act allows payment of non-extraordinary dividends without
prior approval of the Commissioner of the NCDOI provided that, in the
Commissioner's judgment, the dividends do not impair the financial soundness of
the company or are not detrimental to its policyholders. Extraordinary dividends
are defined as dividends within a 12-month period that exceed the lesser of
(i) 10% of an insurer's surplus as regards policyholders as of the preceding
December 31, or (ii) net income, not including realized capital gains, for the
12-month period ending the preceding December 31. In determining whether a
dividend or distribution is extraordinary, an insurer other than a life insurer
may carry forward net income from the previous two calendar years that has not
already been paid out as dividends. Extraordinary dividends must be approved by
the Commissioner of the NCDOI prior to payment.

The Company's insurance subsidiaries' assets, liabilities and results of
operations have been reported in these consolidated financial statements in
accordance with GAAP, which varies from statutory accounting practices ("SAP")
prescribed or permitted by insurance regulatory authorities. Prescribed
statutory accounting practices are found in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), state laws and
regulations, as well as through general practices. The principal differences
between SAP and GAAP are that under SAP: (1) certain assets that are not
admitted assets are eliminated from the balance sheet, (2) acquisition costs for
policies are expensed as incurred, while they may be deferred and amortized over
the estimated life of the policies under GAAP, (3) deferred tax assets
calculated for statutory purposes are subject to an admissibility test and
(4) the gains on the sale-leaseback of property and the sale of the renewal
rights to the Company's NFIP business are not deferred. Each of the Company's
insurance subsidiaries must file with applicable state insurance regulatory
authorities an "Annual Statement" which reports, among other items, net income
(loss) and shareholders' equity (called "surplus as regards policyholders" in
statutory reporting).

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 11 DIVIDEND RESTRICTIONS AND STATUTORY REPORTING (CONTINUED)
A reconciliation between the GAAP net income (loss) and the statutory net
income (loss) of the insurance subsidiaries is as follows for the year ended
December 31:

A reconciliation between GAAP shareholders' equity and surplus as regards
policyholders, at December 31, is as follows:

Effective January 1, 2001, both the North Carolina 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

83

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 11 DIVIDEND RESTRICTIONS AND STATUTORY REPORTING (CONTINUED)
the RAD, UIC is required to submit monthly financial statements to the NCDOI. On
August 21, 2002, the SCDOI issued an Order Imposing Administrative Supervision
and Appointing Supervisor that placed SCIC, Catawba and CAIC under
administrative supervision (see Note 1).

NOTE 12 BENEFIT AND STOCK OPTION PLANS

STOCK OPTIONS AND STOCK OPTION PLANS

The Company currently has three plans under which stock options and
incentive stock may be granted to employees, non-employee directors, consultants
and active independent agents of the Company. Under the 1996 Stock Option Plan
for Employees ("Employee Plan") and the 1995 Stock Option Plan for Independent
Agents ("Agents Plan"), stock options expire five (5) years from the date of
grant. Under the 1995 Stock Option Plan for Non-Employee Directors ("Directors
Plan"), the options expire ten (10) years from the date of grant. Each plan is
administered by a committee appointed by the Board of Directors.

The Employee Plan became effective on November 1, 1995. The Employee Plan
has reserved 2,500,000 shares of the Company's common stock for issuance under
the plan as options and incentive stock to employees and consultants of the
Company. Activity in the Employee Plan is summarized as follows:

Options vest at the discretion of the Compensation Committee of the
Company's Board of Directors. All grants made under the Employee Plan have
exercise prices no lower than the market price at the date of grant. At
December 31, 2002, 1,933,968 shares of the Company's common stock have been
reserved for future grants. Following is a summary of options outstanding and
exercisable by price range as of December 31, 2002:

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 12 BENEFIT AND STOCK OPTION PLANS (CONTINUED)
The Agents Plan became effective on June 15, 1996. The Agents Plan has
reserved 125,000 shares of the Company's common stock for issuance under the
plan as options to independent insurance agents of the Company. Activity in the
Agents Plan is summarized as follows:

Options vest at the discretion of the 1995 Stock Option Plan for Independent
Agents Committee. All grants made under the Agents Plan have exercise prices no
lower than the market price at the date of grant. Options granted during 2001
and 2000 were granted at exercise prices of $2.01 and $1.83, respectively. At
December 31, 2002, 95,581 shares of the Company's common stock have been
reserved for future grants. Following is a summary of options outstanding and
exercisable by price range as of December 31, 2002:

The Directors Plan became effective on June 15, 1995, with 250,000 shares of
the Company's common stock reserved for issuance under the plan. Activity in the
Directors Plan is summarized as follows:

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 12 BENEFIT AND STOCK OPTION PLANS (CONTINUED)
Under the Directors Plan, all non-employee directors holding office on
June 15 of each year are granted 1,250 fully vested options to purchase the
Company's common stock. All grants made under the Directors Plan have exercise
prices no lower than the market price at the date of grant. Options granted
during 2002, 2001 and 2000 were granted at exercise prices of $2.50, $2.55 and
$1.09, respectively. At December 31, 2002, 182,500 shares of the Company's
common stock have been reserved for future grants. Following is a summary of
options outstanding and exercisable by price range as of December 31, 2002:

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Accordingly, no compensation cost has
been recognized for its three stock option plans. Had compensation costs for the
Company's stock option plans been determined based on the fair value at the
grant date for awards in 2002, 2001 and 2000 consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and income (loss) per share would
have been as follows:

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 12 BENEFIT AND STOCK OPTION PLANS (CONTINUED)
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:

WARRANTS

During the year ended December 31, 2001, the Company issued warrants to
purchase 75,000 shares of its common stock at a price of $2.00 per share and an
additional 75,000 shares of its common stock at a price of $1.00 per share in
connection with the settlement of liabilities assumed in an acquisition. The
warrants expire February 19, 2006.

In connection with the elimination of certain debt and the settlement of
certain litigation during the year ended December 31, 2000, the Company issued
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 warrants expire upon the death of the holder.

During the year ended December 31, 1998, the Company issued warrants to
purchase 57,971 shares of its common stock to the holder of its Credit Facility
that was repaid on March 28, 2002 (see Note 7). The warrants currently allow for
the purchase of the Company's stock at a price of $2.00 per share and expire
September 30, 2004.

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 12 BENEFIT AND STOCK OPTION PLANS (CONTINUED)

OTHER BENEFIT PLANS

The Company sponsors the South Carolina Insurance Company Employees'
Profit-Sharing and Savings Plan (the "Plan"), which provides both a
profit-sharing and a 401(k) element for the employees of the Company, its
subsidiaries and affiliates. As of December 31, 2002, the amount of assets
available in the Plan was $9,516. The profit-sharing element of the Plan covers
all full-time employees who have met minimum eligibility requirements. There
were no contributions to this part of the Plan in 2002, 2001 or 2000. Under the
401(k) element of the Plan, employees may elect to have a portion of their
salary withheld from pre-tax wages for investment in the Plan, subject to
limitations imposed by IRS regulations. The Company matches 50% of the first 6%
of the employee's contribution to the Plan. The Company's contribution to the
Plan on behalf of the participating employees was $268, $244, and $310 in 2002,
2001, and 2000 respectively.

The Company currently provides certain health care and life insurance
benefits for certain retired employees. The projected future cost of providing
post-retirement benefits is reflected as an expense as employees render services
instead of when the benefits are paid. The net transition obligation is being
recorded as a charge against income on a prospective basis as part of the future
annual benefit cost. Post-retirement benefit expense was approximately $59 in
2002, $70 in 2001, and $110 in 2000.

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 12 BENEFIT AND STOCK OPTION PLANS (CONTINUED)

The weighted-average annual assumed rate of increase in the per capita cost
of covered benefits (i.e., health care cost trend rate) was 10.0% for 2002 (11%
for 2001) and is assumed to decrease to a 5% ultimate trend with a duration to
ultimate trend of five years (six years in 2001). Increasing or decreasing the
assumed health care cost trend rate by one percentage point would have no
significant effect on the post-retirement benefit obligation as of December 31,
2002.

NOTE 13 SEGMENT REPORTING

Reportable segments are determined based on management's internal reporting
approach, which is based on product line and complementary coverages. The
reportable segments are comprised of Automobile, Flood, Commercial, Adjusting
Services and All Other. Following is a summary of the Company's reporting
segments with indications of whether the supporting operating segments are
risk-bearing or fee-based operations and whether the supporting operating
segments are ongoing operations or in runoff:

While the majority of revenues and expenses are captured directly by each
reportable segment, the Company does have shared income and expenses. Shared
income comprised approximately 67%, 35% and 35% of "all other income" in fiscal
2002, 2001 and 2000, respectively. The gain on the sale of investment in the
common stock of ISO accounted for 26% of shared "all other income" for fiscal
2002

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 13 SEGMENT REPORTING (CONTINUED)
(see Note 2). Shared expenses comprised approximately 4%, 2% and 2% of "all
other expenses" in fiscal 2002, 2001 and 2000, respectively. These shared
amounts were allocated on a basis proportionate with each reportable segment's
total net loss and LAE and unearned premium reserves. The results of the
reportable segments are included in the following tables:

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 13 SEGMENT REPORTING (CONTINUED)

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 13 SEGMENT REPORTING (CONTINUED)

NOTE 14 COMMITMENTS AND CONTINGENCIES

(a) In December 2000, the Company sold its corporate headquarters to its
majority shareholder, Chairman of the Board of Directors and Chief Executive
Officer. 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 $290 and $458 in 2002 and
2001, respectively. Approximate minimum future lease payments are $259 in 2003.

The Company and its subsidiaries lease various other office space, computer
equipment and automobiles under several operating leases that expire at various
times. Lease expense amounted to

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THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 14 COMMITMENTS AND CONTINGENCIES (CONTINUED)
$822, $1,027, and $1,320 in 2002, 2001, and 2000 respectively. Approximate
minimum future lease payments under these operating leases at December 31, 2002
are as follows:

2003........................................................ $ 797
2004........................................................ 721
2005........................................................ 462
2006........................................................ 61
------
Total..................................................... $2,041
======

(b) A contingent liability exists with respect to reinsurance placed with
other companies (See Note 5).

(c) Estimated reserves for losses and LAE for claims arising under the HDC
Program have been established by the Company net of the deductible that HDC is
required to pay under order of the Court. The Company has a potential
off-balance sheet credit risk associated with such deductibles if the Company
were required to fund the deductibles in the event that HDC cannot pay the
deductible.

The Court has ordered HDC to retain an independent actuary to estimate the
unpaid losses and LAE of the HDC Program, subject to the deductible, as of
December 31, 2002, and has ordered HDC to deposit funds in an equivalent amount
in a Court-restricted commercial checking account to serve as the funds from
which losses of the HDC Program are to be paid. The actuary retained by HDC has
issued a report estimating HDC's liability for the deductibles to be $4,300 as
of December 31, 2002 and HDC has deposited funds totaling $4,300 into a
Court-restricted commercial checking account ($3,000 on January 29, 2003, and
$1,300 on February 21, 2003) to serve as the funds from which losses are to be
paid. Pursuant to the court order, the Company has retained an actuary to review
the work of the actuary retained by HDC. The actuary retained by the Company has
raised questions regarding aspects of the methodology used by the actuary
retained by HDC and has not received a response to those questions. The Company,
in consultation with its consulting actuary, has estimated that HDC's liability
for the deductibles may be as much as $9,800 as of December 31, 2002. Whether
the actuaries will be able to agree on an amount representing HDC's estimated
liability for the deductibles at December 31, 2002 cannot be determined at this
time.

(d) Litigation was initiated in the United States District Court for the
Middle District of Florida, Tampa Division in November 2001 by QualSure, 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 were the three defendants to the
litigation and who collectively owned 30.625% of the stock of QualSure until
October 3, 2002. Effective October 3, 2002, the ownership interest in QualSure
held by SCIC, Catawba and CAIC was redeemed by QualSure. A condition of the
redemption was that the litigation would be dismissed with prejudice. On
October 17, 2002, the litigation was dismissed with prejudice.

(e) 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. The pleadings allege that a putative
class of persons in Texas

93

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 14 COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. AFS has
filed a third-party claim against DeBroux Marketing Co. ("DeBroux") for fraud
and indemnity stemming from DeBroux's transmission of the faxes at issue.
Settlement discussions are ongoing, but the Company does not believe final
resolution of the litigation will have a material impact on its financial
statements.

(f) Litigation was initiated in the Maricopa County Superior Court, State of
Arizona on March 25, 2002 by Du Pre Insurance Services, Inc., a California
corporation, Infinet Holdings, Inc., an Arizona corporation, Human Dynamics
Corporation, a California corporation and HDC Financial Services Corporation, an
Arizona corporation. The litigation names as defendants the Company, SCIC and
CAIC. Effective January 1, 2002, the Company, through SCIC and CAIC, issued two
workers' compensation insurance master policies to the HDC Group. SCIC and CAIC
did not obtain the approval of the SCDOI prior to issuing the master policies
and, therefore, subsequently canceled them. Litigation was initiated in the
Superior Court of the State of Arizona on March 25, 2002 by the HDC Group
against the Company, alleging that the Company wrongfully terminated workers
compensation coverage, breached its implied duty of good faith and fair dealing
by unilaterally rescinding HDC's workers compensation coverage and that the
Company breached its contract with the HDC Group to provide workers compensation
coverage. HDC claims its entitlement to punitive damages in an unspecified
amount. On July 9, 2002, an Arizona Superior Court Judge ruled that the policies
are in effect from January 1, 2002 through December 31, 2002. The Company
intends to appeal the decision.

In September 2002, the Company and the HDC Group mediated several
outstanding issues which resulted in an Interim Agreement between the parties
that was approved by the Court in October 2002. In accordance with the
court-approved Interim Agreement, the HDC Group is responsible for funding all
losses of the HDC 2002 workers' compensation program. Reinsurance coverage for
the HDC Program was obtained on October 21, 2002 effective for losses incurred
between January 1, 2002 and December 31, 2002 and amounting to $15,000 in excess
of $5,000 per occurrence. The Company, upon receiving approval from the SCDOI,
elected to retain the risk for losses amounting to $4,000 in excess of $1,000
per occurrence for premiums prescribed in the court-approved Interim Agreement.
In addition, the Company received or is to receive fees equal to 4% of collected
premium equivalents under the HDC Program as well as reimbursement for actual
boards, bureaus, assessments and premium taxes incurred for the insurance
policies. All premiums not remitted to the reinsurers or to the Company were
retained by the HDC Group.

In subsequent Court proceedings it was ordered that the HDC Program is to
function as a large deductible workers' compensation program with HDC being
responsible for all losses and LAE of the program up to $1,000 per occurrence
(the "deductible"). Coverage for losses and LAE in excess of the deductible is
provided by the Company, subject to its reinsurance for losses and LAE of
$15,000 in excess of $5,000 per occurrence (see item (c) above).

With respect to punitive damages claimed by HDC, the Company intends to
vigorously defend this matter and is considering filing a counterclaim. The
ultimate outcome of this litigation cannot be reasonably determined at this
time.

94

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 14 COMMITMENTS AND CONTINGENCIES (CONTINUED)
(g) 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.

NOTE 15 RELATED PARTY TRANSACTIONS

INS recorded commission and service income of $4,608, $3,915 and $3,458,
respectively, in connection with its Claims Administration Services Agreement
with QualSure. Effective October 3, 2002, the Company's ownership interest in
QualSure Holding was redeemed by QualSure Holding. Under the terms of the
underlying redemption agreement, INS continues to provide claim administration
services to QualSure under an amended contract at a reduced rate for terms that
expire from October 4, 2005 through January 21, 2010.

The Company's majority shareholder, Chairman of the Board of Directors and
Chief Executive Officer 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, 2002, 2001 and 2000, the Company paid a
total of $116, $242 and $225, respectively, to SADISCO.

On December 21, 2000, the Company sold its corporate headquarters to its
majority shareholder, Chairman of the Board of Directors and Chief Executive
Officer. 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 $290 and $458 in 2002 and
2001, respectively.

During the years ended December 31, 2002, 2001 and 2000, the Company paid a
total of $12, $61 and $110 to FHI, Inc. ("FHI"), respectively, for services
related to the settlement of certain outstanding litigation and other consulting
services. A member of the Company's Board of Directors is the owner of FHI. For
this Director's personal services, the Company paid FHI an additional $150 and
$373 in 2002 and 2001, respectively.

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, Chairman of the Board of Directors and Chief Executive Officer 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 pays quarterly dividends at an
annual adjustable rate of 3.5% plus LIBOR (4.9% at December 31, 2002).

95

SUPPLEMENTARY DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The following is a summary of unaudited quarterly information for the years
ended December 31, 2002 and 2001:

Commission and service income showed a marked decrease in the fourth quarter
of 2002 primarily as a result of the sale of the renewal rights to the Company's
NFIP business to The Hartford. On September 12, 2002, the Company announced that
it had received notice from FEMA that FEMA did not intend to offer SCIC and
Catawba a Financial Assistance/Subsidy Arrangement with the Federal Insurance
and Mitigation Administration for the fiscal year beginning October 1, 2002,
effectively terminating their participation in the NFIP. On November 15, 2002,
the Company announced completion of the transaction with The Hartford. Further
negatively impacting overall commission and service income during 2002 was that
reported by AFS. One of AFS' product offerings is a "life of loan" flood zone
determination whereby AFS agrees to update the zoning status of the subject
property throughout the life of the original underlying loan. AFS has deferred
approximately $500 of commission and service income at December 31, 2002
associated with this product and will amortize it into income over the estimated
life of the original underlying loans. Finally, commission and service income
was negatively impacted during 2002 as a result of the pricing and other
competitive initiatives effected by certain of UIC's competitors and the
continued runoff of the SC Facility. UIC generally does not engage in pricing
competitions with its competitors. Rather, UIC relies on its superior customer
service, long standing agency relationships and proven commitment to the North
Carolina marketplace to maintain or grow its premium volume. The SC Facility has
been in runoff since March 1, 1999 but began its final stage of runoff effective
March 1, 2002.

Premiums earned exhibited significant fluctuations between the second, third
and fourth quarters of 2002, primarily as a result of the accounting and
reporting for the HDC Program. The program was originally intended to be a
fronted program, administered by HDC with minimal underwriting risk to SCIC and
CAIC due to the anticipated placement of multiple layers of reinsurance
coverage. SCIC and CAIC did not obtain the approval of the SCDOI prior to
issuing the master policies and subsequently canceled them during the first
quarter of 2002. The cancellation of these policies is the ongoing subject of
litigation and mediation. On July 9, 2002, an Arizona Superior Court Judge ruled
that the policies are in effect from January 1, 2002 through December 31, 2002.
The Company did not receive sufficient information to enable the recording of
estimated premiums earned under this fronting program until the third quarter of
2002, at which time it recorded premiums earned of $10,046 representing
estimated premiums earned from January 1 through September 30, 2002. In
subsequent Court proceedings it was

96

SUPPLEMENTARY DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

ordered that the HDC Program was to function as a large deductible workers'
compensation program with HDC being responsible for all losses and LAE of the
program up to $1,000 per occurrence (the "deductible"). The impact of this
ruling is significant to the accounting treatment of the program because the
premium equivalents for a large deductible program do not include amounts
related to the deductible, as this risk is borne by the policyholder.
Accordingly, during the fourth quarter of 2002, the Company recorded the changes
to reflect the HDC Program cumulatively in 2002 as a large deductible program in
accordance with the order of the Court.

Following is a comparison of the HDC Program for the quarter and nine months
ended September 30, 2002 as reported (accounted for as a fronting type
arrangement) and proforma disclosure of the HDC Program for the same period as
if it had been accounted for as a large deductible program. The following table
also includes a comparison to the actual amounts recorded with respect to this
large deductible program year to date December 31, 2002:

The trend of net investment income during 2002 is directly related to the
general level of market interest rates and the relative mix and duration of the
Company's investment portfolio. In the fourth quarter of 2002, the Company
received cash of $8,575 related to the sale of QualSure Holding and the renewal
rights to its NFIP business. However, substantially all of these proceeds
remained invested in lower yielding short duration cash equivalents at
December 31, 2002.

The gradually decreasing balances of other interest income is a direct
result of the runoff of the Company's North Carolina premium finance operation,
PBP. Beginning in December 2001 no additional premiums were financed through PBP
and its reported other interest income was, therefore, that received on the
runoff of already financed premiums.

The net realized gain reported in the fourth quarter of 2002 is due to the
net effect of two transactions. First, effective October 3, 2002, the Company's
combined ownership interest in QualSure Holding was redeemed by QualSure Holding
for $4,775 resulting in a realized gain of $632. Second, in connection with the
sale of the renewal rights to its NFIP business to The Hartford, the Company
impaired certain data processing equipment and software used in that operation,
resulting in a realized loss of $27.

97

SUPPLEMENTARY DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

The equity in (loss) earnings of unconsolidated subsidiary result from the
Company's equity ownership interests in Sunshine State and QualSure. 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 the equity method, are included in current earnings. Effective October 3,
2002, the Company's ownership interest in QualSure was redeemed by QualSure.

The fourth quarter increase in other income is primarily related to policy
fees earned through SBC's managing general agent operation and amortization of
the deferred gain on the sale of the renewal rights to the Company's NFIP
business. Effective July 1, 2002, SBC entered into an agreement with a Florida
domiciled insurance company to serve as managing general agent for that
company's low-value dwelling homeowners' insurance program in the state of
Florida until such time as that program is runoff. Therefore, the Company does
not expect to recognize significant revenue related to the agreement after
December 31, 2002. In its capacity as managing general agent SBC earned policy
fees of $17 during the fourth quarter of 2002. On November 15, 2002, the Company
announced that it had sold the right to renew or assume all of SCIC and
Catawba's in-force NFIP business to The Hartford for $3,800 in cash at closing,
plus up to $1,000 to be paid on November 15, 2003, if certain retention
thresholds on the book of business are achieved. Provisions of the underlying
sales agreement, as approved by FEMA, provide that The Hartford administer and
report the Company's business to the NFIP over the transition period that ends
September 30, 2003. As a result of the Company's continuing involvement with the
book of business during the transition period, the gain on the transaction of
$3,499 (purchase price of $3,800 less expenses of sale of $301) has been
deferred and will be recognized evenly over the transition period. Included in
other income for the fourth quarter of 2002 is $350 of amortized gain.

Commission and service income showed an overall modest increase over 2000.
While the Company endured continuing decreases in its commission and service
income related to the SC Facility, it also experienced significant premium
growth in its NFIP operations. 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 attributable to the Company's
NFIP operations increased 14.8% for the year ended December 31, 2001 as compared
to the same period of 2000. The increase is primarily due to obtaining several
large books of flood business from independent insurance agents across the
United States that was facilitated by the introduction of new

98

SUPPLEMENTARY DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

technology. During the second and third quarters of 2001, overall commission and
service income exhibited modest increases primarily due to normal cyclical
fluctuations of the Company's underwriting operations for the NFIP. However, as
there was very little hurricane-related claims activity for the 2001 season,
commission and service income related to the NFIP decreased sharply in the
fourth quarter of 2001.

Premiums earned continued to show substantial overall quarterly reductions
when compared to the quarterly results of 2000. This is primarily attributable
to the discontinuation of the Company's Nashville and South Carolina automobile
operations at the beginning of the third quarter of 2000. Marginally offsetting
the significant decrease in premiums earned through the Company's Nashville and
South Carolina automobile operations was an increase in premiums earned through
its Commercial operations. From April 1, 2000 through March 31, 2001, the
Company ceded 70% of its written and earned premium to a reinsurer under a quota
share reinsurance agreement. Effective April 1, 2001 this agreement was canceled
and replaced with excess of loss and catastrophe reinsurance coverages.

Net investment income exhibited gradual decreases throughout 2001 resulting
primarily from steady decreases in the general level of market interest rates
and fluctuations in the Company's investment portfolio.

Other interest income experienced widely fluctuating results throughout 2001
as a result of 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. The Company's participation in each of these pools
and associations is calculated by and communicated to the Company on a quarterly
basis by a centralized statistical processing agency. Similar to the unusual
fourth quarter fluctuation of other interest income in 2000, the second and
third quarter fluctuations in 2001 are directly related to the time value of
money consideration on recoupment premiums the Company writes for the SC
Facility. The tendency for large fluctuations in this activity is heightened as
the SC Facility is nearing the end stages of runoff. Excluding the effects of
the mandatory residual market pools and associations, other interest income is
substantially comprised of interest income on premium notes receivable earned by
the Company's premium finance subsidiary, PBP. For a variety of reasons,
including PBP's continuing operating losses and reassessments of the Company's
strategic direction, PBP was placed into runoff in mid December 2001. Other
interest income earned by PBP for the first through fourth quarters of 2001 was
$266, $251, $348 and $266, respectively.

Net realized losses of $211 for the year ended December 31, 2001 resulted
from the sale of certain automobiles no longer required for operations and the
disposal of certain obsolete data processing equipment and software partially
offset by gains realized on the liquidation of a portion of the Company's bond
portfolio to fund its operations.

A substantial source of other income for the Company has historically been
its Nashville and PBP operations. Other income showed substantial overall
quarterly reductions in 2001 as compared to the quarterly results of 2000. This
is largely attributable to the net effect of several factors. First, at the
beginning of the third quarter of 2000, the Nashville operations were
discontinued. During 2001, premium activity related to the Nashville operations,
upon which its policy fees are based, was insignificant. Second, 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. As such, policy setup and the
related fee income previously retained by PBP became the responsibility of the
vendor. Third, the Company holds equity investments in two unconsolidated
affiliates. As each of the investments exceeds 20% of the equity of each
respective

99

SUPPLEMENTARY DATA

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

company, the Company's equity in the undistributed earnings of the affiliates,
using a computed equity method, are recorded as other income. Other income
recorded by the Company in 2001 was a loss of $486 as compared to income in 2000
of $129. Finally, partially offsetting these decreases in other income was the
amortization of the deferred gain on sale of the Company's corporate
headquarters. In December 2000, the Company sold its corporate headquarters to
its majority shareholder, Chairman of the Board of Directors and Chief Executive
Officer, resulting in 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 entire gain resulting from this transaction was deferred
and is being amortized into income evenly over the term of the leaseback.

In June 2000, the Company's Board of Directors approved and the Company
announced the Restructuring Plan centering on the discontinuation of its
Nashville operations. The Restructuring Plan was completed by September 30,
2001, and included a final downward adjustment to the original estimated cost of
$156.

100

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

On May 30, 2002, upon the recommendation of the Company's Audit Committee,
the Board of Directors appointed Johnson Lambert & Co. ("Johnson Lambert") to
serve as the Company's independent auditors for the fiscal year ended
December 31, 2002. Johnson Lambert replaced Arthur Andersen LLP ("Andersen")
which had been the Company's independent auditors since 1993. Andersen was
dismissed on May 30, 2002.

Andersen's reports on the consolidated financial statements of the Company
and its subsidiaries for the two previous fiscal years ended December 31, 2001
did not contain any adverse opinion or disclaimer of opinion, nor were such
reports qualified or modified as to uncertainty, audit scope or accounting
principles.

During the Company's two previous fiscal years ended December 31, 2001, and
the subsequent period ending May 30, 2002, there were: (i) no disagreements
between the Company and Andersen on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which,
if not resolved to Andersen's satisfaction, would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports on the Company's consolidated financial statement for such years; and
(ii) no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

During the Company's two most recent fiscal years ended December 31, 2001
and the subsequent interim period through May 30, 2002, the Company did not
consult with Johnson Lambert with respect to the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's consolidated financial
statements, or any other matters or reportable events as set forth in Items
304(a)(2)(i) and (ii) of Regulation S-K.

101

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is information about the executive officers of the Company.

102

The information relating to Directors of the Company set forth under the
caption "Election of Directors--Vote Required and Board Recommendation" and
"Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated by
reference from the Company's definitive proxy statement to be used in connection
with the 2003 Annual Meeting of Shareholders which is expected to be filed
pursuant to Regulation 14A within 120 days after the end of the Company's fiscal
year ended December 31, 2002 (the "Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION

The information relating to executive compensation set forth in the Proxy
Statement under the caption "Compensation of Directors and Executive Officers"
with the exception of the information set forth under the captions "Report of
the Compensation Committee on Executive Compensation" and "Stock Performance
Chart" is incorporated herein by reference from the Proxy Statement.

103

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of December 31, 2002 about all
of the Company's equity compensation plans. All plans have been approved by the
Company's shareholders.

The other information relating to security ownership of certain beneficial
owners and management set forth in the Proxy Statement under the caption
"Security Ownership of the Company" is herein incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information relating to certain relationships and related transactions
set forth in the Proxy Statement under the caption "Certain Transactions" is
herein incorporated by reference.

ITEM 14. CONTROLS AND PROCEDURES

(a) Based on their evaluation of the issuer's disclosure controls and
procedures (as defined in 17 C.F.R. Sections 240.13a-14(c) and 240.15d-14(c)) as
of a date within 90 days prior to the filing of this annual report, the issuer's
chief executive officer and treasurer and controller (principal financial
officer) concluded that the effectiveness of such controls and procedures was
adequate.

(b) There were no significant changes in the issuer's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

104

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) AND (2) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULES

- The following consolidated financial statements of The Seibels Bruce
Group, Inc. and subsidiaries are included in Item 8:

- Report of Independent Public Accountants--Johnson Lambert & Co.

- Report of Independent Public Accountants--Arthur Andersen LLP (This
is a copy of a report previously issued by Arthur Andersen LLP and it
has not been reissued by Arthur Andersen LLP)

- Consolidated Balance Sheets--As of December 31, 2002 and 2001

- Consolidated Statements of Operations--For the years ended
December 31, 2002, 2001 and 2000

- Consolidated Statements of Changes in Shareholders' Equity--For the
years ended December 31, 2002, 2001 and 2000

- Consolidated Statements of Cash Flows--For the years ended
December 31, 2002, 2001 and 2000

- The Notes to Consolidated Financial Statements included in Item 8
pertain both to the consolidated financial statements listed above
and the condensed financial information of the Registrant included in
Schedule II under Item 15(d).

- The following financial statement schedules are included in item 15(d):

- Schedule I--Summary of Investments Other than Investments in Related
Parties

- Schedule II--Condensed Financial Information of Registrant

- Schedule III--Supplementary Insurance Information

- Schedule IV--Reinsurance

- Schedule V--Valuation and Qualifying Accounts

- Schedule VI--Supplemental Information Concerning Property/Casualty
Insurance Operations

- All other schedules to the consolidated financial statements required by
Article 7 of Regulation S-X are not required under the related
instructions or are inapplicable and therefore have been omitted.

(a)(3) LIST OF EXHIBITS

3.1 Restated Articles of Incorporation of the Registrant, as
amended, dated February 12, 1999, incorporated herein by
reference to the Annual Report on Form 10-K, Exhibit 3.1,
for the year ended December 31, 1998. Articles of Amendment
to the Restated Articles of Incorporation, dated March 28,
2002, incorporated herein by reference to the Annual Report
on Form 10-K, Exhibit 3.1, for the year ended December 31,
2001. See Exhibit 3.1.

3.2 By-laws of the Registrant, as amended and restated, dated
February 4, 1999, incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit 3.2, for the year ended
December 31, 1998.

105

4.1 The rights of the Company's equity security holders are
defined in the Company's Restated Articles of Incorporation,
as amended, dated February 12, 1999, incorporated herein by
reference to the Annual Report on Form 10-K, Exhibit 3.1,
for the year ended December 31, 1998 and the Company's
Articles of Amendment to the Restated Articles of
Incorporation, dated March 28, 2002.

4.2 Form of the certificate of the Company's Common Stock, par
value $1.00 per share, incorporated herein by reference to
the Registrant's Registration Statement on Form S-2 (File
No. 333-24081).

10.1 South Carolina Insurance Company Employee's Profit Sharing
and Savings Plan, dated June 30, 1992, as amended
January 4, 1993, incorporated herein by reference to the
Annual Report on Form 10-K(10)(9)-9, for the year ended
December 31, 1992. Amendments dated June 2, 1993, April 21,
1994, July 1, 1994, July 1, 1995, July 1, 1996 and
September 26, 1997, incorporated herein by reference to the
Annual Report on Form 10-K, Exhibit 10.1, for the year ended
December 31, 1997. Amendment dated March 16, 1998,
incorporated herein by reference to the Annual Report on
Form 10-K, Exhibit 10.1, for the year ended December 31,
1998. Amendments dated April 16, 1999 and September 1, 2000,
incorporated by reference to the Annual Report on
Form 10-K, Exhibit 10.1, for the year ended December 31,
2000.

10.2 Stock Purchase Agreement, dated January 29, 1996, by and
between the Registrant and Charles H. Powers and Walker S.
Powers, and amendment thereto, incorporated herein by
reference to the Definitive Proxy Statement filed May 10,
1996.

10.3 Stock Purchase Agreement, dated March 28, 1996, by and
between the Registrant and Fred C. Avent, Frank H. Avent
and PepsiCo of Florence, incorporated herein by reference to
Form S-2, filed October 15, 1996, file number 333-14123.

10.4 Stock Purchase Agreement, dated March 28, 1996, by and
between Registrant and Junius DeLeon Finklea, Joseph K.
Newsom, Sr., Mark J. Ross, Larry M. Brice, J. Howard Stokes,
Winston W. Godwin, IRA and Peter D. and Vera C. Hyman,
incorporated herein by reference to Form S-2, filed
October 15, 1996, file number 333-14123.

10.5 The Seibels Bruce Group, Inc. 1996 Stock Option Plan for
Employees, dated November 1, 1995, incorporated herein by
reference to the Definitive Proxy Statement filed May 10,
1996, as amended by the Amendment thereto, effective
October 8, 1998, incorporated herein by reference to
Form S-8, filed October 9, 1998, file number 333-65537.

10.6 The Seibels Bruce Group, Inc. 1995 Stock Option Plan for
Independent Agents, dated June 14, 1996, incorporated herein
by reference to the Definitive Proxy Statement filed
May 10, 1996.

10.7 The Seibels Bruce Group, Inc. 1995 Stock Option Plan for
Non-Employee Directors, dated June 14, 1996, incorporated
herein by reference to the Definitive Proxy Statement filed
May 10, 1996. Amendment dated November 11, 1999 incorporated
by reference to the Definitive Proxy Statement filed
April 5, 2000.

10.8 Arrangement, dated October 1, 1996, by and between Catawba
Insurance Company, Kentucky Insurance Company and South
Carolina Insurance Company and The United States of America
Federal Emergency Management Agency, incorporated herein by
reference to the Annual Report on Form 10-K, Exhibit 10.14,
for the year ended December 31, 1996.

10.9 Joint Underwriting Association contract, dated October 13,
1998, by and between South Carolina Insurance Company and
the South Carolina Associated Auto Insurers Plan,
incorporated herein by reference to the Annual Report on
Form 10-K, Exhibit 10.15, for the year ended December 31,
1998.

106

10.10 Stock Purchase Agreement, dated March 28, 2002, by and
between The Seibels Bruce Group, Inc. and Charles H. Powers,
incorporated herein by reference to the Annual Report on
Form 10-K, Exhibit 10.16, for the year ended December 31,
2001.

10.11 Registration Rights Agreement, dated March 28, 2002, by and
between The Seibels Bruce Group, Inc. and Charles H. Powers,
incorporated herein by reference to the Annual Report on
Form 10-K, Exhibit 10.17, for the year ended December 31,
2001.

10.12 Commercial Lease, dated December 21, 2000, by and between
The Seibels Bruce Group, Inc. and Charles H. Powers,
incorporated herein by reference to the Annual Report on
Form 10-K, Exhibit 10.18, for the year ended December 31,
2001.

10.13 Claim Administration Services Agreement, dated January 21,
2000, by and between Insurance Network Services, Inc. and
QualSure Insurance Corporation (f/k/a Magna Florida
Insurance Company, Inc.). Amendment dated October 4, 2002.

10.14 Stock Redemption Agreement, dated October 4, 2002, by and
between South Carolina Insurance Company, Catawba Insurance
Company, Consolidated American Insurance Company, QualSure
Holding Corporation, Fenelon Ventures II, LLC and N.E.M.
(West Indies) Insurance Limited.

10.15 Renewal Rights and Assumption Reinsurance Agreement, dated
November 15, 2002, by and between South Carolina Insurance
Company, Catawba Insurance Company and The Hartford Fire
Insurance Company.

21.1 Subsidiaries of the Registrant.

23.1 Consent of Johnson Lambert & Co.

(b) REPORTS ON FORM 8-K.

(i) Form 8-K filed pursuant to Item 5 thereof with the Securities and
Exchange Commission on October 1, 2002 to report that the Company had
entered into a non-binding letter of intent with Selective Insurance
Company of America under which the Company would transfer its rights,
title and interest in flood insurance policies written by its insurance
subsidiaries through the National Flood Insurance Program.

(ii) Form 8-K filed pursuant to Item 5 thereof with the Securities and
Exchange Commission on October 2, 2002 to report that the previously
announced letter of intent to transfer its flood insurance servicing
rights to Selective Insurance Company of America was mutually
terminated due to lack of regulatory approval.

(iii) Form 8-K filed pursuant to Item 5 thereof with the Securities and
Exchange Commission on October 4, 2002 to report that Charles H. Powers
had assumed the position of chief executive officer and that Bryan D.
Rivers had been appointed treasurer.

(iv) Form 8-K filed pursuant to Item 5 thereof with the Securities and
Exchange Commission on October 10, 2002 to report that the Company's
investment in QualSure Holding Corporation ("QualSure") had been
redeemed by QualSure.

(v) Form 8-K filed pursuant to Item 5 thereof with the Securities and
Exchange Commission on October 29, 2002 to report that Michael A.
Culbertson had been appointed president.

(vi) Form 8-K filed pursuant to Item 5 thereof with the Securities and
Exchange Commission on November 15, 2002 to report that the Company had
completed a transaction with The Hartford Financial Services
Group, Inc. ("The Hartford") under which The Hartford acquired

107

the right to renew or assume all of the Company's in-force National
Flood Insurance Program business written under the Write Your Own
Program.

(vii) Form 8-K filed pursuant to Item 5 thereof with the Securities and
Exchange Commission on December 10, 2002 to report certain senior
management changes.

(viii) Form 8-K filed pursuant to Item 5 thereof with the Securities and
Exchange Commission on February 7, 2003 to report that the South
Carolina Department of Insurance had approved the Company's request to
permit its subsidiary Catawba Insurance Company to enter the
risk-bearing personal automobile and property insurance markets in
South Carolina.

(c) AND (d) EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The applicable exhibits and financial statement schedules are included
immediately after the signature pages.

108

SIGNATURES

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

THE SEIBELS BRUCE GROUP, INC. (Registrant)

Date: March 28, 2003 By /s/ MICHAEL A. CULBERTSON
----------------------------------------------------
Michael A. Culbertson
President

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

109

CERTIFICATIONS

I, Charles H. Powers, certify that:

1. I have reviewed this annual report on Form 10-K of The Seibels Bruce
Group, Inc.;

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

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

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

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

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

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

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

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

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

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

March 28, 2003 By /s/ CHARLES H. POWERS
- ------------------------------------------ ------------------------------------------
Date Charles H. Powers,
CHIEF EXECUTIVE OFFICER

110

CERTIFICATIONS

I, Bryan D. Rivers, certify that:

1. I have reviewed this annual report on Form 10-K of The Seibels Bruce
Group, Inc.;

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

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

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

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

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

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

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

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

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

6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

March 28, 2003 By /s/ BRYAN D. RIVERS
- ------------------------------------------ ------------------------------------------
Date Bryan D. Rivers,
TREASURER AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)

111

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE I--SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS

IN RELATED PARTIES

AS OF DECEMBER 31, 2002

(DOLLARS SHOWN IN THOUSANDS)

112

SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)

BALANCE SHEETS

AS OF DECEMBER 31,

(DOLLARS SHOWN IN THOUSANDS)

- ------------------------

* Eliminated in consolidation.

The accompanying notes are an integral part of these financial statements.

113

SCHEDULE II (CONTINUED)--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)

STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31,

(DOLLARS AND WEIGHTED AVERAGE SHARES OUTSTANDING SHOWN IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)

- ------------------------

* Eliminated in consolidation.

The accompanying notes are an integral part of these financial statements.

114

SCHEDULE II (CONTINUED)--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31,

(DOLLARS SHOWN IN THOUSANDS)

The accompanying notes are an integral part of these financial statements.

115

SCHEDULE II (CONTINUED)--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

THE SEIBELS BRUCE GROUP, INC. (PARENT COMPANY)

STATEMENTS OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31,

(DOLLARS SHOWN IN THOUSANDS)

The accompanying notes are an integral part of these financial statements.

116

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION

(DOLLARS SHOWN IN THOUSANDS)

- ------------------------------

(1) Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates. Results would change if different
methods were applied.

117

THE SEIBELS BRUCE GROUP, INC. AND SUBSIDIARIES

SCHEDULE IV--REINSURANCE

(DOLLARS SHOWN IN THOUSANDS)

- ------------------------

* Includes amount written as designated carrier for the NC Facility, SC
Facility and NFIP.

118

THE SEIBELS BRUCE GROUP, INC.
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS SHOWN IN THOUSANDS)

119

THE SEIBELS BRUCE GROUP, INC.
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
(DOLLARS SHOWN IN THOUSANDS)

- ----------------------------------

* The Company does not discount its loss and LAE reserves.

120