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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
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 1-12338
VESTA INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-1097283
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3760 RIVER RUN DRIVE 35243
BIRMINGHAM, ALABAMA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(205) 970-7000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the registrant's common stock,
$.01 par value, as of September 30, 1997
18,737,500
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VESTA INSURANCE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<C> <S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996................................................. 1
Consolidated Statements of Operations for the Three
Months and Nine Months Ended September 30, 1997 and 1996.......... 2
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996.......................... 3
Notes to Consolidated Financial Statements........................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 6
<CAPTION>
PART II OTHER INFORMATION
<C> <S> <C>
Item 1. Legal Proceedings................................................. 11
Item 2. Changes in Securities............................................. 11
Item 3. Defaults Upon Senior Securities................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............... 11
Item 5. Other Information................................................. 11
Item 6. Exhibits and Reports on Form 8-K.................................. 12
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
(UNAUDITED)
Assets:
Investments:
Fixed maturities available for sale--at market
(cost: 1997--$466,657;
1996--$306,026)................................. $ 471,742 $ 308,898
Equity securities--at market (cost: 1997--$4,066;
1996--$4,365)................................... 11,442 8,326
Short-term investments............................ 219,964 105,415
----------- ----------
Total investments................................ 703,148 422,639
Cash............................................... 20,843 4,637
Accrued investment income.......................... 8,095 5,392
Premiums in course of collection .................. 308,288 259,275
Reinsurance balances receivable.................... 288,478 115,768
Reinsurance recoverable on paid losses............. 108,784 69,698
Deferred policy acquisition costs.................. 84,526 75,532
Property and equipment............................. 18,352 3,920
Other assets....................................... 62,126 49,381
Goodwill........................................... 88,218 7,339
----------- ----------
Total assets..................................... $ 1,690,858 $1,013,581
=========== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses............... 555,282 247,224
Unearned premiums................................. 338,453 228,325
----------- ----------
893,735 475,549
Accrued income taxes............................... 17,980 21,463
Reinsurance balances payable....................... 140,123 51,162
Other liabilities.................................. 59,911 26,425
Short term debt.................................... 10,000 22,000
Long term debt..................................... 98,314 98,279
----------- ----------
Total liabilities................................ 1,220,063 694,878
Commitments and contingencies
Deferrable Capital Securities....................... 100,000 --
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, none
issued............................................ -- --
Common stock, $.01 par value, 32,000,000 shares
authorized,
issued: 1997--18,970,695 shares; 1996--18,970,695
shares ........................................... 190 190
Additional paid-in capital......................... 160,072 161,037
Unrealized investment gains, net of applicable
taxes............................................. 8,099 4,442
Retained earnings.................................. 211,889 166,795
Receivable from issuance of restricted stock....... (2,926) (3,207)
Treasury stock..................................... (6,529) (10,554)
----------- ----------
Total stockholders' equity....................... 370,795 318,703
----------- ----------
Total liabilities and stockholders' equity....... $ 1,690,858 $1,013,581
=========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
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VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------------
1997 1996 1997 1996
--------- ----------------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Net premiums written..................... $ 114,405 $ 67,568 $382,907 $385,571
Decrease in unearned premiums............ 38,882 20,776 29,717 15,044
--------- -------- -------- --------
Net premiums earned...................... 153,287 88,344 412,624 400,615
Net investment income.................... 12,251 6,102 25,576 17,108
Other, including realized gains and
losses 5,030 61 5,266 144
--------- -------- -------- --------
Total revenues........................ 170,568 94,507 443,466 417,867
Expenses:
Losses incurred.......................... 62,985 38,627 191,212 214,411
Loss adjustment expenses incurred........ 10,940 7,938 21,648 15,158
Policy acquisition expenses.............. 44,944 21,696 109,691 103,067
Operating expenses....................... 13,376 1,946 27,950 13,870
Premium taxes and fees................... 2,127 1,541 5,394 4,958
Interest on debt......................... 3,771 2,568 8,379 7,557
Goodwill................................. 1,037 211 1,704 466
--------- -------- -------- --------
Total expenses........................ 139,180 74,527 365,978 359,487
Net income before income taxes............ 31,388 19,980 77,488 58,380
Income taxes.............................. 10,519 6,568 26,664 19,318
Deferrable capital securities interest,
net of income tax........................ 1,409 -- 3,718 --
--------- -------- -------- --------
Net income............................ $ 19,460 $ 13,412 $ 47,106 $ 39,062
========= ======== ======== ========
Per share amounts:
Net income............................ $ 1.04 $ 0 .71 $ 2.53 $ 2.06
========= ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
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VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Operating Activities:
Net Income................................................ $ 47,106 $ 39,062
Adjustments to reconcile net income to cash provided from
operations:
Change in:
Loss and LAE reserves................................... 17,742 28,167
Unearned premium reserve................................ 11,750 25,864
Reinsurance balances payable............................ 88,960 26,302
Accrued income taxes.................................... (5,744) 6,076
Other liabilities....................................... 10,918 7,649
Premiums in course of collection........................ (8,231) (36,974)
Reinsurance balances receivable......................... (107,034) (36,555)
Reinsurance recoverable on paid losses.................. (34,073) (21,505)
Other assets............................................ (13,993) (18,151)
Policy acquisition costs deferred........................ (53,052) (37,509)
Policy acquisition costs amortized....................... 67,134 41,622
Amortization and depreciation............................ 2,920 2,713
Investment (gains)....................................... (4,511) (11)
(Gain) on disposition of property, plant and equipment... (106) (67)
-------- --------
Net cash provided from operations....................... 19,786 26,683
Investing Activities:
Investments sold or matured:
Fixed maturities available for sale-matured, called...... -- 30,566
Fixed maturities available for sale, sold................ 265,909 --
Equity Securities........................................ 2,291 3,726
Investments acquired:
Fixed maturities available for sale...................... (4,507) (12,354)
Equity Securities........................................ (1,448) (7,326)
Net cash paid for acquisition............................ (234,698) --
Net (increase) in short-term investments.................. (114,549) (41,061)
Additions to property, plant and equipment................ (6,175) (1,341)
Dispositions of property, plant and equipment............. 316 172
-------- --------
Net cash used in investing activities................... (92,861) (27,618)
Financing Activities:
Dividends paid............................................ (2,094) (2,121)
Capital contributions and change in receivable from re-
stricted stock........................................... 3,340 1,220
Issuance of long and short-term debt...................... 242,000 --
Increase in long-term debt................................ -- 104
Retirement of long and short-term debt.................... (153,965) --
-------- --------
Net cash provided from (used in) financing activities... 89,281 (797)
Increase (decrease) in cash................................ 16,206 (1,732)
Cash at beginning year..................................... 4,637 6,833
-------- --------
Cash at end of year........................................ $ 20,843 $ 5,101
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
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VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
Basis of Presentation: The accompanying unaudited financial statements have
been prepared in conformity with generally accepted accounting principles and,
in the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of results for such
periods. The results of operations and cash flows for any interim period are
not necessarily indicative of results for the full year. These financial
statements should be read in conjunction with the financial statements and
related notes in the Company's 1996 Annual Report. Certain amounts in the
financial statements presented have been reclassified from amounts previously
reported in order to be comparable between years. These reclassifications have
no effect on previously reported stockholders' equity or net income during the
period involved.
Earnings Per Share: Net earnings per share is calculated by dividing net
income by weighted average number of common shares and common equivalent
shares outstanding including the net effect of the restricted stock grants.
The weighted average number of common shares and common equivalent shares
outstanding for the nine month period ended September 30, 1997 and 1996 was
18,630,695 and 18,917,044, respectively. The weighted average number of common
shares and common equivalent shares outstanding for the three month period
ended September 30, 1997 and 1996 was 18,709,082 and 18,919,939.
Business Acquisition: After the close of business on June 30, 1997, the
Company completed its acquisition of all the issued and outstanding stock of
the operating subsidiaries of Anthem Casualty Insurance Group, Inc., each of
which are property and casualty insurance companies headquartered in Ohio, for
$238.75 million. The acquired subsidiaries had $648 million of assets and
approximately $217 million of stockholders' equity at December 31, 1996. The
acquisition was accounted for as a purchase and the results of operations
since the acquisition date were consolidated. Goodwill from the transaction is
being amortized straight line over 15 years.
A summary of net assets acquired follows:
<TABLE>
<S> <C>
Assets acquired:
Investments................................................... $419,271
Cash.......................................................... 15,069
Goodwill...................................................... 60,667
Other Assets.................................................. 168,505
--------
Total........................................................ $663,512
Liabilities Assumed
Loss and loss adjustment expenses............................. $290,315
Unearned premiums............................................. 98,378
Other......................................................... 36,069
--------
Total........................................................ $424,762
Purchase price................................................ $238,750
Acquisition expenses.......................................... 11,017
Less cash acquired............................................ (15,069)
Aggregate purchase price...................................... 234,698
</TABLE>
The above table represents the purchase price plus acquisition costs through
September 30, 1997. The purchase agreement specifies that Vesta Insurance
Group make contingent payments based on audited financial statements of the
operating subsidiaries of Anthem Casualty Group as of June 30, 1997. The audit
has not been completed but, based on preliminary findings, it does not appear
that the contingent payments will significantly affect the purchase price.
4
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The table below presents supplemental pro forma information for 1996 and
1997 as if the Anthem acquisition were made at January 1, 1996, based on
estimates and assumptions considered appropriate:
<TABLE>
<CAPTION>
Nine months
ended September
30
---------------
1997 1996
------- -------
<S> <C> <C>
Revenues................................................. 594,114 664,408
Net income............................................... 51,978 42,409
Net income per common share.............................. 2.79 2.42
</TABLE>
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Vesta Insurance Group, Inc. (the "Company" or "Vesta") is a holding company
for a group of property and casualty insurance companies (the "Vesta Group")
that offer treaty reinsurance and primary insurance on personal and commercial
risks. In both its reinsurance and primary insurance operations, the Company
focuses principally on property coverages, for which ultimate losses generally
can be more promptly determined than on casualty risks. The Company's revenues
from operations are derived primarily from net premiums earned on risks
written and reinsured by the Company, investment income and investment gains
or losses, while expenses consist primarily of payments for claims losses and
underwriting expenses, including agents' commissions, and operating expenses.
Comparison of Third Quarter 1997 to Third Quarter 1996
Net income increased by $6.1 million, or 45.5%, to $19.5 million for the
quarter ended September 30, 1997, from $13.4 million for the quarter ended
September 30, 1996. On a per share basis, net income for the third quarter of
1997 was $1.04 per share versus net income of $.71 per share for the third
quarter of 1996. On a per share basis, net realized investment gains after tax
for the third quarter of 1997 was $.15 versus $.0 for the same period in 1996.
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written increased by $70.6 million, or 40.6%, to $244.5 million for
the quarter ended September 30, 1997, from $173.9 million for the quarter
ended September 30, 1996, while net premiums written increased by $46.8
million, or 69.2%, to $114.4 million. Substantially all of the premiums
generated from the Anthem subsidiaries are from primary lines of business.
Therefore, the acquisition of Anthem and the transfer of business from assumed
reinsurance to personal lines following the acquisition of Vesta County Mutual
Insurance Company has had the effect of significantly increasing the portion
of net written premiums attributable to primary business.
Gross premiums written for reinsurance decreased by $6.0 million, or 4.5%,
to $128.2 million for the quarter ended September 30, 1997, from $134.2
million for the quarter ended September 30, 1996. The decrease was primarily
attributable to the transfer of business from assumed reinsurance to personal
lines following the acquisition of Vesta County Mutual Insurance Company. Net
premiums written for reinsurance increased $18.1 million, or 32.7%, to $73.5
million for the quarter ended September 30, 1997, from $55.4 million for the
quarter ended September 30, 1996. Net premiums written in the third quarter of
1996 were reduced by approximately $22 million as a result of an unearned
premium portfolio cession related to the Company's 20% quota share reinsurance
facility.
Gross premiums written for primary insurance increased by $76.6 million, or
192.5%, to $116.4 million for the quarter ended September 30, 1997, from $39.8
million for the quarter ended September 30, 1996 due to the third quarter
writings on personal lines and commercial lines from the operating
subsidiaries of Anthem resulting in an increase of $68.3 million of gross
premium written, and the transfer of business from assumed reinsurance to
personal lines following the acquisition of Vesta County Mutual Insurance
Company. Gross premiums written for personal products increased 188.9% to
$82.9 million for the quarter ended September 30, 1997, compared to $28.7
million for the quarter ended September 30, 1996. Gross premiums on commercial
lines increased 204.5%, from $11.0 million for the quarter ended September 30,
1996 to $33.5 million for the quarter ended September 30, 1997.
Net premiums written for primary insurance increased by $28.7 million, or
235.2%, to $40.9 million for the quarter ended September 30, 1997, from $12.2
million for the quarter ended September 30, 1996. The increase in net premiums
written was largely attributable to the writings from the operating
6
<PAGE>
subsidiaries of Anthem and the transfer of business from assumed reinsurance
to personal lines following the acquisition of Vesta County Mutual Insurance
Company. The third quarter of 1997 net premiums written was reduced by
approximately $40 million as a result of incorporating the operating
subsidiaries of Anthem into Vesta's current reinsurance program. The decrease
in net written premiums was offset by a decrease in unearned premium,
therefore there was no impact on net earned premium.
Net premiums earned increased by $65 million, or 73.6%, to $153.3 million
for the quarter ended September 30, 1997, from $88.3 million for the quarter
ended September 30, 1996. Net premiums earned for reinsurance increased $24.6
million from $67.2 million for the third quarter of 1996 to $91.8 million for
the third quarter of 1997. Net premiums earned for primary insurance risks
increased $40.4 million from $21.1 million for the third quarter of 1996 to
$61.5 million for the third quarter 1997.
Net Investment Income. Net investment income increased by $6.1 million, or
100%, to $12.2 million for the quarter ended September 30, 1997, from $6.1
million for the quarter ended September 30, 1996. The weighted average yield
on invested assets (excluding realized and unrealized gains) was 6.1% for the
quarter ended September 30, 1997, compared with 5.6% for the quarter ended
September 30, 1996. The increase in net investment income is primarily
attributable to the increased portfolio of investments following the
acquisition of the operating subsidiaries of Anthem and the increased weighted
average pre-tax yield.
Losses and Loss Adjustment Expenses Incurred. Losses and loss adjustment
expenses ("LAE") increased by $27.3 million, or 58.6%, to $73.9 million for
the quarter ended September 30, 1997, from $46.6 million for the quarter ended
September 30, 1996. The substantial increase in losses and loss adjustment
expenses was largely attributable to the growth in the overall business
following the acquisition of the operating subsidiaries of Anthem. The loss
and LAE ratio for the quarter ended September 30, 1997 was 48.2% as compared
to 52.7% for the quarter ended September 30, 1996. The improved loss and LAE
ratio related primarily to the quarter to quarter decrease of $2.2 million in
catastrophe losses.
Policy Acquisition and Other Underwriting Expenses. Policy acquisition and
other underwriting expenses increased by $35.2 million, or 139.7%, to $60.4
million for the quarter ended September 30, 1997, from $25.2 million for the
quarter ended September 30, 1996. The increase in policy acquisition and other
underwriting expenses was largely attributable to the growth in the overall
business following the acquisition of the operating subsidiaries of Anthem.
The underwriting expense ratio for the quarter ended September 30, 1997, was
39.4%, as compared to 28.5% for the quarter ended September 30, 1996. The
increase in the underwriting expense ratio was primarily attributable to
increased commission expenses due to new incentive plans implemented for
Anthem and existing agents, as well as a decrease in commission rates on ceded
premiums.
Federal Income Taxes. Federal income taxes increased by $3.9 million, or
59.1%, to $10.5 million for the quarter ended September 30, 1997. The
effective rate on pre-tax income increased from 32.9% to 33.5% for the quarter
ended September 30, 1997. This increase was due primarily to a smaller portion
of income from tax free municipal bonds in 1997 versus 1996.
Comparison of Nine Months Ended September 30, 1997 with Nine Months Ended
September 30, 1996
The first nine months of 1997 resulted in net income of $47.1 million, an
increase of $8 million from the $39.1 million reported for the same period in
1996. On a per share basis, net income for the first nine months of 1997 was
$2.53 per share.
7
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Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written increased by $97.5 million, or 17.6% to $651.4 million for
the nine month period ended September 30, 1997, from $553.9 million for the
nine month period ended September 30, 1996, while net premiums written
decreased by $2.7 million, or .7%, to $382.9 million for the nine month period
ended September 30, 1997.
Gross premiums written for reinsurance decreased by $5.6 million, to $433.2
million for the nine month period ending September 30, 1997 from $438.8
million for the nine month period ending September 30, 1996. The decrease is
primarily attributable to the transfer of business from assumed reinsurance to
personal lines following the acquisition of Vesta County Mutual Insurance
Company. Net premiums written for reinsurance decreased by $38.6 million, or
12.2% to $278.8 million for the first nine months of 1997, from $317.4 million
for the first nine months of 1996 due to the pro rata reinsurance facility
entered into by Vesta Fire on July 1, 1996, and the transfer of business from
assumed reinsurance to personal lines following the acquisition of Vesta
County Mutual Insurance Company.
Gross premiums written for primary insurance increased by $103.1 million, or
89.6%, to $218.2 million for the nine month period ended September 30, 1997,
from $115.1 million for the nine month period ended September 30, 1996. Gross
premiums written for personal products increased 95.1%, to $157.4 million for
the nine months ended September 30, 1997, compared to $80.7 million for the
nine months ended September 30, 1996. The growth was primarily attributable to
the writings from the operating subsidiaries of Anthem and the transfer of
business from assumed reinsurance to personal lines following the acquisition
of Vesta County Mutual Insurance Company. Gross premiums on commercial lines
increased by 76.3%, from $34.5 million for the nine month period ended
September 30, 1996 to $60.8 million for the nine month period ended September
30, 1997. This increase in gross premiums written was primarily attributable
to the growth in the overall business following the acquisition of the
operating subsidiaries of Anthem.
Net premiums written for primary insurance increased $35.9 million, or 52.6%
to $104.1 million for the nine month period ended September 30, 1997, from
$68.2 million for the nine month period ended September 30, 1996 due to the
growth in the overall business following the acquisition of the operating
subsidiaries of Anthem.
Net premiums earned increased by $12.0 million, or 3%, to $412.6 million for
the nine month period ended September 30, 1997, from $400.6 million for the
nine month period ended September 30, 1996. Net premiums earned for
reinsurance decreased $27.3 million, or 8.3% to $300.3 million for the nine
month period ended September 30, 1997 from $327.6 million for the nine month
period ended September 30, 1996. Net premiums for primary lines increased
$39.3 million or 53.8% to $112.3 million for the nine month period ended
September 30, 1997, from $73.0 million for the nine month period ended
September 30, 1996.
Net Investment Income. Net investment income increased by $8.5 million, or
49.7%, to $25.6 million for the first nine months of 1997, from $17.1 million
for the first nine months of 1996. The weighted average pre-tax yield on
invested assets (excluding realized and unrealized gains) was 5.7% for the
nine month period ended September 30, 1997, compared with 5.6% for the nine
month period ended September 30, 1996. The increase in net investment income
is primarily attributable to the increased portfolio of investments following
the acquisition of the operating subsidiaries of Anthem.
Loss and Loss Adjustment Expenses Incurred. Losses and loss adjustment
expenses ("LAE") decreased $16.7 million, or 7.3%, to $212.9 million at
September 30, 1997 from $229.6 million at September 30, 1996 due to a pro rata
reinsurance facility entered into by Vesta Fire Insurance Corporation in July
1996 and to a decrease in catastrophe losses. The loss and LAE ratio for the
nine month period ended September 30, 1997 was 51.6% as compared to 57.4% at
September 30, 1996. During the first nine months of 1997, the Company incurred
catastrophe losses of approximately $4.0 million as compared to $12.1 million
during the first nine months of 1996.
8
<PAGE>
Policy Acquisition and Other Underwriting Expenses. Policy acquisition and
other underwriting expenses increased by $21.1 million, or 17.3%, to $143.0
million for the nine months ended September 30, 1997, from $121.9 million for
the nine months ended September 30, 1996. The underwriting expense ratio for
the nine months ended September 30, 1997 was 34.7%, as compared to 30.4% for
the nine months ended September 30, 1996. The increase in policy acquisition
and other underwriting expenses was largely attributable to the growth in
overall business following the acquisition of the operating subsidiaries of
Anthem.
Federal Income Taxes. Federal income taxes increased by $7.4 million, or
38.4%, to $26.7 million for the nine month period ended September 30, 1997.
The effective rate on pre-tax income increased from 33.1% for the first nine
months of 1996 to 34.5% for the first nine months of 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company whose principal asset is its investment in
the capital stock of the companies constituting the Vesta Group, a group of
wholly-owned property and casualty insurance companies including Vesta Fire.
The insurance company subsidiaries comprising Vesta Group are individually
supervised by state insurance regulators. Vesta Fire is the principal
operating subsidiary of the Company.
As a holding company with no other business operations, the Company relies
primarily upon dividend payments from Vesta Fire to meet its cash requirements
(including its debt service) and to pay dividends to its stockholders.
Transactions between Vesta Fire and the Company, including the payment of
dividends by Vesta Fire, are subject to certain limitations under the
insurance laws of Alabama. Specifically, Alabama law permits the payment of
dividends in any year which, together with other dividends or distributions
made within the preceding 12 months, do not exceed the greater of 10% of
statutory surplus as of the end of the preceding year or the net income for
the preceding year, with larger dividends payable only after receipt of prior
regulatory approval. Based upon restrictions presently in effect, the maximum
amount available for payment of dividends to the Company by its insurance
subsidiaries in 1997 without prior approval of regulatory authorities is
approximately $50.7 million.
The principal uses of funds at the holding company level are to pay
operating expenses, interest on outstanding indebtedness and dividends to
stockholders. During the last three years, the insurance subsidiaries of the
Company have produced operating results sufficient to fund the needs of the
Company. There can be no assurance as to the ability of the Company's
insurance subsidiaries to continue to pay dividends at current levels.
However, the Company is not aware of any demands or commitments of the
insurance subsidiaries that would prevent the payment of dividends to the
Company sufficient to meet the anticipated needs (including debt service) of
the Company over the next twelve months.
During the first nine month period of 1997, the Company paid approximately
$2.1 million in dividends on its common stock, and it is expected that the
Company will pay approximately $2.8 million for all of 1997. The Company is
also required to make semi-annual interest payments of $4.4 million on its
$100 million of 8.75% Senior Debentures due 2025 and $4.25 million on the $100
million of 8.525% Capital Securities due 2027 issued by Vesta Capital Trust I.
The principal sources of funds for the Company's insurance subsidiaries are
premiums, investment income and proceeds from the sale or maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions and the purchase of investments. In order to provide
further liquidity, the Company increased its Line of Credit to $200 million
from $100 million effective April 8, 1997. As of September 30,1997, the
Company has $10 million outstanding under this line of credit. The Credit
Agreement contains certain covenants that
9
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require, among other things, the Company to maintain a certain consolidated
net worth, maintain a certain amount of investment income available to pay
interest expense, require each insurance subsidiary to maintain a certain
total adjusted capital and limit the amount of indebtedness the Company can
have. The Company is in compliance with these covenants.
On a consolidated basis, net cash provided from operations for the nine
month period ended September 30, 1997 and 1996 was $19.8 million and $26.7
million, respectively.
Total assets of the Company increased by 70.0% to $1.7 billion in 1997, from
$1.0 billion in 1996. Cash and invested assets were $724.0 million at
September 30, 1997, increasing 69.4% from December 31, 1996.
As of September 30, 1997, the Company's investment portfolio consisted of
cash and short-term investments (33.3%), U.S. Government securities (12.4%),
mortgage-backed securities (8.7%), corporate bonds (25.5%), foreign government
securities (0.5%), municipal bonds (18.1%) and equity securities (1.5%).
According to Moody's rating, 94.9% of the Company's portfolio is rated A or
better. The Company expects current cash flow to be sufficient to meet
operating needs, although, a certain amount of invested assets has been
categorized as available for sale in the event short-term cash needs exceed
available resources. The Company adjusts its holdings of cash, short-term
investments and invested assets available for sale according to its seasonal
cash flow needs. Beginning in June of each year, the Company begins to
increase its holdings of cash and short-term investments. This practice
facilitates the Company's ability to meet its higher short-term cash needs
during the hurricane season.
After the close of business on June 30, 1997, the Company completed its
acquisition of the issued and outstanding stock of the operating subsidiaries
of Anthem Casualty Insurance Group, Inc. ("Anthem"), each of which are
property and casualty insurance companies headquartered in Ohio, for $238.75
million. The acquired subsidiaries had $648 million of assets and
approximately $217 million of stockholders' equity at December 31, 1996. The
Company funded the payment of the purchase price for this acquisition with
available cash on hand, short term investments, cash available from its
insurance subsidiaries and with funds available under its line of credit. The
Company does not believe that the payment of the purchase price as described
above will have an adverse impact on the Company's liquidity.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described
in the Company's filings with the Securities and Exchange Commission,
including its most recent Annual Report on Form 10-K. If any of these
assumptions or opinions prove incorrect, any forward-looking statements made
on the basis of such assumptions or opinions may also prove materially
incorrect in one or more respects.
10
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other specified relief. Based upon information presently
available, and in light of legal and other defenses available to the Company
and its subsidiaries, management does not consider liability from any
threatened or pending litigation to be material.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
11
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company, dated September
1, 1993 (filed as an exhibit to Amendment No. 1 to the Registration
Statement on Form S-1 (Registration No. 33-68114) of Vesta Insurance
Group, Inc., filed on October 18, 1993 and incorporated herein by ref-
erence (File No. 1-12338)).
3.2 By-Laws of the Company (Amended and Restated as of October 1, 1993)
(filed as an exhibit to Amendment No. 1 to the Registration Statement
on Form S-1 (Registration No. 33-68114) of Vesta Insurance Group,
Inc., filed on October 18, 1993 and incorporated herein by reference
(File No. 1-12338)).
4.1 Indenture between the Company and Southtrust Bank of Alabama, National
Association, dated as of July 19, 1995 (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1995, filed on
March 28, 1996 and incorporated herein by reference (File No. 1-
12338)).
4.2 Supplemental Indenture between the Company and Southtrust Bank of Ala-
bama, National Association, dated July 19, 1995 (filed as an exhibit
to the Company's Form 10-K for the year ended December 31, 1995, filed
on March 28, 1996 and incorporated herein by reference (File No. 1-
12338)).
4.3 Indenture dated as of January 31, 1997, between the Company and First
Union National Bank of North Carolina, as trustee (filed as an exhibit
to the Company's Form 10-Q for the quarter ended March 31, 1997, filed
on May 13, 1997 and incorporated herein by reference (File No. 1-
12338)).
4.4 Amended and Restated Declaration of Trust, dated as of January 31,
1997, of Vesta Capital Trust I (filed as an exhibit to the Company's
Form 10-Q for the quarter ended March 31, 1997, filed on May 13, 1997
and incorporated herein by reference (File No. 1-12338)).
4.5 Capital Securities Guarantee Agreement, dated as of January 31, 1997,
between the Company and First Union National Bank of North Carolina,
as trustee (filed as an exhibit to the Company's Form 10-Q for the
quarter ended March 31, 1997, filed on May 13, 1997 and incorporated
by reference (File No. 1-12338)).
10.1 Separation and Public Offering Agreement between Torchmark Corporation
and the Company dated September 13, 1993 (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1993, filed on
March 28, 1994 and incorporated herein by reference (File No. 1-
2338)).
10.2 Marketing and Administrative Services Agreement between Liberty Na-
tional File Insurance Company, Liberty National Insurance Corporation
and Liberty National Life Insurance Company dated September 13, 1993
(filed as an exhibit to the Company's Form 10-K for the year ended De-
cember 31, 1993, filed on March 28, 1994 and incorporated herein by
reference (File No. 1-2338)).
10.3 Investment Services Agreement between Waddell & Reed Asset Management
Company and the Company dated September 13, 1993 (filed as an exhibit
to Amendment No. 1 to the Registration Statement on Form S-1 (Regis-
tration No. 33-68114) of Vesta Insurance Group, Inc., filed on October
18, 1993 and incorporated herein by reference (File No. 1-12338)).
10.5 Management Agreement between J. Gordon Gaines, Inc., Liberty National
Fire Insurance Company, Sheffield Insurance Corporation, Liberty Na-
tional Insurance Corporation and Vesta Insurance Corporation dated No-
vember 15, 1994 (filed as an exhibit to the Company's Form 10-K for
the year ended December 31, 1993, filed on March 28, 1994 and incorpo-
rated herein by reference (File No. 1-2338)).
10.6 Form of Restricted Stock Agreement (filed as an exhibit to the Regis-
tration Statement on Form S-1 (Registration No. 33-68114) of Vesta In-
surance Group, Inc., filed on August 31, 1993 and incorporated herein
by reference (File No. 1-12338)).
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.7* The Company's Long Term Incentive Plan as amended effective as of May
16, 1995 (filed as an exhibit to the Company's Form 10Q for the quar-
ter ended June 30, 1995, filed on August 14, 1995 and incorporated
herein by reference (File No. 1-12338)).
10.8* Form of Non-Qualified Stock Option Agreement entered into by and be-
tween the Company and certain of its executive officers and directors
(filed as an exhibit to the Company's Form 10-K for the year ended De-
cember 31, 1995, filed on March 28, 1996 and incorporated herein by
reference (File No. 1-12338)).
10.9* Cash Bonus Plan of the Company (filed as an exhibit to the Company's
Form 10-K for the year ended December 31, 1993, filed on March 28,
1994 and incorporated herein by reference (File No. 1-2338)).
10.10* J. Gordon Gaines, Inc. Post Retirement Benefits Plan (filed as an ex-
hibit to the Company's Form 10-K for the year ended December 31, 1994,
filed on March 29, 1995 and incorporated herein by reference (File No.
1-12338)).
10.11* J. Gordon Gaines, Inc. Retirement Savings Plan (filed as an exhibit to
the Company's Form 10-K for the year ended December 31, 1994, filed on
March 29, 1995 and incorporated herein by reference (File No. 1-
12338)).
10.12* The Company's Non-Employee Director Stock Plan (filed as an exhibit to
the Company's 10-Q for the quarter ended June 30, 1995, filed on Au-
gust 14, 1995 and incorporated herein by reference (File No. 1-
12338)).
10.13 Office Lease between the Company and Torchmark Development Corpora-
tion, dated as of April 20, 1992 (filed as an exhibit to the Company's
Form 10-K for the year ended December 31, 1993, filed on March 28,
1994 and incorporated herein by reference (File No. 1-12338)).
10.14 Agency Agreement between Liberty National Fire Insurance Company,
Vesta Insurance Corporation, Sheffield Insurance Corporation, and
Overby-Seawell Company (filed as an exhibit to Amendment No. 1 to the
Registration Statement on Form S-1 (Registration No. 33-68114) of
Vesta Insurance Group, Inc., filed on October 18, 1993 and incorpo-
rated herein by reference (File No. 1-12338)).
10.15 Commercial/Personal Property Risk Excess Reinsurance Contracts, dated
July 1, 1993, constituting the Company's Direct Per Risk Treaty Pro-
gram, between Vesta Fire Insurance Corporation and its subsidiary and
affiliated companies and various reinsurers (filed as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1 (Registra-
tion No. 33-68114) of Vesta Insurance Group, Inc., filed on October
18, 1993 and incorporated herein by reference (File No. 1-12338)) Re-
newed July 1, 1997.
10.16 Catastrophe Reinsurance Contracts, dated July 1, 1995, constituting
the Company's Direct Property Catastrophe Program, between Vesta Fire
Insurance Corporation and its subsidiary and affiliated companies and
various reinsurers (filed as an exhibit to the Company's Form 10-K for
the year ended December 31, 1994, filed on March 29, 1995 and incorpo-
rated herein by reference (File No. 1-12338)). Renewed July 1, 1997.
10.17 Specific Regional Catastrophe Excess Contracts, dated January 1, 1996,
constituting the Company's Regional Property Catastrophe Program, be-
tween Vesta Fire Insurance Corporation and various reinsurers (filed
as an exhibit to the Company's Form 10-K for the year ended December
31, 1995, filed on March 28, 1996 and incorporated herein by reference
(File No. 1-12338)). Renewed January 1, 1997.
10.18 Casualty Excess of Loss Reinsurance Agreements, dated January 1, 1994,
constituting the Company's Casualty Excess of Loss Reinsurance Pro-
gram, between Vesta Fire Insurance Corporation, Vesta Insurance Corpo-
ration, Sheffield Insurance Corporation, Vesta Lloyds Insurance Com-
pany and various reinsurers (filed as an exhibit to the Company's Form
10-K for the year ended December 31, 1993, filed on March 28, 1994 and
incorporated herein by reference (File No. 1-12338)). Renewed January
1, 1997.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.19 Amendment to Catastrophe Reinsurance Contracts, dated July 1, 1995,
constituting the Company's Direct Property Catastrophe Program,
between Vesta Fire Insurance Corporation, Vesta Insurance Corporation,
Sheffield Insurance Corporation, Vesta Lloyds Insurance Company,
Hawaiian Insurance & Guaranty Company, Limited and various reinsurers.
(Filed as an exhibit to the Company's Form 10-Q for the quarter ended
September 30, 1995, filed on November 14, 1995 and incorporated herein
by reference (File No. 1-12338)). Renewed July 1, 1997.
10.20 Amendment to Catastrophe Reinsurance Contracts, dated January 1, 1996,
constituting the Company's Direct Property Catastrophe Program,
between Vesta Fire Insurance Corporation, Vesta Insurance Corporation,
Sheffield Insurance Corporation, Vesta Lloyds Insurance Company,
Hawaiian Insurance & Guaranty Company, Ltd. and various reinsurers
(filed as an exhibit to the Company's Form 10-K for the year ended
December 31, 1995, filed on March 28, 1996 and incorporated herein by
reference (File No. 1-12338)). Renewed January 1, 1997.
10.21 Amended and Restated Credit Agreement between Vesta Insurance Group,
Inc. and Southtrust Bank of Alabama, N.A., ABN Amro Bank B.V., Bank of
Tokyo-Mitsubishi Trust Company, The First National Bank of Chicago,
Wachovia Bank of Georgia, N.A. and First Union National Bank of North
Carolina (as agent), dated April 8, 1997 (filed as an exhibit to the
Company's Form 10-Q for the quarter ended March 31, 1997, filed on May
13, 1997, and incorporated herein by reference (File No. 1-12338)).
10.22 Quota Share Reinsurance Contract, dated July 1, 1996, covering all
lines of business written by Vesta Fire Insurance Corporation and its
subsidiary and affiliated companies and various reinsurers (filed as
an exhibit to the Company's Form 10-Q for the quarter ended
September 30, 1996, filed on November 14, 1996 and incorporated herein
by reference (File No. 1-12338)). Renewed July 1, 1997.
10.23 Stock Purchase Agreement between Anthem Casualty Insurance Group,
Inc., and Vesta Insurance Group, Inc., dated April 23, 1997 (filed as
an exhibit to the Company's Form 10-Q for the year ended December 31,
1997, filed on May 13, 1997 and incorporated herein by reference (File
No. 1-12338)).
</TABLE>
- --------
*These are the Company's compensatory plans.
B) REPORTS ON FORM 8-K.
The Company reported its acquisition of the Anthem operating subsidiaries (as
discussed under Item 2 of this report) on Form 8-K dated June 30, 1997 and
filed with the Securities and Exchange Commission on July 14, 1997. The
financial statements of Anthem Casualty Insurance Group, Inc. and pro forma
financial information required to be included in such report on Form 8-K
were filed by amendment on September 12, 1997.
14
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
THEREUNTO DULY AUTHORIZED.
VESTA INSURANCE GROUP, INC.
Date: November 13, 1997
/s/ Barry A. Patrick
-------------------------------------
Barry A. Patrick
Principal Financial Officer
/s/ Mary Beth Heibein
-------------------------------------
Mary Beth Heibein
Controller and Principal
Accounting Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 471,742
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 11,442
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 703,148
<CASH> 20,843
<RECOVER-REINSURE> 108,784
<DEFERRED-ACQUISITION> 84,526
<TOTAL-ASSETS> 1,690,858
<POLICY-LOSSES> 555,282
<UNEARNED-PREMIUMS> 338,453
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 108,314
0
0
<COMMON> 190
<OTHER-SE> 370,605
<TOTAL-LIABILITY-AND-EQUITY> 1,690,858
412,624
<INVESTMENT-INCOME> 25,576
<INVESTMENT-GAINS> 106
<OTHER-INCOME> 5,160
<BENEFITS> 212,860
<UNDERWRITING-AMORTIZATION> 109,691
<UNDERWRITING-OTHER> 33,344
<INCOME-PRETAX> 77,488
<INCOME-TAX> 26,664
<INCOME-CONTINUING> 50,824
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,106
<EPS-PRIMARY> 2.53
<EPS-DILUTED> 0
<RESERVE-OPEN> 247,224
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 555,282
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
