<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT
AUGUST 19, 1998
(DATE OF EARLIEST EVENT REPORTED)
VESTA INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION)
<TABLE>
<S> <C>
1-12338 63-1097283
(COMMISSION FILE NO.) (IRS EMPLOYER IDENTIFICATION NO.)
3760 RIVER RUN DRIVE 35243
BIRMINGHAM, ALABAMA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
(205) 970-7000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Item 5. Other Events.
On June 1, 1998 and June 29, 1998, Vesta Insurance Group, Inc. (the
"Company") issued press releases which were filed with the Securities and
Exchange Commission as exhibits to current reports on Form 8-K on June 4, 1998
and July 1, 1998, respectively. These releases, which are incorporated into
this report by reference, announced the Company's intention to restate its
historical financial statements.
The Company has now issued restated consolidated balance sheets as of
December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flow for each of the three years in
the period ended December 31, 1997 which have been audited by the Company's
independent auditors, KPMG Peat Marwick LLP, and unaudited restated financial
statements for the three months ended March 31, 1998. A copy of the audited
financial statements referred to above, together with report of KPMG Peat
Marwick LLP thereon, is attached to this current report on Form 8-K as Exhibit
99.1. A copy of the unaudited restated financial statements for the three
months ended March 31, 1998 is attached to this current report on Form 8-K as
Exhibit 99.2.
Item 7. Financial Statements and Exhibits.
(c)Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
----------- -----------------------
<C> <S>
23 Consent of KPMG Peat Marwick, LLP
99.1 Restated Financial Statements for each of the three years in
the period ended December 31, 1997, together with independent
auditors report thereon.
99.2 Restated Financial Statements (unaudited) for the three months
ended March 31, 1998.
</TABLE>
2
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
Dated as of August 19, 1998.
VESTA INSURANCE GROUP, INC.
/s/ James E. Tait
-------------
By: James E. Tait
Its: Executive Vice President--Chief
Financial Officer
3
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Vesta Insurance Group, Inc.:
We consent to incorporation by reference in the registration statements
(Nos. 33-74160, 3381114, 33-81126, 33-80385, 33-80387, and 33-80395) on Forms
S-8 of our report dated March 27, 1998, except as to Note B, which is as of
August 19, 1998, relating to the consolidated balance sheets of Vesta
Insurance Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, cash
flows, for each of the years in the three-year period ended December 31, 1997,
which report appears in the current report on Form 8-K of Vesta Insurance
Group, Inc., dated August 19, 1998.
Our report refers to restatement of Vesta Insurance Group, Inc.'s financial
statements for each of the years in the three-year period ended December 31,
1997.
KPMG Peat Marwick LLP
Birmingham, Alabama
August 19, 1998
<PAGE>
EXHIBIT 99.1
INDEX
Page
----
Independent Auditors' Report..............................................
Consolidated Balance Sheets at December 31, 1996 and 1997................. 1
Consolidated Statements of Operations for each of the years
in the three-year period ended December 31, 1997........................ 2
Consolidated Statements of Stockholders' Equity for each of the
years in the three-year period ended December 31, 1997.................. 3
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1997............................... 4
Notes to Consolidated Financial Statements................................ 5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Vesta Insurance Group, Inc.
Birmingham, Alabama:
We have audited the consolidated balance sheets of Vesta Insurance
Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flow for
each of the years in the three-year period ended December 31, 1997. These
financial statements are the responsibility of Vesta's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vesta
Insurance Group, Inc. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note B, Vesta has restated its financial statements for
each of the years in the three-year period ended December 31, 1997.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
March 27, 1998, except
as to Note B, which is
as of August 19, 1998
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1996 1997
---------- ----------
(RESTATED) (RESTATED)
<S> <C> <C>
Assets:
Investments:
Fixed maturities available for sale--at fair value
(cost: 1996--$306,026; 1997--$488,923).............. $308,898 $ 495,566
Equity securities--at fair value: (cost: 1996--$4,365;
1997--$10,921).......................................... 8,326 20,424
Short-term investments................................ 105,415 119,025
-------- ----------
Total investments.................................... 422,639 635,015
Cash................................................... 4,637 21,801
Accrued investment income.............................. 5,392 15,799
Premiums in course of collection (net of allowances for
losses of
$70 in 1996 and $654 in 1997)......................... 113,728 252,193
Reinsurance balances receivable........................ 115,768 368,949
Reinsurance recoverable on paid losses................. 69,698 83,225
Deferred policy acquisition costs...................... 75,532 102,124
Property and equipment................................. 3,920 18,093
Income tax receivable.................................. 5,461 5,609
Other assets........................................... 47,271 39,358
Goodwill............................................... 7,339 96,141
-------- ----------
Total assets......................................... $871,385 $1,638,307
======== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses................... 173,275 596,797
Unearned premiums..................................... 228,325 365,052
-------- ----------
401,600 961,849
Reinsurance balances payable........................... 51,162 56,897
Other liabilities...................................... 26,425 67,610
Short term debt........................................ 22,000 45,000
Long term debt......................................... 98,279 98,602
-------- ----------
Total liabilities.................................... 599,466 1,229,958
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: 1996--18,970,695 shares; 1997--18,970,695..... 190 190
Additional paid-in capital............................. 161,037 162,550
Unrealized investment gains, net of applicable taxes... 4,442 9,829
Retained earnings...................................... 120,011 165,087
Receivable from issuance of restricted stock........... (3,207) (3,891)
Treasury stock......................................... (10,554) (25,416)
-------- ----------
Total stockholders' equity........................... 271,919 308,349
-------- ----------
Total liabilities and stockholders' equity........... $871,385 $1,638,307
======== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1995 1996 1997
---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C>
Revenues:
Net premiums written........................ $390,504 $468,056 $526,475
(Increase) decrease in unearned premiums.... (77,426) (28,720) (8,817)
-------- -------- --------
Net premiums earned......................... 313,078 439,336 517,658
Net investment income....................... 17,972 23,148 35,960
Realized investment gains (losses).......... 276 32 3,283
Other....................................... 216 188 2,094
-------- -------- --------
Total revenues............................ 331,542 462,704 558,995
Expenses:
Losses incurred............................. 186,384 229,953 256,829
Loss adjustment expenses incurred........... 12,578 21,830 24,864
Policy acquisition expenses................. 69,199 118,608 132,984
Operating expenses.......................... 18,747 21,167 38,913
Premium taxes and fees...................... 6,037 5,928 8,567
Interest on debt............................ 5,273 10,059 10,860
Goodwill amortization....................... 264 484 4,007
-------- -------- --------
Total expenses............................ 298,482 408,029 477,024
Net income before income taxes............... 33,060 54,675 81,971
Income taxes................................. 10,468 17,862 29,048
Deferrable capital securities interest, net -- -- 5,050
of income tax................................
-------- -------- --------
Net income................................. $ 22,592 $ 36,813 $ 47,873
======== ======== ========
Basic net income per common share.......... $ 1.20 $ 1.95 $ 2.57
======== ======== ========
Diluted net income per common share........ $ 1.19 $ 1.92 $ 2.51
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
RECEIVABLE
ADDITIONAL FROM
PREFERRED COMMON PAID-IN UNREALIZED RETAINED TREASURY RESTRICTED
STOCK STOCK CAPITAL GAINS/(LOSSES) EARNINGS STOCK STOCK
--------- ------ ---------- -------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994 as previously
reported.............. -- 188 158,051 (258) 79,271 -- (3,377)
Cumulative effect of
prior period
adjustments........... -- -- -- -- (13,253) -- --
Balance, December 31,
1994, as restated..... -- 188 158,051 (258) 66,018 -- (3,377)
Net income.............. -- -- -- -- 22,592 -- --
Issuance of stock....... -- 1 1,297 -- -- -- --
Change in restricted
stock receivable....... -- -- -- -- -- -- 215
Treasury stock
acquisitions........... -- -- -- -- -- (520) --
Common dividends
declared
(0.20 per share)....... -- -- -- -- (2,512) -- --
Net change in unrealized
gains.................. -- -- -- 5,463 -- -- --
Tax Benefit from
exercise of stock
options................ -- -- 101 -- -- -- --
----- --- ------- ----- ------- ------- ------
Balance, December
31,1995 as restated... -- 189 159,449 5,205 86,098 (520) (3,162)
Net income.............. -- -- -- -- 36,813 -- --
Issuance of stock....... -- 1 1,188 -- -- -- --
Change in restricted
stock receivable....... -- -- -- -- -- -- (45)
Treasury stock
acquisitions........... -- -- -- -- -- (10,597) --
Treasury stock issued
for options exercised.. -- -- 63 -- (64) 563 --
Common dividends
declared (0.15 per
share)................. -- -- -- -- (2,836) -- --
Net change in unrealized
gains.................. -- -- -- (763) -- -- --
Tax benefit from
exercise of stock
options................ -- -- 337 -- -- -- --
----- --- ------- ----- ------- ------- ------
Balance, December
31,1996 as restated... -- 190 161,037 4,442 120,011 (10,554) (3,207)
Net income.............. -- -- -- -- 47,873 -- --
Change in restricted
stock receivable....... -- -- -- -- -- -- (684)
Treasury stock
acquisitions............ -- -- -- -- -- (21,164) --
Treasury stock issued
for options exercised.. -- -- (1,061) -- -- 6,302 --
Common dividends
declared (0.15 per
share)................. -- -- -- -- (2,797) -- --
Net change in unrealized
gains.................. -- -- -- 5,387 -- -- --
Tax benefit from
exercise of stock
options................ -- -- 2,574 -- -- -- --
----- --- ------- ----- ------- ------- ------
Balance, December
31,1997 as restated... -- 190 162,550 9,829 165,087 (25,416) (3,891)
===== === ======= ===== ======= ======= ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED)
<S> <C> <C> <C>
Operating Activities:
Net income................................. $ 22,592 $36,813 $ 47,873
Adjustments to reconcile net income to cash
provided from operations:
Changes in:
Loss and LAE reserves.................... 43,857 4,773 123,207
Unearned premium reserves................ 67,514 59,813 38,350
Accrued income taxes..................... (4,778) (3,326) (8,463)
Reinsurance balances payable............. (214) (18,201) 5,735
Other liabilities........................ 3,868 14,126 18,617
Premiums in course of collection......... (59,187) (10,877) (285,188)
Reinsurance recoverable on paid losses... (16,295) (25,363) (8,515)
Other assets............................. (5,195) (39,632) 16,263
Policy acquisition costs deferred......... (73,466) (60,797) (113,725)
Policy acquisition costs amortized........ 38,419 53,096 105,209
Investment gains.......................... (276) (32) (3,283)
Amortization and depreciation............. 3,229 3,562 4,803
Gain on disposition of property, plant, (213) (115) (38)
equipment...................................
--------- ------- ---------
Net cash provided from (used in) 19,855 13,840 (59,155)
operations..................................
Investing Activities:
Investments sold or matured:
Fixed maturities held to maturity--matured, 18,316 -- --
called.................................
Fixed maturities available for sale--sold.. 7,664 -- 283,723
Fixed maturities available for sale-- 46,940 43,811 --
matured, called........................
Equity securities.......................... 2,738 -- 2,291
Real estate................................ 554 -- --
Investments acquired:
Fixed maturities available for sale........ (138,680) (37,239) (52,871)
Equity securities.......................... (82) (7,326) --
Net cash paid for acquisition(1)........... (35,974) -- (245,811)
Net (increase) in short-term investments... (17,571) (9,490) (13,610)
Additions to property and equipment........ (2,604) (1,754) (4,182)
Dispositions of property and equipment..... 533 236 289
--------- ------- ---------
Net cash used in investing activities.... (118,166) (11,762) (30,171)
Financing Activities:
Long-term borrowing........................ (28,000) -- --
Issuance of long & short term debt and 113,162 7,116 123,321
deferrable capital securities...............
Issuance of treasury stock................. -- 563 6,302
Acquisition of treasury stock.............. (520) (10,597) (21,164)
Dividends paid............................. (2,512) (2,836) (2,797)
Exercise of stock options.................. 1,614 1,481 828
--------- ------- ---------
Net cash provided from (used in) 83,744 (4,273) 106,490
financing activities........................
--------- ------- ---------
Increase (decrease) in cash................. (14,567) (2,195) 17,164
Cash at beginning year...................... 21,399 6,832 4,637
--------- ------- ---------
Cash at end of year......................... $ 6,832 $ 4,637 $ 21,801
========= ======= =========
</TABLE>
- --------
(1) Vesta acquired The Hawaiian Insurance & Guaranty Company, Limited on June
19, 1995 and the operating subsidiaries of Anthem Casualty Insurance Group,
Inc. on June 30, 1997.
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation: Vesta Insurance Group, Inc. (Vesta) was
incorporated by Torchmark Corporation on July 9, 1993 and capitalized on July
16, 1993 with a $50 million contribution from Torchmark and the contribution
from Torchmark of all of the outstanding common stock of J. Gordon Gaines,
Inc., Liberty National Reinsurance Company, Ltd, and Vesta Fire Insurance
Corporation and its wholly-owned subsidiaries. On November 18, 1993, the
Company completed an initial public offering of common stock which resulted in
proceeds to the Company of approximately $51 million. At year-end 1997,
Torchmark held approximately 28% of the outstanding common stock of the
Company with the balance publicly traded.
Nature of Operations: The Company 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. The
lead insurer in the Vesta Group is Vesta Fire Insurance Corporation ("Vesta
Fire"). In both its reinsurance and primary insurance operations, the Company
focuses primarily on property coverages. Gross premiums written by the Company
in 1997 totalled $866.0 million. Gross premiums written in the reinsurance
line were $535.4 million in 1997, substantially all of which were on personal
(including automobile) risks and commercial property risks. Also, property
(including auto physical damage) risks accounted for approximately 86% of the
Company's gross premiums written in all lines in 1997.
The availability and cost of reinsurance and retrocessional coverage may
vary significantly over time and are subject to prevailing market conditions.
Pricing on both assumed and ceded reinsurance weakened due to increased
availability of reinsurance market capacity.
Use of Estimates in the Preparation of the Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. These estimates and
assumptions are particularly important in determining the premiums in course
of collection, reserves for losses and loss adjustment expenses and deferred
policy acquisition costs.
Investments: Investment securities are classified in three categories at
date of purchase and accounted for as follows: (i) Debt securities which are
purchased with the positive intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost; (ii) Debt and
equity securities which are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
and (iii) Debt and equity securities which are not classified as either held-
to-maturity or trading securities are classified as available for sale and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity.
Short-term investments are carried at cost and include investments in
certificates of deposit and other interest-bearing time deposits with original
maturities of one year or less. If an investment becomes permanently impaired,
such impairment is treated as a realized loss and the investment is adjusted
to net realizable value.
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains and losses realized on the disposition of investments are recognized as
revenues and are determined on a specific identification basis. Unrealized
gains and losses on equity securities and fixed maturities available for sale,
net of deferred income taxes, are reflected directly in stockholders' equity.
Determination of Fair Values of Financial Instruments: Fair values for cash,
short-term investments, short-term debt, receivables and payables approximate
their carrying value. Fair values for investment securities and long-term debt
are based on quoted market prices where available. Otherwise, fair values are
based on quoted market prices of comparable instruments.
Cash: Cash consists of balances on hand and on deposit in banks and financial
institutions.
Recognition of Premium Revenue: Earned premiums are generally recognized as
revenue on a pro rata basis over the policy term. Due to the delay in reporting
from its reinsurance cedants, the Company accrues unreported premium revenue on
its assumed reinsurance business based on historical experience. These accrued
premiums are necessarily based on estimates and, while management believes that
the accruals are reasonable, the ultimate reported premium may be less than or
in excess of the amounts accrued.
Losses and Loss Adjustment Expenses: The liability for losses and loss
adjustment expenses includes an amount determined from loss reports and
individual cases. It also includes an amount for losses incurred but not
reported which is based on past experience. Such liabilities are necessarily
based on estimates and, while management believes that the amount is adequate,
the ultimate liability may be in excess of or less than the amounts provided.
The methods for making such estimates and for establishing the resulting
liabilities are continually reviewed, and any adjustments are reflected in
earnings currently. These reserves are established on an undiscounted basis and
are reduced for estimates of salvage and subrogation.
Deferred Acquisition Costs: Commissions and other costs of acquiring
insurance that vary with and are primarily related to the production of new and
renewal business are deferred and amortized over the terms of the policies or
reinsurance treaties to which they relate. Anticipated investment income is
considered in determining recoverability of deferred acquisition costs on
certain lines.
Reinsurance: Reinsurance enables an insurance company, by assuming or ceding
reinsurance, to diversify its risk and limit its financial exposure to risk and
catastrophic events. However, reinsurance does not ordinarily relieve the
primary insurer from its obligations to the insured. In the ordinary course of
business, Vesta assumes business from other insurance organizations and also
reinsures certain risks with other insurance organizations.
Income Taxes: Vesta accounts for income taxes using the asset and liability
method under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the straight
line method over the estimated useful lives of these assets which range from 2
to 5 years for equipment. Ordinary maintenance and repairs are charged to
income as incurred.
Goodwill: The company amortizes goodwill straight-line over a period of 15
years.
Reclassification: 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.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Split: On January 22, 1996 Vesta distributed one share for every two
shares owned by shareholders of record as of January 5, 1996 in the form of a
stock dividend. All prior year share and per share data has been restated to
give effect for the dividend.
Income Per Share: The Company adopted SFAS 128, "Earnings per share,"
effective year end 1997. This standard requires the dual presentation of basic
and diluted earnings per share ("EPS") on the face of the income statement and
a reconciliation of basic EPS to diluted EPS. As required by SFAS 128, all
prior-period EPS data has been restated for comparability. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding for the period. Weighted average common
shares outstanding for each period are as follows: 1997 18,600,000, 1996
18,860,000, 1995 18,842,000. Diluted EPS is calculated by adding to shares
outstanding the additional net effect of potentially dilutive securities or
contracts which could be exercised or converted into common shares. Weighted
average diluted shares outstanding for each period are as follows: 1997
19,053,000, 1996 19,157,000, 1995 18,970,000.
Recently Issued Accounting Standards: In June 1997, the FASB issued
Financial Accounting Statement No. 130, Reporting Comprehensive Income,
("FAS130") and Financial Accounting Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, ("FAS131"). FAS130
establishes reporting and presentation standards for comprehensive income and
its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances arising from nonowner sources. FAS130 is effective for both
interim and annual financial statements issued for periods beginning after
December 15, 1997, and also applies to financial statements presented for
prior periods. FAS131 requires that financial and descriptive information be
disclosed for each reportable operating segment based on the management
approach. The management approach focuses on financial information that an
enterprise's decision makers use to assess performance and make decisions
about resource allocation. The statement also prescribes the enterprise-wide
disclosures to be made about products, services, geographic areas and major
customers. FAS131 is effective for annual financial statements issued for
periods beginning after December 15, 1997, and for interim financial
statements in the second year of application. The Company adopted FAS130 and
FAS131 on January 1, 1998.
NOTE B--RESTATEMENT
The Company has restated its consolidated statements of operations,
stockholders' equity and cash flows for each of the three years ended
December 31, 1997, 1996 and 1995. The Company has restated its consolidated
balance sheets for the years ended December 31, 1997 and 1996. The cumulative
after tax effect for periods prior to January 1, 1995 has been reflected as a
charge to beginning retained earnings on the consolidated statement of
stockholders' equity. All information presented in the consolidated financial
statements and related notes includes all such restatements.
Subsequent to the filing of its quarterly report on Form 10-Q for the period
ended March 31, 1998 with the Securities and Exchange Commission, the Company
became aware of certain inappropriate reductions of reserves and
overstatements of premium income in the Company's reinsurance business that
had been recorded in the fourth quarter of 1997 and the first quarter of 1998.
The Company promptly commenced an internal investigation to determine the
exact scope and amount of such reductions and overstatements. Based on the
information discovered in that investigation, the Company has restated its
previously issued financial statements to make the necessary corrections.
During its internal investigation the Company and its independent auditors
also re-evaluated the accounting methodology being utilized to recognize
earned premium income in its reinsurance business. The Company had
historically reported certain assumed reinsurance premiums as earned in
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE B--RESTATEMENT (CONTINUED)
the year in which the related reinsurance contracts were entered even though
the terms of those contracts frequently bridged two years.
The Company has now determined that reinsurance premiums should be
recognized as earned over the contract period. Therefore, the Company has
corrected the error in its accounting methodology which includes a revision of
the actuarial methodology on which anticipated reinsurance premiums and losses
were calculated.
As a result of the restatement described above, the Company made the
following adjustments to the Company's consolidated statements of operations
and comprehensive income for the years ended December 31, 1997, 1996 and 1995
and cumulative adjustments to the December 31, 1997 Balance Sheet.
<TABLE>
<CAPTION>
CUMULATIVE
RESTATEMENTS THROUGH
DECEMBER 31, 1997
--------------------
<S> <C>
Premiums in course of collection..................... $(78,962)
Reinsurance balances receivable...................... 53,415
Reinsurance recoverable on paid losses............... (1,275)
Deferred acquisition costs........................... 825
Other assets......................................... 9,484
Reserves for losses and loss adjustment expenses..... (76,457)
Reinsurance balances payable......................... 17,569
Other liabilities.................................... (15,290)
--------
Total pretax........................................ (90,691)
Tax effect on above items............................ 31,137
--------
$(59,554)
========
</TABLE>
The effect of the restatements, as discussed above, on the income statement
line items, is shown in the following table:
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
1995 REPORTED RESTATEMENTS RESTATED
---- ------------- ------------ --------
<S> <C> <C> <C>
Total revenue........................ $400,266 $(68,724) $331,542
Losses incurred...................... 206,513 (20,129) 186,384
Loss adjustment expenses incurred.... 12,578 -- 12,578
Policy acquisition expenses.......... 87,022 (17,823) 69,199
Operating Expenses................... 18,747 -- 18,747
Premium taxes and fees............... 6,037 -- 6,037
Interest on debt..................... 5,273 -- 5,273
Goodwill amortization................ 264 -- 264
Income taxes......................... 21,133 (10,665) 10,468
-------- -------- --------
Net income.......................... $ 42,699 $(20,107) $ 22,592
======== ======== ========
Basic net income per common share... $2.27 $1.20
======== ========
Diluted net income per common share. $2.25 $1.19
======== ========
</TABLE>
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE B--RESTATEMENT (CONTINUED)
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
1996 REPORTED RESTATEMENTS RESTATED
---- ------------- ------------ --------
<S> <C> <C> <C>
Total revenue......................... $535,280 $(72,576) $462,704
Losses incurred....................... 273,090 (43,137) 229,953
Loss adjustment expenses incurred..... 21,830 -- 21,830
Policy acquisition expenses........... 127,503 (8,895) 118,608
Operating Expenses.................... 21,167 -- 21,167
Premium taxes and fees................ 5,928 -- 5,928
Interest on debt...................... 10,059 -- 10,059
Goodwill amortization................. 484 -- 484
Income taxes.......................... 24,982 (7,120) 17,862
-------- -------- --------
Net income............................ $ 50,237 $(13,424) $ 36,813
======== ======== ========
Basic net income per common share..... $2.66 $1.95
======== ========
Diluted net income per common share... $2.62 $1.92
======== ========
</TABLE>
<TABLE>
<CAPTION>
AS PREVIOUSLY AS
1997 REPORTED RESTATEMENTS RESTATED
---- ------------- ------------ --------
<S> <C> <C> <C>
Total revenue........................ $563,684 $ (4,689) $558,995
Losses incurred...................... 252,098 4,731 256,829
Loss adjustment expenses incurred.... 24,864 -- 24,864
Policy acquisition expenses.......... 122,743 10,241 132,984
Operating Expenses................... 38,913 -- 38,913
Premium taxes and fees............... 9,086 (519) 8,567
Interest on debt..................... 10,860 -- 10,860
Goodwill amortization................ 4,007 -- 4,007
Income taxes......................... 35,420 (6,372) 29,048
Deferred capital securities interest. 5,050 -- 5,050
-------- -------- --------
Net income.......................... $ 60,643 $(12,770) $ 47,873
======== ======== ========
Basic net income per common share... $3.26 $2.57
======== ========
Diluted net income per common share. $3.18 $2.51
======== ========
</TABLE>
NOTE C--STATUTORY ACCOUNTING
Insurance subsidiaries of Vesta are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from GAAP. The
tables set forth below reflect the Company's revision of its accounting for
its assumed reinsurance business to reflect only accident/calendar year
information. Effective with its year end 1997 statutory filings, the
adjustments reversed, in the form of a one-time charge, the cumulative effect
of the Company's prior practice of making estimates for reinsurance assumed on
a combined underwriting and accident year basis, the accounting practice
consistently applied over prior years. On a GAAP basis, the revision was
accounted for by restating prior financial statements. Consolidated net income
(loss) and stockholders' equity on a statutory basis for the insurance
subsidiaries were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)............................. $ 14,745 $ 46,745 $(44,941)
Stockholders' equity.......................... 318,997 352,695 317,875
</TABLE>
The excess, if any, of stockholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available for
distribution to its stockholders without regulatory approval.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE C--STATUTORY ACCOUNTING (CONTINUED)
A reconciliation of Vesta's insurance subsidiaries' statutory net income
(loss) to Vesta's consolidated GAAP net income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Statutory net income (loss)............ $ 14,745 $ 46,745 $ (44,941)
Deferral of acquisition costs.......... 73,466 60,797 112,981
Amortization of acquisition costs...... (38,419) (53,096) (105,210)
Differences in insurance policy (571) 1,104 13,177
liabilities............................
Reinsurance premium and loss accrual... (20,107) (13,424) 46,785 (1)
Deferred income taxes.................. (6,609) (5,499) 18,220
Income of non-insurance entities....... 3 670 10,592
Investment gains....................... 348 -- 276
Goodwill amortization.................. (263) (484) (4,007)
-------- -------- ---------
GAAP net income........................ $ 22,592 $ 36,813 $ 47,873
======== ======== =========
</TABLE>
A reconciliation of Vesta's insurance subsidiaries' statutory stockholders'
equity to Vesta's consolidated GAAP stockholders' equity is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
--------- -------- ---------
<S> <C> <C> <C>
Statutory stockholder's equity........... $ 318,997 $352,695 $ 317,875
Differences in insurance policy
liabilities.............................. 1,273 2,376 15,554
Deferred acquisition costs............... 67,831 75,532 102,123
Deferred income taxes.................... (16,089) (21,463) 1,379
Nonadmitted assets....................... (1,111) 1,267 297
Goodwill................................. 7,522 7,339 96,141
Net liabilities of non-insurance
entities................................. (103,198) (101,914) (231,204)
Reinsurance premium and loss accrual(1).. (33,360) (46,785) --
Unrealized gain on investments........... 5,394 2,872 6,184
--------- -------- ---------
GAAP stockholders' equity................ $ 247,259 $271,919 $ 308,349
========= ======== =========
</TABLE>
- --------
(1) Vesta Fire has revised its statutory accounting for its assumed
reinsurance business to reflect only accident/calendar year information.
Effective with its year end 1997 statutory filings, the adjustments
reversed, in the form of a one-time charge, the cumulative effect of the
Company's prior practice of making estimates for reinsurance assumed on a
combined underwriting and accident year basis, the accounting practice
consistently applied over prior years. On a GAAP basis, the correction was
accounted for by restating prior financial statements.
The Company's insurance subsidiaries are subject to regulation by the
insurance departments of states in which they are licensed and undergo
examinations by those departments. Vesta Fire is currently undergoing an
examination by the Alabama Department of Insurance. This examination could
result in adjustments to Vesta Fire's statutory statements, including
policyholder surplus. Management does not believe that such adjustments, if
any, would have a material impact on the Company's financial position or
results of operations.
Restrictions on Dividends: Vesta relies on dividends from its subsidiaries to
meet its cash requirements and to pay dividends to its stockholders. The
payment of dividends by Vesta's insurance subsidiaries are subject to certain
limitations imposed by the insurance laws of the States of Alabama,
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE C--STATUTORY ACCOUNTING (CONTINUED)
Indiana, Ohio, Hawaii and Texas. The restrictions are generally based on
certain levels of surplus, investment income and operating income, as
determined under statutory accounting practices. Alabama, Indiana, Ohio, Texas
and most other states that regulate Vesta's operations permit dividends in any
year which together with other dividends or distributions made within the
preceding 12 months, do not exceed the greater of (i) 10% of statutory surplus
as of the end of the preceding year or (ii) the net income for the preceding
year, with larger dividends payable only upon prior regulatory approval.
Hawaii law limits dividends to the lesser of (i) and (ii) without prior
approval. Certain other extraordinary transactions between an insurance
company and its affiliates, including sales, loans or investments which in any
twelve-month period aggregate at least 3% of its admitted assets or 25% of its
statutory capital and surplus, also are subject to prior approval by the
Department of Insurance. Based upon restrictions presently in effect, the
maximum amount available for payment of dividends to the Company by its
insurance subsidiaries in 1998 without prior approval of regulatory
authorities is estimated to be approximately $31.8 million.
Risk-Based Capital Requirements. The NAIC adopted risk-based capital
requirements that require insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies. Under the
formula, a company determines its "risk-based capital" ("RBC") by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). Risk-based capital rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" ("ACL") of RBC. Based on
calculations made by the Company, the risk-based capital levels for each of
the Company's insurance subsidiaries did not trigger regulatory attention.
NOTE D--INVESTMENT OPERATIONS
Investment income is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Fixed maturities............................... $13,839 $16,668 $23,876
Equity securities.............................. 108 199 248
Short-term investments......................... 4,566 6,982 12,763
------- ------- -------
18,513 23,849 36,887
Less investment expense........................ (541) (701) (927)
------- ------- -------
Net investment income.......................... $17,972 $23,148 $35,960
======= ======= =======
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE D--INVESTMENT OPERATIONS (CONTINUED)
An analysis of gains (losses) from investments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Realized investment gains (losses) from:
Fixed maturities............................ $ (78) $ (139) $ 3,000
Real estate................................. 300 -- --
Equity securities........................... 54 171 283
------- ------- -------
276 32 3,283
======= ======= =======
Net change in unrealized investment gains
(losses) on:
Fixed maturities available for sale......... $ 7,402 $(2,523) $ 3,772
Equity securities available for sale........ 1,001 1,349 5,542
Applicable tax.............................. (2,940) 411 (3,927)
------- ------- -------
Net change in unrealized gains (losses)...... $ 5,463 $ (763) $ 5,387
======= ======= =======
Net increase (decrease) in fair value
relative to amortized cost of fixed
maturities during the year.................. $12,985 $(2,523) $ 3,772
======= ======= =======
</TABLE>
A summary of fixed maturities and equity securities by amortized cost and
estimated fair value at December 31, 1995 and 1996 is as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1996: COST GAINS LOSSES VALUE
- ----- --------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
United States Government............. $ 37,398 $ 246 $ 69 $ 37,576
States, municipalities and political
subdivisions........................ 155,966 1,705 48 157,623
Foreign governments.................. 2,000 6 0 2,006
Corporate............................ 102,902 1,187 78 104,011
Mortgage-backed securities, GNMA
collateral.......................... 7,760 13 91 7,682
-------- ------- ---- --------
Total Fixed Maturities.............. 306,026 3,157 286 308,898
Equity securities..................... 4,365 3,961 0 8,326
-------- ------- ---- --------
Total portfolio..................... $310,391 $ 7,118 $286 $317,224
======== ======= ==== ========
<CAPTION>
1997:
- -----
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
United States Government............. $ 84,896 $ 1,348 $ 96 $ 86,148
States, municipalities and political
subdivisions........................ 145,567 2,891 0 148,458
Foreign governments.................. 3,643 102 0 3,745
Corporate............................ 194,672 1,844 107 196,409
Mortgage-backed securities, GNMA
collateral.......................... 60,145 743 82 60,806
-------- ------- ---- --------
Total Fixed Maturities.............. 488,923 6,928 285 495,566
Equity securities..................... 10,921 9,503 0 20,424
-------- ------- ---- --------
Total portfolio..................... $499,844 $16,431 $285 $515,990
======== ======= ==== ========
</TABLE>
A schedule of fixed maturities held for investment by contractual maturity
at December 31, 1997 is shown below on an amortized cost basis and on a fair
value basis. Actual maturities could differ from contractual maturities due to
call or prepayment provisions.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE D--INVESTMENT OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
<S> <C> <C>
Due in one year or less................................ $ 99,960 $100,201
Due from one to five years............................. 210,805 213,262
Due from five to ten years............................. 117,617 120,843
Due in ten years or more............................... 396 454
-------- --------
428,778 434,760
Mortgage backed securities, including
GNMA's and GNMA collateral............................ 60,145 60,806
-------- --------
Total.................................................. $488,923 $495,566
======== ========
</TABLE>
Proceeds from sales of fixed maturities were $8 million in 1995, $40 million
in 1996 and $284 million in 1997. Gross gains realized on those sales were
$273 thousand in 1995, $23 thousand in 1996 and $3,386 thousand in 1997. Gross
losses on those sales were $351 thousand in 1995, $161 thousand in 1996 and
$329 thousand in 1997.
NOTE E--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- --------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
------ ------------ ------- ------------
<S> <C> <C> <C> <C>
Building and real estate......... $ -- $ -- $16,518 $ 8,415
Data processing equipment........ 2,610 1,990 7,383 2,557
Furniture and office equipment... 3,099 1,467 3,952 1,776
Other............................ 2,035 367 3,744 756
------ ------ ------- -------
$7,744 $3,824 $31,597 $13,504
====== ====== ======= =======
</TABLE>
Depreciation expense on property and equipment used in the business was
$1,037 thousand, $1,415 thousand, and $2,940 thousand in each of the years
1995, 1996, 1997.
NOTE F--DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs for the years ended December 31, 1995 1996
and 1997 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Balance at beginning of year.............. $ 32,784 $ 67,831 $ 75,532
Deferred policy acquisition costs acquired
from Anthem Casualty Group............... -- -- 18,820
Deferred during period.................... 73,466 60,797 112,981
Amortized during period................... (38,419) (53,096) (105,209)
-------- -------- ---------
Balance at end of year.................... $ 67,831 $ 75,532 $ 102,124
======== ======== =========
</TABLE>
Commissions comprise the majority of the additions to deferred policy
acquisition costs in each year.
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE G--RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The table below presents a reconciliation of beginning and ending loss and
loss adjustment expense reserves for the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Losses and LAE reserves at beginning of $110,297 $ 168,502 $173,275
year........................................
Increases (decreases) in provision for
losses and LAE for claims incurred:
Current year............................... 208,315 272,482 289,257
Prior year................................. (9,352) (20,697) (7,564)
Acquisition of Shelby....................... -- -- 300,315
Losses and LAE payments for claims incurred:
Current year............................... (92,925) (158,409) (23,129)
Prior year................................. (47,833) (88,603) (135,357)
-------- --------- --------
Gross loss and LAE reserves................. $168,502 $ 173,275 $596,797
======== ========= ========
</TABLE>
NOTE H--RELATED PARTY TRANSACTIONS
Vesta leases office space from Torchmark Development Corporation, a wholly
owned subsidiary of Torchmark. Rent expense of $494 thousand, $566 thousand
and $718 thousand was charged to operations for the years ended December 31,
1995, 1996 and 1997, respectively, related to this lease agreement.
Waddell & Reed Asset Management Company, a subsidiary of Torchmark
("WRAMCO"), provides investment advice and services to the Company and its
subsidiaries in connection with the management of their respective portfolios
pursuant to an Investment Services Agreement. The Company paid $222 thousand,
$409 thousand and $394 thousand in fees to WRAMCO pursuant to the Investment
Services Agreement in 1995, 1996 and 1997, respectively.
On September 13, 1993, Vesta Fire Insurance Corporation, a wholly owned
subsidiary of the Company ("Vesta Fire"), and Liberty National Life Insurance
Company ("Liberty National"), a wholly owned subsidiary of Torchmark, entered
into a Marketing and Administrative Services Agreement, pursuant to which
Vesta Fire marketed certain of its industrial fire insurance products through
agents of Liberty National. Under this agreement, Liberty National pays to
Vesta Fire an amount equal to all premiums collected by Liberty National after
deducting all expenses incurred by Liberty National which are directly
attributable to the industrial fire insurance products and after deducting a
fee for administrative services. Such fee for 1995, 1996 and 1997 was $2,305
thousand, $1,702 thousand and $1,353 thousand, respectively. This agreement
was terminated effective April 30, 1995, and these products are no longer
marketed through Liberty National agents. However, Liberty National continues
to service the existing business.
NOTE I--COMMITMENTS AND CONTINGENCIES
Litigation: Commencing in June 1998, the Company and several of its current
and former officers and directors were named in several purported class action
law suits in the United States District Court for the Northern District of
Alabama and in one purported class action law suit in the Circuit Court of
Jefferson County, Alabama. The complaints allege various violations of the
federal and state securities laws and seek unspecified but potentially
significant damages. The Company is presently evaluating these complaints and
is unable, at this time, to determine the potential financial impact of the
litigation.
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE I--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 causes of action. These lawsuits may include claims for
punitive damages in addition to 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.
Leases: The Company leases office space for its home office and HIG under
operating lease arrangements. These leases contain various renewal options and
escalation clauses. Rental expense for operating leases was $706 thousand,
$1,014 thousand, and $1,206 thousand, for the years ending December 31, 1995,
1996, and 1997, respectively. Future minimum rental commitments required under
these leases are approximately $1.5 million per year.
Concentrations of Credit Risk: Vesta maintains a highly-diversified
investment portfolio with limited concentrations in any given region,
industry, or economic characteristic. At December 31, 1997, the investment
portfolio consisted of securities of the U.S. government or U.S. government
backed securities (13.1%); mortgage backed securities, GNMA collateral (9.3%);
investment grade corporate bonds (29.9%); cash and short-term investments
(21.4%); securities of state and municipal governments (22.6%); securities of
foreign governments (.6%); and corporate common stocks (3.1%). Corporate
equity and debt investments are made in a wide range of industries. All of
Vesta's investments at year-end 1997 were rated investment-grade.
As discussed in note C, the Company corrected its accounting for assumed
reinsurance business. The impact of the aforementioned correction has been
reflected in amounts ceded under the Company's 20 percent whole account quota
share treaty. The aggregate amount recoverable from the reinsurers under this
treaty totaled $40.3 million at December 31, 1997. The Company believes that
such treatment is appropriate under the terms of this treaty. However, the
Company is currently negotiating the renewal of this treaty, which expired
June 30, 1998, and the impact of the correction in accounting methodology is
an element of those negotiations. The effect of the results of those
negotiations on the Company's financial position or results of operations as
of December 31, 1997, if any, cannot be determined at this time.
At December 31, 1997, the Company has unsecured reinsurance recoverables
from six reinsurers that are in excess of 3% of statutory surplus, the largest
of which is $34 million.
NOTE J--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
The following table summarizes Vesta's non-cash transactions, which are not
reflected on the Statement of Cash Flow, as required by GAAP:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
--------- -------------
<S> <C> <C> <C>
Paid in capital from tax benefit of stock option $ 101 $ 337 $ 2,574
exercises.........................................
Transfer of fixed maturities from held to maturity
to available for sale............................ $121,627 $ -- $ --
</TABLE>
The following table summarizes certain amounts paid during the period as
required by GAAP:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C> <C>
Interest paid.................................. $ 5,253 $ 9,494 $15,113
Income taxes paid.............................. $14,989 $21,500 $22,571
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE K--REINSURANCE
Vesta engages in reinsurance ceded transactions as part of its overall
underwriting and risk management strategy. Vesta's reinsurance ceded programs
include coverages which limit the amount of individual claims to a fixed
amount or percentage and which limit the amount of claims related to
catastrophes.
The effect on premiums earned and losses and loss adjustment expenses
incurred of all reinsurance ceded transactions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Reinsurance ceded:
Premiums ceded................................. $117,654 $149,964 $300,799
Losses and loss adjustment expenses recovered
and recoverable............................... 90,522 134,756 362,726
</TABLE>
The amounts deducted from reserves for unpaid losses and loss adjustment
expenses and unearned premiums that Vesta would remain liable for should
reinsuring companies be unable to meet their obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
----------- ------------
<S> <C> <C>
Losses and loss adjustment expense............... $ 60,343 $ 215,780
Unearned premiums................................ 55,477 94,253
</TABLE>
Vesta engages in assumed reinsurance transactions as part of its overall
business strategy. The effect on premiums earned and losses and loss
adjustment expenses of all assumed reinsurance transactions, including
involuntary pools, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Premiums assumed................................ $290,822 $427,476 $538,655
Losses and loss adjustment expenses assumed..... 181,023 288,835 333,488
</TABLE>
The effect of reinsurance on premiums written and earned is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- -------------------- ------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
--------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Direct.................. $ 163,005 $ 139,910 $ 153,413 $ 161,824 $287,032 $279,802
Assumed................. 290,822 290,822 498,359 427,476 579,019 538,655
Ceded................... (127,554) (117,654) (183,716) (149,964) (339,576) (300,799)
--------- --------- --------- --------- -------- --------
Net premiums.......... $ 326,273 $ 313,078 $ 468,056 $ 439,336 $526,475 $517,658
========= ========= ========= ========= ======== ========
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE L--INCOME TAXES
Income tax expense for the years ended December, 1995, 1996 and 1997 was
allocated as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
Operating income..................................... $10,468 $17,862 $29,048
Deferrable Capital Securities........................ -- -- (2,719)
<S> <C> <C> <C>
Stockholder's equity, for unrealized gains (losses).. 2,941 (413) 3,927
Stockholder's equity, for compensation expense for
tax purposes in excess of amounts recognized for
financial reporting purposes........................ 101 337 (2,574)
------- ------- -------
$13,510 $17,786 $27,682
======= ======= =======
</TABLE>
Income tax expense attributable to income from operations consists of:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Current tax expense.............................. $13,406 $19,483 $25,849
Deferred tax expense............................. (2,938) (1,621) 3,199
------- ------- -------
Total........................................... $10,468 $17,862 $29,048
======= ======= =======
</TABLE>
Vesta's effective income tax rate differed from the statutory income tax
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income tax rate. $11,571 35% $19,136 35% $28,690 35%
Increases (reductions) in tax
resulting from:
Tax exempt investment income..... (1,974) (3) (2,240) (3) (2,019) (2)
State income tax................. -- -- -- -- 337 --
Other............................ 871 1 966 1 2,040 2
------- --- ------- --- ------- ---
$10,468 33% $17,862 33% $29,048 35%
======= === ======= === ======= ===
</TABLE>
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE L--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities included in
other liabilities at December 31, 1996 and 1997 are presented below:
<TABLE>
<CAPTION>
1996 1997
------- -------
Deferred tax assets:
<S> <C> <C>
Unearned and advance premiums............................. $12,099 $19,439
Reinsurance recoverables.................................. 24,814 26,321
Discounted unpaid losses.................................. 4,325 9,795
------- -------
Total gross deferred tax assets............................ $41,238 $55,555
======= =======
Deferred tax liabilities:
Deferred acquisition costs................................ $26,436 $35,455
Contingent commissions.................................... 8,010 6,008
Unrealized gains.......................................... 2,390 6,317
Fixed assets.............................................. 100 1,470
Contingent receivables.................................... -- 2,467
Goodwill.................................................. -- 2,252
Other..................................................... 951 207
------- -------
Total gross deferred tax liabilities....................... $37,887 $54,178
------- -------
Net deferred tax asset..................................... $ 3,351 $1,379
======= =======
</TABLE>
A valuation allowance for deferred tax assets, as of December 31, 1996 and
1997, was not necessary.
NOTE M--RETIREMENT PLANS
Vesta has a defined contribution retirement and savings plan and a
supplemental executive retirement plan. These plans are fully funded at year-
end 1997. Vesta's total cost for benefits under these plans since the Offering
date was $319,337 for 1995, $348,125 for 1996 and $721,693 for 1997.
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE N--SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- ----------
<S> <C> <C> <C>
Revenues
Reinsurance Operations
Net premiums earned........................... $221,933 $342,452 $ 335,359
Net investment income......................... 12,740 18,043 23,296
Investment gains ............................. 196 25 2,127
-------- -------- ----------
Total reinsurance............................ 234,869 360,520 360,782
Primary insurance operations
Net premiums earned........................... 91,145 96,884 182,299
Net investment income......................... 5,232 5,105 12,664
Investment gains ............................. 80 7 1,156
-------- -------- ----------
Total primary................................ 96,457 101,996 196,119
Other operations revenues...................... 216 188 2,094
-------- -------- ----------
Total revenues............................... $331,542 $462,704 $ 558,995
======== ======== ==========
Total pretax income from operations
Reinsurance Operations
Underwriting gain ............................ $ 5,014 $ 35,168 $ 38,072
Net investment income......................... 12,740 18,043 23,296
Investment gains ............................. 196 25 2,127
-------- -------- ----------
Total reinsurance............................ 17,950 53,236 63,495
Primary insurance operations
Underwriting gain ............................ 15,119 6,682 17,429
Net investment income......................... 5,232 5,105 12,664
Investment gains ............................. 80 7 1,156
Goodwill...................................... (264) (484) (4,007)
-------- -------- ----------
Total primary................................ 20,167 11,310 27,242
Other operations
Other income.................................. 216 188 2,094
Interest expense.............................. (5,273) (10,059) (10,860)
-------- -------- ----------
Total other (expense)........................ (5,057) (9,871) (8,766)
-------- -------- ----------
Total pretax income from operations.......... $ 33,060 $ 54,675 $ 81,971
======== ======== ==========
Total identifiable assets
Reinsurance operations........................ $517,367 $676,581 $1,059,933
Primary operations............................ 218,391 194,804 578,374
-------- -------- ----------
Total identifiable assets.................... $735,758 $871,385 $1,638,307
======== ======== ==========
</TABLE>
NOTE O--DEBT
On July 19, 1995, the Company issued $100 million of its 8.75% Senior
Debentures due July 15, 2025. The Debentures are not subject to redemption or
any sinking fund prior to maturity. The Debentures are unsecured and rank on
parity with all of its other unsecured and unsubordinated indebtedness. The
Debentures contain covenants that limit the ability of the Company or its
subsidiaries to issue, sell or otherwise dispose of shares of voting common
stock of any Restricted Subsidiary and limit the ability of the Company or its
subsidiaries to pledge the shares of capital stock of any subsidiary. The
Debentures also place certain limitations on the Company's ability to
consolidate or merge with or sell its assets substantially as an entirety. The
Company used the proceeds from the sale to repay a $28,000,000 loan from a
Torchmark affiliate, and to increase the capital and surplus of its principal
insurance subsidiary, Vesta Fire Insurance Corporation.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE O--DEBT (CONTINUED)
On January 31, 1997, Vesta Capital Trust I, a Delaware business trust
controlled by the Company, sold $100 million of its 8.525% Deferrable Capital
Securities. These securities have a 30 year maturity and are not redeemable
except in certain limited circumstances. These securities were sold in a
private placement transaction to qualified institutional buyers and were not
registered under Securities Act of 1933 pursuant to an exemption from
registration provided by Rule 144A promulgated thereunder. A portion of the
proceeds from the sale of these securities were used to repay indebtedness
under the Company's existing lines of credit and for general corporate
purposes.
In April of 1997, Vesta increased the size of its line of credit to $200
million from $100 million. The interest charge on the funds borrowed is either
(i) the London Interbank Rate plus 0.25% or (ii) the higher of the prime rate
and the Federal Funds rate plus 0.5%, at the Company's discretion. At December
31, 1997 the London Interbank three month rate was 5.91% and the Federal Funds
rate was 5.56%.There was a balance of $45 million under this line of credit at
December 31, 1997. The line of credit contains covenants which (1) restricts
the Company from incurring consolidated indebtedness greater than 42.5% of the
sum of the Company's consolidated indebtedness and consolidated net worth, (2)
requires the Company to maintain consolidated net worth to be equal to or
greater than $350,000,000 plus 50% of the aggregate of consolidated net income
for each fiscal quarter ending after September 30, 1996 up to and including
the fiscal quarter then ending minus the aggregate amount of all dividends
paid with respect to the Company's equity securities at any time after
September 30, 1996, (3) requires the Company to maintain a ratio of
consolidated income before interest and taxes to consolidated interest expense
of 3.0 to 1.0 ("the Fixed Charge Ratio"), and (4) requires the Company to
maintain total adjusted capital (within the meaning of Risk-Based Capital for
Insurers Model Act ("Model Act")) of Vesta Fire to be equal to or greater than
150% of the applicable "Company Action Level RBC" (within the meaning of the
model act). Subsequent to the period ended June 30, 1998, the Company's banks
agreed to amend the Fixed Charge Ratio as of the last day of the fiscal
quarter ended June 30, 1998 and waive any Event of Default arising from
noncompliance with such covenant as of June 30, 1998. As an inducement to the
Company's banks to enter into such amendment and waiver, the Company has
agreed not to request any additional borrowings under this Credit Agreement
until such time as the Company has delivered financial statements to the banks
in form and substance satisfactory to the banks.
NOTE P--STOCK OPTIONS
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, Accounting for Stock-Based Compensation ("FAS
123"). The Statement defines a fair value based method of accounting for an
employee stock option. It also allows an entity to continue using the
intrinsic valued based accounting method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company
has continued to use this method to account for its stock options. However,
FAS 123 requires entities electing to remain with the intrinsic method of
accounting to provide pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied as well
as other disclosures about the Company's stock-based employee compensation
plans. Information about the Company's stock option plans and the related
required disclosures follow.
Prior to completion of the Company's initial public offering, the Company's
stockholders approved the Vesta Insurance Group, Inc. Long Term Incentive Plan
("Plan"), which provided for grants to the Company's executive officers of
restricted stock, stock options, stock appreciation rights, and deferred stock
awards, and in certain instances grants of options to directors. The Company's
stockholders approved certain amendments to the Plan effective May 16, 1995,
including an amendment to increase
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE P--STOCK OPTIONS (CONTINUED)
the shares of the Company's common stock available for awards under the Plan
from 1,091,400 shares to 2,221,998 shares and an amendment to delete the
provision for the grant of options to non-employee directors. The Company's
stockholders also approved the Vesta Insurance Group, Inc. Non-Employee
Director Stock Plan ("Director Plan") effective May 16, 1995, which provides
for grants to the Company's non-employee directors of stock options and
restricted stock.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997, respectively; risk-free interest rates of 6.37
percent and 5.75 percent; dividend yields of .37 and .27 percent; volatility
factor of the expected market price of the Company's common stock of 34.0 and
38.75; and a weighted-average expected life of the options of ten years for
both years.
The Company's actual and pro forma information follows (in thousands except
for earnings per share information):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1996 1997
------- -------
<S> <C> <C>
NET INCOME:
As reported............................................. $36,813 $47,873
Pro forma............................................... 34,020 44,589
BASIC NET INCOME PER COMMON SHARE:
As reported............................................. $ 1.95 $ 2.57
Pro forma............................................... 1.80 2.40
DILUTED NET INCOME PER COMMON SHARE:
As reported............................................. $ 1.92 $ 2.51
Pro forma............................................... 1.78 2.34
</TABLE>
The following summary sets forth activity under the Plan for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of the year............ 828,896 $16.06 1,055,699 $18.37 1,022,872 $20.38
Granted................. 414,409 21.98 129,394 31.93 135,085 51.64
Exercised............... 42,750 15.63 55,667 15.51 220,506 17.15
Forfeited............... 144,856 16.31 106,554 16.99 -- --
--------- ------ --------- ------ --------- ------
Outstanding--end of the
year................... 1,055,699 $18.37 1,022,872 $20.38 937,451 $25.65
========= ====== ========= ====== ========= ======
Weighted-average fair
value of options
granted during the
year................... $ 28.37 $ 25.85 $ 36.89
</TABLE>
Of the 937,451 outstanding options at December 31, 1997, 549,087 were
exercisable with the remaining having varying vesting periods. Exercise prices
for options outstanding as of December 31, 1997 ranged from $14.88 to $55.44.
Unexercised options with exercise prices of less than $25.00 for 589,852
shares had a weighted average contractual life of 6.9 years and a weighted
average exercise price of $18.13 while unexercised options with exercise
prices greater than $25.00 for 347,599 shares had a weighted average
contractual life of 9.2 years and a weighted average exercise price of $38.42.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE P--STOCK OPTIONS (CONTINUED)
In 1993, the Company entered into restricted stock agreements under which
Vesta granted 153,300 shares of common stock at $10.26 per share to officers of
the Company in exchange for promissory notes. In 1994, an additional 60,000
shares of Common Stock at $18.92 per share were issued to an officer of the
Company under a restricted stock agreement in exchange for a promissory note.
The common stock is being held by the Company as security for repayment of the
notes. A portion of the shares will be released to the officers annually as
they repay the promissory notes. The Company intends to pay cash bonuses each
year in amounts sufficient to reduce the notes by the amount of the purchase
price for the shares which are earned in that year. During 1995 the company
acquired 31,192 shares of its common stock with respect to previously granted
awards of restricted stock in exchange for release of indebtedness of $320
thousand. The balance of the notes at December 31, 1995 was $3,162 thousand.
During 1996 the Company acquired 19,564 shares of its common stock with respect
to previously granted awards of restricted stock in exchange for release of
indebtedness of $169 thousand. The balance of the notes at December 31, 1996
was $3,207 thousand. During 1997 the Company did not acquire any shares of its
common stock with respect to previously granted awards of restricted stock. The
balance of the notes at December 31, 1997 was $3,891 thousand. The promissory
notes and the unearned compensation are shown as deductions from stockholders
equity.
In 1995, the Company entered into restricted stock agreements under which the
Company granted 23,333 shares of restricted common stock to certain officers of
the Company. The Company entered into restricted stock agreements under which
the Company granted 23,144 and 20,915 shares of restricted common stock to
certain employees of the Company and 5,664 and 9,632 shares of restricted
common stock to certain directors of the Company in 1996 and 1997,
respectively. The common stock with respect to all awards of restricted stock
is being held by the Company until the restrictions lapse.
NOTE Q--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data, in thousands except
per share data:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
MARCH 31, 1997 JUNE 30, 1997 SEPTEMBER 30, 1997 DECEMBER 31, 1997
---------------------- ---------------------- ---------------------- ----------------------
PREVIOUSLY PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written.. $203,831 $171,187 $203,043 $203,043 $244,513 $239,794 $219,522 $252,025
Net premiums written.... 131,316 105,736 137,186 137,186 114,405 114,405 148,257 169,148
Premiums earned......... 125,620 100,040 133,717 133,717 153,287 153,287 109,723 130,614
Net investment income... 6,147 6,147 7,178 7,178 10,363 12,251 12,251 10,384
Operating costs and
expenses............... 108,850 94,504 112,673 112,673 134,372 136,544 91,788 118,414
Net income.............. 12,558 6,353 15,088 15,088 19,460 18,261 13,537 8,171
-------- -------- -------- -------- -------- -------- -------- --------
Per Share Data:
Net income.............. 0.68 0.34 0.81 0.81 1.04 0.98 0.73 0.44
Stockholders' equity per
share.................. 17.72 14.87 18.62 15.78 19.79 16.90 19.94 16.71
Cash dividends per
share.................. 0.0375 0.0375 0.0375 0.0375 0.0375 0.0375 0.0375 0.0375
-------- -------- -------- -------- -------- -------- -------- --------
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
---------------------- ---------------------- ---------------------- ----------------------
PREVIOUSLY PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED
---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross premiums written.. $104,460 $141,460 $185,567 $142,133 $173,884 $151,282 $215,675 $216,898
Net premiums written.... 152,509 104,878 165,494 142,009 67,568 75,827 155,061 145,342
Premiums earned......... 145,136 97,506 167,135 143,649 88,344 96,604 111,297 101,576
Net investment income... 4,946 4,946 6,057 6,057 6,102 6,102 6,040 6,040
Operating costs and ex-
penses................. 131,965 88,769 147,750 140,738 71,748 87,722 98,055 80,257
Net income.............. 10,509 7,627 15,141 4,433 13,412 8,398 11,174 16,354
-------- -------- -------- -------- -------- -------- -------- --------
Per Share Data:
Net income.............. 0.56 0.40 0.30 0.23 0.71 0.44 0.60 0.88
Stockholders' equity per
share.................. 15.28 13.37 16.01 13.53 16.72 13.98 17.16 14.64
Cash dividends per
share.................. 0.0375 0.0375 0.0375 0.0375 0.0375 0.0375 0.0375 0.0375
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE R--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 $260.9
million. The acquired subsidiaries had $648 million of assets and
approximately $217 million of stockholders' equity at June 30, 1997. 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.......................................................... 83,341
Other Assets...................................................... 166,944
--------
Total............................................................ 684,625
Liabilities Assumed
Loss and loss adjustment expenses................................. 300,315
Unearned premiums................................................. 98,378
Other............................................................. 25,052
--------
Total............................................................ $423,745
Purchase price.................................................... $238,750
Acquisition expenses.............................................. 22,130
Less cash acquired................................................ (15,069)
--------
Aggregate purchase price.......................................... $245,811
========
</TABLE>
The above table represents the purchase price plus acquisition costs through
December 31, 1997.
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>
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Revenues.................................................. 784,858 709,643
Net income................................................ 42,351 55,145
Basic net income per common share......................... 2.25 2.97
Diluted net income per common share....................... 2.21 2.89
</TABLE>
NOTE S--NET INCOME PER COMMON SHARE
During 1996, the FASB issued Financial Accounting Statement No. 128,
Earnings per Share, ("FAS128"). FAS128 specifies the computation, presentation
and disclosure requirements for earnings per share, replacing the presentation
of primary earnings per share with the presentation of basic earnings per
share. For entities with complex capital structures, the presentation of fully
diluted earnings per share is replaced with diluted earnings per share. FAS128
is effective for both interim and annual financial statements issued for
periods ending after December 15, 1997, with earlier adoption
23
<PAGE>
prohibited. The Company adopted FAS128 on December 31, 1997, and, as required,
all periods presented in the consolidated financial statements have been
restated to reflect the adoption of the statement.
Presented below is a summary of the components used to calculate basic and
diluted net income per share for the year ended December 31, 1997, 1996 and
1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE:
Weighted average common shares outstanding............ 18,842 18,860 18,600
Net income............................................ $22,592 $36,813 $47,873
Basic net income per share............................ $ 1.20 $ 1.95 $ 2.57
DILUTED NET INCOME PER SHARE:
Weighted average common shares outstanding............ 18,842 18,860 18,600
Net effect of the assumed exercise of stock options
and nonvested restricted stock--based on the treasury
stock method using average market price for the year. 128 297 453
------- ------- -------
Total weighted average common shares and common stock
equivalents outstanding.............................. 18,970 19,157 19,053
Net income............................................ $22,592 $36,813 $47,873
Diluted net income per share.......................... $ 1.19 $ 1.92 $ 2.51
</TABLE>
24
<PAGE>
EXHIBIT 99.2
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1998 1997
------------ -----------
<S> <C> <C>
(RESTATED) (RESTATED)
(UNAUDITED)
Assets:
Investments:
Fixed maturities available for sale--at fair value
(cost: 1997--$488,923; 1998--$482,905).......... $ 489,756 $ 495,566
Equity securities--at fair value: (cost: 1997--
$10,921; 1998--$9,794).......................... 20,920 20,424
Short-term investments............................ 142,639 119,025
------------ ----------
Total investments................................ 653,315 635,015
Cash............................................... 47,916 21,801
Accrued investment income.......................... 7,982 15,799
Premiums in course of collection (net of allowances
for losses of $654 in 1997 and $572 in 1998) ..... 207,656 252,193
Reinsurance balances receivable.................... 306,270 368,949
Reinsurance recoverable on paid losses............. 120,808 83,225
Deferred policy acquisition costs.................. 105,581 102,124
Property and equipment............................. 17,944 18,093
Income tax receivable.............................. 9,107 5,609
Other assets....................................... 50,218 39,358
Goodwill........................................... 94,476 96,141
------------ ----------
Total assets..................................... $ 1,621,273 $1,638,307
============ ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses............... 547,010 596,797
Unearned premiums................................. 372,718 365,052
------------ ----------
919,728 961,849
Accrued income taxes............................... 33,295 --
Reinsurance balances payable....................... 28,113 56,897
Other liabilities.................................. 66,151 67,610
Short term debt.................................... 70,000 45,000
Long term debt..................................... 98,336 98,602
------------ ----------
Total liabilities................................ 1,215,623 1,229,958
Commitments and contingencies
Deferrable Capital Securities....................... 100,000 100,000
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;
1998--18,969,524.................................. 190 190
Additional paid-in capital......................... 162,594 162,550
Unrealized investment gains, net of applicable
taxes............................................... 9,968 9,829
Retained earnings.................................. 161,958 165,087
Receivable from issuance of restricted stock....... (3,936) (3,891)
Treasury stock..................................... (25,124) (25,416)
------------ ----------
Total stockholders' equity....................... 305,650 308,349
------------ ----------
Total liabilities and stockholders' equity....... $ 1,621,273 $1,638,307
============ ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
1
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------
1998 1997
-------------- -------------
(RESTATED) (RESTATED)
(UNAUDITED)
<S> <C> <C>
Revenues:
Net premiums written......................... $ 131,883 $ 98,672
(Increase) decrease in unearned premiums..... 7,408 (5,696)
-------------- -------------
Net premiums earned.......................... 139,291 92,976
Net investment income........................ 9,300 6,147
Other........................................ 1,250 314
-------------- -------------
Total revenues............................ 149,841 99,437
Expenses:
Losses incurred.............................. 87,627 56,512
Loss adjustment expenses incurred............ 7,715 3,650
Policy acquisition expenses.................. 28,906 17,433
Operating expenses........................... 17,256 7,599
Premium taxes and fees....................... 3,135 2,246
Interest on debt............................. 3,108 2,359
Goodwill..................................... 1,669 305
-------------- -------------
Total expenses............................ 149,416 90,104
Income before income taxes and deferrable
capital securities........................... 425 9,333
Income taxes.................................. 209 2,057
Deferrable capital securities interest, net of
income tax................................... 1,362 923
-------------- -------------
Net income (loss)......................... $ (1,146) $ 6,353
============== =============
Basic net income (loss) per common share.. $ (.06) $ .34
============== =============
Diluted net income (loss) per common
share.................................... $ (.06) $ .34
============== =============
STATEMENTS OF COMPREHENSIVE INCOME
Net income (loss)............................. $ (1,146) $ 6,353
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
available-for-sale securities............... 139 (1,785)
Less realized gains on available-for-sale
securities.................................. -- 282
-------------- -------------
139 (1,503)
Comprehensive income (loss)................... $ (1,007) $ 4,850
============== =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE>
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
1998 1997
---------- ----------
(RESTATED) (RESTATED)
(UNAUDITED)
<S> <C> <C>
Operating Activities:
Net Income (loss)....................................... $(1,146) $ 6,353
Adjustments to reconcile net income (loss) to cash
provided from operations:
Change in:
Loss and LAE reserves................................. (52,013) 221
Unearned premium reserve.............................. 7,665 20,191
Reinsurance balances payable.......................... (28,783) 30,583
Accrued income taxes.................................. 28,716 1,565
Other liabilities..................................... (1,459) (3,589)
Premiums in course of collection...................... 44,537 (1,292)
Reinsurance balances receivable....................... 62,678 (25,738)
Reinsurance recoverable on paid losses................ (35,357) (22,411)
Other assets.......................................... (1,378) (20,206)
Payables from deferrable capital trust................. -- 1,421
Policy acquisition costs amortized..................... 27,945 (19,995)
Policy acquisition costs deferred...................... (31,402) 18,001
Investment gains....................................... -- (282)
Amortization and depreciation.......................... 1,492 836
Gain on disposition of property, plant and equipment... (107) (91)
-------- -------
Net cash provided from (used in) operations........... 21,388 (14,433)
Investing Activities:
Investments sold or matured:
Fixed maturities available for sale-matured, called.... 32,661 7,287
Equity securities...................................... -- 2,291
Investments acquired:
Fixed maturities available for sale.................... (27,824) --
Equity securities...................................... -- (1,039)
Net increase in short-term investments.................. (23,615) (81,859)
Additions to property, plant and equipment.............. (1,056) (507)
Dispositions of property, plant and equipment........... 227 165
-------- -------
Net cash (used in) investing activities............... (19,607) (73,662)
Financing Activities:
Issuance (repayment) of long and short term debt........ 24,735 (6,988)
Issuance of deferrable capital securities............... -- 100,000
Dividends paid.......................................... (691) (697)
Capital contributions and change in receivable from re-
stricted stock......................................... 290 340
-------- -------
Net cash provided from financing activities........... 24,334 92,655
Increase (decrease) in cash.............................. 26,115 4,560
Cash at beginning year................................... 21,801 4,637
-------- -------
Cash at end of year...................................... $ 47,916 $ 9,197
======== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
3
<PAGE>
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
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 audited restated consolidated balance sheets as
of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholders' equity and cash flow for each of the three years in
the period ended December 31, 1997 which were filed with the Securities and
Exchange Commission as exhibits to a current report on Form 8-K dated August
19, 1998. 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.
Income per share: Basic weighted average common shares outstanding for the
three month period ended March 31, 1998 and 1997 was 18,456,976 and
18,581,703, respectively. Basic EPS is computed by dividing income available
to common stockholders by the weighted average common shares outstanding for
the period. Diluted EPS is calculated by adding to shares outstanding the
additional net effect of potentially dilutive securities or contracts which
could be exercised or converted into common shares. Diluted weighted average
shares outstanding for the three month period ended March 31, 1998 and 1997
was 18,873,197 and 18,855,793, respectively.
Recently Issued Accounting Standards: In June 1997, the FASB issued
Financial Accounting Statement No. 130, Reporting Comprehensive Income.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances arising from non-owner sources. The Company adopted FAS130 on
January 1, 1998.
NOTE B--RESTATEMENT OF FINANCIAL STATEMENTS
As noted above, the Company has restated its previously reported financial
results for 1995 through 1997. Unaudited quarterly financial data for 1997 and
1996 have also been restated. All information presented in the consolidated
financial statements and related notes includes all such restatements.
A summary of the restatements by category is as follows:
<TABLE>
<CAPTION>
CUMULATIVE RESTATEMENTS
THROUGH MARCH 31, 1998
-----------------------
<S> <C>
Premiums in course of collect........................... $(168,913)
Unearned premium reserve ............................... (12,312)
Reinsurance recoverable on paid losses.................. 1,230
Deferred acquisition costs.............................. 3,418
Reserves for losses and LAE............................. 60,583
Other liabilities ...................................... 1,187
---------
Total pretax.......................................... (114,807)
Tax effect on above items............................... 39,611
---------
$ (75,196)
=========
</TABLE>
4
<PAGE>
The effect of the restatements, as discussed above, on the income statement
line items, is shown in the following table:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------
AS PREVIOUSLY AS
REPORTED RESTATEMENTS RESTATED
------------- ------------ --------
<S> <C> <C> <C>
Revenue.................................... $180,257 $(30,415) $149,842
Losses..................................... 77,977 9,651 87,628
Loss adjustment expenses incurred.......... 7,715 -- 7,715
Policy acquisition expenses................ 44,905 (15,999) 28,906
Operating expenses......................... 17,256 -- 17,256
Premium taxes and fees..................... 3,135 -- 3,135
Interest on debt........................... 3,108 -- 3,108
Goodwill amortization...................... 1,669 -- 1,669
Income taxes............................... 8,633 (8,424) 209
Deferred capital securities interest....... 1,362 -- 1,362
-------- -------- --------
Net income............................... $ 14,497 $(15,643) $ (1,146)
======== ======== ========
Basic net income per common share........ $ .79 $ (.06)
======== ========
Diluted net income per common share...... $ .77 $ (.06)
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------
AS PREVIOUSLY AS
REPORTED RESTATEMENTS RESTATED
------------- ------------ --------
<S> <C> <C> <C>
Revenue..................................... $132,081 $(32,644) 99,437
Losses...................................... 70,545 (14,033) 56,512
Loss adjustment expenses incurred........... 3,650 -- 3,650
Policy acquisition expenses................. 24,810 (7,377) 17,433
Operating expenses.......................... 7,599 -- 7,599
Premium taxes and fees...................... 2,246 -- 2,246
Interest on debt............................ 2,359 -- 2,359
Goodwill amortization....................... 305 -- 305
Income taxes................................ 7,086 (5,029) 2,057
Deferred capital securities interest........ 923 -- 923
-------- -------- ------
Net income................................ $ 12,558 $ (6,205) $6,353
======== ======== ======
Basic net income per common share......... $ .68 $ .34
======== ======
Diluted net income per common share....... $ .67 $ .34
======== ======
</TABLE>
NOTE C--CONTINGENCIES
Litigation: Commencing in June 1998, the Company and several of its current
and former officers and directors were named in several purported class action
law suits in the United States District Court for the Northern District of
Alabama and in one purported class action law suit in the Circuit Court of
Jefferson County, Alabama. The complaints allege various violations of the
federal and state securities laws and seek unspecified but potentially
significant damages. The Company is presently evaluating these complaints and
is unable, at this time, to determine the potential financial impact of the
litigation.
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.
5
<PAGE>
Regulatory: The Company's insurance subsidiaries are subject to regulation
by the insurance departments of states in which they are licensed and undergo
examinations by those departments. Vesta Fire is currently undergoing an
examination by the Alabama Department of Insurance. This examination could
result in adjustments to Vesta Fire's statutory statements, including
policyholder surplus. Management does not believe that such adjustments, if
any, would have a material impact on the Company's financial position or
results of operations.
As previously discussed, the Company corrected its accounting for assumed
reinsurance business. The impact of the aforementioned correction has been
reflected in amounts ceded under the Company's 20 percent whole account quote
share treaty. The aggregate amount recoverable from the reinsurers under this
treaty totaled $40.3 million at December 31, 1997. The Company believes that
such treatment is appropriate under the terms of this treaty. However, the
Company is currently negotiating the renewal of this treaty, which expired
June 30, 1998, and the impact of the correction in accounting methodology is
an element of those negotiations. The effect of the results of those
negotiations on the Company's financial position or results of operations as
of December 31, 1997, if any, cannot be determined at this time.
6
