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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________TO _______________________
COMMISSION FILE NUMBER 1-12338
VESTA INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 63-1097283
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3760 RIVER RUN DRIVE 35243
BIRMINGHAM, ALABAMA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(205) 970-7000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
The number of shares outstanding of the registrant's common stock,
$.01 par value, as of March 31, 1998
18,457,004
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VESTA INSURANCE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
<C> <S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997................................................. 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1997.............................. 2
Consolidated Statements of Cash Flow for the Three
Months Ended March 31, 1998 and 1997.............................. 3
Notes to Consolidated Financial Statements........................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 5
<CAPTION>
PART II OTHER INFORMATION
<C> <S> <C>
Item 1. Legal Proceedings................................................. 9
Item 2. Changes in Securities............................................. 9
Item 3. Defaults Upon Senior Securities................................... 9
Item 4. Submission of Matters to a Vote of Security Holders............... 9
Item 5. Other Information................................................. 9
Item 6. Exhibits and Reports on Form 8-K.................................. 10
</TABLE>
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
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>
(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) ....... 376,569 331,155
Reinsurance balances receivable...................... 306,270 315,534
Reinsurance recoverable on paid losses............... 119,578 84,500
Deferred policy acquisition costs.................... 102,163 101,299
Property and equipment............................... 17,944 18,093
Income tax receivable................................ -- 26,474
Other assets......................................... 50,218 29,874
Goodwill............................................. 94,476 96,141
----------- ----------
Total assets....................................... $ 1,776,431 $1,675,685
=========== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses................. 607,593 520,340
Unearned premiums................................... 360,406 365,052
----------- ----------
967,999 885,392
Accrued income taxes................................. 62,507 52,002
Reinsurance balances payable......................... 28,113 74,466
Other liabilities.................................... 67,338 52,320
Short term debt...................................... 70,000 45,000
Long term debt....................................... 98,337 98,602
----------- ----------
Total liabilities.................................. 1,294,294 1,207,782
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.................................... 238,446 224,641
Receivable from issuance of restricted stock......... (3,936) (3,891)
Treasury stock....................................... (25,124) (25,416)
----------- ----------
Total stockholders' equity......................... 382,138 367,903
----------- ----------
Total liabilities and stockholders' equity......... $ 1,776,431 $1,675,685
=========== ==========
</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
------------- -------------
(UNAUDITED)
<S> <C> <C>
Revenues:
Net premiums written............................. $ 149,986 $ 131,316
Increase in unearned premiums.................... 19,720 (5,696)
------------- -------------
Net premiums earned.............................. 169,706 125,620
Net investment income............................ 9,230 6,147
Other............................................ 1,250 314
------------- -------------
Total revenues................................ 180,256 132,081
Expenses:
Losses incurred.................................. 77,976 70,545
Loss adjustment expenses incurred................ 7,715 3,650
Policy acquisition expenses...................... 44,905 24,810
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................................ 155,764 111,514
Income before income taxes and deferrable capital
securities....................................... 24,492 20,567
Income taxes...................................... 8,633 7,086
Deferrable capital securities interest, net of in-
come tax......................................... 1,362 923
------------- -------------
Net income.................................... $ 14,497 $ 12,558
============= =============
Basic net income per common share............. $ .79 $ .68
============= =============
Diluted net income per common share........... $ .77 $ .67
============= =============
STATEMENTS OF COMPREHENSIVE INCOME
Net income........................................ $ 14,497 $ 12,558
Other comprehensive income, net of tax:
Unrealized holding gains arising during period... 139 (1,503)
------------- -------------
Comprehensive Income.............................. $ 14,636 $ 11,055
============= =============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
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VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-------------------
1998 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Operating Activities:
Net Income............................................... $ 14,497 $ 12,558
Adjustments to reconcile net income to cash provided from
operations:
Change in:
Loss and LAE reserves.................................. 87,253 14,254
Unearned premium reserve............................... (4,647) 20,191
Reinsurance balances payable........................... (46,352) 30,583
Accrued income taxes................................... 37,189 6,594
Other liabilities...................................... 15,018 (3,589)
Premiums in course of collection....................... (45,414) (26,559)
Reinsurance balances receivable........................ 9,263 (25,738)
Reinsurance recoverable on paid losses................. (35,078) (22,411)
Other assets........................................... (10,862) (20,206)
Payables from deferrable capital trust.................. -- 1,421
Policy acquisition costs amortized...................... 27,945 (19,995)
Policy acquisition costs deferred....................... (28,809) 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)
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 1997 Annual Report. Certain amounts in the
financial statements presented have been reclassified from amounts previously
reported in order to be comparable between years. These reclassifications have
no effect on previously reported stockholders' equity or net income during the
period involved.
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. 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.
4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Vesta Insurance Group, Inc. (the "Company" or "Vesta") is a holding company
for a group of property and casualty insurance companies (the "Vesta Group")
that offer treaty reinsurance and primary insurance on personal and commercial
risks. In both its reinsurance and primary insurance operations, the Company
focuses principally on property coverages, for which ultimate losses generally
can be more promptly determined than on casualty risks. The Company's revenues
from operations are derived primarily from net premiums earned on risks
written and reinsured by the Company, investment income and investment gains
or losses, while expenses consist primarily of payments for claims losses and
underwriting expenses, including agents' commissions and operating expenses.
Comparison of First Quarter 1998 to First Quarter 1997
Net income increased by $1.9 million, or 15.1%, to $14.5 million for the
quarter ended March 31, 1998, from $12.6 million for the quarter ended March
31, 1997. On a diluted per share basis, net income for the first quarter of
1998 was $.77 per share versus net income of $.67 per share for the first
quarter of 1997. In comparing the first quarter 1998 results to first quarter
1997 results, attention should be given to the acquisition of Shelby Casualty
Insurance Company ("Shelby") on June 30, 1997 and Vesta County Mutual
Insurance Company ("Vesta County Mutual") effective December 31, 1996 as
discussed below. Although the results of the Vesta County Mutual transaction
affected the first quarter of 1997, its impact was more pronounced in the
first quarter of 1998.
Premiums, Loss and LAE--Primary Insurance
Gross premiums written for primary insurance increased by $78.1 million, or
180.8%, to $121.3 million for the quarter ended March 31, 1998, from $43.2 for
the quarter ended March 31, 1997. Included in the $78.1 million increase in
gross premiums written for primary insurance was $69.3 million of gross
premiums written by Shelby. The remaining increase of $8.8 million was
primarily due to the transfer of business from assumed reinsurance to personal
lines following the acquisition of Vesta County Mutual offset by declining
premium volume in the financial and commercial lines, as well as declining
volume in The Hawaiian Insurance and Guaranty Company, Ltd. ("HIG").
Net premiums written for primary insurance increased by $49.2 million, or
181.5%, to $76.3 million for the quarter ended March 31, 1998, from $27.1
million for the quarter ended March 31, 1997. The increase in net premiums
written was largely attributable to the writings from Shelby and the transfer
of business from assumed reinsurance to personal lines following the
acquisition of Vesta County Mutual. Net premiums earned for primary insurance
increased $54.7 million, or 221.5% to $79.4 million for the quarter ended
March 31, 1998, from $24.7 million for the quarter ended March 31, 1997.
Loss and loss adjustment expenses ("LAE") for primary insurance increased by
$39 million, or 297.7% to $52.1 million for the quarter ended March 31, 1998,
from $13.1 million for the quarter ended March 31, 1997. Included in the $39
million increase in loss and loss adjustment expenses was $28.8 million in
losses incurred by Shelby. The loss and LAE ratio for primary insurance for
the quarter ended March 31, 1998 was 65.6% as compared to 53.0% at March 31,
1997. The increase in the loss ratio is primarily attributable to the
Company's increased writings of personal automobile policies. The increase to
the personal automobile lines was a result of the acquisitions of Shelby and
Vesta County Mutual which have historically written predominantly personal
automobile lines.
Premiums, Loss and LAE--Reinsurance
Gross premiums written for reinsurance decreased by $31.2 million, or 19.4%
to $129.4 million for the quarter ended March 31, 1998 from $160.6 million for
the quarter ended March 31, 1997. The
5
<PAGE>
decrease was primarily attributable to the transfer of business from assumed
reinsurance to personal lines following the acquisition of Vesta County Mutual
Insurance Company. Additionally, the Company's clients have reported declining
volume, in varying percentages, for two quarters consecutively. Net premiums
written for reinsurance decreased by $30.6 million, or 29.3% to $73.7 million
for the quarter ended March 31, 1998 from $104.3 million for the quarter ended
March 31, 1997. Net premiums earned decreased $10.7 million, or 10.6% to $90.3
million for the quarter ended March 31, 1998, from $101.0 million for the
quarter ended March 31, 1997.
Loss and loss adjustment expenses ("LAE") for reinsurance decreased by $27.5
million, or 45.0%, to $33.6 million for the quarter ended March 31, 1998, from
$61.1 million for the quarter ended March 31, 1997. The loss and LAE ratio for
reinsurance for the quarter ended March 31, 1998 was 37.2% as compared to
60.6% for the quarter ended March 31, 1997. The decrease in the loss and LAE
ratio was primarily due to reduced reported losses from the Company's excess
of loss contracts. The reduction is a result of small first quarter
catastrophes which remained within the retention level of the ceding
companies. Also, the Company is writing more middle and higher layer contracts
which were not affected by the smaller catastrophes which occurred during the
first quarter of 1998.
Policy Acquisition Expenses and Other Expenses. Policy acquisition expenses
increased by $20.1 million, or 81.0% to $44.9 million for the quarter ended
March 31, 1998, from $24.8 million for the quarter ended March 31, 1997. The
increase in policy acquisition expenses is primarily attributable to the
increase in net written premiums, as well as low loss ratios in the
reinsurance lines which resulted in increased contingent commissions for the
quarter. Other expenses include operating expenses not directly related to the
generation of premium revenue, premium taxes and fees, interest on debt and
goodwill amortization. Operating expenses increased $9.7 million. The increase
in operating costs is primarily attributable to the assimilation and
administration of the Shelby operations. The increase in premium taxes and
fees is directly related to the increase in gross premiums written. These
factors caused the underwriting expense ratio to increase from 27.6% in the
first quarter of 1997 to 38.5% in the first quarter of 1998. The increase in
goodwill amortization is attributable to the $83 million of goodwill acquired
on June 30, 1997 in connection with the Shelby acquisition.
Net Investment Income. Net investment income increased by $3.1 million, or
50.8%, to $9.2 million for the quarter ended March 31, 1998, from $6.1 million
for the quarter ended March 31, 1997. The weighted average yield on invested
assets (excluding realized and unrealized gains) was 5.93% for the quarter
ended March 31, 1998, compared with 5.62% for the quarter ended March 31,
1997. The increase in net investment income is primarily attributable to an
increase in average invested assets relating to the Shelby acquisition.
Federal Income Taxes. Federal income taxes increased by $1.5 million, or
21.1%, to $8.6 million for the quarter ended March 31, 1998. The effective
rate on pre-tax income increased from 34.5% to 35.2% for the quarter ended
March 31, 1998. The increase in the effective tax rate is primarily
attributable to a smaller portion of income from tax free municipal bonds in
1998 versus 1997, as well as, an increase in nondeductible goodwill expense.
Net Income. For the reasons discussed above, net income increased by $1.9
million, or 15.1%, to $14.5 million for the quarter ended March 31, 1998, from
$12.6 million for the quarter ended March 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company whose principal asset is its investment in
the capital stock of the companies constituting the Vesta Group, a group of
wholly owned property and casualty insurance
6
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companies including Vesta Fire. The insurance subsidiaries comprising the
Vesta Group are individually supervised by state insurance regulators. Vesta
Fire is the principal operating subsidiary of the Company.
As a holding company with no other business operations, the Company relies
primarily upon dividend payments from Vesta Fire and Shelby to meet its cash
requirements (including its debt service) and to pay dividends to its
stockholders. Transactions between Vesta Fire, Shelby and the Company,
including the payment of dividends by Vesta Fire and Shelby, are subject to
certain limitations under the insurance laws of Alabama. Specifically, Alabama
and Texas law permits the payment of dividends in any year which, together
with other dividends or distributions made within the preceding 12 months, do
not exceed the greater of 10% of statutory surplus as of the end of the
preceding year or the net income for the preceding year, with larger dividends
payable only after receipt of prior regulatory approval. Hawaii law limits
dividends to the lesser of 10% of statutory surplus as of the end of the
preceding year or the net income for the preceding year without prior
approval. 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
approximately $35.5 million.
The Company's insurance companies are subject to regulation by government
agencies in the states in which they do business. State regulatory examiners
perform periodic examinations of insurance companies. Vesta Fire is currently
undergoing its routine examination by the department of insurance in its
domicile state, Alabama. For additional discussion see the Company's Form 10-K
for the fiscal year ended December 31, 1997.
The principal uses of funds at the holding company level are to pay
operating expenses, interest on outstanding indebtedness and dividends to
stockholders. During the last three years, the insurance subsidiaries of the
Company have produced operating results sufficient to fund the needs of the
Company. There can be no assurance as to the ability of the Company's
insurance subsidiaries to continue to pay dividends at current levels.
However, the Company is not aware of any demands or commitments of the
insurance subsidiaries that would prevent the payment of dividends to the
Company sufficient to meet the anticipated needs (including debt service) of
the Company over the next twelve months.
During the first quarter of 1998, the Company paid approximately $0.7
million in dividends on its common stock, and it is expected that the Company
will pay approximately $2.8 million for all of 1998. The Company is also
required to make semi-annual interest payments of $4.4 million on its $100
million of 8.75% Senior Debentures due 2025 and semi-annual interest payments
of $4.3 million on its $100 million of 8.525% Junior Subordinated Capital
Securities Deferrable Interest Debentures issued to Vesta Capital Trust I in
connection with its sale of $100 million of 8.525%.
In order to provide further liquidity, the Company has a $200 million line
of credit. To date, the Company has borrowed $70 million under this line of
credit for general corporate purposes. The Credit Agreement relating to this
line of credit contains certain covenants that require, among other things,
the Company to maintain a certain consolidated net worth, maintain a certain
amount of investment income available for the payment of interest expense,
cause each insurance subsidiary to maintain a certain total adjusted capital
and which limits the amount of the Company's allowable indebtedness. The
Company is in compliance with each of these covenants.
The principal sources of funds for the Company's insurance subsidiaries are
premiums, investment income and proceeds from the sale or maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions and the purchase of investments. On a consolidated
basis, net cash provided from (used in) operations for the quarters ended
March 31, 1998 and 1997, was $21.4 million and $(14.4) million, respectively.
Net cash
7
<PAGE>
provided from operations in the first quarter of 1998 was due principally to
cash receipts relating to the assumption of the unearned premium portfolio on
selected personal lines from CIGNA Property and Casualty Insurance Company.
Cash flow during the first quarter of 1997 was adversely affected by the
settlement of various reinsurance unearned premium portfolio transfers.
Total assets of the Company increased by 5.9% to $1.8 billion in 1998, from
$1.7 billion in 1997. Cash and invested assets were $701.2 million at March
31, 1998, increasing 6.8% from $656.8 million at December 31, 1997.
As of March 31, 1998, the Company's investment portfolio consisted of cash
and short-term investments (27.1%), U.S. Government securities (12.9%),
mortgage-backed securities (10.4%), corporate bonds (25.7%), foreign
government securities (.5%), municipal bonds (20.4%) and equity securities
(3.0%). According to Moody's, 97.5% of the Company's portfolio is rated A or
better. The Company expects current cash flow to be sufficient to meet
operating needs, although invested assets have been categorized as available
for sale in the event short-term cash needs exceed available resources. The
Company adjusts its holdings of cash, short-term investments and invested
assets available for sale according to its seasonal cash flow needs.
The Company is heavily dependent upon computer systems for all phases of its
operations. The year 2000 issue--common to most corporations--concerns the
inability of certain software and databases to properly recognize date
sensitive information beginning January 1, 2000. This problem could result in
a material disruption to the Company's operations, if not corrected. The
Company has assessed and developed a detailed strategy to prevent or at least
minimize problems related to the year 2000 issue. In 1997 resources were
committed and implementation began to modify the affected information systems.
Total costs related to the project are estimated to be approximately $3.5
million, of which $1.1 million was spent in 1997. Substantially all remaining
costs will be expended in 1998 of which $855 thousand was spent in the first
quarter of 1998. Implementation is currently on schedule. The degree of
success of this project cannot be determined at this time. However, management
believes that the final outcome will not have a material adverse effect on the
operations of the Company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described
in the Company's filings with the Securities and Exchange Commission,
including its most recent Annual Report on Form 10-K. If any of these
assumptions or opinions prove incorrect, any forward-looking statements made
on the basis of such assumptions or opinions may also prove materially
incorrect in one or more respects.
8
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PART II
ITEM 1. LEGAL PROCEEDINGS
The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other specified relief. Based upon information presently
available, and in light of legal and other defenses available to the Company
and its subsidiaries, management does not consider liability from any
threatened or pending litigation to be material.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
9
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EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
3.1 Restated Certificate of Incorporation of the Company, dated
September 1, 1993 (filed as an exhibit to Amendment No. 1 to
the Registration Statement on Form S-1 (Registration No. 33-
68114) of Vesta Insurance Group, Inc., filed on October 18,
1993 and incorporated herein by reference (File No. 1-12338)).
3.2 By-Laws of the Company (Amended and Restated as of October 1,
1993) (filed as an exhibit to Amendment No. 1 to the Registra-
tion Statement on Form S-1 (Registration No. 33-68114) of
Vesta Insurance Group, Inc., filed on October 18, 1993 and in-
corporated herein by reference (File No. 1-12338)).
4.1 Indenture between the Company and Southtrust Bank of Alabama,
National Association, dated as of July 19, 1995 (filed as an
exhibit to the Company's Form 10-K for the year ended December
31, 1995, filed on March 28, 1996 and incorporated herein by
reference (File No. 1-12338)).
4.2 Supplemental Indenture between the Company and Southtrust Bank
of Alabama, National Association, dated July 19, 1995 (filed
as an exhibit to the Company's Form 10-K for the year ended
December 31, 1995, filed on March 28, 1996 and incorporated
herein by reference (File No. 1-12338)).
4.3 Indenture dated as of January 31, 1997, between the Company
and First Union National Bank of North Carolina, as trustee
(filed as an exhibit to the Company's Form 10-Q for the quar-
ter ended March 31, 1997, filed on May 13, 1997 and incorpo-
rated herein by reference (File No. 1-12338)).
4.4 Amended and Restated Declaration of Trust, dated as of January
31, 1997, of Vesta Capital Trust I (filed as an exhibit to the
Company's Form 10-Q for the quarter ended March 31, 1997,
filed on May 13, 1997 and incorporated herein by reference
(File No. 1-12338)).
4.5 Capital Securities Guarantee Agreement, dated as of January
31, 1997, between the Company and First Union National Bank of
North Carolina, as trustee (filed as an exhibit to the
Company's Form 10-Q for the quarter ended March 31, 1997,
filed on May 13, 1997 and incorporated by reference (File No.
1-12338)).
10.1 Separation and Public Offering Agreement between Torchmark
Corporation and the Company dated September 13, 1993 (filed as
an exhibit to the Company's Form 10-K for the year ended De-
cember 31, 1993, filed on March 28, 1994 and incorporated
herein by reference (File No. 1-2338)).
10.2 Marketing and Administrative Services Agreement between Lib-
erty National Fire Insurance Company, Liberty National Insur-
ance Corporation and Liberty National Life Insurance Company
dated September 13, 1993 (filed as an exhibit to the Company's
Form 10-K for the year ended December 31, 1993, filed on March
28, 1994 and incorporated herein by reference (File No. 1-
2338)).
10.3 Investment Services Agreement between Waddell & Reed Asset
Management Company and the Company (filed as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-68114) of Vesta Insurance Group, Inc.,
filed on October 18, 1993 and incorporated herein by reference
(File No. 1-12338)) dated September 13, 1993.
10.5 Management Agreement between J. Gordon Gaines, Inc., Liberty
National Fire Insurance Company, Sheffield Insurance Corpora-
tion, Liberty National Insurance Corporation and Vesta Insur-
ance Corporation dated November 15, 1994 (filed as an exhibit
to the Company's Form 10-K for the year ended December 31,
1993, filed on March 28, 1994 and incorporated herein by ref-
erence (File No. 1-2338)).
10.6 Form of Restricted Stock Agreement (filed as an exhibit to the
Registration Statement on Form S-1 (Registration No. 33-68114)
of Vesta Insurance Group, Inc., filed on August 31, 1993 and
incorporated herein by reference (File No. 1-12338)).
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.7* The Company's Long Term Incentive Plan as amended effective as
of May 16, 1995 (filed as an exhibit to the Company's Form 10Q
for the quarter ended June 30, 1995, filed on August 14, 1995
and incorporated herein by reference (File No. 1-12338)).
10.8* Form of Non-Qualified Stock Option Agreement entered into by
and between the Company and certain of its executive officers
and directors (filed as an exhibit to the Company's Form 10-K
for the year ended December 31, 1995, filed on March 28, 1996
and incorporated herein by reference (File No. 1-12338)).
10.9* Cash Bonus Plan of the Company (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1993,
filed on March 28, 1994 and incorporated herein by reference
(File No. 1-2338)).
10.10* J. Gordon Gaines, Inc. Post Retirement Benefits Plan (filed as
an exhibit to the Company's Form 10-K for the year ended De-
cember 31, 1994, filed on March 29, 1995 and incorporated
herein by reference (File No. 1-12338)).
10.11* J. Gordon Gaines, Inc. Retirement Savings Plan (filed as an
exhibit to the Company's Form 10-K for the year ended December
31, 1994, filed on March 29, 1995 and incorporated herein by
reference (File No. 1-12338)).
10.12* The Company's Non-Employee Director Stock Plan (filed as an
exhibit to the Company's
10-Q for the quarter ended June 30, 1995, filed on August 14,
1995 and incorporated herein by reference (File No. 1-12338)).
10.13 Office Lease between the Company and Torchmark Development
Corporation, dated as of April 20, 1992 (filed as an exhibit
to the Company's Form 10-K for the year ended December 31,
1993, filed on March 28, 1994 and incorporated herein by ref-
erence (File No. 1-12338)).
10.14 Agency Agreement between Liberty National Fire Insurance Com-
pany, Vesta Insurance Corporation, Sheffield Insurance Corpo-
ration, and Overby-Seawell Company (filed as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-68114) of Vesta Insurance Group, Inc.,
filed on October 18, 1993 and incorporated herein by reference
(File No. 1-12338)).
10.15 Commercial/Personal Property Risk Excess Reinsurance Con-
tracts, dated July 1, 1993,
constituting the Company's Direct Per Risk Treaty Program, be-
tween Vesta Fire Insurance Corporation, Sheffield Insurance
Corporation, Vesta Insurance Corporation, Vesta Lloyds Insur-
ance Company and various reinsurers (filed as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-68114) of Vesta Insurance Group, Inc.,
filed on October 18, 1993 and incorporated herein by reference
(File No. 1-12338)) Renewed July 1, 1997.
10.16 Catastrophe Reinsurance Contracts, dated July 1, 1995, consti-
tuting the Company's Direct Property Catastrophe Program, be-
tween Vesta Fire Insurance Corporation, Vesta Insurance Corpo-
ration, Sheffield Insurance Corporation, Vesta Lloyds Insur-
ance Company and various reinsurers (filed as an exhibit to
the Company's Form 10-K for the year ended December 31, 1994,
filed on March 29, 1995 and incorporated herein by reference
(File No. 1-12338)). Renewed July 1, 1997.
10.17 Specific Regional Castastrophe Excess Contracts, dated January
1, 1996, constituting the Company's Regional Property Catas-
trophe Program, between Vesta Fire Insurance Corporation and
various reinsurers (filed as an exhibit to the Company's Form
10-K for the year ended December 31, 1995, filed on March 28,
1996 and incorporated herein by reference (File No. 1-12338)).
Renewed January 1, 1998.
10.18 Casualty Excess of Loss Reinsurance Agreements, dated January
1, 1998, constituting the Company's Casualty Excess of Loss
Reinsurance Program, between Vesta Fire Insurance Corporation,
Vesta Insurance Corporation, Sheffield Insurance Corporation,
Vesta Lloyds Insurance Company and Employers Reinsurance Cor-
poration.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S> <C>
10.19 Amendment to Catastrophe Reinsurance Contracts, dated July 1,
1995, constituting the Company's Direct Property Catastrophe
Program, between Vesta Fire Insurance Corporation, Vesta In-
surance Corporation, Sheffield Insurance Corporation, Vesta
Lloyds Insurance Company, Hawaiian Insurance & Guaranty Compa-
ny, Limited and various reinsurers. (Filed as an exhibit to
the Company's Form 10-Q for the quarter ended September 30,
1995, filed on November 14, 1995 and incorporated herein by
reference (File No. 1-12338)).
10.20 Amendment to Catastrophe Reinsurance Contracts, dated January
1, 1996, constituting the Company's Direct Property Catastro-
phe Program, between Vesta Fire Insurance Corporation, Vesta
Insurance Corporation, Sheffield Insurance Corporation, Vesta
Lloyds Insurance Company, Hawaiian Insurance & Guaranty Compa-
ny, Limited and various reinsurers (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1995,
filed on March 28, 1996 and incorporated herein by reference
(File No. 1-12338)). Renewed January 1, 1998.
10.21 Amended and Restated Credit Agreement between Vesta Insurance
Group, Inc. and Southtrust Bank of Alabama, N.A., ABN Amro
Bank B.V., Bank of Tokyo-Mitsubishi Trust Company, The First
National Bank of Chicago, Wachovia Bank of Georgia, N.A. and
First Union National Bank of North Carolina (as agent), dated
April 8, 1997 (filed as an exhibit to the Company's Form 10-Q
for the quarter ended March 31, 1997, filed on May 13, 1997,
and incorporated herein by reference (File No. 1-12338)).
10.22 Quota Share Reinsurance Contract, dated July 1, 1996, covering
all lines of business written by Vesta Fire Insurance Corpora-
tion and its subsidiary and affiliated companies and various
reinsurers (filed as an exhibit to the Company's Form 10-Q for
the quarter ended September 30, 1996, field on November 14,
1996 and incorporated herein by reference (File No. 1-12338)).
Renewed July 1, 1997.
10.23 Stock Purchase Agreement between Anthem Casualty Insurance
Group, Inc, and Vesta Insurance Group, Inc., dated April 23,
1997 (filed as an exhibit to the Company's Form 10-Q for the
year ended September 30, 1997, filed on November 13, 1997 and
incorporated herein by reference (File No. 1-12338)).
10.24 Business Transfer and Management Agreement between Vesta Fire
Insurance Corporation and its affiliated companies and CIGNA
Property and Casualty Insurance Company and its affiliated
companies, dated January 28, 1998 (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1997,
filed on March 27, 1998 (File No. 1-12338)).
</TABLE>
- --------
*These are the Company's compensatory plans.
B) REPORTS ON FORM 8-K.
None.
12
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
THEREUNTO DULY AUTHORIZED.
VESTA INSURANCE GROUP, INC.
Date: May 13, 1998 /s/ Mary Beth Heibein
_____________________________________
Mary Beth Heibein
Controller and Principal
Accounting Officer
Date: May 13, 1998 /s/ Robert Y. Huffman
_____________________________________
Robert Y. Huffman
President and
Chief Executive Officer
13
<PAGE>
REINSURANCE PROGRAM CONFIRMATION AND COVER NOTE
FOR THE
CASUALTY REINSURANCE PROGRAM
FIRST, SECOND AND THIRD CASUALTY EXCESS OF LOSS REINSURANCE AGREEMENTS
BETWEEN
VESTA INSURANCE GROUP
OF
BIRMINGHAM, ALABAMA
INCLUDING:
VESTA FIRE INSURANCE CORPORATION
VESTA INSURANCE CORPORATION
SHEFFIELD INSURANCE CORPORATION
VESTA LLOYDS INSURANCE COMPANY
THE HAWAIIAN INSURANCE AND GUARANTY COMPANY LTD.
VESTA COUNTY MUTUAL INSURANCE COMPANY
AFFIRMATIVE INSURANCE COMPANY
ANTHEM CASUALTY INSURANCE COMPANY
INSURA PROPERTY AND CASUALTY INSURANCE COMPANY
THE SHELBY INSURANCE COMPANY
OR
ANY SUBSIDIARIES OR AFFILIATES IN WHICH VESTA INSURANCE GROUP
HAS A CONTROLLING INTEREST;
AND
EMPLOYERS REINSURANCE CORPORATION
OVERLAND PARK, KANSAS
COMMENCEMENT AND Effective January 1, 1998 with respect to losses arising
TERMINATION: out of occurrences having dates of loss on or after that
date. Continuous contract, may be terminated on any
January 1 by either party providing 90 days written notice
by certified mail. The Reinsured shall have the right to
elect to continue the application of this agreement to loss
under policies in force on the termination date as respects
occurrences taking place prior to the earlier of each
policy's termination date, or its next succeeding
anniversary date. Such election shall be given in writing
along with the Notice of Termination. During that period,
reinsurance rates as stated in the Agreement will apply to
Net Premium Income as appropriate.
APPLICATION OF See Exhibit I.
AGREEMENT:
BUSINESS COVERED Automobile Liability - (including Garage Liability
UNDER REINSURANCE --------------------
SCHEDULE: Policies and Truckers Liability policies written under
the Reinsured's Non Trucking Liability Program);
General Liability, BUT NOT INCLUDING:
-----------------
. Aircraft Liability;
<PAGE>
(BUSINESS COVERED . Any policy covering Professional Liability (this does not
CONTINUED) include Incidental Medical Malpractice, Druggists,
Barbers, Funeral Directors or Beauticians Professional
Liability);
. Pollution Liability or Environmental Impairment Liability
(when written as such);
. Directors and Officers Liability (this does not include
Condominium Directors and Officers Liability);
. Errors and Omissions Liability - this does not include
Employee Benefits Liability; Media Professional E&O
written under the Group's Broadcasters and
Communications Program; Printers E&O; Powersports
Agents E&O; or Truth in Lending, Title and Odometer
E&O policies written under Garage Policies;
Liability Section of the following policies:
-------------------------------------------
. Homeowners;
. Farmowners;
. Commercial Multiple Peril;
. Business Owners;
Commercial Umbrella Policies;
----------------------------
Personal Umbrella Policies.
--------------------------
RETENTIONS AND First Layer Excess--$250,000 ultimate net loss each
REINSURANCE occurrence excess of $50,000 ultimate net loss each
LIMITS: occurrence.
Second Layer Excess--$700,000 ultimate net loss each
occurrence excess of $300,000 ultimate net loss each
occurrence.
Third Layer Excess--$1,000,000 ultimate net loss each
occurrence excess of $1,000,000 ultimate net loss each
occurrence.
COMMERCIAL AND A $50,000 retention will apply per occurrence for
PERSONAL UMBRELLA Umbrella policies issued by the Reinsured. This retention
RETENTION: is satisfied by loss retained in the underlying layers.
NET PREMIUM INCOME: Net Premium Income (NPI) means Gross Net Earned premium,
after deducting premiums paid for facultative reinsurance,
if any, for the lines of business covered, earned by the
Reinsured on and after the effective date and prior to the
termination date of the Agreement. As regards policies
written with indivisible premiums, NPI shall be allocated
as follows:
15% for Business Owners Policies;
5% for HIG Homeowners Policies;
10.5% for Vesta Homeowners Policies.
<PAGE>
1998 ESTIMATED Estimated Subject Net Premium Income is $159,000,000
SUBJECT NET ------------
PREMIUM INCOME: for entities other than Vesta County Mutual and Affirmative
Insurance Company; for Vesta County Mutual and Affirmative
Insurance Company the Estimated Subject Net Premium
Income is $84,386,149.
-----------
REINSURANCE RATES First Layer Excess--Reinsurance Rate--9.81% of NPI.
AND 1998 ESTIMATED Est. Annual Ceded Premium of $15,597,000, due in four equal
CEDED PREMIUMS: -----------
deposits of $3,899,475 on January 1, April 1, July 1 and
----------
October 1 of each year.
Second Layer Excess--Reinsurance Rate--2.15% of NPI.;
Est. Annual Ceded Premium of $3,418,500 due in four equal
----------
deposits of $854,625 on January 1, April 1, July 1 and
--------
October 1 of each year.
Third Layer Excess--Reinsurance Rate--.20% of NPI;
Est. Annual Ceded Premium of $318,000, due in four equal
--------
deposits of $79,500 on January 1, April 1, July 1 and
-------
October 1 of each year.
REINSURANCE RATE Based on the underwriting information, these entities
AND 1998 ESTIMATED do not substantially expose the treaty, except for
CEDED PREMIUM, ECO/XPL. As such, the premium for the entities is
VESTA COUNTY MUTUAL considered to be included in the above quoted rates. If
AND AFFIRMATIVE the limits profile or the subject premiums change
INSURANCE: significantly over the annual period, the Reinsured
agrees to advise the Reinsurer of such changes.
REPORTS AND As regards lines other than Commercial and Personal
REMITTANCES: Umbrella, within 45 days following the close of the
calendar year, the Reinsured shall furnish, in a form
satisfactory to the Reinsurer, a report segregating the Net
Premium Income, by line and by company, to which the
reinsurance rates shall apply. The deposit premiums will be
adjusted by the premiums calculated from the report,
subject to minimum premiums equal to 80% of the total
deposit amounts applying.
As regards Commercial and Personal Umbrella policies,
within 30 days following the close of each calendar
quarter, the Reinsured shall furnish a report (in a form
satisfactory to the Reinsurer) showing the Gross Net Earned
Premium for the Commercial Umbrella and Personal Umbrella
lines for that quarter, less a ceding commission of 27.5%.
This amount shall be remitted to the corporation within 45
days following the close of the calendar quarter.
<PAGE>
MAXIMUM POLICY As per the schedule furnished by the Reinsured in the
LIMITS: 1997 underwriting information, with the addition of:
Commercial Umbrella, $5,000,000; Personal Umbrella,
$2,000,000; Media Professional Errors and Omissions,
$1,000,000.
DEFINITION OF See Exhibit II.
LOSS AND CLAIMS
EXPENSES:
INDEMNITY FOR Included in Ultimate Net Loss, and subject to the
CLAIMS EXPENSES: Reinsurance Limit. For Commercial and Personal Umbrella
Policies, claims expenses will be in addition to the
Reinsurance Limit, subject to the definition of "Loss
and Claims Expenses" in Exhibit 11.
ECO/XPL: 90%/90% coverage. Defined in Exhibit II.
CLAIMS REPORTING: Individual loss notices and settlements. The Reinsured
agrees to give notice of any claim in excess of the
applicable retention, or of any other development which
would involve the Reinsurer. The Reinsured also agrees that
notice will be given for any claim involving fatality,
amputation, spinal cord damage, blindness, extensive burns
or multiple fractures.
OTHER REINSURANCE: Addressed in Application of Agreement, Exhibit 1.
???SH CALLS: This is not normally addressed in ERC agreements. However,
cash transfer for covered losses is done at the reinsured's
request, normally within 24 hours of proof of loss payment.
EXCLUSIONS: See Exhibit 111.
EXCLUDED RISKS If the Reinsured becomes bound on an excluded risk
INADVERTENTLY without knowledge of a member of the underwriting
BOUND: department, reinsurance coverage will apply as if the risk
were not excluded with respect to occurrences taking place
prior to the 31st day of such discovery. If the Reinsured
is prohibited or limited by statute from canceling such
risk, the reinsurance shall apply as if the risk were not
excluded, until the earliest date the risk can be canceled,
or the next succeeding anniversary of the underlying
insurance.
SPECIAL ACCEPTANCES: Risks not covered can be submitted to the Reinsurer for
Special Acceptance. Such risks, if accepted, are subject to
the terms of the Agreement, except as modified by such
written Special Acceptance.
<PAGE>
DEFINITION OF ERC Agreements do not normally contain a definition of
OCCURRENCE: "occurrence". ERC will apply the same definition of
occurrence as per Vesta's primary policy.
OTHER ARTICLES: Offset--balances arising from this or other Agreements
between the parties.
Inspection of Records--the Reinsurer may inspect the
records of the Reinsured, with respect to risks reinsured
under the Agreement.
Assignments and Changes of Interest--no assignment or
change of the Reinsured's interest under the Agreement
shall be binding upon the Reinsurer.
ARBITRATION: ERC Arbitration Clause attached as Exhibit IV.
ERRORS AND ERC E&O Clause attached Exhibit V.
OMISSIONS:
EMPLOYERS REINSURANCE VESTA INSURANCE GROUP
CORPORATION
[signature illegible] [signature illegible]
- ---------------------------- ------------------------------------
ASSISTANT VICE PRESIDENT Vice President
- ---------------------------- ------------------------------------
Title Title
[signature illegible] [signature illegible]
- ---------------------------- ------------------------------------
ASSISTANT SECRETARY Vice President
- ---------------------------- ------------------------------------
Title Title
<PAGE>
EXHIBIT I
APPLICATION OF AGREEMENT. This agreement applies to the lines of business and
- ------------------------
coverages thereunder, as set forth in the Reinsurance Schedule, as respects
occurrences taking place on or after the effective date and prior to the
termination date of this agreement.
This agreement does not apply to:
. reinsurance assumed by the REINSURED, however this does not apply to
reinsurance between the REINSURED'S member companies on business covered under
this agreement, or to Agency Reinsurance;
. policies written specifically as excess insurance over an underlying
policy on the same insured, however this does not apply to Umbrella policies
or Excess Powersports policies issued by the REINSURED;
. coverages written excess of a deductible or retention greater than $5,000
each occurrence;
. business written as a pro rata participant with one or more other insurers;
. business to the extent that it is reinsured outside of this agreement;
. the REINSURED'S liability as a participant, member, subscriber or reinsurer of
any pool, syndicate, association, insolvency fund, guaranty fund or other
combination of insurers or reinsurers formed for the purpose of covering
specific coverages, specific lines of business or for the purpose of insuring
or reinsuring risks located in specific geographical areas, but this
subparagraph (f) does not apply to any risk assigned under any automobile
insurance plan.
The Insolvency Clause and the Nuclear Incident Exclusion Clauses are attached
hereto and made a part of this agreement.
<PAGE>
EXHIBIT II
Definition of Loss and Claim Expenses. The word "loss" shall mean only such
amounts:
a) within applicable policy limits as are actually paid by the REINSURED in
settlement of claims or in satisfaction of awards or judgments (including
prejudgement interest and plaintiff's costs included in the judgment and
subject with the judgment to the applicable policy limit);
b) equal to 90% of the amount paid by the REINSURED in excess of applicable
third party liability coverage policy limits occasioned by liability imposed
upon the REINSURED on account of the failure of the REINSURED to settle a
claim for an amount within such policy limits;
c) equal to 90% of the amount paid by the REINSURED for punitive, exemplary, or
compensatory damages awarded to the insured and arising out of the conduct
of the REINSURED in the investigation, trial or settlement of any claim or
failure to pay or delay in payment of any benefits under any policy.
Provided, however, that in the event of insolvency of the REINSURED, "loss"
shall mean the amount of loss which the insolvent insurer has incurred or is
liable for, and payment by the REINSURER shall be made to the liquidator,
receiver or other statutory successor of the REINSURED in accordance with the
provisions of the Insolvency Clause of this agreement; but the word "loss" shall
not include claim expenses.
Net salvage, subrogation or any other recovery (after expenses) shall be used to
reduce the loss and so much of such recovery shall be paid to the REINSURER as
will reduce the loss ultimately born by the REINSURER to what it would have been
had the recovery preceded any payment of such loss by the INSURER.
The term "claim expenses" shall mean all payments under the supplementary
payments provisions of the REINSURED'S policy, including court costs, interest
upon judgments, and allocated investigation, adjustment, and legal expenses.
Neither the word "loss" nor the term "claim expenses" shall include:
a) salaries paid to employees of the REINSURED;
b) any statutory penalty imposed upon the REINSURED on account of any unfair
trade practice or any unfair claim practice.
<PAGE>
EXHIBIT III
EXCLUSION LIST
REINSURANCE DOES NOT APPLY TO LOSS:
1. Arising from any operation involving asbestos installation, handling,
removal or distribution.
2. Arising from classes of business with principal operations that are listed as
"decline" in the Company's Commercial Lines Underwriting Guide, copy of which
was submitted to, and is on file with, the Reinsurer. The Reinsured agrees to
notify the Reinsurer of changes in the Underwriting Guide.
3. From Pollution Liability under General Liability, Commercial Umbrella or
Garage Liability policies, except with respect to policies to which the
Reinsured has included the standard ISO pollution exclusion or its
equivalent, or a pollution exclusion to which the Reinsurer has given its
prior written approval where the policy does not include the standard ISO or
equivalent exclusionary endorsement.
<PAGE>
EXHIBIT IV
ARBITRATION CLAUSE
------------------
1. Any irreconcilable disputes or differences arising between the REINSURED and
the CORPORATION in respect of this agreement, including its formation and
validity, shall be referred to arbitration, as set out below. Notice
requesting arbitration, along with a description of the issue (s) to be
arbitrated, must be in writing.
2. Each party shall appoint an Arbitrator, and the two named shall, in writing,
before they enter upon the arbitration, appoint an Umpire who has agreed to
act. In the event of one party failing to appoint its Arbitrator within
thirty days of the other party requesting it to do so, the requesting party
may appoint the second arbitrator after ten days notice in writing to the
other party of its intent to do so. Should the Arbitrators fail to appoint an
Umpire within thirty days of the appointment of the second Arbitrator, each
Arbitrator shall submit a list of three names, from which the other
Arbitrator shall decline two, and the Umpire shall be selected from the
remaining names by drawing lots.
3. The Arbitrators and Umpire shall be officers or former officers of
disinterested insurance or reinsurance companies.
4. Within thirty days of the appointment of the Umpire, each party shall submit
its case in writing to the Arbitrators. The Arbitrators shall consider the
differences between the parties and shall submit to the Umpire only those
questions upon which they disagree. The Arbitrators and the Umpire may, if
they so decide, call either or both parties to be heard.
5. The Arbitrators and Umpire shall be permitted to exercise wide latitude in
the pursuit of information necessary to arrive at a decision and shall
include the ability to compel answers to interrogatories and request
documentation in the possession of either party. In the event legal
interpretation is required, the laws of the state of Alabama shall apply.
6. The Arbitrators, if they agree on all items in dispute, or otherwise the
majority of the two Arbitrators and the Umpire, shall render their decision
in writing within sixty days of the appointment of the Umpire. No monetary
award issued by the arbitration tribunal shall exceed the limits of the
treaty. The decision agreed upon by the arbitration tribunal shall be final
and not subject to appeal and shall be binding on both parties.
7. Unless the arbitration tribunal decides otherwise, each party shall pay the
expenses of its own Arbitrator and half of the other costs of the
arbitration.
8. Any such arbitration shall take place at Birmingham, Alabama, unless some
other location is mutually agreed upon by the two parties in interest.
<PAGE>
EXHIBIT V
ERRORS AND OMISSIONS. Inadvertent delays, errors, or omissions made in
connection with this Agreement will not relieve either party from any liability
that would have attached had such delay, error or omission not occurred,
provided always that such error or omission is rectified immediately upon
discovery. The liability of the Reinsurer shall in no event exceed the limits
specified herein.
<PAGE>
- --------------------------------------------------------------------------------
TREATY REINSURANCE CASH INPUT
SEQ#: 00022
- --------------------------------------------------------------------------------
CARD BOOKED CHECK ONE
CODE MO YR [_] CASH RECEIPTS
61 04 1998 [_] CASH DISBURSEMENTS
[_] CHARGE OFF
CODING INSTRUCTIONS
RECEIPTS-CARD CODE 61 TRANS. 51 = UNAPPLIED
RECEIPTS-CARD CODE 61 TRANS. 52 = CORRECTION
RECEIPTS-CARD CODE 61 TRANS. 53 = CHARGE OFF
DISBURSEMENTS - CARD CODE 62 TRANS. 52 = CORRECTION
TREATY ACCOUNT CLAIM TRANS FED TAX
NUMBER NO/YR. NUMBER CODE ID # AMOUNT
- --------------------------------------------------------------------------------
60039 4/1998 900001 61 222005057 280.57
- --------------------------------------------------------------------------------
60039 4/1998 900001 61 382145898 280.57
- --------------------------------------------------------------------------------
59999 4/1998 900001 61 382145898 .01
- --------------------------------------------------------------------------------
/ .00
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/ .00
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/ .00
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/ .00
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/ .00
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PAGE TOTALS: 561.15
TOTAL: 561.15 SEQ#: 00022
DATE PRINTED: 4/27/98 TIME PRINTED: 10:40:21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 489,756
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 20,920
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 653,315
<CASH> 47,916
<RECOVER-REINSURE> 119,578
<DEFERRED-ACQUISITION> 102,163
<TOTAL-ASSETS> 1,776,431
<POLICY-LOSSES> 670,593
<UNEARNED-PREMIUMS> 360,406
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 98,337
190
0
<COMMON> 0
<OTHER-SE> 381,948
<TOTAL-LIABILITY-AND-EQUITY> 1,776,431
169,706
<INVESTMENT-INCOME> 9,230
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 1,250
<BENEFITS> 85,691
<UNDERWRITING-AMORTIZATION> 44,905
<UNDERWRITING-OTHER> 20,391
<INCOME-PRETAX> 24,492
<INCOME-TAX> 8,633
<INCOME-CONTINUING> 15,859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,497
<EPS-PRIMARY> .79
<EPS-DILUTED> .77
<RESERVE-OPEN> 520,340
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 607,593
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
