SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report
June 30, 2000
(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)
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)
(205)970-7000
(Registrant's telephone number, including area code)
Item 7. Financial Statements and Exhibits
(a) In the current report on Form 8-K filed by Vesta Insurance Group, Inc.
(the "Company") on July 14, 2000, the Company indicated it would file
financial statements of American Founders Financial Corporation
required by this item by amendment. American Founders was formed on
January 28, 2000 to acquire Securus Financial Corporation and
Subsidiaries. Since American Founders had no operations prior to
January 28, 2000, we have presented the historical financial statements
of Securus as the predecessor to American Founders. The unaudited
interim income statement for the six-month period ended June 30, 2000
includes the results of operations of American Founders for the five
months since its acquisition of Securus and one month of Securus prior
to its acquisition by American Founders. The historical financial
statements of American Founders' predecessor Securus and the interim
financial statements of American Founders are filed herewith as
Exhibit A:
1. Report of Independent Certified Public Accountants on Consolidated Financial Statements.
2. Consolidated Balance Sheets (audited) as of the end of the two most recent fiscal years (years ended December 31,
1999 and 1998).
3. Consolidated Statements of Operations (audited) for each of the three years ending December 31, 1999.
4. Consolidated Statements of Changers in Shareholder's Equity (audited) for the years ended December 31, 1999, 1998
and 1997.
5. Consolidated Statements of Cash Flows for each of the three years ending December 31, 1999.
6. Notes to Consolidated Financial Statements.
7. Consolidated Interim Balance Sheet (unaudited) as of June 30, 2000.
8. Consolidated Interim Statement of Operation (unaudited) for the six months ended June 30, 2000.
9. Consolidated Interim Statement of Changes in Shareholders' Equity (unaudited) for the six months ended June 30, 2000.
10. Consolidated Interim Statement of Cash Flows (unaudited) for the six months ended June 30, 2000.
11. Notes to the Consolidated Interim Financial Statements (unaudited).
(b) Pro Forma Financial Information
In the Form 8-K filed by the Company on July 14, 2000, the Company indicated that it would file pro forma information
required by this item by amendment. The pro forma information presents the operations of American Founders as if its
acquisition by Vesta and its acquisition of Securus had occurred on January 1. The following pro forma financial
information is filed herewith as Exhibit B:
Vesta Insurance Group, Inc. and Subsidiaries Unaudited Pro Forma Condensed Statements of Income for the six months
ended June 30, 2000 and the year ended December 31, 1999.
(c) Exhibits
2.1 Note Purchase Agreement, dated June 30, 2000, by and between AFFC, Vesta and Vesta Fire. Disclosure schedules to the
Agreement are not included with this exhibit. Vesta agrees to furnish supplementally a copy of such schedules to the
Commission upon request.
2.2 Consent of Grant Thornton LLP.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to be
signed on its behalf by the undersigned, thereto duly authorized.
VESTA INSURANCE GROUP, INC.
Dated as of September 12, 2000
By: /s/ Donald W. Thornton
------------------------------------------------
Its: Senior Vice President-General
Counsel and Secretary
Exhibit A
---------
American Founders Financial Corp. and Its Predecessor
Securus Financial Corporation and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1999, 1998, and 1997
CONTENTS
Page
SECURUS FINANCIAL CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-2
Consolidated Financial Statements
Balance Sheets F-3
Statements of Operations F-4
Statement of Changes in Shareholder's Equity F-5
Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7
AMERICAN FOUNDERS FINANCIAL CORP.
CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED F-33-37
Securus Financial Corporation and Subsidiaries
F-11
Report of Independent Certified Public Accountants
Board of Directors
Securus Financial Corporation
We have audited the accompanying consolidated balance sheets of Securus Financial Corporation and Subsidiaries, as of December 31,
1999 and 1998, and the related consolidated statements of operations, changes in shareholder's equity, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company'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 financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Securus Financial Corporation and Subsidiaries, as of December 31, 1999 and 1998, and the consolidated results of their
operations and their consolidated cash flows for each of the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
/S/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
April 14, 2000
Securus Financial Corporation and Subsidiaries
The accompanying notes are an integral part of these statements.
F-3
Consolidated Balance Sheets
December 31,
ASSETS 1999 1998
(In thousands)
Investments
Fixed maturities, available-for-sale $ 507,679 $ 698,575
Equity securities, available-for-sale 8,838 11,297
Cash and cash equivalents 1,576 5,371
Short-term investments 2,112 53,647
Mortgage loans 24,240 26,125
Collateral loans 38,622 27,797
Policy loans 64,607 65,859
Due from reinsurers - modified coinsurance 63,605 67,234
Due from reinsurers - coinsurance 209,087 -
Other invested assets 12,225 24,401
Total investments 932,591 980,306
Investment income due and accrued 12,808 10,503
Deferred policy acquisition costs 4,190 14,257
Cost of policies purchased 49,124 42,182
Receivable from related parties 9,351 -
Other assets 13,082 8,733
Federal income taxes receivable 2,000 -
Deferred income taxes 436 -
Separate account assets 5,303 5,257
$1,028,885 $1,061,238
Liabilities and shareholder's equity
Liabilities
Future policy benefits $ 731,588 $ 767,547
Deferred federal income taxes - 8,365
Borrowings
Federal Home Loan Bank advances 150,805 158,314
Other - related party 33,469 33,469
Other liabilities 37,391 16,520
Payable to related parties - 270
Separate account liabilities 5,303 5,257
Total liabilities 958,556 989,742
Commitments and contingencies - -
Shareholder's equity
Common stock, no par value; authorized, 1,000 shares; issued
and outstanding, 100 shares 67,958 67,958
Retained earnings 6,739 1,623
Accumulated other comprehensive income (loss) (4,368) 1,915
70,329 71,496
$1,028,885 $1,061,238
The accompanying notes are an integral part of these statements.
F-4
Consolidated Statements Of Operations
Year ended December 31,
1999 1998 1997
(In thousands)
Revenues
Premiums earned $ 11,668 $ 11,737 $ 1,229
Investment product policy charges 9,680 7,734 5,912
Net investment income 65,798 67,486 51,953
Net realized gain (loss) on investments (2,476) 3,695 247
84,670 90,652 59,341
Benefits and expenses
Policyholders' benefits 22,672 16,425 2,587
Interest credited to insurance liabilities 23,591 26,968 28,572
Increase (decrease) in future policy benefits (3,823) 809 274
Commissions, taxes, and administrative expenses 11,904 9,538 7,191
Interest expense 13,265 13,101 7,024
Amortization of deferred policy acquisition costs 2,602 4,822 2,134
Amortization of cost of policies purchased 6,588 11,246 9,967
76,799 82,909 57,749
Income before income taxes 7,871 7,743 1,592
Income tax expense 2,755 2,670 541
Net INCOME $ 5,116 $ 5,073 $ 1,051
The accompanying notes are an integral part of this statement.
F-5
Consolidated Statement of Changes in Shareholder's Equity
Years ended December 31, 1999, 1998, and 1997
Accumulated other
Common Retained comprehensive
Total stock earnings income (loss)
(In thousands)
Balance, January 1, 1997 - BNL $ 42,376 $ 46,528 $ (4,501) $ 349
Additional paid-in capital 5,225 5,225 - -
Effects of Securus acquisition 16,205 16,205 - -
Comprehensive income
Net income 1,051 - 1,051 -
Other comprehensive income
Change in unrealized investment gain - net 1,885 - - 1,885
Comprehensive income 2,936
Balance, December 31, 1997 66,742 67,958 (3,450) 2,234
Comprehensive income
Net income 5,073 - 5,073 -
Other comprehensive loss
Change in unrealized investment gain - net (319) - - (319)
Comprehensive income 4,754
Balance, December 31, 1998 71,496 67,958 1,623 1,915
Comprehensive loss
Net income 5116 5,116 -
Other comprehensive loss
Change in unrealized investment gain - net (6,283) - - (6,283)
Comprehensive loss (1,167)
Balance, December 31, 1999 $ 70,329 $ 67,958 $ 6,739 $ (4,368)
The accompanying notes are an integral part of these statements.
F-6
Consolidated Statements of Cash Flows
Year ended December 31,
1999 1998 1997
(In thousands)
Cash flows from operating activities
Net income $ 5,116 $ 5,073 $ 1,051
Adjustments to reconcile net income to net cash provided by
operating activities
Amortization and depreciation 9,560 16,364 12,553
Accretion of discount and amortization of premium on
investments 1,138 88 (4,149)
Investment product policy charges (9,680) (7,871) (6,158)
(Gain) loss on sale of investments 2,476 (3,695) (247)
Deferred policy acquisition costs (1,927) (2,218) (5,915)
Future policy benefits (7,652) 14,035 (3,256)
Interest credited to insurance liabilities 23,591 26,968 28,572
Federal income taxes - current (2,000) - (251)
Provision for deferred taxes (5,482) 2,332 1,104
Other - net (5,983) 7,033 4,936
Net cash provided by operating activities 9,157 58,109 28,240
Cash flows from investing activities
Sales of fixed maturity investments, available-for-sale 127,623 261,801 86,149
Purchases of fixed maturity investments, available-for-sale (159,798) (182,310) (209,701)
Sales of short-term investments - net 51,535 1,541 6,359
Sales (purchases) of equity securities - net 2,272 (575) (7,202)
Purchases of mortgage, collateral, and policy loans - net (7,688) (16,549) (4,150)
Sale (purchase) of other invested assets - net 12,176 (22,015) -
Change in receivable from related parties (9,621) 2,039 (251)
Change in unsettled investment payable 1,324 5,226 (6,886)
Purchase of fixed assets (391) (247) (248)
Cash paid in business combinations - (9,355) -
Net cash provided by (used in) investing activities 17,432 39,556 (135,930)
Cash flows from financing activities
Deposits to insurance liabilities 48,062 21,357 52,361
Withdrawals from insurance liabilities (70,937) (108,594) (58,464)
Additional contributed capital - - 5,225
Change in FHLB advances (7,509) (6,888) 106,240
Cash acquired in Securus acquisition - - 674
Net cash provided by (used in) financing activities (30,384) (94,125) 106,036
Net increase (DECREASE) in cash
and cash equivalents (3,795) 3,540 (1,654)
Cash and cash equivalents at beginning of year 5,371 1,831 3,485
Cash and cash equivalents at end of year $ 1,576 $ 5,371 $ 1,831
F-7
Notes to Consolidated Financial Statements
December 31, 1999, 1998, and 1997
NOTE A - Organization AND Operation
At December 31, 1999, Securus Financial Corporation (Securus) is a holding company for investments in insurance related
subsidiaries of IFS Insurance Holdings Corporation (Holdings), a subsidiary of Pueblo Holdings Corporation (Pueblo, formerly IFS
Financial Corporation). Securus owns directly or indirectly the following companies:
Ultimate
percentage
Company ownership Nature of operations
Laurel Life Insurance Company
(Laurel) 100% Life insurance holding company for AFL
American Founders Life Insurance
Company (AFL) 100% Life insurance company
American Physicians Life Insurance
Company (APL) 100% Life insurance company, subsidiary of AFL
Bradford Investments, L.C. (BI) 100% Formed in 1997 to hold investments in mortgage servicing rights,
subsidiary of AFL
ABP/Living Benefits Association
Agency, Inc. (ABP) 100% Insurance agency, subsidiary of APL
Securus and subsidiaries are collectively referred to as the Company. On January 31, 2000, American Founders Financial
Corporation (AFFC) acquired Securus and its subsidiaries. (See Note R - Subsequent Events for more details.)
At December 31, 1999, the majority of the Company's active life insurance operations are conducted through AFL. AFL is a stock
life insurance company organized under the laws of the State of Texas. Its operations consist of traditional life products,
universal life products, annuity and pension contracts, and related products. Although AFL is licensed in forty states and the
District of Colombia, approximately 54% of the premiums on the Company's existing block of business are in Texas, Ohio, and
California. AFL's products are sold through third-party marketing firms, financial institutions, and general agents.
Effective December 4, 1998, the Company acquired APL. APL is organized under the insurance laws of the State of Texas and is
licensed in twenty-five states and the District of Colombia. APL specializes in life insurance products that provide for
accelerated benefits in the case of critical illness, other life products, and annuity products (see Note D.)
F-8
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE A - Organization AND Operation - CONTINUED
On May 1, 1999, AFL, through certain assumption and coinsurance agreements, assumed all of the insurance business of APL and
Bradford National Life Insurance Company (BNL), a subsidiary of Laurel until October 8, 1999 (Assumption). This Assumption was
part of a Plan of Reorganization approved by the Commissioner of Insurance of the State of Texas and included BNL and APL
retaining net assets sufficient to maintain the required minimum capital and surplus.
On October 8, 1999, BNL was sold for approximately $12.5 million. The transaction resulted in a gain (pretax) of $2 million,
which is included in net investment income for the year ended December 31, 1999.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of the accompanying consolidated
financial statements follows.
1. Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting
principles (GAAP), which differ in certain respects from statutory accounting practices followed in reports filed by the insurance
subsidiaries with insurance regulatory authorities.
The accompanying consolidated financial statements include the accounts and transactions of Pueblo's insurance subsidiaries. For
1997, such financial statements included only BNL. For periods subsequent to 1997, such financial statements include Securus and
its subsidiaries.
2. Investments
Fixed maturities are securities that mature more than one year after issuance. They include notes, bonds, collateralized mortgage
obligations, and other debt instruments. All fixed maturity investments are classified as available-for-sale securities and are
carried at fair value with any unrealized gain or loss charged or credited to other comprehensive income, net of amortization and
tax effects.
Cost of securities sold is recognized by specific identification. Discounts and premiums on investment securities are amortized
using the interest method as yield adjustments over the contractual lives of the underlying securities and callable corporate
bonds. Principal prepayments can alter the cash flow pattern and yield of prepayment sensitive investments such as
mortgage-backed securities (MBS). The accretion of discount and amortization of premium takes into consideration actual and
estimated principal prepayments. In the case of MBS, estimated prepayment speed information is obtained from published sources or
from estimates developed by an investment advisor. The effects on the yield of a security from changes in principal prepayments
are recognized retrospectively. The degree to which a security is susceptible to yield adjustments is influenced by the
difference between its amortized cost and par; the relative sensitivity of the underlying assets backing the securities to
changing interest rates; and the repayment priority of the securities in the overall securitization structure. Prepayments may
also reduce future yield to the extent that proceeds are reinvested in a lower rate environment.
F-9
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE B - Summary of Significant Accounting Policies - continued
2. Investments - Continued
Equity securities available-for-sale include investments in common stocks and nonredeemable preferred stocks and are carried at
market value with the corresponding unrealized appreciation or depreciation, net of tax effects, reflected in other comprehensive
income. Common stocks include investments in shares of the Federal Home Loan Bank of Dallas (FHLB). Because FHLB shares are not
publicly traded, the market value of the shares was considered to be equivalent to cost due to the fact the FHLB has historically
redeemed the shares at the original cost.
Cash and cash equivalents are highly liquid investments with a maturity of less than ninety days from original acquisition and
include principally money market funds, repurchase agreements, and other bank deposits. Short-term investments are investments
with a maturity of less than one year and greater than ninety days and include primarily certificates of deposit and commercial
paper.
Mortgage loans are stated at the aggregate unpaid principal balances, less unamortized discount and less allowance for possible
losses, if required.
Investments in policy loans and collateral loans are carried at the unpaid principal balance.
Due from reinsurers - modified coinsurance consists of investments held in trust by the reinsurers for the Company related to the
reserves reinsured. The Company manages the assets and bears the investment risk. The amount due from reinsurers is recorded at
fair market value based on the underlying portfolio, which the Company has classified as available-for-sale.
Investments are regularly evaluated based on current economic conditions, credit loss experience, and other investee-specific
developments. If there is a decline in a security's estimated fair value that is other than temporary, it is treated as a
realized loss and the cost basis of the security is reduced to its estimated fair value. If a loan becomes impaired (i.e., it
becomes unlikely that all amounts will be collected according to the contractual terms of the agreement), the loan is revalued at
the present value of expected cash flows, discounted at the loan's effective interest rate. Interest is accrued thereafter on the
net carrying amount of impaired loans.
3. Deferred Policy Acquisition Costs and Cost of Policies Purchased
The costs of writing new business, consisting primarily of commissions and certain costs of policy issuance and agency related
expenses, have been deferred. Deferred policy acquisition costs for life policies and immediate annuities with life contingencies
are amortized over the estimated lives of the policies. Deferred policy acquisition costs for investment products, principally
single premium deferred and flexible annuities and immediate annuities without life contingencies, are amortized with interest in
relation to the present value of the expected gross profits, based on estimated investment yields, mortality, persistency, and
surrender charges, over the lives of the policies. Deferred policy acquisition costs are reviewed periodically to insure that the
unamortized balance does not exceed those amounts recoverable from future profits.
F-10
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE B - Summary of Significant Accounting Policies - CONTINUED
3. Deferred Policy Acquisition Costs and Cost of Policies Purchased - Continued
The cost of policies purchased represents the actuarially determined present value of the projected future profits from acquired
policies. The projected profits are determined using various lapse, mortality, operating expense, and investment spreads on the
blocks of business acquired. This asset is amortized with interest at the credited rate based on the incidence of the expected
profits.
Actual experience on purchased and written business may vary from projections. Variances from original projections, whether
positive or negative, are included in earnings as they occur. For investment-type products, to the extent that these variances
indicate that future profits will differ from those reflected in the scheduled amortization of the cost of policies purchased and
written, current and future amortization is adjusted in the year of variance. Additionally, for investment-type products, when
the Company sells fixed maturity investments and the resulting gain/loss also reduces/increases the future investment spread
because the proceeds from the sale of investments are reinvested at a lower/higher earnings rate and amortization is
increased/decreased to reflect the change in the incidence of profits. Unrealized gains and losses from changes in market values
of fixed maturity investments affect amortization similar to realized gains and losses.
Expected future cash flows used in determining the amortization pattern and recoverability of deferred policy acquisition costs
and cost of policies purchased is based on historical gross profits and management's estimates and assumptions regarding future
investment spreads, maintenance expenses, and persistency of the block of business. The accuracy of the estimates and assumptions
are impacted by several factors, including factors outside the control of management such as movements in interest rates and
competition from other investment alternatives. It is reasonably possible that conditions impacting the estimates and assumptions
will change, and that such changes will result in future adjustments to deferred policy acquisition costs and the cost of policies
purchased.
4. Recognition of Insurance Policy Income, Related Benefits, Expenses, and Liabilities
The Company's reserves for investment-type contracts are based either on the contract account balance (if future benefit payments
in excess of the account balance are not guaranteed) or on the present value of future benefit payments (if such payments are
guaranteed). Additions to insurance liabilities are made if it is determined that future cash flows (including investment income)
are insufficient to cover future benefits and expenses.
For investment contracts without mortality risk (such as deferred annuities and immediate annuities withbenefits paid for a
certain period), the Company records premium deposits and benefit payments as increases or decreases in a liability account,
rather than as revenue and expense. The Company recordsas revenue any amounts charged against the liability account for the cost
of insurance, policy administration, and surrender penalties. Any interest credited to the liability account and any benefit
payments which exceed the contract liability account balance are recorded as expenses. As of December 31, 1999 and 1998,
approximately $134 million (33%) and $97 million (22%), respectively,
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE B - Summary of Significant Accounting Policies - CONTINUED
of the Company's annuity reserves are subject to discretionary withdrawal without surrender charges or other adjustments.
Reserves for traditional life contracts are generally calculated using the net level premium method, based on assumptions as to
mortality, withdrawals, dividends, and investment yields ranging from 2.5% to 6.5%. These assumptions are generally made at the
time the contract is issued or at the purchase date. These assumptions are based on projections from past experience, making
allowance for possible unfavorable deviation.
For traditional life insurance contracts, premiums are recognized as income when due. Benefits and expenses are recognized as a
level percentage of earned premiums, accomplished by providing for future policy benefits and by amortizing the deferred
acquisition costs.
5. Income Taxes
Income tax benefits or expenses include deferred taxes arising from temporary differences between the tax basis of assets and
liabilities and the financial reporting basis and from carryforwards. Recorded amounts will be adjusted to reflect changes in
income tax rates for the period in which the change is enacted.
6. Intangible Assets
The excess of the cost of acquisitions over the net assets acquired is recorded as goodwill and is amortized on the straight-line
basis over a fifteen-year period. In addition, the Company assigned $690,000 of its initial purchase price to the value of the
state licenses acquired by BNL. The licenses allowed Bradford to operate in the various states in which it conducts business.
During 1999, in conjunction with the Plan of Reorganization, amounts attributable to such licenses were written off. Further,
goodwill attributable to BNL was included in the cost of assets disposed during 1999 upon the sale of BNL. Goodwill of $3.5
million and $4.1 million, respectively, at December 31, 1999 and 1998 is included in other assets and is amortized over a fifteen-
to twenty-year period on a straight-line basis.
7. Reinsurance
The Company reports assets and liabilities related to insurance contracts before the effects of reinsurance. Reinsurance
receivables and prepaid reinsurance premiums (including amounts related to insurance liabilities) are reported as assets.
Estimated reinsurance receivables are recognized in a manner consistent with the liabilities related to the underlying reinsured
contracts.
8. Use of Estimates
The preparation of the financial statements in conformity with GAAP 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.
F-12
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE C - Concentrations
The Company's cash and short-term investments included approximately $36.4 million invested in an NAIC 1 designated money market
mutual fund at December 31, 1998.
The Company maintains a mortgage loan portfolio consisting of first-lien residential and commercial mortgages. At December 31,
1999 and 1998, the Company had residential mortgages with carrying values of $6.1 million and $6.8 million, respectively, and
commercial mortgages with carrying values of $18.1 million and $19.3 million, respectively.
At December 31, 1999 and 1998, approximately the following percentages of the Company's related mortgage loan portfolios were
located in the following states:
1999 1998
Residential
Massachusetts 23% -
Arizona 19% 36%
Commercial
Georgia 43% 64%
Florida 21% 20%
Texas 18% 1%
The Company's investment portfolio includes a series of seven mortgage notes, all in good standing, from Riverside Group, Inc.
(Riverside) with a net carrying value of $10.6 million and $10.2 million as of December 31, 1999 and 1998, respectively. The
loans are collateralized by real estate in Florida and Georgia, with an appraised value of approximately $15.2 million and
approximately $10.3 million in Wickes Lumber Company (Wickes) stock, a publicly traded business corporation.
At December 31, 1999 and 1998, included in collateral loans are the following:
Three separate collateral loans totaling $9.1 million issued to three different individuals and secured by their shares of
common stock of Pueblo.
Five separate collateral loans totaling $28.6 million at December 31, 1999 ($18.7 million at December 31, 1998) secured by
the stock of four separate Mexican companies.
Included in other invested assets at December 31, 1999 and 1998 are common stock purchase warrants of International Real Estate
Development Corporation of $5 million and $4.8 million, respectively. The common stock purchase warrants vest on May 23, 2000 and
provide for a predetermined rate of return in the event the warrants are redeemed or exercised. The warrants are ultimately
collateralized by common stock of a Mexican real estate development company whose assets consist primarily of undeveloped real
estate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1999, 1998, and 1997
NOTE C - Concentrations - CONTINUED
Other investment positions in securities of a single issuer which have an aggregate carrying value at December 31, 1999 (amortized
cost) in excess of $7 million, 10% of stockholder's equity, are as follows:
Carrying value
(In thousands)
FHA - #99 USGI Citicorp Real Estate $ 8,049
AAZ 1999-1 PRIN PRTd TR CERTF 11,053
FHLB common stock 7,943
The following percentages of the Company's direct premiums were written in the following states in 1999:
Texas 22%
California 20%
Ohio 12%
No other state accounted for more than 5%.
The Company places its cash and temporary cash investments with highly rated financial institutions. At times, such cash and
temporary investments may be in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced
any losses in such accounts and believes it is not exposed to any significant credit risk on cash balances.
F-14
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE D - Acquisitions
Effective December 31, 1997, Holdings acquired Securus and its subsidiaries, Laurel and AFL. The acquisition was accounted for
using the purchase method of accounting. All assets and liabilities were revalued based upon estimated fair values at the date of
the acquisition. The results of operations of the acquired entities are included in the consolidated statements of operations for
periods subsequent to December 31, 1997. The purchase price was approximately $49.7 million, consisting of cash and other direct
costs of acquisition. The acquisition resulted in goodwill of $2.5 million, which is being amortized over fifteen years.
Concurrent with this acquisition, Holdings transferred 100% of its ownership in BNL to Laurel in exchange for a $33.5 million
surplus note (see Note L). The effect of including these acquired entities and the $33.5 million surplus note transaction in the
consolidated financial statements was an increase to shareholder's equity of $16.2 million and is summarized as follows:
(In thousands)
Net assets of acquired entities
Cash and cash equivalents $ 674
Fixed maturity securities 159,995
Short-term investments 9,098
Mortgage loans 26,602
Policy loans 17,842
Investment income due and accrued 2,885
Cost of policies purchased 20,790
Goodwill 2,460
Other assets 5,438
Future policy benefits (189,779)
Other liabilities (6,331)
49,674
Surplus note issued to Holdings (33,469)
$ 16,205
Effective December 4, 1998, AFL acquired APL. The acquisition was accounted for using the purchase method of accounting. All
assets and liabilities were revalued based upon the estimated fair values at the date of the acquisition. The accompanying
consolidated balance sheet as of December 31, 1998 includes the estimated fair values of acquired assets and liabilities. The
results of operations of the acquired entity are included in the consolidated statements of operations for periods subsequent to
December 31, 1998. The purchase price was approximately $9.4 million, consisting of cash and other direct costs of acquisition.
The acquisition resulted in goodwill of $1.4 million, which is being amortized over fifteen years.
F-15
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE D - Acquisitions - CONTINUED
The following summarizes the estimated fair values of the assets acquired and liabilities assumed relating to the APL acquisition:
(In thousands)
Fixed maturity securities $ 7,841
Equity securities 1,047
Policy loans 1,247
Short-term investments 40,527
Investment income due and accrued 128
Due from reinsurers 97
Cost of policies purchased 5,131
Goodwill 1,356
Other assets 64
Future policy benefits (45,754)
Other liabilities (2,329)
Cash paid $ 9,355
NOTE E - Fair Values of Financial Instruments
The carrying amounts and estimated fair values of the Company's financial instruments, none of which were held for trading
purposes, were as follows:
December 31,
1999 1998
Carrying Estimated Carrying Estimated
amount fair value amount fair value
(In thousands)
Financial assets
Fixed maturities $507,679 $507,679 $698,575 $698,575
Equity securities 8,838 8,838 11,297 11,297
Cash, cash equivalents, and short-term
investments 3,688 3,688 59,018 59,018
Mortgage loans 24,240 23,790 26,125 25,639
Policy loans 64,607 N/A 65,859 N/A
Due from reinsurers - modified coinsurance 63,605 63,605 67,234 67,234
Due from reinsurers - coinsurance 209,087 209,087 - -
Other invested assets, including collateral loans 50,847 50,847 52,198 52,198
Receivables 12,808 12,808 10,503 10,503
Separate account assets 5,303 5,303 5,257 5,257
Financial liabilities
Insurance liabilities for investment contracts $423,251 $390,837 $455,164 $417,396
Borrowings
FHLB advances 150,805 154,004 158,314 170,937
Other - related party 33,469 33,469 33,469 33,469
F-16
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE E - Fair Values of Financial Instruments - CONTINUED
The fair values presented represent management's best estimates and may not be substantiated by comparisons to independent markets
and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all
nonfinancial instruments are not required to be disclosed; therefore, the aggregate fair value amounts presented do not purport to
represent the underlying fair value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is
practicable to estimate that value.
Fixed Maturities - Fair values of fixed maturity securities are based on quoted market prices, dealer quotes, and prices obtained
from independent pricing services.
Equity Securities - The carrying value of unaffiliated common stock, except for stock of FHLB, approximates fair value. Because
FHLB shares are not publicly traded, the market value of the stock was considered to be equivalent to cost due to the fact that
FHLB has historically redeemed the shares at the original cost.
Cash, Cash Equivalents, and Short-Term Investments - The carrying amounts for cash, cash equivalents, and short-term investments
approximate fair value due to the highly liquid nature of the instruments.
Mortgage Loans - The fair value of mortgage loans is calculated by discounting scheduled cash flows through the estimated maturity
using the current rates at which similar loans would be made to borrowers with similar credit and interest rate risks.
Policy Loans - These loans are carried at their unpaid principal amounts. It is not practical to estimate the fair value of
policy loans as they have no stated maturity and their rates are set at a spread related to policy liability amounts.
Due From Reinsurers - Modified Coinsurance and Separate Account Assets - These balances consist principally of fixed maturity
securities. Fair values of fixed maturity securities are based on quoted market prices, dealer quotes, and prices obtained from
independent pricing services. The carrying amounts of the remaining assets, which include short-term investments and receivables,
approximate fair value due to short-term characteristics of these assets.
Due From Reinsurers - Coinsurance - The carrying amounts for due from reinsurers - coinsurance is calculated based on the fair
value of the underlying contracts.
Other Invested Assets, Including Collateral Loans - The carrying value of certain other invested assets approximates fair value
because existing rates of return approximates the current rates of return required on similar investments. The carrying amount of
collateral loans approximates fair value as effective yields approximate current rates.
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE E - Fair Values of Financial Instruments - CONTINUED
Receivables - The carrying amounts for receivables from investment income due and accrued and related parties approximate fair
value due to the short-term characteristics of these receivables.
Insurance Liabilities For Investment Contracts - Insurance liabilities for investment contracts include single premium and
flexible premium deferred and immediate annuity contracts, supplementary contracts not having significant mortality risk,
policyholder dividend accumulations, and separate account liabilities. Cash surrender value is used in determining the fair value
of single premium and flexible premium deferred annuity contracts. Carrying amounts approximated fair value for immediate
annuities, supplementary contracts, policyholder dividend accumulations, and separate account liabilities.
Borrowings - Fair values for the advances from FHLB were calculated using interest rates in effect as of each year end with the
other terms of the advances unchanged. Carrying value of related party borrowings approximates fair value as effective rates
approximate current rates.
NOTE F - Investments
The amortized cost, gross unrealized gains and losses, and estimated market values of available-for-sale investments at December
31, 1999 are as follows:
Gross Gross
unrealized unrealized Market
Amortized cost gains losses value
(In thousands)
U.S. Treasury securities and
obligations of U.S. government,
Corporations and agencies $ 45,146 $ 168 $ (816) $ 44,498
Political subdivisions 25,840 - (1,931) 23,909
Public utilities 10,454 - (474) 9,980
Corporate securities 151,391 696 (9,811) 142,276
Mortgage-backed securities 291,741 1,921 (6,646) 287,016
$524,572 $ 2,785 $ (19,678) $507,679
Equity securities $ 9,119 $ - $ (281) $ 8,838
F-18
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE F - Investments - CONTINUED
The amortized cost, gross unrealized gains and losses, and estimated market values of available-for-sale investments at December
31, 1998 are as follows:
Gross Gross
unrealized unrealized Market
Amortized cost gains losses value
(In thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 60,322 $ 3,190 $ (52) $ 63,460
Municipal bonds 49,675 1,377 (254) 50,798
Corporate securities 197,453 4,905 (3,989) 198,369
Mortgage-backed securities 378,132 8,510 (694) 385,948
$ 685,582 $ 17,982 $ (4,989) $ 698,575
Equity securities $ 11,587 $ - $ (290) $ 11,297
The amortized cost and market value of fixed maturity investments by contractual maturity as of December 31, 1999 are shown
below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Available-for-sale
Amortized Market
cost value
(In thousands)
Due in one year or less $ 12,989 $ 12,965
Due after one through five years 50,247 49,292
Due after five through ten years 100,175 96,181
Due after ten through twenty years 146,735 143,690
Due after twenty years 214,426 205,551
$524,572 $507,679
F-19
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE F - Investments - CONTINUED
The portfolio of securities and other assets held in trust by the reinsurers under modified coinsurance agreements at December 31,
1999 and 1998 is as follows:
1999 1998
(In thousands)
U.S. Treasury securities and obligations
of U.S. government corporations and agencies $ 716 $ 803
Municipal bonds - 2,598
Corporate securities 48,076 49,225
Mortgage-backed securities 10,937 12,546
Total securities, at market value 59,729 65,172
Short-term investments, at cost 2,528 886
Investment income due and accrued 1,348 1,176
Total due from reinsurers - modified coinsurance $ 63,605 $ 67,234
Net investment income consisted of:
Year ended December 31,
1999 1998 1997
(In thousands)
Investment income
Fixed maturities $ 49,112 $ 56,642 $ 47,512
Equity securities 582 575 347
Mortgage loans 2,927 4,257 1,230
Collateral loans 3,848 898 73
Cash, cash equivalents, and short-term investments 1,452 1,193 816
Other 8,970 5,017 2,686
Gross investment income 66,891 68,582 52,664
Less investment expenses 1,093 1,096 711
Net investment income $ 65,798 $ 67,486 $ 51,953
F-20
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE F - Investments - CONTINUED
The unrealized gain (loss) on investments carried at fair value, net of the effects on other balance sheet accounts, is reported
as accumulated other comprehensive income (loss) and was as follows:
December 31,
1999 1998
(In thousands)
Investments carried at estimated fair value including due from reinsurers $ (17,064) $ 16,129
Less effect on other balance sheet accounts
Cost of policies purchased 9,522 (6,490)
Deferred policy acquisition costs 822 (6,757)
Deferred income tax asset (liability) 2,352 (967)
Net unrealized gain (loss) $ (4,368) $ 1,915
Gross proceeds and realized gains and losses on available-for-sale securities sold for the years ended December 31 were:
1999 1998 1997
(In thousands)
Proceeds $129,895 $261,801 $ 86,149
Gross gains 1,686 4,220 834
Gross losses (4,162) (525) (587)
Certain investments with an aggregate amortized cost of $57.8 million and $39.2 million at December 31, 1999 and 1998,
respectively, were on deposit with regulatory authorities in accordance with statutory requirements.
The Company maintains a diversified and balanced fixed maturity portfolio, including the portfolio which is held in trust with the
reinsurers, representing a broad spectrum of industries. Further diversification is provided by limiting the amount invested in
any one issue and issuer, and at December 31, 1999 and 1998, no investment in one issuer (excluding government-backed securities)
exceeded 1% of the investment portfolio. Additionally, liquidity is maintained in the investment portfolio by holding a level of
cash, cash equivalents, and short-term investments which, at December 31, 1999 and 1998, amounted to $3.7 million and $59 million,
respectively. Also, the Company has the ability to borrow funds from FHLB to further enhance its liquidity. At December 31,
1998, approximately $40.1 million of cash, cash equivalents, and short-term investments related to the acquisition of APL. Such
investments were incorporated into the Company's overall investment strategies in 1999.
F-21
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE F - Investments - CONTINUED
The Company invests primarily in high quality fixed income investments. Duration and cash flow characteristics of the fixed
income investments are matched with those of the insurance liabilities. Only fixed income investments back the Companys life
insurance liabilities and cash flow testing is performed on a periodic basis.
The mortgage-backed securities portfolio did not include any interest-only, principal-only, or inverse floating CMOs, nor any
residual interests in CMOs. Management is of the opinion that the mortgage-backed securities owned by the Company have good
liquidity in readily available markets and were substantially all rated NAIC 1 or 1Z.
NOTE G - Deferred Policy Acquisition Costs and Cost of Policies Purchased
Information concerning deferred policy acquisition costs and cost of policies purchased and their effects on income and
shareholder's equity for the years ended December 31, 1999, 1998, and 1997 is presented below:
Deferred policy Cost of policies
acquisition costs purchased
1999 1998 1997 1999 1998 1997
(In thousands)
Beginning balance $ 14,257 $ 18,656 $ 17,950 $ 42,182 $ 47,536 $ 42,851
Items reflected in current income
Policy acquisition costs deferred 1,927 2,218 5,915 - - -
Interest added 461 1,171 1,564 2,382 2,308 2,711
Amortization of deferred costs (3,063) (5,993) (3,698) (8,970) (13,554) (12,678)
(675) (2,604) 3,781 (6,588) (11,246) (9,967)
Current year acquisitions - - - - 5,131 21,014
Effect of reinsurance transactions (16,971) - - (2,482) - -
Adjustment related to application
of SFAS 115 reflected in
shareholder's equity 7,579 (1,795) (3,075) 16,012 761 (6,362)
Ending balance $ 4,190 $ 14,257 $ 18,656 $ 49,124 $ 42,182 $ 47,536
Based on current conditions and assumptions as to future events on policies in force, approximately 9.4% to 14.2% of the cost of
policies purchased as of December 31, 1999 (7.7% to 11.2% at December 31, 1998), excluding the effect of the fair value adjustment
of investment securities available-for-sale, is expected to be amortized in each of the next five years. The average discount
rate for the cost of policies purchased was approximately 5% for each of the years ended December 31, 1999 and 1998.
December 31, 1999, 1998, and 1997
NOTE H - Reinsurance
The Company annually evaluates the financial condition of its reinsurers and believes it has appropriately spread
reinsurance-ceded risks among a group of highly rated reinsurers. In the event the assuming reinsurance companies are unable to
meet their obligations under the reinsurance agreements in force, the Company's life insurance subsidiaries would continue to have
primary liability to policyholders for benefits. On life insurance policies issued prior to October 24, 1990, the Company retains
no more than $50,000 of risk on any one life and generally retains up to $250,000 per risk on policies issued subsequently.
The Company has reinsurance agreements with Conseco Medical Insurance Company (Conseco Medical, formerly known as Connecticut
National Life Insurance Company) and Conseco Life Insurance Company (Conseco Life, formerly known as Massachusetts General Life
Insurance Company). The policies written by Conseco Medical were primarily interest-sensitive, single-premium, whole life
policies while the policies under the Conseco Life agreement were primarily universal and traditional life policies. Future
policy benefits assumed related to the Conseco Medical agreement totaled approximately $133.6 million and $151.8 million at
December 31, 1999 and 1998, respectively. Future policy benefits assumed related to the Conseco Life agreement totaled
approximately $34.9 million and $37.1 million at December 31, 1999 and 1998, respectively.
The Company has reinsurance agreements with both Allianz Life Insurance Company (Allianz) and Montgomery Ward Life Insurance
Company (MWL) under which the Company assumes certain blocks of business written by these entities. In connection with these
agreements, the Company has separate automatic bulk yearly renewable term nonrefund agreements under which the Company retrocedes
95% of the mortality risk on these policies back to Allianz and MWL. In addition, the Company has administrative service
agreements with both of these entities to service these blocks of business. Future policy benefits assumed and ceded under these
reinsurance agreements were $7.6 million and $134,000, respectively, at December 31, 1999 and $5.7 million and $23,000,
respectively, at December 31, 1998.
On June 30, 1999, the Company entered into a Master Reinsurance Agreement with Bankers National Life Insurance Company (Bankers
National) whereby the Company, through two 100% coinsurance arrangements, ceded two blocks of single premium and flexible premium
deferred annuities. Future policy benefits ceded under this reinsurance agreement were $227.2 million and the transaction
resulted in a deferred gain of $12.6 million. As part of this transaction, the Company also agreed to continue to administer
these two blocks of business. Administrative fee income from Bankers National for 1999 was $72,000.
On August 16, 1999, the Company entered into a Master Reinsurance Agreement with Baltimore Life Insurance Company (Baltimore Life)
whereby the Company agreed to 100% coinsure a certain block of business written by Baltimore Life. In addition, an administrative
service agreement was executed with Baltimore Life to service this block. The Company paid a ceding commission to Baltimore Life
of $1.85 million and future policy benefits of $4.5 million were assumed under this agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
December 31, 1999, 1998, and 1997
NOTE H - Reinsurance - continued
On December 31, 1999, the Company entered into a Master Reinsurance Agreement with Old Reliance Insurance Company (Old Reliance)
whereby the Company agreed to reinsure, on a 75% quota share basis, certain blocks of business written by Old Reliance. The
Company paid a $2.4 million ceding commission to Old Reliance and future policy benefits of $12.7 million were assumed under this
agreement. The Company also executed an administrative service agreement, whereby Old Reliance will administer the business for
up to six months, at which time the Company will be responsible for the administration.
An analysis of the effect of reinsurance on the Company's operations is as follows:
1999 1998
(In thousands)
Reinsurance assumed
Face amount $684,289 $635,317
Reserves 281,104 188,776
Premiums 3,756 3,935
Benefits 9,056 6,759
Reinsurance ceded
Face amount $801,742 $849,087
Reserves 216,144 7,211
Premiums 3,667 4,054
Benefits 9,807 3,951
NOTE I - Provision for Income Taxes
Securus is included in the consolidated federal income tax return of Pueblo. Laurel files a consolidated federal income tax
return with its subsidiaries, BNL, AFL, and APL, and includes any taxable income of BI because BI is taxed as a partnership.
Taxes are allocated to members of the consolidated group based upon amounts calculated as if each member filed its own separate
tax return.
Income tax expense (benefit) for the Company was as follows:
Year ended December 31,
1999 1998 1997
(In thousands)
Current $ 8,237 $ 338 $ (563)
Deferred (5,482) 2,332 1,104
$ 2,755 $ 2,670 $ 541
F-24
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE I - Provision for Income Taxes - CONTINUED
The components of income tax assets and liabilities included in the accompanying consolidated balance sheets were as follows:
December 31,
1999 1998
(In thousands)
Deferred income tax liabilities
Investments $ - $ 789
Cost of policies purchased and deferred policy
acquisition costs 10,239 19,783
Unrealized gain on fixed maturities - 980
Gross deferred income tax liabilities 10,239 21,552
Deferred income tax assets
Investments 48 -
Insurance liabilities 4,419 12,170
Carryforwards - 3,609
Unrealized loss on fixed maturities 2,352 -
Other 3,856 270
10,675 16,049
Valuation allowance - (2,862)
Gross deferred income tax assets 10,675 13,187
Net deferred income tax asset (liability) $ 436 $ (8,365)
Decrease in valuation allowance for the year $ (2,862) $ (1,114)
Net income tax currently payable (receivable) $ (2,000) $ -
At December 31, 1998, a valuation allowance was recorded for a portion of the deferred tax assets related to net operating loss,
capital loss, and AMT credit carryforwards, as management believed that it was more likely that these carryforwards would not be
utilized in the future due to limitations on their utilization.
F-25
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE I - Provision for Income Taxes - CONTINUED
Reconciliation of taxes computed at the statutory rate of 34% to the income tax expense was as follows:
Year ended December 31,
1999 1998 1997
(In thousands)
Tax expense at statutory rate $ 2,676 $ 2,633 $ 541
Other 79 37 -
Income tax expense $ 2,755 $ 2,670 $ 541
NOTE J - FEDERAL HOME LOAN BANK BORROWINGS
Advances from FHLB as of December 31 are as follows:
1999 1998
(In thousands)
Short-term advances, bearing interest at 5.99% for 1999 and 4.85% for 1998 $ 72,500 $ 78,600
Amortizing advances with balloon payments, bearing interest at rates
from 6.41% to 7.3%, maturing from 2003 to 2017 69,688 71,164
Fully amortizing advances, bearing interest at rates ranging from
6.19% to 7.48%,maturing from 2010 to 2016 8,066 8,550
Accrued interest on advances 551 -
$150,805 $158,314
The Company is required to maintain a collateral deposit with FHLB. At December 31, 1999 and 1998, investments having a market
value of $158.5 million and $161.1 million were pledged to FHLB. Inter-est expense was approximately $9.6 million, $10.2 million,
and $7 million for the years ended December 31, 1999, 1998, and 1997 respectively. At December 31, 1999, $.2 million was
available to the Company for undrawn advances if current collateral levels remain unchanged.
F-26
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE J - FEDERAL HOME LOAN BANK BORROWINGS - CONTINUED
Annual maturities of borrowings from FHLB as of December 31, 1999 are as follows:
(In thousands)
2000 $ 75,114
2001 2,177
2002 2,301
2003 6,337
2004 5,249
Thereafter 59,627
$150,805
NOTE K - Separate Accounts
Separate account assets and liabilities generally represent funds maintained in accounts to meet specific investment objectives of
contractholders who bear the investment risk. The assets consist primarily of long-term bonds and preferred and common stocks,
carried at market, and short-term investments, carried at cost which approximates market. Investment income and investment gains
and losses accrue directly to such contractholders. Deposits, net investment income, and realized and unrealized gains and losses
on separate account assets are not reflected in the statements of operations of the Company and are reflected directly in the
separate account liabilities.
NOTE L - Related Party Transactions
The Company has mortgage loans and collateral loans outstanding for funds loaned to affiliates. Outstanding mortgage loan
balances were $99,000 at December 31, 1999 and 1998. Outstanding collateral loans to affiliates were $950,000 and $1,000,000 at
December 31, 1999 and 1998, respectively. As of December 31, 1999 and 1998, outstanding collateral loans totaling $9 million were
issued to shareholders of Pueblo. The net investment income earned in 1999, 1998, and 1997 was approximately $10,000, $10,000,
and $9,000, respectively, for these mortgage loans and $579,000, $579,000, and $73,000, respectively, for these collateral loans.
On December 31, 1997, Laurel issued a $33.5 million surplus note with a stated maturity of January 1, 2008 to Holdings (see Note
D). Repayment of the note is subject to Laurel's surplus exceeding the available surplus floor, as defined by the Texas
Department of Insurance ($1.9 million as of December 31, 1999). This note bears interest on the lesser of the rate charged
Holdings on a certain credit agreement plus .5%, or the highest lawful rate as defined in the same agreement. As of December 31,
1999 and 1998, the interest rate charged was 8.12% and 8.16%, respectively. No principal payments were made in either 1998 or
1999. Interest expense recognized on this note was $3.6 million and $2.9 million in 1999 and 1998, respectively.
F-27
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE L - Related Party Transactions - CONTINUED
From time to time, the Company makes advances to or receives advances from related parties. The advances are generally
noninterest-bearing and without fixed payment terms. Following is a summary of related party advances at December 31:
1999 1998
(In thousands)
Amount receivable (payable)
Holdings $ 8,526 $ (1,544)
Bradford Brokerage, Inc. (a subsidiary of Holdings) 825 932
Circle Investors, Inc. (parent of Securus) - 342
$ 9,351 $ (270)
NOTE M - REGULATORY MATTERS
The insurance subsidiaries are subject to regulation and supervision by the states in which they transact business. The state of
domicile exercises principal regulatory supervision of insurance companies. The purpose of such regulation and supervision is
primarily to provide safeguards for policyholders. The states have established regulatory agencies with broad administrative
powers to regulate, among other things: licenses to transact business; policy forms; trade practices; premium and commission
rates; agency agreements; deposit of securities for the benefit of policyholders; form and content of statutory financial
statements; accounting practices; maintenance of reserves and capital for the protection of policyholders; dividends; examination
of insurers' affairs; and investments. The relationships of the affiliates are subject to regulations under state insurance
holding company laws. Under these laws, intercompany asset transfers, investments, and other transactions, as well as dividends
from insurance companies, may be subject to prior notice to, or approval by, the state insurance regulatory authority, depending
upon the size of such transaction or dividend.
The Company's insurance subsidiaries prepare their statutory financial statements in accordance with accounting practices
prescribed or permitted by the Department of Insurance of the states in which they are domiciled. Prescribed statutory accounting
practices include a variety of publications of the National Association of Insurance Commissioners, as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so
prescribed. Management is not aware of any permitted statutory accounting practices utilized by its insurance subsidiaries.
F-28
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE M - REGULATORY MATTERS - CONTINUED
Following is a summary of selected statutory financial information for the primary life insurance subsidiaries at December 31:
1999 1998 1997
(In thousands)
Laurel
Statutory capital and surplus $ 48,842 $ 41,235 $ 43,664
Statutory net income 12,764 6,829 3,859
AFL
Statutory capital and surplus $ 59,681 $ 17,097 $ 19,564
Statutory net income 15,673 6,516 N/A
APL
Statutory capital and surplus $ 5,708 $ 4,319 N/A
Statutory net income 141 N/A N/A
Bradford
Statutory capital and surplus N/A $ 33,225 $ 33,860
Statutory net income N/A 4,390 848
Under the applicable laws and regulations of the State of Texas, the life insurance subsidiaries are each required to maintain a
minimum statutory capital of $700,000 and surplus of $700,000. Risk-based capital (RBC) rules have been adopted by most states,
including Texas. RBC rules evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risk.
The effect of RBC is an early warning tool to assist regulators in identifying possible weakly capitalized companies. At December
31, 1999 and 1998, the RBC of all life insurance subsidiaries exceeds the required regulatory levels at which the Company must
initiate action with regulatory authorities.
Dividend payments by the active insurance subsidiaries are limited by statutory restrictions to the greater of 10% of prior year's
statutory surplus or 100% of the prior year statutory net gain from operations to the extent the insurance subsidiary has positive
"earned surplus" as defined by Texas statute. Dividends may also be subject to the broad discretionary powers of insurance
regulating authorities to further limit dividend payments of insurance companies.
At December 31, 1999, dividends of approximately $10.3 million could be paid by Laurel without prior regulatory approval.
F-29
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE N - Commitments and Contingencies
The Company leases office space for its administrative operations in Phoenix, Arizona under a noncancelable operating lease
agreement expiring in 2002. The Company also leases office space for sales and administrative operations in Dallas, Texas under a
noncancelable operating lease expiring in 2001.
Future minimum rental commitments under these leases as of December 31, 1999 are as follows:
(In thousands)
2000 $ 530
2001 525
2002 342
$ 1,397
Total office rental expense, including common area maintenance expense for 1999, 1998, and 1997 was $562,000, $235,000, and
$122,000, respectively.
The Company's insurance subsidiaries are subject to assessment from the guaranty fund associations established by the various
states in which the entities do business. Assessments are made by the associations to cover the insurance obligations of
insolvent or rehabilitated insurance companies. In most states, guaranty fund assessments can be recovered through a reduction in
future premium and other state taxes payable. Based on information available from the National Organization of Life and Health
Insurance Guaranty Associations, the Company has recorded a $825,000 and a $1,200,000 liability at December 31, 1999 and 1998,
respectively, for known insolvencies.
In 1997, the Company adopted a plan to consolidate the administrative functions of BNL and AFL in its Phoenix, Arizona facilities
and close its Louisiana facilities. In connection with this plan, the Company accrued liabilities of $596,000 in 1997 relating to
estimated termination benefits and moving costs. The termination benefits were paid and the relocation completed during 1998. In
1998, the Company also adopted a plan to consolidate the administrative function of APL into the Phoenix facility. The Company
accrued liabilities of $390,000 in 1998 relating to estimated termination benefits and moving costs to close the Columbus, Ohio
facilities of APL. The termination benefits and moving costs were paid during 1999.
The Company is a defendant in lawsuits which have arisen out of the normal course of business and which are in various stages of
litigation. These suits arose primarily from policyholder disputes. The Company has established claim liabilities for the amount
of benefits management feels are potentially payable. The Company believes that no material adverse settlements in excess of the
amounts provided will be made.
F-30
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE O - Employee Benefit Plans
The Company and its eligible employees participate in benefit plans under Section 401(k) of the Internal Revenue Code. Employees
may contribute up to 15% (subject to certain ERISA limitations) of their eligible compensation to the plans on a pre-tax basis,
and the Company may make discretionary matching contributions. The Company contributed approximately $77,000, $32,000, and
$16,000 to the plans in 1999, 1998, and 1997, respectively.
NOTE P - OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) on a pretax and after-tax basis for the years ended December 31 are as follows:
1999 1998 1997
Pretax After tax Pretax After-tax Pretax After-tax
(In thousands)
Unrealized holding gains (losses) arising
during the period $ (35,669) $ (23,226) $ 4,252 $ 2,934 $ 12,498 $ 8,373
Adjustments to unrealized gains and
losses arising during the period
Deferred policy acquisition costs 7,579 4,926 777 536 (6,362) (4,263)
Cost of policies purchased 16,012 10,408 (1,795) (1,239) (3,075) (2,060)
Net unrealized holding gains (losses)
arising during the period (12,078) (7,892) 3,234 2,231 3,061 2,050
Less reclassification adjustment for
net realized (gains) losses included
in net income 2,476 1,609 (3,695) (2,550) (247) (165)
Other comprehensive income (loss) $ (9,602) $ (6,283) $ (461)$ (319) $ 2,814 $ 1,885
NOTE Q - Supplemental Cash Flow Information
Supplemental cash flow information for the years ended December 31 was as follows:
1999 1998 1997
(In thousands)
Cash paid (received) during the year for
Interest $ 12,894 $ 12,032 $ 6,496
Federal income taxes $ 11,582 $ 480 $ (1,241)
Securus Financial Corporation and Subsidiaries
F-31
Notes to Consolidated Financial Statements - continued
December 31, 1999, 1998, and 1997
NOTE R - SUBSEQUENT EVENTS
As of January 1, 2000, the Company ceded, through a modified coinsurance quota share reinsurance agreement, 35% of its current
block of business (excluding certain specified plans) to Employers Reassurance Corporation. The Company received a ceding
commission of $10 million. This re-insurance agreement did not significantly affect the Company's assets or liabilities; however,
it did result in additional statutory capital and surplus for AFL.
On January 31, 2000, a controlling interest in the Company was acquired by American Founders Financial Corp. (AFFC), a life
insurance holding corporation formed and controlled by the Company's management group. As part of the transaction the Company
paid approximately $43.9 million to its former parent, which included effectively repaying the $33.5 million surplus note payable.
NOTE S - EVENT (UNAUDITED) SUBSEQUENT TO THE DATE OF THE REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
On June 30, 2000, a controlling interest in AFFC (approximately 71% voting control) was acquired by Vesta Insurance Group, Inc.
F-32
This Page Intentionally Left Blank
American Founders Financial Corp. and Subsidiaries
The accompanying notes are an integral part of these statements.
F-33
CONSOLIDATED BALANCE SHEET - UNAUDITED
(in thousands)
June 30, 2000
ASSETS
Investments
Fixed maturities - available-for-sale $453,407
Equity securities - available-for-sale 7,009
Cash and cash equivalents 11,439
Short-term investments 8,927
Mortgage loans 22,102
Collateral loans 33,999
Policy loans 64,765
Due from reinsurers - modified coinsurance 66,002
Due from reinsurers - coinsurance 182,170
Other invested assets 13,274
863,094
Investment income due and accrued 7,285
Deferred policy acquisition costs 439
Cost of policies purchased 21,096
Other assets 2,173
Deferred income taxes 12,891
Separate account assets 358
$907,336
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Future policy benefits $690,701
Federal income taxes payable 2,997
Borrowings
Federal Home Loan Bank advances 143,123
9.5% convertible debentures 25,000
Other liabilities 18,445
Separate account liabilities 358
Total liabilities 880,624
Mandatorily redeemable preferred stock (Series C) 24,927
Commitments and contingencies -
Shareholders' equity
Common stock 1
Preferred stock (Series B) -
Preferred stock (Series D) -
Accumulated other comprehensive income 875
Retained earnings 909
1,785
$907,336
American Founders Financial Corp. and Subsidiaries
The accompanying notes are an integral part of this statement.
F-34
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(in thousands)
AFFC Securus (predecessor)
Six months ended One month ended
June 30, 2000 January 31, 2000
Revenues
Premiums earned $ 1,648 $ 306
Investment product policy charges 2,106 508
Net investment income 18,309 3,475
Net realized gain (loss) on investments 1,065 (1,210)
23,128 3,079
Benefits and expenses
Policyholders' benefits 4,055 1,261
Interest credited to insurance liabilities 5,696 1,096
Decrease in future policy benefits (1,137) (945)
Commissions, taxes, and administrative expenses 4,074 882
Interest expense 4,878 1,151
Amortization of cost of policies purchased 1,227 (188)
18,793 3,257
Income (loss) before taxes 4,335 (178)
Income tax expense 1,519 262
NET INCOME (LOSS) $ 2,816 $ (440)
The accompanying notes are an integral part of this statement.
F-35
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - UNAUDITED
(in thousands)
Six months ended June 30, 2000
Series A Series B Series D Additional Accumulated other Total
Common preferred preferred preferred paid-in Retained comprehensive shareholders'
stock stock stock stock capital earnings income equity
Balance at January 1, 2000 $ 1 $ - $ - $ - $ - $ - $ - $ 1
Recapitalization - - - - - - - -
Securus
acquisition
Preferred stock issued
(50,000 shares of
Series A) - 39,293 - - - - - 39,293
Common stock warrants
(50,000 warrants) - - - - 5,727 - - 5,727
Accretion of preferred
stock discount - 1,664 - - - (1,664) - -
Redemption of Series A
preferred and related
warrants - (40,957) - - (5,727) (243) - (46,927)
Preferred stock issued (25
shares of Series D) - - - - - - - -
Comprehensive income
Net income - - - - - 2,816 - 2,816
Other comprehensive income
Change in unrealized
investment gains - net - - - - - - 875 875
Comprehensive income 3,691
Balance at June 30, 2000 $ 1 $ - $ - $ - $ - $ 909 $ 875 $ 1,785
F-36
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
(in thousands)
Six months ended June 30, 2000
Cash flows from operating activities
Net income $ 2,816
Adjustments to reconcile net income to net cash provided by operating activities
Amortization and depreciation 1,349
Accretion of discount and amortization of premium on investments (655)
Investment product policy charges (2,106)
Gain on sale of investments (1,065)
Deferred policy acquisition costs (439)
Future policy benefits (9,633)
Interest credited to insurance liabilities 5,696
Federal income taxes - current 1,152
Provision for deferred taxes 1,049
Other, net 14,296
Net cash provided by operating activities 12,460
Cash flows from investing activities
Sales of fixed maturity investments, available-for-sale
23,380
Purchases of fixed maturity investments, available-for-sale (17,418)
Purchase of short-term investments, net (4,850)
Sales of equity securities, net 829
Decrease in mortgage, collateral, and policy loans, net 6,051
Purchase of property and equipment, net (52)
Increase in other invested assets (4,602)
Net cash received in business combinations 3,580
Net cash provided by investing activities 6,918
Cash flows from financing activities
Net withdrawals from insurance liabilities (1,639)
Redemption of Series A preferred stock (22,000)
Change in borrowings 15,699
Net cash used in financing activities (7,940)
NET INCREASE IN CASH AND CASH EQUIVALENTS 11,438
Cash and cash equivalents at beginning of period 1
Cash and cash equivalents at end of period $ 11,439
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited interim financial statements include the accounts of American Founders Financial Corp. (AFFC) and
Subsidiaries (collectively, the Company) and 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 1999 audited financial statements of Securus Financial Corporation and Subsidiaries (the Company's predecessor).
NOTE B - RECAPITALIZATION
On January 28, 2000, AFFC was recapitalized resulting in 50,000 shares of common stock issued and outstanding and 2,000 shares of
Series B convertible preferred stock issued and outstanding. The Series B has a par value of $.01 per share and a stated value of
$1,000. Series B is entitled to cumulative annual dividends of $100 per share, is entitled to vote 10 votes per share as if
converted to shares of common stock, and is convertible into the number of shares of common stock equal to the result of the
stated value plus accrued and unpaid dividends divided by 10. The recapitalization also resulted in the issuance of warrants for
an additional 50,000 common shares that can be exercised after January 31, 2002 at $10 and $20 per share, depending on the series.
NOTE C - ACQUISITION
On January 31, 2000, AFFC acquired Securus. AFFC is a life insurance holding company formed and controlled by the management
group of Securus. Prior to the acquisition of Securus, AFFC had no material operations. Concurrent with the acquisition, the
Texas Department of Insurance approved and Securus paid $43.9 million to its former parent, which included effectively repaying
the $33.5 million surplus note payable. The Company accounted for the acquisition under the purchase method of accounting and,
accordingly, the results of operations of Securus for the period from January 31, 2000 are included in the accompanying
consolidated financial statements. The purchase price included 50,000 shares convertible preferred stock (Series A) with a stated
value of $50 million and an estimated fair value of $39.3 million and common stock warrants with an estimated fair value of $5.7
million. The purchase price has been allocated to assets acquired and liabilities assumed as follows:
(in thousands)
Invested assets $ 682,986
Other assets 244,755
Value of business acquired 21,893
Future policy benefits (717,508)
Notes payable (152,423)
Other liabilities (34,683)
$ 45,020
F-38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
June 30, 2000
NOTE C - ACQUISITION - CONTINUED
Also, as part of this transaction, certain management employees of the Company purchased 50,000 shares of restricted common stock
for $.01 per share which included warrants for an additional 50,000 common shares that can be exercised after January 31, 2002 at
$10 and $20 per share, depending on the series.
NOTE D - DISPOSITIONS
On June 9, 2000, the Company completed the sale of American Physicians Life Insurance Company (APL). The Company recognized a
pretax gain of approximately $800,000 on the sale.
NOTE E - CAPITAL TRANSACTIONS
On June 30, 2000, the Company issued $25 million of 9.5% convertible subordinated notes to Vesta Insurance Group (Vesta) for
cash. These notes are immediately convertible into common stock of the Company at $25 per share. Vesta also received 25 shares
of special voting preferred stock (Series D) with a par value of $.01 for $250. This preferred stock does not provide for
dividends; however, it does allow Vesta to vote the number of shares of common stock that the convertible subordinated notes are
convertible into, as if converted on that date.
In conjunction with this issuance, the Company redeemed the Series A convertible preferred stock for $22 million in cash and
issued 30,000 shares of Series C preferred stock with a stated value of $30 million, which is mandatorily redeemable. The fair
value of the Series C preferred stock was estimated to be approximately $24.9 million. Series C is entitled to a cumulative
annual dividend of $50 per share until June 30, 2005 at which time the rate increases to $100 per share thereafter. Shares of
Series C must be redeemed by the Company as the carrying value of certain selected assets becomes greater than the stated value of
the Series C such that the resulting stated value of the Series C is not greater than the carrying value of those selected
assets. The projected first redemption is June 30, 2002.
Vesta Insurance Group, Inc.
F-39
Exhibit B
---------
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following presentation sets forth the unaudited proforma consolidated income statements of Vesta Insurance Group for the six
months ended June 30, 2000 and the year ended December 31, 1999 giving effect to Vesta Insurance Group's acquisition of American
Founders and American Founders' acquisition of Securus. The acquisition will be accounted for as a purchase.
The following transactions have been reflected in the unaudited pro forma consolidated income statements as if those transactions had
occurred in the beginning of each respective period.
o On June 30, 1999, Securus Financial Corporation and Subsidiaries (Securus) entered into a Master Reinsurance Agreement with
Bankers National Life Insurance Company (Bankers National) whereby Securus, through two 100% coinsurance arrangements, ceded
two blocks of single premium and flexible premium deferred annuities. Future policy benefits ceded under this reinsurance
agreement were $227.2 million. As part of this transaction, Securus also agreed to continue to administer these two blocks
of business.
o As of January 1, 2000, Securus ceded, through a modified coinsurance quota share reinsurance agreement, 35% of its current
block of business (excluding certain specified plans) to Employers Reassurance Corporation.
o On January 31, 2000, American Founders acquired Securus (the American Founders transaction). Prior to the acquisition of
Securus, American Founders had no material operations. As a part of the transaction, Securus paid approximately $43.9
million to its former parent, which included effectively repaying the $33.5 million surplus note payable. American Founders
accounted for the acquisition under the purchase method of accounting and, accordingly, the purchase price has been
allocated to the tangible and indentifiable intangible assets acquired and liabilities assumed on the basis of their
respective fair values on the acquisition date. The purchase price of Securus and Subsidiaries included 50,000 shares of
convertible preferred stock (Series A) with a stated value of $50 million and an estimated fair value of $39.3 million and
common stock warrants with an estimated fair value of $5.7 million.
o On June 30, 2000, a controlling interest in American Founders (approximately 71% voting control) was acquired by Vesta
Insurance Group, Inc. (Vesta) (the Vesta transaction). American Founders received $25 million in cash in exchange for $25
million of 9.5% convertible subordinated notes (immediately convertible into common stock of American Founders) and 25
shares of special voting preferred stock. This preferred stock does not provide for dividends; however, it does allow Vesta
to vote the number of shares of common stock that the convertible subordinated notes are convertible into. Vesta accounted
for the transaction under the purchase method of accounting and, accordingly, the purchase price has been allocated to the
tangible and identifiable intangible assets and liabilities of American Founders on the basis of their respective fair
values on the acquisition date.
o In conjunction with this acquisition, American Founders redeemed the Series A convertible preferred stock for $22 million in
cash and issued 30,000 shares of Series C preferred stock with a stated value of $30 million, which is mandatorily
redeemable. The fair value of the Series C preferred stock was estimated to be approximately $24.9 million.
F-40
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION-CONTINUED
The proforma information should be read in conjunction with the historical financial statements of Vesta, Securus, and American
Founders and the related notes thereto. The following presentation is not necessarily indicative of the results of operations that
would have resulted had the merger been consummated at the periods indicated, nor is it necessarily indicative of the results of
operations of future periods.
Vesta Insurance Group, Inc.
See Notes to Unaudited Proforma Consolidated Income Statements
F-41
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
(in thousands)
For the six months ended June 30, 2000
Historical Proforma adjustments
Balances Purchase
AFFC Securus Vesta not accounting Proforma
(six months) (one month) (six months) acquired entries Vesta
Revenues
Net premiums earned $ 1,648 $ 306 $129,396 $ - $ - $131,350
Investment product policy charges 2,106 508 - - - 2,614
Net investment income 18,309 3,475 12,385 (92)(f) (770)(k) 33,307
Other, including realized gains
and losses 1,065 (1,210) 1,651 - 1,298(e) 2,804
23,128 3,079 143,432 (92) 528 170,075
Benefits and expenses
Policyholders' benefits 4,055 1,261 - - - 5,316
Loss and loss adjustment
expenses incurred - - 80,709 - - 80,709
Policy acquisition expenses 1,227 (188) 27,110 - 272(c) 28,421
Interest credited to insurance
liabilities 5,696 1,096 - - - 6,792
Decrease in future policy benefits (1,137) (945) - - - (2,082)
Operating expenses 4,074 882 19,456 - - 24,412
Interest on debt 4,878 1,151 6,166 (288)(a) - 11,907
Goodwill and other intangible
amortization and depreciation - - 754 - - 754
18,793 3,257 134,195 (288) 272 156,229
Income from continuing operations before
income taxes, deferrable capital securities,
mandatorily redeemable preferred stock
of subsidiary, and minority interests
in subsidiary 4,335 (178) 9,237 196 256 13,846
Income tax expense 1,519 262 3,058 69(h) (237)(h) 4,671
Deferrable capital securities,
net of income taxes - - 1,142 - - 1,142
Mandatorily redeemable preferred
stock of subsidiary - - - - 1,246(i) 1,246
Minority interests in subsidiary,
net of income taxes - - - - 399(j) 399
Income (loss) from continuing
operations $ 2,816 $ (440) $ 5,037 $ 127 $ (1,152) $ 6,388
Income (loss) from continuing operations per share - basic $ .27 $ .35
Income (loss) from continuing operations per share - diluted $ .21 $ .26
See Notes to Unaudited Proforma Consolidated Income Statements
F-42
UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS - CONTINUED
(in thousands)
For the year ended December 31, 1999
Historical Proforma adjustments
Balances Material Purchase Proforma
AFFC Securus Vesta not acquired transactons accounting entries Vesta
Revenues
Net premiums earned $ - $ 11,668 $344,106 $ - $ (3,559)(g) $ - $352,215
Investment product policy charges - 9,680 - - (3,560)(b)(g) - 6,120
Net investment income - 65,798 26,907 (1,974)(f) (18,194)(b)(g) (1,540)(k) 70,997
Gain on sale of assumed
reinsurance renewal rights - - 15,000 - - - 15,000
Other, including realized
gains and losses - (2,476) 17,283 - 1,300(g) 2,476(e) 18,583
- 84,670 403,296 (1,974) (24,013) 936 462,915
Benefits and expenses
Policyholders' benefits - 22,672 - - (7,524)(g) - 15,148
Loss and loss adjustment
expenses incurred - - 211,701 - - - 211,701
Policy acquisition expenses - 9,190 88,638 - - (3,866)(c) 93,962
Interest credited to insurance
liabilities - 23,591 - - (11,515)(b)(g) - 12,076
Increase (decrease) in future
policy benefits - (3,823) - - 242(g) - (3,581)
Operating expenses - 11,599 42,662 - 15(g) - 54,276
Interest on debt - 13,265 13,215 (2,522)(a) - - 23,958
Goodwill and other intangible
amortization and depreciation - 305 2,118 - - (305)(d) 2,118
- 76,799 358,334 (2,522) (18,782) (4,171) 409,658
Income from continuing operations
before income taxes, deferrable
capital securities,mandatorily
redeemable preferred stock of
subsidiary, and minority interests
in subsidiary - 7,871 44,962 548 (5,231) 5,107 53,257
Income tax expense - 2,755 13,633 192(h) (1,831)(h) 1,787(h) 16,536
Deferrable capital securities,
net of income taxes - - 5,632 - - - 5,632
Mandatorily redeemable preferred
stock of subsidiary - - - - - 2,493(i) 2,493
Minority interests in subsidiary,
net of income taxes - - - - - 743 743
Income (loss) from continuing
operations $ - $ 5,116 $ 25,697 $ 356 $ (3,400) $ 84 $ 27,853
Income (loss) from continuing
operations per share-basic $ 1.37 $ 1.49
Income (loss) from continuing
operations per share-diluted $ 1.27 $ 1.38
F-43
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED INCOME STATEMENTS
(a) Eliminate interest on $33.5 million surplus note repaid in American Founders transaction
(b) Remove the effect of business reinsured to Bankers National on June 30, 1999 through two 100% coinsurance arrangements as if
it occurred at the beginning of the period.
(c) Adjust amortization of cost of policies purchased based upon Vesta transaction calculating Value of Business Acquired using
a 10.7% discount rate
(d) Eliminate predecessor goodwill amortization.
(e) Eliminate realized gains/losses based on mark-to-market with Vesta transaction
(f) Eliminate income earned on assets transferred in the American Founders transaction based on an assumed rate of 7%.
(g) Remove effect of 35% modified coinsurance quota share agreement as if it had occurred at beginning of period
(h) Recognize the tax effects of the adjustment as if they had occurred at the beginning of the period.
(i) Recognize dividends on the preferred stock as if it had been outstanding from beginning of period
(j) Recognize minority interest as if it had been applicable from beginning of period
(k) Reflect the effect on investment income of the $22 million paid in the Vesta transaction as if it had occurred at the
beginning of the period based on an assumed rate of 7%.
Exhibit 2.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 14, 2000, on the consolidated financial statements of Securus Financial Corporation and
Subsidiaries as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, appearing in the
Current Report on Form 8-K of Vesta Insurance Group, Inc. filed on September 12, 2000. We consent to the incorporation by reference
in the S-3 Registration Statement filed by Vesta Insurance Group, Inc., of the aforementioned report.
/S/ GRANT THORNTON LLP
Oklahoma City, Oklahoma
September 12, 2000
