Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
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 November 12, 2001
34,759,494
| Part I | Financial Information | Page |
|---|---|---|
| Item 1. | Financial Statements: | |
| Consolidated Balance Sheets at September 30, 2001 and December 31, 2000 | 1 | |
| Consolidated Statements of Income and Comprehensive Income for the | ||
| Three Months and Nine Months ended September 30, 2001 and 2000 | 2 | |
| Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 | 3 | |
| Notes to Consolidated Financial Statements | 4-10 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 11 |
| Part II | Other Informaton | |
| Item 1. | Legal Proceedings | 15 |
| Item 2. | Changes in Securities | 17 |
| Item 3. | Defaults Upon Senior Securities | 17 |
| Item 4. | Submission of Matters to a Vote of Securities | 17 |
| Item 5. | Other Information | 17 |
| Item 6. | Exhibits and Reports on Form 8-K | 18 |
September 30, December 31,
2001 2000
--------------- ---------------
(unaudited)
Assets:
Investments:
Fixed maturities available for sale - at fair value
(cost: 2001 - $808,984; 2000 - $795,118) $ 831,321 $ 798,205
Equity securities-at fair value: (cost: 2001-$29,340; 2000-$30,221) 29,798 31,285
Mortgage and collateral loans 54,774 63,060
Policy loans 64,137 61,413
Short-term investments 23,607 22,586
Other invested assets 35,607 29,343
--------------- ---------------
Total investments 1,039,244 1,005,892
Cash 33,375 13,374
Accrued investment income 16,157 17,017
Premiums in course of collection (net of allowances for losses
of $4,106 in 2001 and $3,937 in 2000) 46,646 23,882
Reinsurance balances receivable 355,418 353,949
Reinsurance recoverable on paid losses 67,560 57,325
Deferred policy acquisition costs 52,394 45,954
Deferred income taxes 38,180 22,457
Other assets 124,417 82,149
--------------- ---------------
Total assets $ 1,773,391 $ 1,621,999
=============== ===============
Liabilities:
Policy liabilities $ 689,068 $ 660,284
Losses and loss adjustment expenses 281,212 263,689
Unearned premiums 145,259 104,755
Federal Home Loan Bank advances 162,599 150,691
Short term debt 9,973 5,000
Long term debt 79,432 86,419
Other liabilities 118,514 102,825
--------------- ---------------
Total liabilities 1,486,057 1,373,663
Commitments and contingencies: See Note B
Deferrable Capital Securities 29,750 33,225
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, issued:
2001 - 0 and 2000 - 2,950,000 -- 30
Common stock, $.01 par value, 100,000,000 shares authorized, issued:
2001 - 34,907,966 and 2000 - 18,964,322 319 190
Additional paid-in capital 229,962 167,382
Accumulated other comprehensive income, net of tax expense
of $7,978 and $1,453 in 2001 and 2000, respectively 14,817 2,698
Retained earnings 34,113 57,643
Treasury stock (148,472 shares and 166,294 shares at cost
at September 30, 2001 and December 31, 2000, respectively) (1,644) (5,865)
Unearned stock (19,983) (6,967)
--------------- ---------------
Total stockholders' equity 257,584 215,111
--------------- ---------------
Total liabilities, deferrable capital securities
and stockholders' equity $1,773,391 $ 1,621,999
=============== ===============
See accompanying Notes to Consolidated Financial Statements
Three months ended Nine months ended
September 30, September 30,
2001 2000 2001 2000
-------------- ------------- ------------ ------------
(unaudited) (unaudited)
Revenues:
Net premiums written $ 80,152 $ 55,431 $ 215,619 $160,454
Change in unearned premiums (6,455) (2,129) (2,336) 1,551
-------------- ------------- ------------ ------------
Net premiums earned 73,697 53,302 213,283 162,005
Policy fees 2,230 1,438 5,211 1,677
Net investment income 15,450 16,854 48,163 29,115
Realized gains (losses) 757 (1,829) 4,985 (2,321)
Other 3,183 898 7,925 2,802
-------------- ------------- ------------ ------------
Total revenues 95,317 70,663 279,567 193,278
Expenses:
Policyholder benefits 8,436 4,302 25,431 4,302
Losses and loss adjustment expenses incurred 43,896 29,421 121,668 95,015
Policy acquisition expenses 17,506 13,532 48,883 37,969
Litigation settlement charge 30,000 -- 30,000 --
Operating expenses 17,575 12,369 47,464 31,295
Interest on debt 4,054 4,188 13,199 10,354
Goodwill and other intangible amortization 935 351 2,430 1,105
-------------- ------------- ------------ ------------
Total expenses 122,402 64,163 289,075 180,040
Income (loss) from continuing operations before taxes,
minority interest, and deferrable capital securities (27,085) 6,500 (9,508) 13,238
Income tax expense (benefit) (9,510) 2,078 (3,324) 4,262
Minority interest, net of tax 200 858 981 858
Deferrable capital security distributions, net of tax 387 571 1,153 1,713
-------------- ------------- ------------ ------------
Net income (loss) from continuing operations (18,162) 2,993 (8,318) 6,405
Income (loss) from discontinued operations, net of tax (19,800) 1,003 (19,958) 2,083
Extraordinary gain on debt extinguishments, net of tax 910 -- 910 5,250
-------------- ------------- ------------ ------------
Net income (loss) (37,052) 3,996 (27,366) 13,738
Preferred stock dividend -- (1,272) (163) (2,398)
Gain on redemption of preferred securities, net of tax 5,099 -- 5,099 --
-------------- ------------- ------------ ------------
Net income (loss) available to common shareholders $ (31,953) $ 2,724 $ (22,430) $ 11,340
============== ============= ============ ============
Net income (loss) from continuing operations per share - Basic $ (0.57) $ 0.17 $ (0.33) $ 0.35
============== ============= ============ ============
Net income (loss) available to common shareholders per share - Basic $ (1.00) $ 0.15 $ (0.90) $ 0.62
============== ============= ============ ============
Net income (loss) from continuing operations per share - Diluted $ (0.57) $ 0.12 $ (0.33) $ 0.26
============== ============= ============ ============
Net income (loss) available to common shareholders per share - Diluted $ (1.00) $ 0.14 $ (0.90) $ 0.53
============== ============= ============ ============
Statements of Comprehensive Income
Net income (loss) $ (37,052) $ 3,996 $ (27,366) $ 13,738
Other comprehensive income, net of tax:
Unrealized holding gains on available-for-sale securities net of tax
of $4,224, $1,292, $8,270 and $2,515, respectively 7,845 2,400 15,359 4,671
Less realized gains on available-for-sale securities net of tax
of $265, $(12), $1, 745 and $(184), respectively 492 (22) 3,240 (342)
-------------- ------------- ------------ ------------
7,353 2,422 12,119 5,013
Gain on redemption of preferred securities, net of tax 5,099 -- 5,099 --
-------------- ------------- ------------ ------------
Comprehensive income $ (24,600) $ 6,418 $ (10,148) $ 18,751
============== ============= ============ ============
See accompanying Notes to Consolidated Financial Statements
Nine months ended September 30,
2001 2000
--------------- ------------------
(unaudited)
Operating Activities:
Net income (loss) $ (27,366) $ 13,738
Adjustments to reconcile net income (loss) to cash used in operations
Changes in:
Loss and LAE reserves, and future policy liabilities (3,935) (82,382)
Unearned premium reserves 4,689 (18,392)
Reinsurance balances receivable 12,671 12,138
Premiums in course of collection (7,539) 27,242
Reinsurance recoverable on paid losses (10,259) 12,084
Other assets and liabilities (5,136) (36,808)
Policy acquisition costs deferred (15,166) (19,073)
Policy acquisition costs amortized 16,506 27,110
Realized (gains) losses (4,985) 2,321
Amortization and depreciation 6,921 4,496
Extraordinary gain (910) (5,250)
--------------- ------------------
Net cash used in operations (34,509) (62,776)
Investing Activities:
Investments sold, matured, and called:
Fixed maturities available for sale 282,566 117,802
Other invested assets 9,824 --
Investments acquired:
Fixed maturities available for sale (227,224) (91,037)
Equity securities (11,244) (2,306)
Other invested assets (5,311) 5,028
Net cash paid for acquisition (46,674) (13,561)
Net decrease in short-term investments 5,374 92,462
Additions to property and equipment (4,701) (3,698)
--------------- ------------------
Net cash provided from investing activities 2,610 104,690
Financing Activities:
Net change in FHLB borrowings 8,636 --
Change in short-term debt 4,973 --
Net deposits and withdrawals from insurance liabilities (3,877) (4,970)
Retirement of long term debt and preferred securities -- (43,911)
Issuance of common stock 96,381 30,923
Acquisition of common stock (52,322) (33,285)
Dividends paid (1,891) (1,256)
--------------- ------------------
Net cash provided by (used in) financing activities 51,900 (52,499)
Increase (decrease) in cash 20,001 (10,585)
Cash at beginning of period 13,374 17,677
--------------- ------------------
Cash at end of period $ 33,375 $ 7,092
=============== ==================
See accompanying Notes to Consolidated Financial Statements
Basis of Presentation: The accompanying unaudited interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States 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 which have been issued by the Company and filed with the Securities and Exchange Commission.
Reclassifications: 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 periods involved.
New Accounting Standards: In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (Statement 142). Statement 142 supersedes Accounting Principles Board Opinion 17, Intangible Assets, and addresses how intangible assets acquired individually or within a group of other assets are accounted for in financial statements upon their acquisition. Statement 142 is effective for fiscal years beginning after December 15, 2001.
In June 2001, the FASB issued Statement of Financial Accounting Standards No. 141, Business Combinations (Statement 141). Statement 141 requires the use of the purchase method for all business combinations. Statement 141 is effective for all business combinations occurring after June 30, 2001.
In August, 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement 144). Statement 144 revises Statement 121 by requiring the use of a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and by modifying the use of discontinued operations accounting on future transactions. Statement 144 is effective for fiscal years beginning after December 15, 2001.
The Company is currently evaluating the impact of these statements on our operating results and financial condition.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (Statement 133). Statement 133 and subsequent amendments standardize the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the financial statements and measure them at fair value. Management has evaluated our activities and has determined that Vesta does not currently have any material derivative exposures and that the adoption of the Statement 133 on January 1, 2001 did not have a material impact on the financial statements.
Change in Compensation Plan: Effective June 30, 2001, the Board of Directors approved a change to the Executive Officer Incentive Compensation Plan such that Messrs. Gayle, Tait, and Thornton agreed to accept 1.25 million shares of restricted stock and a $5.0 million loan as satisfaction of Vesta's obligations under the terms of the plan. The restrictions on the stock award and the loan repayments are lifted over a 10 year vesting period in accordance with the terms of the plan and charged to compensation expense.
Discontinued Operations: Although our reinsurance assumed operations and our commercial operations have been discontinued and segregated from our continuing operations, we continue to incur and pay losses on policies with coverage periods prior to the relevant measurement dates under APB 30. At the time these operations were discontinued, we established reserves that we believed were adequate to fund the ultimate settlement and administration of current and future claims from these discontinued operations. Reserves are estimates involving actuarial projections at a given point in time of what we expect to be the costs of the ultimate settlement and administration of claims based on facts and circumstances then known, estimates of trends in claims severity and other variables such as inflation.
In the third quarter of 2001, we undertook an analysis of our assumed reinsurance and commercial results for 2001. This review of paid losses and other activity, in particular those losses paid in the third quarter resulted in a conclusion that we should increase the reserves associated with our discontinued operations by approximately $30.0 million. Remaining gross reserves, before reinsurance, for loss and loss adjustment expenses for our discontinued operations approximated $123.7 million at September 30, 2001.
Litigation Settlement: As discussed more fully in the Commitment and Contingencies footnote, we settled a securities class action lawsuit in the third quarter. Related to this we recorded a pre-tax charge of $30.0 million to cover the amount we funded on behalf of Cincinnati Insurance Company and other expenses incurred related to this litigation. See Note B for further discussion.
Income per Share. Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts which could be exercised or converted into common shares except when the additional shares would produce anti-dilutive results.
4
Reconciliation of income available to common shareholders and average shares outstanding for the nine months ending September 30, 2001 and 2000 and the three months ending September 30, 2001 and 2000 are as follows:
Three months ended September 30,
2001 2000
------------------- -----------------
Net (loss) income available to common shareholders $ (31,953) $ 2,724
Preferred stock dividends on convertible preferred stock 563
------------------- -----------------
Adjusted net (loss) income available to common shareholders $ (31,953) $ 3,287
=================== =================
Weighted average shares outstanding-basic (1) 31,837 17,918
Stock options and restricted stock (2) -- 232
Weighted average convertible preferred stock (1) -- 5,900
------------------- -----------------
Weighted average shares outstanding-diluted (1) 31,837 24,050
=================== =================
Nine months ended September 30,
2001 2000
------------------- ------------------
Net (loss) income available to common shareholders $ (22,430) $ 11,340
Preferred stock dividends on convertible preferred stock 163 1,689
------------------- ------------------
Adjusted net (loss) income available to common shareholders $ (22,267) $ 13,029
=================== ==================
Weighted average shares outstanding-basic (1) 24,848 18,231
Stock options and restricted stock (2) -- 233
Weighted average convertible preferred stock (1), (2) -- 5,900
------------------- ------------------
Weighted average shares outstanding-diluted (1) 24,848 24,364
=================== ==================
| (1) Reflects weighted averages. At September 30, 2001, Vesta had 34.7 million shares outstanding and zero shares of convertible preferred stock outstanding. Weighted average shares outstanding for earnings per share purposes do not include shares held by the Agent’s Stock Incentive Plan Trust that have not been allocated to participants, and shares issued as restricted stock that represent unearned amounts. |
| (2) Under the provisions of SFAS No. 128, Earnings per Share, contingently issuable shares that would have the effect of being anti-dilutive are excluded for the average shares outstanding calculation. Potentially dilutive securities for the three month and nine month periods ending September 30, 2001 are .8 million shares and 1.2 million shares respectively. |
Earnings per share for discontinued operations and extraordinary gains for the three and nine months ended September 30, 2001 and 2000 are as follows:
2001 2000
3 month 9 month 3 month 9 month
------------ ------------- ------------- ------------
Basic Earnings per share:
Discontinued Operations $ (0.62) $ (0.80) $ 0.06 $ 0.11
Extraordinary Gain 0.03 0.04 -- 0.29
Diluted Earnings per share:
Discontinued Operations $ (0.62) $ (0.80) $ 0.04 $ 0.09
Extraordinary Gain 0.03 0.04 -- 0.22
5
Securities Litigation
On October 26, 2001, Vesta executed a definitive agreement to settle the securities litigation that has been pending since June 1998 against Vesta and certain current and former officers and directors. Subject to court approval, the consolidated class action securities litigation in U.S. District Court in Alabama is being settled as to Vesta and its officers and directors for a total of $61 million in cash. A related derivative action lawsuit in the Circuit Court of Jefferson County, Alabama is being dismissed with prejudice. Vesta will fund $18.5 million towards the settlement and the Company's excess directors and officers liability insurance carriers will fund the remaining $42.5 million. Vesta used its line of credit to finance its portion of the settlement and recorded a pre-tax one-time charge of approximately $30 million against earnings to cover Vesta's contribution to the settlement and other expenses incurred.
Vesta determined to participate in the funding of the settlement and to take the related one-time charge against earnings as a result of the Cincinnati Insurance Company's attempted rescission of their primary $25 million directors and officers liability policy and denial of coverage. Vesta has sued Cincinnati in Alabama state court alleging that its actions were taken in bad faith and is vigorously pursuing that claim.
Indemnification Agreements and Liability Insurance
Pursuant to Delaware law and our Bylaws, we are obligated to indemnify our current and former officers and directors for certain liabilities arising from their employment with or services to Vesta, provided that their conduct complied with certain requirements. Pursuant to these obligations, we have agreed to advance costs of defense and other expenses on behalf of certain current and former officers and directors, subject to an undertaking from such individuals to repay any amounts advanced in the event a court determines that they are not entitled to indemnification.
Arbitration
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2000, we corrected our accounting for assumed reinsurance business through restatement of our previously-issued 1997 financial statements and our first quarter 1998 Form 10-Q. Similar corrections were made on a statutory accounting basis by recording cumulative adjustments in Vesta Fire's 1997 statutory financial statements. The impact of this correction has been reflected in amounts ceded under our 20% whole account quota share treaty which was terminated on June 30, 1998 on a run-off basis. We believe such treatment is appropriate under the terms of this treaty and have calculated the quarterly reinsurance billings presented to the three treaty participants accordingly. The aggregate amount included herein as recoverable from such reinsurers totaled approximately $55.2 million as of September 30, 2001. We have collected approximately $48.5 million from the drawdown of collateral on hand.
NRMA Insurance, Ltd. ("NRMA"), one of the participants in the 20% whole account quota share treaty, filed a lawsuit in the United States District Court for the Northern District of Alabama contesting our billings. NRMA sought rescission of the treaty and a temporary restraining order preventing us from drawing down approximately $34.5 million of collateral. We filed a demand for arbitration as provided for in the treaty and also filed a motion to compel arbitration which was granted in the United States District Court action. Vesta reached an agreement with NRMA to collect the $34.5 million of collateral in exchange for posting a $25 million letter of credit in favor of NRMA to fund any amounts NRMA may recover as a result of the arbitration. We filed for arbitration against the other two participants in the treaty and all of these arbitrations are in their discovery stages. While management believes its interpretation of the treaty's terms and computations based thereon are correct, the ultimate outcome of these arbitrations is uncertain and their ultimate outcome cannot be determined at this time.
During 1999, F&G Re (on behalf of USF&G), filed for arbitration under two aggregate stop loss reinsurance treaties whereby F&G Re assumed certain risk from us. F&G Re is seeking to rescind the treaties and avoid its obligation. Under the terms of the two treaties, we believe we will be entitled to recoveries of approximately $28.2 million as losses mature from prior accident years. Vesta has recorded a reinsurance recoverable of approximately $28.2 million as of September 30, 2001 and December 31, 2000 related to these two treaties. The hearing in this arbitration is currently scheduled for February 2002 and the ultimate outcome cannot be determined at this time.
We are in arbitration with CIGNA Property and Casualty Insurance Company ("CIGNA") (now ACE USA) under a personal lines insurance quota share reinsurance agreement, whereby we assumed certain risks from CIGNA. During September 2000, CIGNA filed for arbitration under the reinsurance agreement, seeking payment of the balances that CIGNA claims are due under the terms of the treaty. In addition, during the fourth quarter of 2000, the treaty was terminated on a cut-off basis. Vesta is seeking recoupment of all improper claims payments and excessive expense allocations and charges from CIGNA. The arbitration has been bifurcated into two phases with phase one concentrating on the interpretation of the agreement and phase two relating to damages. This arbitration is in the discovery stage with the phase one hearing currently scheduled for February, 2002 and the ultimate outcome cannot be determined at this time.
If the amounts recoverable under the relevant treaties are ultimately determined to be materially less than the amounts that we have reported as recoverable, we may incur a significant, material, and adverse impact on our financial condition and results of operations.
Other Litigation
Vesta, through its subsidiaries, is routinely a party to pending or threatened legal proceedings and arbitration relating to the regular conduct of its insurance business. 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 us and our subsidiaries, management does not consider liability from any threatened or pending litigation regarding routine matters to be material.
6
Note C-Segment Information
We operate several segments, which are distinguishable by their product offerings. The accounting policies of the operating segments are the same as used in preparing the consolidated financial statements. Segment pre-tax income is generally income before income tax, and minority interest, if any. Premiums, policy fees, other income, loss and benefit expenses, and amortization of deferred acquisition costs are attributed directly to each operating segment. Operating expenses are allocated to the segments in a manner which most appropriately reflects the operations of that segment. Net investment income and interest expense are allocated only to those segments for which such amounts are considered an integral part of the financial results for that segment.
A brief description of each segment is as follows:
Standard Property-Casualty
The standard property-casualty segment primarily consists of the marketing and distribution of personal lines products including Homeowners and Personal Auto coverages. Vesta's products are distributed through approximately 1,900 independent agencies in 24 states. Our personal auto line targets drivers over age thirty-five with above average driving records and our homeowners products cover the full range of homes.
Life and Health Insurance
On June 30, 2000, we entered the life and annuity business through a 71% investment in American Founders Financial Corporation, a holding company for two life insurance companies domiciled in Texas and we entered the health insurance business through the acquisition of Aegis Financial Corporation in December 2000. American Founders and Aegis have approximately $2.2 billion (face value) of life and annuity products in force and $22.5 million of health insurance premiums in force at September 30, 2001. American Founders markets traditional life products, universal life products, fixed-rate annuities, pension contracts and related products through independent agents throughout the majority of the United States. Aegis Financial markets health insurance through captive agents throughout the United States.
Specialty Lines
In 2000, we began utilizing our licenses to write business for the benefit of certain reinsurance companies. In this segment, we enter into arrangements whereby we write targeted property-casualty insurance coverages and reinsure substantially all of the risks to reinsurers in exchange for fees. This business takes advantage of our certificates of authority granting us license to write insurance in many states. Income in this segment is primarily generated on a fee-for-service basis.
Non-Standard
In December 2000, we acquired a 52% economic interest in Instant Auto Insurance Holdings, Inc. Instant Auto operates as a non-standard insurance agency. Its principal revenue stream is agents' fees and commissions.
Corporate and Other
Our corporate and other segment primarily consists of unallocated net investment income, unallocated interest expense, and certain overhead expenses not directly associated with a particular segment.
7
A summary of segment results for the nine months ended September 30, 2001 and 2000 is as follows:
Standard Life and
2001 Property- Health Specialty Corporate and
Casualty Insurance Lines Non-Standard Other
------------ ------------- ------------ -------------- --------------
Revenues: (in thousands)
Premiums earned $185,443 $ 22,312 $ 5,528
Net investment income -- 32,138 -- $ 309 $ 15,716
Policy fees 2,285 2,926 -- -- --
Realized gains -- 2,258 -- -- 2,727
Other 586 549 3,150 1,097 2,543
------------ ------------- ------------ --------------- --------------
Total revenues 188,314 60,183 8,678 1,406 20,986
Expenses:
Loss, LAE and policyholder benefits 117,371 25,431 4,297 -- --
Policy acquisition costs 41,096 6,558 1,229 -- --
Litigation settlement charge -- -- -- -- 30,000
Operating expenses 22,143 9,815 211 4,400 10,895
Interest on debt -- 6,695 -- -- 6,504
Goodwill and other intangible amortization -- -- -- -- 2,430
------------ ------------- ------------ --------------- --------------
Total expenses 180,610 48,499 5,737 4,400 49,829
Pre-tax income (loss) from continuing operations $ 7,704 $ 11,684 $ 2,941 $ (2,994) $ (28,843)
============ ============= ============ =============== ==============
Operating segment assets:
Investments and other assets $323,819 $ 940,395 $ 35,876 $ 21,320 $ 266,735
Deferred acquisition costs 30,485 20,955 434 -- --
------------ ------------- ------------ --------------- --------------
$354,304 $ 961,350 $ 36,310 $ 21,320 $ 266,735
============ ============= ============ =============== ==============
Standard Life and
2000 Property- Health Specialty Corporate and
Casualty Insurance Lines Non-Standard Other
------------ --------------- ------------ ------------ ---------------
Revenues: (in thousands)
Premiums earned $160,286 $ 1,578 $ 141 --
Net investment income -- 10,618 -- -- $ 18,497
Policy fees 503 1,174 -- -- --
Realized losses -- -- -- -- (2,321)
Other -- 511 158 -- 2,133
------------ --------------- ------------ ------------ ---------------
Total revenues 160,789 13,881 299 -- 18,309
Expenses:
Loss, LAE and policyholder benefits 94,960 4,302 55 -- --
Policy acquisition costs 36,844 1,091 34 -- --
Operating expenses 20,693 3,024 -- -- 7,578
Interest on debt -- 2,497 -- -- 7,857
Goodwill and other intangible amortization -- -- -- -- 1,105
------------ --------------- ------------ ------------ ---------------
Total expenses 152,497 10,914 89 -- 16,540
Pre-tax income (loss) from continuing operations $ 8,292 $ 2,967 $ 210 -- $ 1,769
============ =============== ============ ============ ===============
Operating segment assets:
Investments and other assets $363,961 $ 873,077 1,862 -- $ 213,138
Deferred acquisition costs 32,320 33,380 -- --
------------ --------------- ------------ ------------ ---------------
$396,281 $ 906,457 $ 1,862 $ - $ 213,138
============ =============== ============ ============ ===============
8
A summary of segment results for the three months ended September 30, 2001 and 2000 is as follows:
Standard Life and
2001 Property- Health Specialty Corporate and
Casualty Insurance Lines Non-Standard Other
------------- ------------ ------------ ------------ -------------
Revenues: (in thousands)
Premiums earned $ 63,890 $ 7,365 $ 2,442
Net investment income -- 10,348 -- $ 49 $ 5,053
Policy fees 1,254 976 -- -- --
Realized gains (losses) -- 860 -- -- (103)
Other 166 314 1,346 299 1,058
------------- ------------ ------------ ------------ -------------
Total revenues 65,310 19,863 3,788 348 6,008
Expenses:
Loss, LAE and policyholder benefits 41,896 8,436 2,000 -- --
Policy acquisition costs 14,519 2,401 586 -- --
Litigation settlement charge -- -- -- -- 30,000
Operating expenses 7,738 3,248 54 1,573 4,962
Interest on debt -- 2,067 -- -- 1,987
Goodwill and other intangible amortization -- -- -- -- 935
------------- ------------ ------------ ------------ -------------
Total expenses 64,153 16,152 2,640 1,573 37,884
Pre-tax income (loss) from continuing operations $ 1,157 $ 3,711 $ 1,148 $ (1,225) $ (31,876)
============= ============ ============ ============ =============
Standard Life and
2000 Property- Health Specialty Corporate and
Casualty Insurance Lines Non-Standard Other
------------- ----------- ------------ ------------ -------------
Revenues: (in thousands)
Premiums earned $ 51,583 $ 1,578 $ 141 --
Net investment income -- 10,618 -- -- $ 6,236
Policy fees 264 1,174 -- -- --
Realized gains (losses) -- -- -- -- (1,829)
Other -- 511 158 -- 229
------------ ----------- ------------ ------------ -------------
Total revenues 51,847 13,881 299 4,636
Expenses:
Loss, LAE and policyholder benefits 29,366 4,302 55 -- --
Policy acquisition costs 12,407 1,091 34 -- --
Operating expenses 7,566 3,024 -- -- 1,779
Interest on debt -- 2,497 -- -- 1,691
Goodwill and other intangible amortization -- -- -- -- 351
------------ ------------ ------------ ------------ -------------
Total expenses 49,339 10,914 89 -- 3,821
Pre-tax income (loss) from continuing operations $ 2,508 $ 2,967 $ 210 $-- $ 815
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9
In the first quarter of 2001, we engaged in a number of stock transactions. On January 20, 2001, we issued approximately 380,000 shares of common stock in exchange for $3.475 million face amount of Deferrable Capital Securities. On January 26, 2001, the holders of our Series A Convertible Preferred Stock converted their shares into 5.9 million shares of common stock pursuant to their original conversion terms. We repurchased that common stock for approximately $47.2 million. In separate transactions, we sold 5.5 million shares of common stock to a number of investors for approximately $32.3 million. These transactions and other transactions resulted in Vesta repurchasing 6.4 million shares of its common stock for approximately $50.8 million and issuing 5.9 million shares of its common stock for approximately $32.3 million of cash and $3.475 million face amount of Deferrable Capital Securities.
In the second quarter of 2001, we engaged in a follow-on offering of our common stock. We sold 8.625 million shares of common stock for approximately $64.0 million after expenses.
In the third quarter of 2001, we issued 568,644 shares of our common stock for $7 million face amount of our 8.75% Senior Debentures due 2025. In connection with this transaction, we recorded an after-tax extraordinary gain of $.9 million. Also in the third quarter, we redeemed $7.0 million face amount of a subsidiary's preferred stock for $3.5 million. In addition, a $3.5 million payable related to a prior redemption of the subsidiary's preferred stock was determined to not be due as the preferred stockholder had not fulfilled certain obligations of the redemption agreement. In connection with these two redemptions, Vesta recorded an after-tax gain, net of minority interest, of $5.1 million
Effective April 1, 2001, we acquired Florida Select Insurance Holdings Inc., the parent company of Florida Select Insurance Company. Florida Select is the 8th largest residential homeowners insurer in the State of Florida with approximately $140.0 million of assets and $60.0 million of annual gross written premium. The transaction has been accounted for as a purchase. Summarized below is a preliminary allocation of assets and liabilities acquired and the consolidated results of operations for the nine-month periods ended September 30, 2001 and 2000 on an unaudited pro forma basis as if the acquisition had occurred as of January 1, 2000. The pro forma information is based on our consolidated results of operations for the nine months ended September 30, 2001 and 2000 and on data provided by the acquired company, after giving effect to certain pro forma adjustments, including the issuance of 8.625 million shares of common stock. The pro forma financial information does not purport to be indicative of results of operations that would have occurred had the transactions occurred on the basis assumed above nor are they indicative of results of the future operations of the combined enterprises.
Assets and liabilities acquired (in thousands except per share amounts and unaudited):
Assets acquired:
Invested assets $ 56,707
Cash 20,764
Other assets 27,107
Goodwill 35,288
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Total assets 139,866
Liabilities acquired:
Loss and LAE reserves 22,019
Unearned premiums 35,100
Other liabilities 16,334
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Total liabilities 73,453
Pro forma consolidated results of operations are as follows (unaudited):
Nine months ended September 30,
2001 2000
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Total revenues $ 296,148 $ 231,849
Income (loss) available to common shareholders $ (18,628) $ 19,078
Income (loss) available to common shareholders per share - basic $ (0.75) $ 1.05
Income (loss) available to common shareholders per share - diluted $ (0.75) $ 0.85
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Subsequent to September 30, 2001, Instant Auto completed the acquisition of SpaceCoast Agency for $2.3 million and A-Affordable Insurance Agency for approximately $8.5 million. These acquisitions will be accounted for as purchased in accordance with Statement 141.
In November, 2001, we announced our intention to purchase up to 1.3 million shares of our common stock. As of November 13, 2001, we had purchased approximately 350 thousand shares under this plan.
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Vesta writes insurance on selected personal lines risks only. Our standard property-casualty writings are balanced between risks of property damage (faster determination of ultimate loss but highly unpredictable) and casualty exposure (more predictable but takes longer to determine the ultimate loss). We also write life, annuity, and health insurance business. Additionally, we are actively involved in the writing of insurance on our policies for the benefit of reinsurance companies, commonly referred to as servicing carrier or fronting, which generates fee-for-service income.
Our revenues from operations are derived primarily from net premiums earned on risks written by our insurance subsidiaries, investment income and investment gains or losses. Our expenses consist primarily of payments for claims and underwriting expenses, including agents' commissions and operating expenses.
Comparison of Third Quarter 2001 to Third Quarter 2000
Income available to common shareholders decreased by $34.7 million, to a $32.0 million loss for the quarter ended September 30, 2001, from $2.7 million for the quarter ended September 30, 2000. On a diluted per share basis, net loss available to common shareholders for the third quarter of 2001 was $(1.00) per share versus net income of $0.14 per share for the third quarter of 2000. The decrease in income available to common shareholders is primarily attributable to a $30.0 million pre-tax charge for settlement of a securities class action litigation and a $30.0 million pre-tax charge for our discontinued operations.
Standard Property-Casualty
Net premiums written for standard property-casualty lines increased by $16.5 million, or 30.8%, to $70.0 million for the quarter ended September 30, 2001, from $53.5 million for the quarter ended September 30, 2000. Net premiums earned for standard property-casualty lines increased $12.3 million, or 23.8% to $63.9 million for the quarter ended September 30, 2001, from $51.6 million for the quarter ended September 30, 2000. The increase in net premiums written and net premiums earned is primarily attributable to the acquisition of Florida Select, offset by decreases in other lines of business.
Loss and loss adjustment expenses ("LAE") for standard property-casualty lines increased by $12.5 million, or 42.5%, to $41.9 million for the quarter ended September 30, 2001, from $29.4 million for the quarter ended September 30, 2000. The loss and LAE ratio for property-casualty lines for the quarter ended September 30, 2001 was 64.3% as compared to 56.6% at September 30, 2000. The increase in the loss and LAE incurred and the loss and LAE ratio is primarily attributable to deteriorating underwriting results in the current period and an increase in earned premium. The deterioration in our underwriting results is being primarily driven by increases in frequency and severity of claims.
Policy acquisition expenses increased $2.1 million for the quarter-to-quarter comparison, consistent with the increase in earned premium. Operating expenses increased by $.2 million, to $7.7 million for the quarter ended September 30, 2001, as increased expenses from Florida Select were offset by expense reductions.
Life and Health Insurance
In June, 2000, we entered the life and annuity business through a 71% investment in American Founders Financial Corporation, a holding company for two life insurance companies domiciled in Texas and we entered the health insurance business through the acquisition of Aegis Financial Corporation, a holding company for two life and health insurance companies domiciled in Texas, in December, 2000. American Founders and Aegis have approximately $2.2 billion (face value) of life and annuity products in force and $21.8 million of health insurance premiums in force at September 30, 2001. Life insurance premiums and policy fees were $2.4 million for the quarter ended September 30, 2001 compared to $1.6 million for the comparable prior period in 2000. The increase is due to the acquisition of Aegis in December 2000 and Washington Life in August 2001. Health insurance premiums totaled $5.0 million for the quarter ended September 30, 2001 versus zero for the comparable prior period. Health insurance benefits incurred totaled $3.0 million for the quarter and health insurance commission expense was $1.5 million.
Specialty Lines
In 2000, we began utilizing our licenses to write business for the benefit of reinsurance companies. In this segment, we enter into arrangements whereby we write targeted property-casualty insurance coverages and reinsure substantially all of the risks to reinsurers in exchange for fees. This business takes advantage of our certificates of authority granting us license to write insurance in many states. Income in this segment is primarily generated on a fee-for-service basis. For the quarter ended September 30, 2001, this segment reported a $.2 million underwriting loss on net premiums written of $2.8 million and net premiums earned of $2.4 million. Additionally, we earned approximately $1.3 million of fees for the quarter ended September 30, 2001.
Non-Standard
In December 2000, we acquired a 52% economic interest in Instant Auto Insurance Holdings, Inc. Instant Auto operates as a non-standard insurance agency. Its principal revenue stream is agents' fees and commissions. Fees and commissions totaled $.3 million for the three months ended September 30, 2001 as Instant Auto began executing its strategy of building its agency business. Effective October 1, 2001, Instant Auto acquired the assets of SpaceCoast Agency in Florida and A-Affordable Insurance Agency in Texas for a total purchase price of $10.8 million. These acquisitions are expected to make Instant Auto profitable in 2002.
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Discontinued Operations
In the third quarter of 2001, we undertook an analysis of our assumed reinsurance and commercial results for 2001. This review of paid losses and other activity, in particular those losses paid in the third quarter, resulted in a conclusion that we should increase the reserves associated with our discontinued operations by approximately $30.0 million.
Net Investment Income
Net investment income decreased by $1.4 million, or 8.3%, to $15.5 million for the quarter ended September 30, 2001, from $16.9 million for the quarter ended September 30, 2000. The weighted average yield on invested assets (excluding realized and unrealized gains) was 6.2% for the quarter ended September 30, 2001, compared with 7.0% for the quarter ended September 30, 2000. The decrease in investment income is primarily attributable to a decrease in the weighted average yield as yields have generally declined in recent months.
Federal Income Taxes
Federal income taxes decreased by $11.6 million to a $9.5 million benefit for the quarter ended September 30, 2001 as a result of less income in the current period compared to the prior period.
Comparison of Nine Months Ended September 30, 2001 with Nine Months Ended September 30, 2000
Income available to common shareholders decreased by $33.7 million, or 298.2% to a $22.4 million loss for the nine months ended September 30, 2001, from $11.3 million for the nine months ended September 30, 2000. On a diluted per share basis, income (loss) available to common shareholders for the nine months ended September 30, 2001 was $(.90) per share versus income of available to common shareholders of $.53 per share for the corresponding period of 2000. The decrease in income available to common shareholders is primarily attributable to a $30 million pre-tax charge for the settlement of our securities litigation and a $30 million pre-tax charge associated with our discontinued operations. The charge for discontinued operations was a result of recent adverse development in our assumed reinsurance and commercial lines that caused us to increase the reserves associated with these lines.
Standard Property-Casualty
Net premiums written for standard property-casualty lines increased by $28.5 million, or 18.0%, to $187 million for the nine months ended September 30, 2001, from $158.5 million for the nine months ended September 30, 2000. Net premiums earned for standard property-casualty lines increased $25.1 million, or 15.7% to $185.4 million for the nine months ended September 30, 2001, from $160.3 million for the nine months ended September 30, 2000. The increase in net premiums written and net premiums earned is primarily attributable to the acquisition of Florida Select.
Loss and loss adjustment expenses ("LAE") for standard property-casualty lines increased by $22.4 million, or 23.6%, to $117.4 million for the nine months ended September 30, 2001, from $95.0 million for the corresponding period ended September 30, 2000. The loss and LAE ratio for property-casualty lines for the nine months ended September 30, 2001 was 62.5% as compared to 59.1% at September 30, 2000. The increase in the loss and LAE incurred and the loss and LAE ratio is primarily attributable to an increase in earned premium, estimated salvage and subrogation recoverable recorded in the prior year, and deteriorating underwriting results in the current year. The deterioration in our underwriting results is being primarily driven by increases in frequency and severity of claims.
Policy acquisition expenses increased for the period-to-period comparison, consistent with earned premium. Operating expenses increased by $1.4 million, or 6.8% to $22.1 million for the nine months ended September 30, 2001, from $20.7 million for the nine months ended September 30, 2000, due to increased expenses related to Florida Select, partially offset by expense reductions.
Life and Health Insurance
In June, 2000, we entered the life and annuity business through a 71% investment in American Founders Financial Corporation, a holding company for two life insurance companies domiciled in Texas and we entered the health insurance business through the acquisition of Aegis Financial Corporation, a holding company for two life and health insurance companies domiciled in Texas, in December, 2000. American Founders and Aegis have approximately $2.2 billion (face value) of life and annuity products in force and $21.8 million of health insurance premiums in force at September 30, 2001. Life insurance premiums and policy fees were $9.0 million for the nine months ended September 30, 2001 compared to $1.6 million for the comparable prior period due to the acquisition of Aegis in December 2000 and Washington Life in August 2001. Health insurance premiums totaled $15.3 million for the nine months ended September 30, 2001 versus zero for the comparable prior period. Health insurance benefits incurred totaled $8.8 million for the nine months and health insurance commission expense was $4.0 million.
Specialty Lines
In 2000, we began utilizing our licenses to write business for the benefit of reinsurance companies. In this segment, we enter into arrangements whereby we write targeted property-casualty insurance coverages and reinsure substantially all of the risks to reinsurers in exchange for fees. This business takes advantage of our certificates of authority granting us license to write insurance in many states. Income in this segment is primarily generated on a fee-for-service basis. For the nine months ended September 30, 2001, the segment reported a $.2 million underwriting loss on net premiums written of $6.3 million and net premiums earned of $5.5 million. Additionally, we earned approximately $3.2 million of fees for the nine months ended September 30, 2001.
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Non-Standard
In December 2000, we acquired a 52% economic interest in Instant Auto Insurance Holdings, Inc. Instant Auto operates as a non-standard insurance agency. Its principal revenue stream is agents' fees and commissions. Fees and commissions totaled $1.1 million for the nine months ended September 30, 2001 as Instant Auto began executing its strategy of building its agency business. Effective October 1, 2001, Instant Auto acquired the assets of SpaceCoast Agency in Florida and A-Affordable Insurance Agency in Texas for a total purchase price of $10.8 million. These acquisitions are expected to make Instant Auto profitable in 2002.
Net Investment Income
Net investment income increased by $19.1 million, or 65.6%, to $48.2 million for the nine months ended September 30, 2001, from $29.1 million for the nine months ended September 30, 2000. The weighted average yield on invested assets (excluding realized and unrealized gains) was 6.3% for the nine months ended September 30, 2001, compared with 6.4% for the nine months ended September 30, 2000. The decrease in investment income is primarily attributable to an increase in average invested assets resulting from our acquisitions, particularly American Founders, partially offset by a decrease in yield as yields have generally declined in recent months.
Federal Income Taxes
Federal income taxes decreased by $7.6 million to a $3.3 million benefit for the nine months ended September 30, 2001 as a result of less income in the current period compared to the prior period.
Liquidity and Capital Resources
Vesta is a holding company whose principal asset is its investment in the capital stock of the companies constituting the Vesta Insurance Group, a group of wholly owned insurance companies including Vesta Fire Insurance Corporation and a majority ownership in a life insurance holding company which includes American Founders Life Insurance Company. The insurance subsidiaries comprising the Vesta Group are individually supervised by various state insurance regulators. Vesta Fire and American Founders are our principal operating subsidiaries.
Dividends and Management Fees
The principal uses of funds at the holding company level are to pay operating expenses, principal and interest on outstanding indebtedness and deferrable capital securities and dividends to stockholders if declared by the Board of Directors. During the last three years, our insurance subsidiaries have produced operating results and paid management fees and dividends sufficient to fund our needs. As a holding company with no other business operations, we rely primarily on fees generated by our management agreement with our insurance subsidiaries and dividend payments from Vesta Fire to meet our cash requirements (including our debt service) and to pay dividends to our stockholders.
Transactions between Vesta and its insurance subsidiaries, including the payment of dividends and management fees to Vesta by such subsidiaries, are subject to certain limitations under the insurance laws of those subsidiaries' domiciliary states. The insurance laws of the state of Illinois, where Vesta Fire is domiciled, permit the payment of dividends out of earned surplus 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. On October 29, 2001, the Illinois Insurance Department published a Company Bulletin that indicates that the Department interprets these dividend limitations to prohibit the payment of dividends if the insurer has negative or zero "unassigned funds" at the end of the prior year, as reported on its statutorily required annual statement. Our lead insurance subsidiary, Vesta Fire, reported negative "unassigned funds" on its annual statement for 2000. Accordingly, we may not be able to declare and pay a dividend from our lead insurance company subsidiary for the foreseeable future without prior approval.
We rely primarily on fees earned under our management agreement with our insurance company subsidiaries to meet our cash requirements (including debt service) and to pay dividends to our stockholders. We believe that this management agreement will provide us with funds sufficient to meet our anticipated needs (including debt service) for at least the next twelve months.
Credit Facilities
On March 3, 2000, we established a revolving credit facility with First Commercial Bank, Birmingham, Alabama ("First Commercial"). In May, 2001 we increased the amounts available and increased the term of the credit facility to the following:
Each of these credit facilities mature on December 31, 2002. These credit agreements contain covenants which require us to maintain minimum (i) statutory consolidated net income, (ii) GAAP consolidated net income, (iii) statutory surplus and (iv) risk based capital. For the period ending September 30, 2001, our GAAP consolidated net income and statutory surplus did not meet the minimum requirements as set forth in our credit agreements. First Commercial has agreed that any such non-compliance will not be deemed an event of default under the credit agreements. As of September 30, 2001, $20.0 million of credit line was available.
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Long Term Debt
In the third quarter of 2001, we exchanged $7.0 million face amount of our Senior Debentures for 569 thousand shares of common stock. We recorded a $.9 million after-tax extraordinary gain in connection with this transaction. Also in the third quarter, we redeemed $7.0 million face amount of a subsidiary's preferred stock for $3.5 million. In addition, a $3.5 million payable related to a prior redemption of the subsidiary's preferred stock was determined to not be due as the preferred stockholder had not fulfilled certain obligations of the redemption agreement. In connection with these two redemptions, Vesta recorded an after-tax gain, net of minority interest, of $5.1 million.
Annual distribution obligations for the Company's long-term debt outstanding at September 30, 2001 are as follows:
| Security | Principal | Annual Interest Obligation |
|---|---|---|
| 8.75% Senior Debentures due 2025 | $80 million | $7.0 million |
| 8.525% Deferrable Capital Securities due 2027 | $29.8 million | $2.5 million |
Cash Flows
The principal sources of funds for our 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. As is typical in the insurance industry, we collect cash in the form of premiums and invest that cash until claims are paid. Cash collected from premiums and cash paid for claims is included in cash flow from operations, while the cash impact from our investing activities is included in cash flow from investing activities. In periods such as 2001 and 2000, where we are exiting certain lines of business such as commercial lines and reinsurance assumed lines we are funding the payout of commercial and reinsurance assumed claims through the liquidation of invested assets, consistent with the historical insurance business model. However, this generates cash outflows from operations that can be misleading.
On a consolidated basis, net cash used in operations for the nine months ended September 30, 2001 and 2000, was $34.5 million and $62.8 million, respectively. Cash flow from operations was negative for the current period due to the continued payout of claims from our discontinued operations, the payout of standard-property casualty claims incurred in prior periods, and the timing of payment of certain payables and other operational items. Net cash provided by investing activities was $2.6 million and $104.7 million for the nine months ended September 30, 2001 and 2000, respectively as we funded the discontinuance of the reinsurance assumed and commercial lines of business. Net cash provided by (used in) financing activities was $51.9 million and $(52.5) million for the nine month periods ending September 30, 2001 and 2000, respectively as we engaged in a number of stock transactions in the nine month period ended September 30, 2001 including the issuance of 8.625 million shares of stock in a follow on offering for approximately $64.0 million, net of underwriting discount and expenses and repurchased outstanding debt in the nine month period ending September 30, 2000.
Market Risk of Financial Instruments
Vesta's principal assets are financial instruments, which are subject to the market risk of potential losses from adverse changes in market rates and prices. Our primary risk exposures are interest rate risk on fixed maturity investments, mortgages and collateral loans and annuity liabilities and equity price risk for stocks. Vesta manages its exposure to market risk by selecting investment assets with characteristics such as duration, yield and liquidity to reflect the underlying characteristics of the related insurance. There have been no material changes to the information about our market risk set forth in our Annual Report on Form 10-K for the year ended December 31, 2000.
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 our filings with the Securities and Exchange Commission, including our 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.
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Securities Litigation
On October 26, 2001, Vesta executed a definitive agreement to settle the securities litigation that has been pending since June 1998 against Vesta and certain current and former officers and directors. Subject to court approval, the consolidated class action securities litigation in U.S. District Court in Alabama is being settled as to Vesta and its officers and directors for a total of $61 million in cash. A related derivative action lawsuit in the Circuit Court of Jefferson County, Alabama is being dismissed with prejudice. Vesta will fund $18.5 million towards the settlement and the Company's excess directors and officers liability insurance carriers will fund the remaining $42.5 million. Vesta used its line of credit to finance its portion of the settlement and recorded a pre-tax one-time charge of approximately $30 million against earnings to cover Vesta's contribution to the settlement and other expenses incurred.
Vesta determined to participate in the funding of the settlement and to take the related one-time charge against earnings as a result of the Cincinnati Insurance Company's attempted rescission of their primary $25 million directors and officers liability policy and denial of coverage. Vesta has sued Cincinnati in Alabama state court alleging that its actions were taken in bad faith and is vigorously pursuing that claim.
Indemnification Agreements and Liability Insurance
Pursuant to Delaware law and our Bylaws, we are obligated to indemnify our current and former officers and directors for certain liabilities arising from their employment with or services to Vesta, provided that their conduct complied with certain requirements. Pursuant to these obligations, we have agreed to advance costs of defense and other expenses on behalf of certain current and former officers and directors, subject to an undertaking from such individuals to repay any amounts advanced in the event a court determines that they are not entitled to indemnification.
Arbitration
As discussed in our Annual Report on Form 10-K for the year ended December 31, 2000, we corrected our accounting for assumed reinsurance business through restatement of our previously-issued 1997 financial statements and our first quarter 1998 Form 10-Q. Similar corrections were made on a statutory accounting basis by recording cumulative adjustments in Vesta Fire's 1997 statutory financial statements. The impact of this correction has been reflected in amounts ceded under our 20% whole account quota share treaty which was terminated on June 30, 1998 on a run-off basis. We believe such treatment is appropriate under the terms of this treaty and have calculated the quarterly reinsurance billings presented to the three treaty participants accordingly. The aggregate amount included herein as recoverable from such reinsurers totaled approximately $55.2 million as of September 30, 2001. We have collected approximately $48.5 million from the drawdown of collateral on hand.
NRMA Insurance, Ltd. ("NRMA"), one of the participants in the 20% whole account quota share treaty, filed a lawsuit in the United States District Court for the Northern District of Alabama contesting our billings. NRMA sought rescission of the treaty and a temporary restraining order preventing us from drawing down approximately $34.5 million of collateral. We filed a demand for arbitration as provided for in the treaty and also filed a motion to compel arbitration which was granted in the United States District Court action. Vesta reached an agreement with NRMA to collect the $34.5 million of collateral in exchange for posting a $25 million letter of credit in favor of NRMA to fund any amounts NRMA may recover as a result of the arbitration. We filed for arbitration against the other two participants in the treaty and all of these arbitrations are in their discovery stages. While management believes its interpretation of the treaty's terms and computations based thereon are correct, the ultimate outcome of these arbitrations is uncertain and their ultimate outcome cannot be determined at this time.
During 1999, F&G Re (on behalf of USF&G), filed for arbitration under two aggregate stop loss reinsurance treaties whereby F&G Re assumed certain risk from us. F&G Re is seeking to rescind the treaties and avoid its obligation. Under the terms of the two treaties, we believe we will be entitled to recoveries of approximately $28.2 million as losses mature from prior accident years. Vesta has recorded a reinsurance recoverable of approximately $28.2 million as of September 30, 2001 and December 31, 2000 related to these two treaties. The hearing in this arbitration is currently scheduled for February 2002 and the ultimate outcome cannot be determined at this time.
We are in arbitration with CIGNA Property and Casualty Insurance Company ("CIGNA") (now ACE USA) under a personal lines insurance quota share reinsurance agreement, whereby we assumed certain risks from CIGNA. During September 2000, CIGNA filed for arbitration under the reinsurance agreement, seeking payment of the balances that CIGNA claims are due under the terms of the treaty. In addition, during the fourth quarter of 2000, the treaty was terminated on a cut-off basis. Vesta is seeking recoupment of all improper claims payments and excessive expense allocations and charges from CIGNA. The arbitration has been bifurcated into two phases with phase one concentrating on the interpretation of the agreement and phase two relating to damages. This arbitration is in the discovery stage with the phase one hearing currently scheduled for February, 2002 and the ultimate outcome cannot be determined at this time.
If the amounts recoverable under the relevant treaties are ultimately determined to be materially less than the amounts that we have reported as recoverable, we may incur a significant, material, and adverse impact on our financial condition and results of operations.
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Other Litigation
Vesta, through its subsidiaries, is routinely a party to pending or threatened legal proceedings and arbitration relating to the regular conduct of its insurance business. 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 us and our subsidiaries, management does not consider liability from any threatened or pending litigation regarding routine matters to be material.
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In the third quarter of 2001, we exchanged 568,644 shares of our common stock for $7.0 million principal amount of our 8.75% Senior Notes due 2025. At the time of each transaction, we issued shares having a market value (based on the five trading days preceding the closing date of each transaction) equal to 80% of the total principal amount of the 8.75% Senior Notes exchanged. The transactions were not registered under the Securities Act of 1933 in reliance on the exemption afforded by Section 3(a)(9) thereof.
None.
None.
None.
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10.25 Employment agreement between the registrant and William P. Cronin, dated as of February 5, 2001.
__________
Current reports were filed on Form 8-K on August 1, 2000 and September 17, 2001 in connection with press releases and on July 18, 2001 in connection with the acquisition of Florida Select Insurance Holdings Inc.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Vesta Insurance Group, Inc.
Date: November 14, 2001
Date: November 14, 2001
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