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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1997 1-12338
VESTA INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 63-1097283
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3760 River Run Drive, 35243
Birmingham, AL
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
Registrant's telephone number, including area code:
(205) 970-7000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS CUSIP NUMBER: ON WHICH REGISTERED:
Common Stock, $.01 Par 925391104 New York Stock Exchange
Value
Securities registered pursuant to Section 12(g) of the Act:
None
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) AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [_]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K ((S)229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN, AND
WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [_]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 3, 1998: $740,288,351
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK, AS OF MARCH
3, 1998 is 18,457,418
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE VESTA INSURANCE GROUP, INC. PROXY STATEMENT FOR ITS 1998
ANNUAL MEETING OF STOCKHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III
HEREOF.
TABLE OF CONTENTS
PART I PAGE
------ ----
Item 1 Business
Overview..................................................... 1
Business Strategy............................................ 3
Lines of Business............................................ 3
Reinsurance.................................................. 4
Primary Insurance Business................................... 6
Reinsurance Ceded............................................ 10
Claims....................................................... 11
Reserves..................................................... 11
Investments.................................................. 14
Regulation................................................... 15
Competition.................................................. 18
Relationship with Torchmark.................................. 18
Employees.................................................... 18
Item 2 Properties................................................... 19
Item 3 Legal Proceedings............................................ 19
Item 4 Submission of Matters to a Vote of Security Holders.......... 19
PART II
-------
Item 5 Market for Registrants' Common Equity and Related Stockholder 19
Matters.....................................................
Item 6 Selected Financial Data...................................... 21
Item 7 Management's Discussion and Analysis of Results of Operations
and Financial Condition..................................... 22
Item 8 Financial Statements and Supplementary Data.................. 29
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 51
PART III
--------
Item 10 Directors and Executive Officers of the Registrants.......... 51
Item 11 Executive Compensation....................................... 51
Item 12 Security Ownership of Certain Beneficial Owners and 51
Management..................................................
Item 13 Certain Relationships and Related Transactions............... 51
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 52
8-K.........................................................
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities LItigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described
in the Company's filings with the Securities and Exchange Commission,
including its most recent Annual Report of 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.
ii
PART I
BUSINESS
OVERVIEW
Vesta Insurance Group, Inc. (the "Company" or "Vesta") is a holding company
for a group of property/casualty insurance companies ("Vesta Group"),
including Vesta Fire Insurance Corporation ("Vesta Fire"), which offers treaty
reinsurance and primary insurance on personal and commercial risks. The
Company was incorporated in Delaware on July 9, 1993 to be the holding company
for the property and casualty insurance subsidiaries of Torchmark Corporation
("Torchmark"). Prior to its initial public offering of common stock in
November 1993, the Company was a wholly owned subsidiary of Torchmark. As of
December 31, 1997, Torchmark held approximately 28% of the outstanding common
stock of the Company. The Company's principal property and casualty subsidiary
is Vesta Fire. The Company's principal executive offices are at 3760 River Run
Drive, Birmingham, Alabama 35243, and its telephone number is (205) 970-7000.
In both its reinsurance and primary insurance operations, the Company
focuses primarily on property coverages. Gross premiums written by the Company
in 1997 totalled $870.9 million. At December 31, 1997, the Company's
stockholders' equity was $367.9 million.
The Company provides treaty reinsurance, principally through reinsurance
intermediaries, for small and medium-sized companies and regional specific
reinsurance for larger insurance companies located throughout the United
States. The principal lines of business reinsured by the Company include
homeowner and commercial property coverages, non-standard automobile insurance
and collateral protection insurance. The reinsurance of personal (including
auto physical damage) and commercial property risks accounted for 93% of the
Company's gross reinsurance premiums written in 1997.
In its primary insurance operations, the Company has developed insurance
products and programs to meet particular market needs. Primary insurance
products offered by the Company include a variety of homeowner and dwelling
insurance products, private passenger automobile, specialty commercial
transportation products, commercial business coverages and certain financial
services products designed to protect the interests of financial institutions
in real and personal property collateral. Primary insurance products are
distributed through independent agents and brokers, with the exception of
certain financial services products, which are distributed through specialist
agents and two managing agents.
In 1996, prior to the acquisition of Shelby and Vesta County Mutual, as
discussed below, assumed reinsurance represented 80 percent of gross premiums.
Primarily as a result of these acquisitions, assumed reinsurance represented
61 percent of 1997 gross premiums. This shift to increased primary writings is
consistent with the Company's strategy to focus on personal auto and property
coverages in all of its lines of business while adjusting the mix and volume
of its writings and retentions to respond to change in market conditions.
Effective December 31, 1997, Vesta Fire entered into a business transfer and
management agreement with CIGNA Property and Casualty Insurance Company
("CIGNA"). The agreement calls for Vesta Fire to reinsure selected personal
lines (covered business) written by CIGNA through a 100% Quota Share
Reinsurance Treaty. The agreement also calls for CIGNA and Vesta Fire to
cooperate to effect the transfer of the covered business from CIGNA to Vesta
Fire as the issuing carrier. While CIGNA does not own "renewal rights" under
agreements with agents and brokers, CIGNA will use good faith efforts, working
with Vesta Fire, to encourage agents and brokers to enter into similar
agreements with Vesta Fire.
After the close of business on June 30, 1997, the Company completed its
acquisition of all the issued and outstanding stock of the operating
subsidiaries of Anthem Casualty Insurance Group, Inc.,
1
each of which are property and casualty insurance companies headquartered in
Ohio, for an aggregate purchase price, including expenses of $260.9 million.
Anthem Casualty Insurance Company has been renamed Shelby Casualty Insurance
Company and all the subsidiaries acquired are collectively referred to as
"Shelby."
Shelby is a regional property and casualty insurer based in Shelby, Ohio,
with approximately $260 million in annual premiums. Shelby markets their
insurance product through approximately 2,200 independent agencies, located in
the mid-west and mid-atlantic states. The majority of the business acquired
consists of auto insurance and homeowners insurance in small towns and
suburbs. The remainder of such business consists primarily of small and medium
sized commercial insurance.
Effective December 31, 1996, the Company acquired control of Ranger County
Mutual Insurance Company through its acquisition of all of the issued and
outstanding capital stock of Ranger General Agency, Inc. from Ranger Insurance
Company ("Ranger"), located in Houston, Texas, for $7.5 million in cash.
Ranger County Mutual Insurance Company has moved its operations to Dallas, and
changed its name to Vesta County Mutual Insurance Company ("Vesta County
Mutual"). All of Vesta County Mutual's business at December 31, 1996, as well
as certain additional business which the Company will permit Ranger to write
through Vesta County Mutual for a period of two years, is reinsured 100% by
Ranger, and the Company does not assume any risk associated with this
business.
Vesta County Mutual is a county mutual insurance company organized under
Chapter 17 of the Texas Insurance Code, and, as such, enjoys certain
regulatory advantages, including the ability to establish rates without the
approval of the Texas Insurance Commission. Prior to the acquisition, Vesta
Fire Insurance Corporation ("Vesta Fire"), the Company's principal insurance
subsidiary, had historically written certain automobile and associated lines
of business in Texas through a similar mutual company for which it pays
commissions. Vesta Fire now writes these lines of business through Vesta
County Mutual and, by doing so, recognizes significant savings as a result of
the Company's control of Vesta County Mutual.
In June of 1995, Vesta Fire acquired all of the issued and outstanding
capital stock of The Hawaiian Insurance & Guaranty Company, Limited ("HIG"), a
provider of personal lines products in the State of Hawaii. HIG began business
as a property and casualty insurance company in 1915. Since its reorganization
in 1993, HIG has written only personal lines business, focusing primarily on
homeowner's insurance. During 1997, HIG contributed $35.7 million in gross
written premiums to the Company's personal lines business.
The combined ratio is a standard measure in the property and casualty
insurance industry of a company's performance in managing its losses and
expenses. Underwriting results are generally considered profitable when the
combined ratio is less than 100%. The following table sets forth statutory
combined ratios for the Company and the statutory combined ratios for the
property and casualty insurance industry as a whole for the preceding three
calendar years.
COMBINED RATIO (STATUTORY BASIS)
1995 1996 1997
------ ------ ------
The Company(1)................................... 90.6% 89.7% 109.5%(3)
Property and Casualty Industry................... 106.4%(2) 105.8%(2) 101.6%(4)
- --------
(1) Data has been derived from the financial statements of the Company
prepared in accordance with statutory accounting practices ("SAP") and filed
with insurance regulatory authorities.
(2) The statutory industry data is taken from the A.M. Best Company, Aggregate
and Averages, 1997 Edition.
(3) The statutory combined ratio was negatively impacted by the one-time
statutory accounting charge following discussions with the Alabama
Department of Insurance during its routine examination. See "Business--
Regulation".
(4) 1997 estimate by the A.M. Best Company, Best Week, March 16, 1998 Edition.
2
While the industry combined ratios are the generally accepted measure for
comparing results within the property and casualty insurance industry, these
combined ratios do not distinguish between property and casualty companies
based upon their mix of business. Unlike many property and casualty companies,
the Company focuses primarily on short-tail property coverages and writes a
very limited amount of longer tail casualty coverages. Long-tail insurance
coverages often produce higher losses relative to the premiums charged than
short-tail property insurance; however, because ultimate claim losses for
longer tail coverages are slower to be reported and finally paid, companies
writing a significant amount of long-tail insurance coverages may be able to
derive investment income from the use of premiums paid to mitigate their
higher losses.
The Company's insurance subsidiaries are currently rated "A" (Excellent) by
A.M. Best, which is A.M. Best's third highest rating category. A.M. Best
ratings are based upon factors of concern to policyholders and are not
directed toward the protection of investors. No assurance can be given that in
the future, A.M. Best will not reduce or withdraw the ratings of the Company's
insurance subsidiaries because of factors, including material losses, that may
or may not be within the Company's control. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
BUSINESS STRATEGY
The Company's strategy is to focus principally on personal auto and property
coverages in all of its lines of business while adjusting the mix and volume
of its writings and retentions to respond to changes in market prices and to
manage its risk exposures. In June of 1997, the Company completed its
acquisition of Shelby. This acquisition, along with the acquisition of Vesta
County Mutual, has significantly increased the Company's sales of primary
insurance. The acquisitions do not represent a permanent shift to emphasize
primary insurance, rather, the acquisitions represent an adjustment to the
Company's mix and volume of writings as the result of current market
conditions.
Historically, the Company has made substantial use of reinsurance and
retrocessional arrangements to reduce its exposure to risks and the
variability of its earnings. The Company plans to continue to cede a portion
of its insurance risks while using its increased capital base to increase
selectively its retentions of certain lines of business based on market
conditions.
LINES OF BUSINESS
The following table provides selected historical information on a GAAP basis
concerning the business written by the Company and the associated underwriting
results. This data should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto. For additional
information on the Company's business segments, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note M to
the Consolidated Financial Statements.
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIO DATA)
REINSURANCE
Gross Premiums Written...... $126,332 $242,030 $422,711 $615,352 $532,367
Percentage of Combined Gross
Written Premiums........... 56.0% 68.2% 72.0% 80.0% 61.1%
Net Premiums Written........ 96,181 193,136 358,289 446,062 348,785
Net Premiums Earned......... 89,356 191,700 290,657 415,028 332,333
Loss Ratio.................. 50.1% 50.5% 58.9% 59.8% 51.7%
Continued
3
YEAR ENDED DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT RATIO DATA)
PRIMARY INSURANCE
Personal
Gross Premiums Written...... $ 64,300 $ 63,658 $105,643 $109,661 $251,188
Net Premiums Written........ 42,580 28,626 52,157 69,769 147,431
Net Premiums Earned......... 36,316 39,223 44,796 63,207 145,691
Commercial
Gross Premiums Written...... 34,796 49,018 58,428 44,573 87,354
Net Premiums Written........ 20,192 37,948 48,782 24,801 34,948
Net Premiums Earned......... 18,138 29,028 46,349 33,677 44,323
Total Primary
Gross Premiums Written...... 99,096 112,676 164,071 154,234 338,542
Percentage of Combined Gross
Written Premiums........... 44.0% 31.8% 28.0% 20.0% 38.9%
Net Premiums Written........ 62,772 66,574 100,939 94,570 182,379
Net Premiums Earned......... 54,454 68,252 91,145 96,884 190,014
Loss Ratio.................. 56.2% 63.7% 52.6% 48.25% 55.4%
COMBINED
Gross Premiums Written...... $225,428 $354,706 $586,782 $769,586 $870,909
Net Premiums Written........ 158,953 259,710 459,228 540,632 531,164
Net Premiums Earned......... 143,810 259,952 381,802 511,912 522,347
Loss Ratio.................. 52.4% 53.9% 57.4% 57.6% 53.0%
Expense Ratio............... 40.5% 34.0% 29.3% 30.2% 32.7%
Combined Ratio.............. 92.9% 87.9% 86.7% 87.8% 85.7%
REINSURANCE
Reinsurance is a contractual arrangement under which one insurer (the ceding
company) transfers to another insurer (the reinsurer) all or a portion of a
risk or risks that the ceding company has assumed under the insurance policy
or policies it has issued. A ceding company may purchase reinsurance for any
number of reasons including, to obtain, through the reduction of its
liabilities, greater underwriting capacity than its own capital resources
would support, to stabilize its underwriting results, to protect against
catastrophic loss, to withdraw from a line of business, and to manage risk
when entering a line of business.
Reinsurance can be written on either a pro rata or excess of loss basis.
Under pro rata reinsurance, the reinsurer, in return for a predetermined
portion or share of the insurance premium charged by the ceding company,
indemnifies the ceding company against a predetermined portion or share of the
losses and loss adjustment expenses ("LAE") of the ceding company under the
covered primary policy or policies. Under excess of loss reinsurance, the
reinsurer indemnifies the ceding company against all or a specified portion of
losses and LAE on underlying insurance policies in excess of a specified
dollar amount, known as the ceding company's retention, subject to a
negotiated policy limit. Catastrophe reinsurance is a form of excess of loss
reinsurance which indemnifies the ceding company for losses resulting from a
particular catastrophic event. Excess of loss reinsurance is often written in
layers, with one or a group of reinsurers taking the risk from the ceding
company's retention layer up to a specified amount, at which point either
another reinsurer or a group of reinsurers takes the excess liability or it
remains with the ceding company. The reinsurer acquiring the risk immediately
above the ceding company's retention layer is said to write working or low
layer
4
reinsurance. A loss that reaches just beyond the primary insurer's retention
layer will create a loss for the working layer reinsurer, but not for the
reinsurers on the higher layers.
Premiums that the ceding company pays to the reinsurer for excess of loss
coverage are not directly proportional to the premiums that the ceding company
receives because the reinsurer does not assume a proportionate risk. Excess of
loss coverage is priced separately and distinctly from the pricing employed by
the ceding company in connection with its risk since the probability of loss
is different for the reinsurer than the ceding company. Accordingly, excess of
loss contracts may increase flexibility to determine premiums for reinsurance.
In contrast, in pro rata reinsurance, premiums that the ceding company pays to
the reinsurer are proportional to the premiums that the ceding company
receives, consistent with the proportional sharing of risk, and the reinsurer
generally pays the ceding company a ceding commission. Generally, the ceding
commission is based upon the ceding company's cost of obtaining the business
being reinsured (i.e., commissions, premium taxes, assessments and
miscellaneous administrative expenses).
Substantially all of the reinsurance that the Company currently writes is on
personal (including automobile) and commercial property risks. Management
believes there are certain advantages in emphasizing the writing of property
reinsurance over casualty reinsurance, the most significant of which is that
ultimate property claims losses generally can be determined more quickly than
ultimate casualty claims losses. Long-tail reinsurance, such as certain
casualty coverages, frequently are slower to be reported and finally
determined. However, the earnings of property insurers are affected by
unpredictable catastrophic events. In addition, a continuing increase in the
severity of catastrophic losses as well as various other market forces could
affect the Company's ability to buy adequate retrocessional coverage and
thereby necessitate a reduction of the Company's reinsurance business to a
level appropriate for the retrocessional protection available.
The Company's mix of reinsurance business on a gross premiums written basis
is set forth in the following table for the periods indicated:
DISTRIBUTION OF REINSURANCE PREMIUMS WRITTEN
YEAR ENDED DECEMBER 31,
--------------------------------------------
TYPE OF REINSURANCE 1995 1996 1997
- ------------------- -------------- ------------- -------------
(IN THOUSANDS, EXCEPT RATIO DATA)
Property Reinsurance
Pro Rata................. $330,486 78.2% $502,463 81.7% $440,264 82.7%
Catastrophe.............. 38,417 9.1 45,721 7.4 51,127 9.6
Excess Risk.............. 2,454 0.6 2,888 .5 3,289 .7
-------- ----- -------- ---- -------- ----
Total Property............ 371,357 87.9 551,072 89.6 494,680 93.0
Casualty Reinsurance......
Auto Liability........... 9,450 11.6 60,912 9.9 32,696 6.1
Other Casualty(1)........ 2,618 0.5 3,368 .5 4,991 .9
-------- ----- -------- ---- -------- ----
Total Casualty............ 51,354 12.1 64,280 10.4 37,687 7.0
-------- ----- -------- ---- -------- ----
Total Reinsurance........ $422,711 100.0% $615,352 100% $532,367 100%
======== ===== ======== ==== ======== ====
- --------
(1) Estimated casualty portion of total reinsurance excluding Auto Liability.
The Company seeks to adjust its reinsurance activities in response to
changing conditions in the reinsurance markets. The Company significantly
increased the writings of pro rata reinsurance during the year ended December
31, 1996, principally for small to medium sized companies and regional
specific reinsurance for larger companies seeking to obtain additional
underwriting capacity and protection against catastrophic loss. In addition,
the Company's current strategy is to maintain its writings of property
catastrophe reinsurance to take advantage of continuing attractive pricing of
5
occurrence catastrophe reinsurance resulting from the unusual level of
catastrophic losses experienced between 1989 and 1996, which included
hurricanes, earthquakes, numerous severe winter storms and several severe hail
storms.
In 1997, the company's pro rata reinsurance writings of private passenger
automobile decreased significantly over 1996. The acquisition of Vesta County
Mutual resulted in the shift of a large portion of private passenger
automobile writings which had been recorded on the reinsurance line to primary
insurance. Additionally, the reinsurance market experienced increased market
capacity accompanied by increased price competition in the private passenger
automobile line of business. The company elected to terminate certain
accounts, which reduced its writings of pro rata reinsurance of private
passenger automobile.
The principal lines of business reinsured by the Company include homeowner
and commercial property coverages, non-standard automobile insurance and
collateral protection insurance. For 1997, homeowner and commercial business
comprised approximately 67% of gross reinsurance premiums written, non-
standard automobile insurance comprised approximately 28% of gross reinsurance
premiums written, and collateral protection insurance comprised approximately
5% of gross reinsurance premiums written. The Company writes a small amount of
casualty reinsurance for a certain number of its property reinsurance clients.
Casualty reinsurance risks assumed by the Company consist largely of non-
standard automobile liability insurance as well as liability coverages
provided under homeowner and commercial multi-peril policies.
Marketing. The Company provides reinsurance to small and medium-sized
regional insurance companies and regional specific reinsurance for larger
insurance companies located throughout the United States. Most of the
Company's reinsurance business is produced through major reinsurance
intermediaries in the United States. In 1996 the Company began writing
international reinsurance business with an emphasis on catastrophe
reinsurance. This was enhanced in September 1996 with the establishment of a
branch office in Copenhagen, Denmark, which improved access to the European
reinsurance market. The Company's reinsurance division currently does business
through approximately 30 intermediaries, six of which were responsible for
approximately 85% of the division's premium volume during 1997.
Underwriting. Management's underwriting strategy is to practice strict
discipline in carrying out its major operating functions, risk selection and
retention. For selecting and managing its portfolio of reinsurance contracts,
the authority to bind the Company is limited to five employees whose duties
are concentrated primarily on identifying and accessing desirable business.
The Company utilizes computers and analytical software to assist underwriters
in evaluating and selecting risks and determining appropriate retention
levels. It is the Company's practice to have direct contact, either by
underwriting audits or periodic visits of a more general nature, with ceding
companies with whom the Company has working layer relationships, both to
enhance the quality of its underwriting process and to develop and retain its
business relationships.
PRIMARY INSURANCE BUSINESS
In its primary insurance operations, the Company has sought to identify
market opportunities and develop insurance products to meet particular market
needs. Prior to 1997, the Company's primary insurance operations focused on
selected personal and commercial insurance lines as well as on financial
services products consisting of certain collateral protection insurance
policies for financial institutions. In 1997, however, the personal automobile
line grew significantly as a result of the acquisition of Shelby in June of
1997 and Vesta County Mutual after the close of business on December 31, 1996.
The acquisition of control of Vesta County Mutual has enabled the Company to
convert a large book of Texas nonstandard personal auto business from
reinsurance operations to its primary operations. As in its reinsurance
operations, the Company emphasizes property coverages, although the Company
generally provides comprehensive personal liability coverage as part of its
6
homeowner products and general liability coverage as part of its business
owners and commercial package policies for small to medium-sized businesses.
The Company's independent agents may bind insurance coverages only in
accordance with guidelines established by the Company. The Company promptly
reviews all coverages bound by its agents and a decision is made as to whether
to continue such coverages. Because of the broad base of the Company's
independent agency force, the contractual limitation on their authority to
bind coverage and the Company's review procedures, the Company does not
believe that the authority of its agents to bind the Company presents any
material risk to the Company and its operations.
Personal Lines
Prior to 1997, the Company's personal lines business related primarily to
the insurance of residential properties and their contents. The purchase of
Shelby and Vesta County Mutual significantly increased the Company's direct
writings of personal automobile lines. The following table sets forth the
principal line of business distribution of the Company's gross premiums
written in its personal lines business for the three years indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Personal Auto................... $ 11,198 10.6% $ 8,379 7.6% $116,594 46.4%
Homeowners...................... 70,684 66.9 66,954 61.1 89,799 35.7
Financial Services.............. 16,997 16.1 25,945 23.7 38,359 15.3
Other........................... 6,764 6.4 8,383 7.6 6,436 2.6
-------- ----- -------- ----- -------- -----
Total.......................... $105,643 100.0% $109,661 100.0% $251,188 100.0%
======== ===== ======== ===== ======== =====
The Company offers personal auto insurance for preferred, standard and non-
standard drivers. In its standard auto line, the Company targets drivers over
age 45 with above average driving records. The non-standard auto line covers
the full spectrum of non-standard drivers.
Liability limits up to $500,000 are written on standard auto policies, with
an additional $2 million personal umbrella limit also available. For non-
standard auto, the Company typically writes minimum basic limits of $50,000 on
liability.
The Company's personal property insurance products cover the full range of
homes starting with low-valued dwellings in the $10,000 to $50,000 range,
through the middle-valued homes from $50,000 to $150,000, as well as higher
valued homes up to $1,000,000. The majority of homes insured are valued
between $40,000 and $150,000.
The Company also provides specialty products protecting collateral and
repossessed property of financial institutions. Certain of these products are
designed to protect the interests of financial institutions against physical
damage to private passenger automobiles and other personal property in those
cases where the borrower fails to insure the collateral in accordance with a
loan agreement. The Company also has mortgage security products that are
designed to protect the interest of the mortgagee and mortgagor (borrower)
caused by the mortgagor's failure to obtain property insurance on the
mortgaged property. Coverage is also provided for properties that are in the
process of foreclosure.
7
Marketing. Prior to 1997, the Company marketed personal lines in 15 states
through approximately 870 agencies, with premium concentrated in the property
lines in the Southeast. With the 1997 acquisitions, the Company increased its
marketing force to approximately 3,200 agencies in 27 states, balancing the
property business throughout. The Company believes its marketing of its
personal lines products has benefited from the Company's "A" A.M. Best rating.
See "Business--A.M. Best Rating" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Within certain parameters, the
agents of the Company are authorized to write policies without approval from
the Company. However, all policies are reviewed by Company underwriting staff
upon receipt of the application by the Company.
The following table sets forth the principal geographic distribution of the
Company's gross premiums written in its personal lines business for the three
years indicated. The states listed below comprise the ten states with the
largest gross premiums written for 1997.
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Texas........................... $ 6,362 6.0% $ 4,588 4.2% $ 50,660 20.2%
Hawaii.......................... 30,828 29.2 41,927 38.5 35,686 14.2
Pennsylvania.................... 5 0.0 20 0.0 24,455 9.7
Alabama......................... 14,869 14.1 15,348 14.1 18,032 7.2
Tennessee....................... 4,642 4.4 4,367 4.0 15,890 6.3
West Virginia................... 307 0.3 358 0.3 12,823 5.1
Illinois........................ 772 0.8 1,482 1.4 12,118 4.8
Ohio............................ 355 0.3 541 0.5 10,865 4.3
Mississippi..................... 5,109 4.8 3,950 3.6 7,773 3.1
Indiana......................... 8 0.0 1,767 1.6 6,829 2.7
All Other....................... 42,386 40.1% 35,313 31.8% 56,057 22.4%
-------- ----- -------- ----- -------- -----
Total.......................... $105,643 100.0% $109,661 100.0% $251,188 100.0%
======== ===== ======== ===== ======== =====
The geographic balance reflected above allows for greater profit protection
and more cost effective management of the property catastrophe exposures. The
Company employs marketing representatives to maintain and expand its agency
relationships in its personal lines business. In addition, the Company pays
what it believes to be competitive commission rates to its agents and has
established a profit sharing plan for agencies, which is based on volume of
premiums and loss ratios for business written.
In earlier years, the Company marketed lower value personal dwelling
insurance in six states through agents of Liberty National Life Insurance
Company ("LNL"), a subsidiary of Torchmark, pursuant to a written marketing
agreement with LNL. However, effective May 1, 1995, LNL terminated this
agreement and no longer markets these products through its agents. In 1997,
these industrial fire products comprised approximately 4.4% of the Company's
gross premiums written in its personal lines business.
Underwriting. Underwriting of personal lines business is conducted in four
locations and performed by the Company's underwriting staff in accordance with
specific underwriting authority related to the acceptability of each risk for
the appropriate program profile. Management information reports are utilized
to measure risk selection and pricing in order to control underwriting
performance. The principal underwriting criteria for personal property
coverages is a financially stable owner with a
8
well-maintained property. Rates for lower valued properties are surcharged to
reflect risk characteristics. Within certain parameters, the agents of the
Company are authorized to write policies without approval from the Company.
It has been the Company's policy generally not to underwrite personal
property business in the Southeast within one hundred miles of a coastline
(except for Florida which is 10 miles) in order to limit its exposure to
typical coastal occurrences such as hurricanes and other types of storms. In
the Northeast and West, the Company does not impose as restrictive a criteria
for property location. The Company continually monitors and controls its
business in order to prudently manage its risk in areas with significant
exposure to natural disasters.
Commercial Lines
The Company provides insurance products covering a select group of property-
oriented target classes for which it has developed specific expertise. While
the Company typically provides a full spectrum of property, liability, and
auto coverage for these target classes, the focus is on small to medium sized
property oriented accounts. These target classes include office buildings,
shopping centers, hotels, apartment buildings, warehouses and mini-storage
facilities, artisan contractors, motorcycle dealerships, and a wide range of
retail stores.
The Company has designed a complementary group of insurance products for the
trucking industry. These products are offered to independent owner-operators
of trucks and small fleets to cover physical damage, non-trucking liability
and cargo risks. Physical damage protection is the principal product written
by the Company in this line of business. The Company offers non-trucking
liability (which insures non-business use of the vehicle by owner-operators)
and cargo insurance as supplementary products to physical damage coverages.
Marketing. The Company's commercial lines products are offered in 47 states.
The Company uses marketing representatives to market its commercial lines
products to independent agents and brokers. These marketing representatives
are employees of the Company and are located in areas in which the Company
operates and targets business development. Commercial business products have
been marketed directly through approximately 1,500 independent agencies.
Transportation products are marketed through approximately 45 agencies which
specialize in this line of business. The Company believes that its "A" A.M.
Best rating and the commissions and profit sharing arrangements it provides to
contracted agents have been important factors in the Company's ability to
access and maintain profitable commercial property-casualty and transportation
business. See "Business--A.M. Best Rating" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
9
The following table sets forth the principal geographic distribution of the
Company's direct premiums written in its commercial lines of business for the
years indicated. The states listed below comprise the ten states with the
largest gross premiums written for 1997.
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PERCENTAGES)
Texas.............................. $14,801 25.3% $11,035 24.8% $11,804 13.5%
North Carolina..................... 1,671 2.9 1,337 3.0 10,869 12.4
Missouri........................... 6,124 10.5 6,554 14.7 5,429 6.2
Tennessee.......................... 1,303 2.2 1,447 3.2 5,336 6.2
Georgia............................ 3,441 5.9 1,410 3.2 4,933 5.6
Ohio............................... 690 1.2 846 1.9 4,673 5.3
Alabama............................ 3,619 6.2 2,276 5.1 4,290 4.9
Connecticut........................ -- 0.0 -- 0.0 4,131 4.7
Kentucky........................... 1,823 3.1 1,787 4.0 3,828 4.4
Louisiana.......................... 5,432 9.3 3,790 8.5 3,581 4.2
All Other.......................... 19,561 33.5 14,091 31.6 28,480 32.6
------- ----- ------- ----- ------- -----
Total............................. $58,465 100.0% $44,573 100.0% $87,354 100.0%
======= ===== ======= ===== ======= =====
Underwriting. Underwriting of the Company's commercial business and
transportation products is centralized in two locations (the Company's home
office and the Shelby office) and performed by the Company's underwriting
staff in accordance with specific underwriting authority based upon the
experience and knowledge level of each underwriter. Risks that are perceived
to be more difficult and complex risk exposures are underwritten by the more
experienced staff and reviewed by management.
Many underwriting factors are examined for the commercial business line,
such as quality of construction, occupancy and protection against fire and
other hazards. Additionally, critical underwriting elements are the financial
condition of the owners and their attitude towards safety and loss prevention.
Transportation underwriting is heavily concentrated on a review of the
driver, including the driver's record and experience. However, other factors
are also considered, such as, in the case of cargo insurance, damageability
and theft exposure.
Limited binding authority is provided to contracted agents, but only for
risks which have been underwritten, priced and accepted by an authorized
underwriter of the Company or risks which qualify under specific and pre-set
guidelines and rate parameters established for a specified class of products.
REINSURANCE CEDED
The Company seeks to manage its risk exposure through the purchase of
reinsurance, including retrocessional placements for its reinsurance business.
The Company obtains reinsurance principally to reduce its net liability on
individual risks and to provide protection for individual loss occurrences,
including catastrophic losses, and to stabilize its underwriting results. In
exchange for reinsurance, the Company pays to its reinsurers a portion of the
premiums received under the reinsured policies. While the assuming reinsurer
is liable for losses to the extent of the coverage ceded, reinsurance does not
legally discharge the Company from primary liability for the full amount of
the policies ceded.
The Company purchases reinsurance separately for its primary insurance
business lines and its reinsurance business. Gross written premiums ceded for
1996 were $229.0 million, which constituted 29.8% of the gross premiums
written, and for 1997, were $339.7 million, which constituted 39.0% of the
gross premiums written. The increase in 1997 was primarily due to Vesta Fire
ceding 12 months
10
of premiums in 1997 versus six months of premiums in 1996 to a pro rata
reinsurance facility covering substantially all primary and assumed business
entered into by Vesta Fire as well as incorporating Shelby's premiums into the
reinsurance facility. While the Company seeks to reinsure a signficant portion
of its property catastrophe risks, there can be no assurance that losses
experienced by the Company will be within the coverage limits of the Company's
reinsurance and retrocessional programs.
The availability and cost of reinsurance and retrocessional coverage may
vary significantly over time and are subject to prevailing market conditions.
Pricing in this business has decreased due to increased availability of
reinsurance market capacity.
The Company seeks to evaluate the credit quality of the reinsurers and
retrocessionaires to which it cedes business. No assurance can be given
regarding the future ability of any of the Company's reinsurers to meet their
obligations.
CLAIMS
Claims arising under the policies and treaties issued or reinsured by the
Company are managed by the Company's Claims Department. When the Company
receives notice of a loss, its claims personnel open a claim file and
establish a reserve with respect to the loss. All claims are reviewed and all
payments are made by the Company's employees, with the exception of claims on
certain collateral protection products, which are adjusted by a managing
general agency and periodically audited by the Company's claims personnel.
Most personal lines claims are adjusted and paid by staff claims adjusters.
Management believes that utilizing the Company's trained employee adjusters
permits faster, more efficient service at a lower cost.
Claims settlement authority levels are established for each adjuster or
manager based upon such employee's ability and level of experience. Upon
receipt, each claim is reviewed and assigned to an adjuster or manager based
upon the type of claim. Claims-related litigation is monitored by home office
litigation supervisors. The Company emphasizes prompt, fair and equitable
settlement of meritorious claims, adequate reserving for claims and
controlling of claims adjustment and legal expenses.
RESERVES
The Company's insurance subsidiaries are required to maintain reserves to
cover their estimated ultimate liability for losses and loss adjustment
expenses with respect to reported and unreported claims incurred. To the
extent that reserves prove to be inadequate in the future, the Company would
have to increase such reserves and incur a charge to earnings in the period
such reserves are increased which could have a material adverse effect on the
Company's results of operations and financial condition. The establishment of
appropriate reserves is an inherently uncertain process and there can be no
assurance that ultimate losses will not materially exceed the Company's loss
reserves. Reserves are estimates involving actuarial and statistical
projections at a given time of what the Company expects to be the cost of the
ultimate settlement and administration of claims based on facts and
circumstances then known, estimates of future trends in claims severity and
other variable factors such as inflation. The inherent uncertainties of
estimating reserves generally are greater with respect to reinsurance
liabilities due to the diversity of development patterns among different types
of reinsurance contracts, the necessary reliance on ceding companies for
information regarding reported claims and differing reserving practices among
ceding companies.
With respect to reported claims, reserves are established on a case-by-case
basis. The reserve amounts on each reported claim are determined by taking
into account the circumstances surrounding each claim and policy provision
relating to the type of loss. Loss reserves are reviewed on a regular basis,
and as new data becomes available, appropriate adjustments are made to
reserves.
11
For incurred but not reported ("IBNR") losses, a variety of methods have
been developed in the insurance industry for determining estimates of loss
reserves. One common method of actuarial evaluation, which is used by the
Company, is the loss development method. This method uses the pattern by which
losses have been reported over time and assumes that each accident year's
experience will develop in the same pattern as the historical loss
development. The Company also relies on industry data to provide the basis for
reserve analysis on newer lines of business (lines written less than 3 years).
Provisions for inflation are implicitly considered in the reserving process.
For GAAP purposes, the Company's reserves are carried at the total estimate
for ultimate expected loss without any discount to reflect the time value of
money.
Reserves are computed by the Company based upon actuarial principles and
procedures applicable to the lines of business written by the Company. These
reserve calculations are reviewed regularly by management, and, as required by
state law, the Company periodically engages an independent actuary to render
an opinion as to the adequacy of statutory reserves established by management,
which opinions are filed with the various jurisdictions in which the Company
is licensed. Based upon the practice and procedures employed by the Company,
without regard to independent actuarial opinions, management believes that the
Company's reserves are adequate.
The following table provides a reconciliation of beginning and ending
liability balances on a GAAP basis for the years indicated:
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
Losses and LAE reserves at beginning of year...... $120,980 $199,314 $247,224
Losses and LAE incurred:
Provision for losses and LAE for claims occurring
in current year................................. 217,293 291,812 296,325
Increase (decrease) in reserves for claims occur-
ring in prior years............................. 1,798 3,109 (19,363)
-------- -------- --------
Total........................................... 219,091 294,921 276,962
Losses and LAE payments for claims incurred:
Current year..................................... 92,924 158,408 26,754
Prior years...................................... 47,833 88,603 (22,908)
-------- -------- --------
Total........................................... 140,757 247,011 3,846
-------- -------- --------
Losses and LAE reserve liability at end of year... $199,314 $247,224 $520,340
======== ======== ========
The reconciliation between statutory basis and GAAP basis reserves for each
of the three years in the period ended December 31, 1996 is shown on the
following page:
RECONCILIATION OF RESERVES FOR UNPAID LOSSES AND LAE FROM STATUTORY BASIS TO
GAAP BASIS
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
Statutory reserves............................... $150,818 $189,309 386,115
Statutory accounting change...................... -- -- (66,002)
Adjustments for salvage and subrogation.......... (1,273) (2,376) (15,553)
Gross-up of amounts netted against reinsurance
recoverable..................................... 49,769 60,291 215,780
-------- -------- --------
Reserves on a GAAP basis......................... $199,314 $247,224 $520,340
======== ======== ========
12
The following table shows the development of the reserves for unpaid losses
and loss adjustment expenses from 1987 through 1997 for the Company's
insurance subsidiaries on a GAAP basis excluding amounts netted against
reinsurance recoverable. The top line of the table shows the liabilities at
the balance sheet date for each of the indicated years. This reflects the
estimated amounts of losses and loss adjustment expenses for claims arising in
that year and all prior years that are unpaid at the balance sheet date,
including losses incurred but not yet reported to the Company. The upper
portion of the table shows the cumulative amounts subsequently paid as of
successive years with respect to the liability. The lower portion of the table
shows the reestimated amount of the previously recorded liability based on
experience as of the end of each succeeding year. The estimates change as more
information becomes known about the frequency and severity of claims for
individual years. A redundance (deficiency) exists when the reestimated
liability at each December 31 is less (greater) than the prior liability
estimate. The "cumulative redundance (deficiency)" depicted in the table, for
any particular calendar year, represents the aggregate change in the initial
estimates over all subsequent calendar years.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS)
Liability for unpaid
losses and LAE......... $44,597 $40,837 $32,861 $27,823 $21,919 $21,976 $34,647 $77,331 $149,545 $186,933 $299,061
Paid (cumulative) as of
One year later......... 7,706 19,730 19,611 11,864 11,890 10,216 18,679 48,007 88,603 (22,908)
Two years later........ 22,139 28,475 24,063 16,078 13,968 13,712 24,153 62,834 39,418
Three years later...... 30,405 32,443 27,692 17,062 15,362 14,074 25,428 9,897
Four years later....... 32,783 34,549 28,699 17,829 15,671 14,365 (12,097)
Five years later....... 34,704 35,564 29,265 18,047 15,741 (15,094)
Six years later........ 35,513 36,073 29,366 18,123 (8,460)
Seven years later...... 36,033 36,449 29,390 (2,882)
Eight years later...... 36,361 36,470 10,615
Nine years later....... 36,400 19,693
Ten years later........ 20,482
Liability reestimated
as of
End of year........... 44,597 40,837 32,861 27,823 21,919 21,976 34,647 77,331 149,545 186,933 299,061
One year later......... 43,721 42,097 34,078 28,779 21,853 22,595 35,714 79,128 152,654 167,570
Two year later......... 43,869 42,702 33,304 29,431 21,273 22,341 35,310 81,850 144,075
Three years later...... 44,541 42,665 33,851 28,467 20,902 22,068 35,153 72,488
Four years later....... 44,181 42,493 33,663 28,316 20,537 21,991 33,347
Five years later....... 43,170 42,149 33,444 28,027 20,385 22,019
Six years later........ 42,987 42,330 33,113 27,886 22,154
Seven years later...... 42,901 42,090 32,921 30,854
Eight years later...... 42,847 41,903 35,606
Nine years later....... 42,675 45,631
Ten years later........ 46,616
Cumulative
redundance/(deficiency). (2,019) (4,794) (2,745) (3,031) (235) (43) 1,300 4,843 5,470 19,363
As the table above indicates, due to the short tail nature of the Company's
business, its claim payout pattern closely tracks increases and decreases in
its premium volume.
The Company reinsured a number of casualty risks in the early 1980's which
could result in claims for coverage of asbestos related and other
environmental impairment liabilities to the extent that such liabilities were
not excluded from the underlying policies. The attachment points in
reinsurance treaties relating to these risks are relatively high, and the
Company's percentage participation in the layers of reinsurance in which it
participates is relatively low. In addition, the Company carries reinsurance
which would mitigate the effect of any losses under these treaties. While
there exists a possibility that the Company could suffer material loss in the
event of a high number of large losses under these treaties, this is unlikely
in management's judgment. Management's judgment is based upon, among other
things, its experience in the
13
property insurance industry generally, the length of time that has elapsed
since these particular treaties were entered into, and the fact that, to
management's knowledge, the Company has received no notices of any material
environmental claims under these treaties.
INVESTMENTS
The Company's investment portfolio consists primarily of investment grade
fixed income securities. Waddell & Reed Asset Management Company ("WRAMCO"), a
subsidiary of Torchmark, provides investment advisory services to the Company
subject to investment policies and guidelines established by management. The
Company's investments at December 31, 1997 totaled approximately $656.8
million and were classified as follows:
AMOUNT AT WHICH % OF
TYPE OF INVESTMENT SHOWN ON BALANCE SHEET PORTFOLIO
- ------------------ ---------------------- ---------
(IN THOUSANDS)
Cash and short-term investments................ $140,826 21.4%
United States Government securities............ 86,148 13.1
Mortgage-backed securities..................... 60,806 9.3
Corporate bonds................................ 196,409 29.9
Foreign government............................. 3,745 .6
Municipal bonds................................ 148,458 22.6
Equity securities.............................. 20,424 3.1
-------- ------
Total........................................ $656,816 100.0%
======== ======
The value of the fixed maturities portfolio, classified by category, as of
December 31, 1997, was as follows:
AMORTIZED COST FAIR VALUE
-------------- ----------
(IN THOUSANDS)
United States Government.............................. $ 84,896 $ 86,148
Mortgage-backed securities............................ 60,145 60,806
Municipal............................................. 145,567 148,458
Foreign government.................................... 3,643 3,745
Corporate............................................. 194,672 196,409
-------- --------
Total............................................... $488,923 $495,566
======== ========
The composition of the fixed maturities portfolio, classified by Moody's
rating as of December 31, 1997 was as follows:
AMORTIZED COST % OF TOTAL
-------------- ----------
(IN THOUSANDS)
Aaa................................................... $219,159 44.8%
Aa.................................................... 52,640 10.8
A..................................................... 193,434 39.6
Baa................................................... 22,188 4.5
Ba.................................................... 1,502 .3
-------- -----
Total............................................... $488,923 100.0%
======== =====
The NAIC has a bond rating system that assigns securities to classes called
"NAIC designations" that are used by insurers when preparing their annual
statutory financial statements. The NAIC assigns designations to publicly-
traded as well as privately-placed securities. The designations assigned by
the NAIC range from class 1 to class 6, with a rating in class 1 being of the
highest quality. As of December 31, 1997, all of the Company's fixed
maturities portfolio, measured on a statutory carrying
14
value basis, was invested in securities rated in class 1 by the NAIC, which
are considered investment grade. The weighted average maturity of the
Company's portfolio at December 31, 1997 was 4.4 years.
As of December 31, 1997, less than .5% of the Company's fixed maturities
portfolio was invested in securities that were rated below investment grade.
Less than 4% of the Company's assets were invested in real estate and equity
securities, and less than 3% of the Company's assets were invested in
collateralized mortgage obligations secured by residential mortgages.
REGULATION
The Company's insurance companies are subject to regulation by government
agencies in the states in which they do business. The nature and extent of
such regulation vary from jurisdiction to jurisdiction, but typically involve
prior approval of the acquisition of control of an insurance company or of any
company controlling an insurance company, regulation of certain transactions
entered into by an insurance company with any of its affiliates, approval of
premium rates for many lines of insurance, standards of solvency and minimum
amounts of capital and surplus which must be maintained, limitations on types
and amounts of investments, restrictions on the size of risks which may be
insured by a single company, licensing of insurers and agents, deposits of
securities for the benefit of policyholders, and reports with respect to
financial condition and other matters. In addition, state regulatory examiners
perform periodic examinations of insurance companies. Such regulation is
generally intended for the protection of policyholders rather than security
holders.
For its assumed reinsurance business, the Company has historically made
estimates for its reinsurance reports received subsequent to a period end on a
combined underwriting and accident year basis for both statutory and GAAP
purposes. During a routine examination by the Alabama Department of Insurance,
the Company agreed to revise the accounting for its reinsurance business for
statutory purposes. Effective with its year end 1997 statutory filings, Vesta
Fire has revised its statutory accounting for its assumed reinsurance business
to reflect only accident/calendar year information. The adjustments
essentially reversed, in the form of a one-time charge, the cumulative effect
of the accounting practice consistently applied over prior years. This
statutory revision did not have a material effect on the Company's GAAP
financial position or result of operations for 1997.
In addition to the regulatory supervision of the Company's insurance
subsidiaries, the Company is also subject to regulation under the Alabama,
Ohio, Indiana, Hawaii and Texas Insurance Holding Company System Regulatory
Acts (the "Holding Company Acts"). The Holding Company Acts contain certain
reporting requirements including those requiring the Company, as the ultimate
parent company, to file information relating to its capital structure,
ownership, and financial condition and general business operations of its
insurance subsidiaries. The Holding Company Acts contain special reporting and
prior approval requirements with respect to transactions among affiliates. The
Alabama Holding Company Act is generally the most significant to the Company
since it governs the Company's relationship with Vesta Fire, the Company's
principal insurance subsidiary.
Insurance companies are also affected by a variety of state and federal
legislative and regulatory measures and judicial decisions that define and
extend the risks and benefits for which insurance is sought and provided.
These include redefinitions of risk exposure in areas such as products
liability, environmental damage and employee benefits, including pensions,
workers' compensation and disability benefits. In addition, individual state
insurance departments may prevent premium rates for some classes of insureds
from reflecting the level of risk assumed by the insurer for those classes.
Such developments may adversely affect the profitability of various lines of
insurance. In some cases, these adverse effects on profitability can be
minimized through repricing of coverages, if permitted by applicable
regulations, or limitation or cessation of the affected business.
15
Restrictions on Dividends to Stockholders. The Company's insurance
subsidiaries are subject to various state statutory and regulatory
restrictions, generally applicable to each insurance company in its state of
incorporation, which limit the amount of dividends or distributions by an
insurance company to its stockholders. The restrictions are generally based on
certain levels of surplus, investment income and operating income, as
determined under statutory accounting practices. Alabama, Ohio, Indiana and
Texas law permits dividends in any year which, together with other dividends
or distributions made within the preceding 12 months, do not exceed the
greater of (i) 10% of statutory surplus as of the end of the preceding year or
(ii) the net income for the preceding year, with larger dividends payable only
after receipt of prior regulatory approval. Hawaii law limits dividends to the
lesser of (i) and (ii) without prior approval. Certain other extraordinary
transactions between an insurance company and its affiliates, also are subject
to prior approval by the Department of Insurance. Future dividends from the
Company's subsidiaries may be limited by business and regulatory
considerations. However, based upon restrictions presently in effect, the
maximum amount available for payment of dividends to the Company by its
insurance subsidiaries in 1998 without prior approval of regulatory
authorities is approximately $35.5 million.
Insurance Regulation Concerning Change or Acquisition of Control. Certain
subsidiaries of the Company are domestic property and casualty insurance
companies organized under the insurance codes of Alabama, Ohio, Indiana,
Hawaii and Texas (the "Insurance Codes"). The Insurance Codes contain a
provision to the effect that the acquisition or change of "control" of a
domestic insurer or of any person that controls a domestic insurer cannot be
consummated without the prior approval of the relevant insurance regulatory
authority. A person seeking to acquire control, directly or indirectly, of a
domestic insurance company or of any person controlling a domestic insurance
company must generally file with the relevant insurance regulatory authority
an application for change of control (commonly known as a "Form A") containing
certain information required by statute and published regulations and provide
a copy of such Form A to the domestic insurer. In Alabama, control is presumed
to exist if any person, directly or indirectly, owns, controls, holds with the
power to vote or holds proxies representing 5% or more of the voting
securities of any other person. In Texas and Hawaii, control is presumed to
exist if any person, directly or indirectly, or with members of the person's
immediate family, owns, controls, or holds with the power to vote, or if any
person other than a corporate officer or director of a person holds proxies
representing, 10% or more of the voting securities of any other person.
In addition, many state insurance regulatory laws contain provisions that
require pre-notification to state agencies of a change in control of a non-
domestic admitted insurance company in that state. While such prenotification
statutes do not authorize the state agency to disapprove the change of
control, such statutes do authorize issuance of a cease and desist order with
respect to the non-domestic admitted insurer if certain conditions exist such
as undue market concentration.
Any future transactions that would constitute a change in control of the
Company would also generally require prior approval by the Insurance
Department of Alabama, Ohio, Indiana, Hawaii and Texas and would require
preacquisition notification in those states which have adopted preacquisition
notification provisions and wherein the insurers are admitted to transact
business. Such requirements may deter, delay or prevent certain transactions
affecting the control of the Company or the ownership of the Company's common
stock, including transactions that could be advantageous to the stockholders
of the Company.
Membership in Insolvency Funds and Associations; Mandatory Pools. Most
states require property and casualty insurers to become members of insolvency
funds or associations which generally protect policyholders against the
insolvency of an insurer writing insurance in the state. Members of the fund
or association must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any one year vary
between 1% and 2% of annual premiums written by a member in that state.
16
The Company is also required to participate in various mandatory insurance
facilities or in funding mandatory pools, which are generally designed to
provide insurance coverage for consumers who are unable to obtain insurance in
the voluntary insurance market. Among the pools in which the Company
participates are those established in coastal states to provide windstorm and
other similar types of property coverage. These pools typically require all
companies writing property insurance in the state for which the pool has been
established to fund deficiencies experienced by the pool based upon each
company's relative premium writings in that state, with any excess funding
typically distributed to the participating companies on the same basis. To the
extent that these assessments are not covered by the Company's reinsurance
treaties, they may have an adverse effect on the Company.
Total assessments from insolvency funds, associations and mandatory pools
were $998,555, $531,380 and $326,008 for 1995, 1996 and 1997, respectively.
Some of these payments are recoverable through future policy surcharges and
premium tax reductions.
Various states in which the Company is doing business have established
certain shared market facilities with respect to the coverage of windstorm and
hurricane losses in the state. The Company is subject to assessments under
these facilities up to certain prescribed limits (which are generally based on
its share of the property insurance market in the state) if funds in the state
facility are inadequate to pay such losses on insured risks. The Company
believes that such assessments generally would be treated as a catastrophic
loss under the Company's catastrophe reinsurance programs.
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and insurance capacity
and pricing. These regulations include (i) the creation of "markets assistance
plans" under which insurers are induced to provide certain coverages, (ii)
restrictions on the ability of insurers to cancel certain policies in mid-
term, (iii) advance notice requirements or limitations imposed for certain
policy non-renewals and (iv) limitations upon or decreases in rates permitted
to be charged.
Risk-Based Capital Requirements. The NAIC adopted risk-based capital
requirements that require insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies. Under the
formula, a company determines its "risk-based capital" ("RBC") by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). Risk-based capital rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" ("ACL") of RBC. Based on
calculations made by the Company, the risk-based capital levels for each of
the Company's insurance subsidiaries did not trigger regulatory attention.
Effect of Federal Legislation. Although the federal government does not
directly regulate the business of insurance, federal initiatives often affect
the insurance business in a variety of ways. Current and proposed federal
measures which may significantly affect the insurance business include federal
government participation in asbestos and other product liability claims,
pension regulation (ERISA), examination of the taxation of insurers and
reinsurers, minimum levels of liability insurance and automobile safety
regulations.
NAIC-IRIS Ratios. The NAIC has developed its Insurance Regulatory
Information System ("IRIS") to assist state insurance departments in
identifying significant changes in the operations of an insurance company,
such as changes in its product mix, large reinsurance transactions, increases
or
17
decreases in premiums received and certain other changes in operations. Such
changes may not result from any problems with an insurance company but merely
indicate changes in certain ratios outside ranges defined as normal by the
NAIC. When an insurance company has four or more ratios falling outside
"normal ranges," state regulators may investigate to determine the reasons for
the variance and whether corrective action is warranted. In 1996, Vesta Fire
had no ratios which varied unfavorably from the "usual value" range. In 1997,
Vesta Fire's IRIS ratios may be negatively impacted by the one-time statutory
charge.
COMPETITION
The property and casualty insurance industry is highly competitive on the
basis of both price and service. The Company competes for direct business with
other stock companies, specialty insurance organizations, mutual insurance
companies and other underwriting organizations, some of which are
substantially larger and have greater financial resources than the Company. In
recent years there has been a trend in the property casualty industry toward
consolidation which could result in even more competitive pricing. The Company
also faces competition from foreign insurance companies and from "captive"
insurance companies and "risk retention" groups (i.e., those established by
insureds to provide insurance for themselves.) In the future, the industry,
including the Company, may face increasing insurance underwriting competition
from banks and other financial institutions.
The property and casualty reinsurance business is also highly competitive.
Competition in the types of reinsurance in which the Company is engaged is
based on many factors, including the perceived overall financial strength of
the reinsurer, premiums charged, contract terms and conditions, services
offered, speed of claims payment, reputation and experience. Competitors
include independent reinsurance companies, subsidiaries or affiliates of
established domestic or worldwide insurance companies, reinsurance departments
of certain primary insurance companies and underwriting syndicates.
RELATIONSHIP WITH TORCHMARK
Prior to the initial public offering of its common stock in November 1993,
the Company was a wholly owned subsidiary of Torchmark. As of December 31,
1997, Torchmark owned approximately 28% of the issued and outstanding common
stock of the Company. R.K. Richey, Chairman of the Executive Committee of the
Board of Directors of Torchmark, serves as a director and the Chairman of the
Board of the Company and C.B. Hudson, Chairman and Chief Executive Officer of
Torchmark, serves as a director of the Company. Prior to its initial public
offering, the Company entered into several agreements with Torchmark and
certain of its subsidiaries regarding the future relationship of the Company
and Torchmark. Among these are a lease agreement, pursuant to which the
Company leases its headquarters building, and an investment services
agreement, pursuant to which the Company receives investment advice and
services in connection with the management of the Company's investment
portfolio. Prior to May of 1995, the Company marketed lower value personal
dwelling insurance in six states through agents of LNL, pursuant to a written
marketing agreement between the Company and LNL. However, LNL terminated this
agreement in 1995 and will no longer market these products through its agents.
EMPLOYEES
As of December 31, 1997, the Company employed 670 persons. The Company's
employees are neither represented by labor unions nor are they subject to any
collective bargaining agreements. Management knows of no current efforts to
establish labor unions or collective bargaining agreements.
18
ITEM 2. PROPERTIES
The Company leases approximately 62,563 square feet for its home office at
3760 River Run Drive, Birmingham, Alabama under a long-term operating lease
from Torchmark Development Corporation, a wholly owned subsidiary of Torchmark
Corporation. The Company considers the office facilities to be suitable and
adequate for its current level of operations. However, the Company anticipates
leasing additional space within the next year to accomodate the further
consolidation of the Shelby companies operations.
HIG leases approximately 8,140 square feet for its operations at 1001 Bishop
Street Pacific Tower, Honolulu, Hawaii under a long-term operating lease. The
Company considers the office facilities to be suitable and adequate for HIG's
current and anticipated level of operations.
The Company owns an office building with approximately 175,000 square feet
located at 175 Mansfield Avenue, Shelby, Ohio for its Shelby operations.
ITEM 3. LEGAL PROCEEDINGS
The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. Based upon information
presently available, and in light of legal and other defenses available to the
Company and its subsidiaries, management does not consider liability from any
threatened or pending litigation to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
(a) Market Information
Since November 11, 1993, the Common Stock has been traded on the New York
Stock Exchange under the symbol "VTA". Prior to November 11, 1993, there was
no established public trading market for the Common Stock. The stock began
trading on November 11, 1993, at $16.67 per share. The amounts in the table
below have been adjusted for the 3-for-2 stock split paid on January 22, 1996.
Quarterly high and low market prices of the Company's common stock in 1996
were as follows:
QUARTER ENDED HIGH LOW
------------- ------ ------
March 31.................................................... $35.50 $28.25
June 30..................................................... 36.88 28.13
September 30................................................ 39.75 33.50
December 31................................................. 38.75 25.63
Quarterly high and low market prices of the Company's common stock in 1997
were as follows:
QUARTER ENDED HIGH LOW
------------- ------ ------
March 31.................................................... $41.50 $30.88
June 30..................................................... 49.00 32.75
September 30................................................ 59.00 43.63
December 31................................................. 64.50 54.88
19
(b) Number of Holders of Common Stock
There were 98 shareholders of record on January 15, 1998 including
shareholder accounts held in nominee form.
(c) Dividend History and Restrictions
The Company's Board of Directors has established a policy of declaring
regular quarterly cash dividends on the Company's common stock. The
declaration and payment of dividends will be at the discretion of the
Company's Board of Directors and will depend upon many factors, including the
Company's financial condition and earnings, the capital requirements of the
Company's operating subsidiaries, legal requirements and regulatory
constraints. Accordingly, there is no requirement or assurance that dividends
will be declared or paid.
The dividends paid by the Company on its common stock for the past two years
were as follows (in thousands):
QUARTER 1996 1997
------- ---- ----
First............................. $708 $697
Second............................ 709 697
Third............................. 704 701
Fourth............................ 715 703
Alabama, Hawaii, Ohio, Indiana and Texas impose restrictions on the payment
of dividends to the Company by the Company's insurance subsidiaries in excess
of certain amounts without prior regulatory approval. The Company does not
currently expect that regulatory constraints or other restrictions will affect
its ability to declare and pay the quarterly dividends contemplated by the
Company's dividend policy described above.
20
ITEM 6. SELECTED FINANCIAL DATA
The following information should be read in conjunction with the Company's
Consolidated Financial Statements and related notes reported elsewhere in this
Form 10-K.
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- ---------- ---------
STATEMENT OF OPERATIONS
DATA
Gross Premiums Written. $225,428 $354,830 $586,782 $ 769,586 $ 870,909
Net Premiums Written... 158,953 259,710 459,228 540,632 531,164
Net Premiums Earned.... 143,810 259,952 381,802 511,912 522,347
Net Investment Income.. 8,949 12,999 17,972 23,148 35,960
Investment Gains (2) (695) 276 32 3,283
(Losses)................
Other.................. 368 100 216 188 2,094
-------- -------- -------- ---------- ---------
Total Revenues......... 153,125 272,356 400,266 535,280 563,684
-------- -------- -------- ---------- ---------
Losses and LAE 75,369 140,281 219,091 294,920 276,962
Incurred................
Policy Acquisition and 58,281 88,295 111,806 154,598 170,742
Other Underwriting
Expenses................
Amortization of -- -- 264 484 4,007
Goodwill................
Interest Expense....... -- 1,708 5,273 10,059 10,860
-------- -------- -------- ---------- ---------
Total Losses and 133,650 230,284 336,434 460,061 462,571
Expenses................
-------- -------- -------- ---------- ---------
Income From Operations 19,475 42,072 63,832 75,219 101,113
Before Income Tax.......
Income Tax............. 6,531 12,843 21,133 24,982 35,420
Deferrable capital -- -- -- -- 5,050
securities interest, net
of income tax...........
Change in Accounting 1,939 -- -- -- --
(1).....................
-------- -------- -------- ---------- ---------
Net Income............. $ 14,883 $ 29,229 $ 42,699 $ 50,237 $ 60,643
======== ======== ======== ========== =========
Earnings Per Share, 0.91 1.55 2.27 2.66 3.26
Before Change in
Accounting (6)(7).....
Basic Earnings Per 1.05 1.55 2.27 2.66 3.26
Share (6)(7)............
Shares used in per 14,268 18,812 18,842 18,860 18,600
share calculation
(6)(7)..................
Diluted Earnings Per $ 1.05 $ 1.55 $ 2.25 $ 2.62 $ 3.18
Share (6)(7)............
Shares used in per 14,268 18,834 18,970 19,157 19,053
share calculation
(6)(7)..................
BALANCE SHEET DATA (AT
END OF PERIOD)
Total Investments and $250,948 $300,186 $422,516 $ 427,276 $ 656,816
Cash....................
Total Assets (2)....... 405,691 510,290 817,624 1,013,581 1,675,685
Reserves For Losses and 78,285 120,980 199,314 247,224 520,340
LAE (2).................
Long Term Debt......... 28,000 28,000 98,163 98,279 98,602
Total Liabilities (2).. 196,588 276,415 537,005 694,878 1,207,782
Deferrable Capital -- -- -- -- 100,000
Securities..............
Stockholders' Equity... 209,103 233,875 280,619 318,703 367,903
CERTAIN FINANCIAL RATIOS
AND OTHER DATA
GAAP
Loss and LAE Ratio..... 52.4% 53.9% 57.4% 57.6% 53.0%
Underwriting Expense 40.5 34.0 29.3 30.2 32.7
Ratio...................
-------- -------- -------- ---------- ---------
Combined Ratio......... 92.9% 87.9% 86.7% 87.8% 85.7%
======== ======== ======== ========== =========
SAP (3)
Loss and LAE Ratio..... 51.7% 54.0% 57.2% 57.9% 61.6
Underwriting Expense 40.1 35.4 33.4 31.8 47.9
Ratio...................
-------- -------- -------- ---------- ---------
Combined Ratio......... 91.8% 89.4% 90.6% 89.7% 109.5%(8)
======== ======== ======== ========== =========
Net Premiums Written to .79x 1.18x 1.44x 1.53x 1.49x
Surplus Ratio...........
Surplus................ $201,752 $212,507 $318,997 $352,695 $355,345
STATUTORY INDUSTRY DATA
(4)
Combined Ratio for 106.9% 108.4% 106.4% 105.8% 101.6%(5)
Property and Casualty
Insurers................
- --------
(1) During the first quarter of 1993, Vesta adopted FASB Statement Number 109,
which resulted in a one-time addition to after-tax earnings of $2,321,000.
Vesta also adopted FASB Statement No. 106 which resulted in a one-time
after tax charge to earnings of $382,000. The implementation of these
standards is not expected to have a material impact on future earnings.
(2) Effective as of January 1, 1993, the Company adopted FASB Statement Number
113. The prior periods have not been restated. See Note J of Notes to
Consolidated Financial Statements.
(3) Statutory data have been derived from the financial statements of the
Company prepared in accordance with SAP and filed with insurance
regulatory authorities.
(4) The statutory industry data are taken from the A. M. Best Company,
Aggregates and Averages, 1997 Edition.
(5) 1997 estimate by A. M. Best, Best Week, March 16, 1998 Edition.
(6) Restated for 3-for-2 stock split paid on January 22, 1996.
(7) Effective as of December 31, 1997, the Company adopted FASB 128. The prior
periods have been restated. See Note R of Notes to Consolidated Financial
Statements.
(8) The statutory combined ratio was negatively impacted by the one-time
statutory accounting charge following discussions with the Alabama
Department of Insurance during its routine examination. See "Business--
Regulation."
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company writes treaty reinsurance and primary insurance on selected
personal and commercial lines risks. In both its reinsurance and primary
insurance operations, the Company focuses principally on property coverages,
for which ultimate losses generally can be more promptly determined than on
casualty risks. The Company's revenues from operations are derived primarily
from net premiums earned on risks written and reinsured by the Company,
investment income and investment gains or losses, while expenses consist
primarily of payments for claims losses and underwriting expenses, including
agents' commissions and operating expenses.
Significant factors influencing results of operations include the supply and
demand for property and casualty insurance and reinsurance, as well as the
number and magnitude of catastrophic losses such as hurricanes, windstorms,
fires and severely cold weather. Premium rate levels are affected by the
availability of insurance coverage which is influenced by levels of surplus in
the industry and other factors. Increases in surplus have generally been
accompanied by increased price competition among property and casualty
insurers. Pricing in this business has weakened due to increased availability
of reinsurance market capacity.
For its assumed reinsurance business, the Company has historically made
estimates for its reinsurance reports received subsequent to a period end on a
combined underwriting and accident year basis for both statutory and GAAP
purposes. During a routine examination by the Alabama Department of Insurance,
the Company agreed to revise the accounting for its reinsurance business for
statutory purposes. Effective with its year end 1997 statutory filings, Vesta
Fire has revised its statutory accounting for its assumed reinsurance business
to reflect only accident/calendar year information. The adjustments
essentially reversed, in the form of a one-time charge, the cumulative effect
of the accounting practice consistently applied over prior years. This
statutory revision did not have a material effect on the Company's GAAP
financial position or result of operations for 1997.
The Company seeks to manage its risk exposure by adjusting the mix and
volume of business written in response to changes in price, maintaining
extensive reinsurance and retrocessional programs and applying the Company's
knowledge of primary insurance markets to its reinsurance business.
The Company has historically followed a practice of maintaining low
retentions in its primary and reinsurance business to reduce the variability
of its earnings. As a result of this practice and the Company's focus on
short-tail business, the Company's loss reserve levels historically have
remained relatively stable from year to year despite changes in premium
volume. The Company is continuing to cede portions of insurance risks while
using its capital base to gradually increase, on a selective basis, its
retention of certain property risks.
Because catastrophe loss events are by their nature unpredictable,
historical results of operations may not be indicative of expected results of
future operations. The Company markets its primary personal insurance products
throughout the United States. While the Company seeks to reduce its exposure
to catastrophic events through the purchase of reinsurance, the occurrence of
one or more major catastrophes in any given period could have a material
adverse impact on the Company's results of operations and financial condition
and result in substantial outflows of cash as losses are paid. In addition,
the increased underwritings of catastrophe related reinsurance, and potential
residual market assessments may also lead to increased variability in the
Company's loss ratio.
Prior to the Shelby and Vesta County Mutual acquisitions, assumed
reinsurance was the dominant line of business, representing 80 percent of 1996
net premiums. As a result of these acquisitions, assumed reinsurance
represented 61 percent of 1997 gross premiums. This shift to increase primary
writing is consistent with the Company's strategy to focus on property
coverages in all of its lines of business while adjusting the mix and volume
of its writings and retentions to respond to change in market conditions.
22
On December 31, 1996 the Company terminated the 75% pro rata reinsurance
contract on its homeowners and dwelling lines of business (excluding HIG)
produced through independent agents and also on its homeowners and dwelling
lines of business in the financial services business. The cancellation enable
the Company to increase its net writings in the personal lines of business.
In July of 1996, Vesta Fire entered into a pro rata reinsurance facility
covering substantially all primary and assumed business in order to provide
capital flexibility to take advantage of growth opportunities in the future.
This reinsurance facility had the effect of reducing net premiums written in
the second half of 1996 by $98.0 million. In 1997, the reinsurance facility
had the effect of reducing net written premiums by $155.1 million, including
reducing Shelby net written premiums by $37.5 million.
COMPARISON OF THE FISCAL YEAR 1997 TO THE FISCAL YEAR 1996
Premiums, Loss and LAE--Reinsurance
Gross premiums written for reinsurance decreased by $83.0 million, or 13.5%,
to $532.4 million for the year ended December 31, 1997, from $615.4 million
for the year ended December 31, 1996. In 1997, the Company's pro rata
reinsurance writings of private passenger automobile decreased significantly
over 1996. The acquisition of Vesta County Mutual resulted in the shift of $47
million of private passenger automobile writings which had been recorded on
the reinsurance line to primary insurance. Additionally, the reinsurance
market experienced increased market capacity accompanied by increased price-
competition in the private passenger automobile line of business. As a result
of these factors, the Company elected to terminate certain accounts. Net
premiums written for reinsurance decreased $97.3 million, or 21.8%, to $348.8
million for the year ended December 31, 1997, from $446.1 million for the year
ended December 31, 1996. Net premiums earned for reinsurance decreased $82.7
million, or 19.9% to $332.3 million for the year ended December 31, 1997, from
$415.0 million for the year ended December 31, 1996. The decreases in net
premiums written and net premiums earned are attributable to the decrease in
gross premiums written for the year ended December 31, 1997, as well as, the
pro-rata reinsurance facility being in place for 12 months in 1997 versus six
months in 1996.
Loss and loss adjustment expenses ("LAE") for reinsurance decreased by $76.3
million, or 30.8% to $171.8 million for the year ended December 31, 1997, from
$248.1 for the year ended December 31, 1996. The dollar amount of loss and
loss adjustment expenses incurred decreased during 1997 due to the decline in
net premiums earned. The loss and LAE ratio for reinsurance for the year ended
December 31, 1997 was 51.7% as compared to 59.8% for the year ended December
31, 1996.
Premiums, Loss and LAE--Primary Insurance
Gross premiums written for primary insurance increased by $184.3 million, or
119.5%, to $338.5 million for the year ended December 31, 1997, from $154.2
million for the year ended December 31, 1996. Included in the $184.3 increase
in gross premiums written for primary insurance was $131.5 million of gross
premiums written by Shelby. The remaining increase of $52.8 million was
primarily due to the transfer of business from assumed reinsurance to personal
lines following the acquisition of Vesta County Mutual.
Net premiums written for primary insurance increased by $87.8 million, or
92.8%, to $182.4 million for the year ended December 31, 1997, from $94.6
million for the year ended December 31, 1996. The increase in net premiums
written was largely attributable to the writings from Shelby and the transfer
of business from assumed reinsurance to personal lines following the
acquisition of Vesta County Mutual. Net premiums earned for primary insurance
increased $93.1 million, or 96.1% to $190.0 million for the year ended
December 31, 1997, from $96.9 million for the year ended December 31, 1996.
23
Loss and loss adjustment expenses ("LAE") for primary insurance increased by
$58.4 million, or 124.8% to $105.2 million for the year ended December 31,
1997, from $46.8 million for the year ended December 31, 1996. Included in the
$58.4 increase in loss and loss adjustment expenses was $56.8 million in
losses incurred by Shelby. The loss and LAE ratio for primary insurance for
the year ended December 31, 1997 was 55.4% as compared to 48.3% at December
31, 1996.
Policy Acquisition Expenses and Other Operating Expenses. Policy acquisition
expenses decreased by $4.8 million, or 3.5% to $122.7 million for the year
ended December 31, 1997, from $127.5 million for the year ended December 31,
1996. The decrease in policy acquisition expenses is primarily attributable to
the decrease in net written premiums. Other operating expenses include
administrative costs not directly related to the generation of premium
revenue, premium taxes and fees, interest on debt and goodwill amortization.
Administrative costs (designated as operating expenses on the statement of
operations) increased $17.7 million. The increase in administration costs is
primarily attributable to the assimilation and administration of the Shelby
operations. The increase in premium taxes and fees is directly related to the
increase in direct premiums written. The increase in goodwill amortization is
attributable to the $83 million of goodwill acquired on June 30, 1997 in
connection with the Shelby acquisition.
Net Investment Income. Net investment income increased by $12.8 million, or
55.5%, to $35.9 million for the year ended December 31, 1997, from $23.1
million for the year ended December 31, 1996. The weighted average yield on
invested assets (excluding realized and unrealized gains) was 5.8% for the
year ended December 31, 1997, compared with 5.6% for the year ended December
31, 1996. The increase in net investment income is primarily attributable to
an increase in average invested assets relating to the Shelby acquisition.
Federal Income Taxes. Federal income taxes increased by $10.5 million, or
42%, to $35.5 million for the year ended December 31, 1997. The effective rate
on pre-tax income increased from 33.2% to 35.1% for the year ended December
31, 1997.
Net Income. For the reasons discussed above, net income increased by $10.4
million, or 20.7%, to $60.6 million for the year ended December 31, 1997, from
$50.2 million for the year ended December 31, 1996.
COMPARISON OF THE FISCAL YEAR 1996 TO THE FISCAL YEAR 1995
Premiums, Loss and LAE--Reinsurance
Gross premiums written for reinsurance increased by $192.7 million, or
45.6%, to $615.4 million for the year ended December 31, 1996, from $422.7
million for the year ended December 31, 1995. This growth was largely
attributable to an increase in gross premiums written on pro rata business.
The growth in pro-rata reinsurance gross premiums written was largely due to
growth in existing accounts as well as the addition of new accounts in the
1996 period as compared to the 1995 period. Net premiums written for
reinsurance increased $87.8 million, or 24.5%, to $446.1 million for the year
ended December 31, 1996, from $358.3 million for the year ended December 31,
1995. Net premiums earned for reinsurance increased $124.3 million, or 42.8%
to $415.0 million for the year ended December 31, 1996, from $290.7 million
for the year ended December 31, 1995. The increase in net premiums earned is
primarily attributable to the increase in net premiums written for the year
ended December 31, 1996.
Loss and loss adjustment expenses ("LAE") for reinsurance increased by $77.0
million, or 45.0% to $248.1 million for the year ended December 31, 1996, from
$171.1 for the year ended December 31, 1995. The dollar amount of loss and
loss adjustment expenses incurred increased during 1996 due to the growth in
premiums earned. The loss and LAE ratio for reinsurance for the year ended
December 31, 1996 was 59.8% as compared to 58.9% for the year ended December
31, 1995.
24
Premiums, Losses and LAE--Primary Insurance
Gross premiums written for primary insurance decreased by $9.9 million, or
6.0%, to $154.2 million for the year ended December 31, 1996, from $164.1
million for the year ended December 31, 1995, due to a $13.9 million decrease
in commercial lines premiums and a $4.0 million increase in personal lines
premiums. Gross premiums written for commercial products decreased 23.6%, to
$44.6 million for the year ended December 31, 1996, compared to $58.4 million
for the year ended December 31, 1995, due primarily to the Company's re-
underwriting of its book of business in an effort to increase profitability in
commercial lines.
Net premiums written for primary insurance decreased by $6.3 million, or
6.2%, to $94.6 million for the year ended December 31, 1996, from $100.9
million for the year ended December 31, 1995. The decrease in net premiums
written was largely attributable to a pro-rata reinsurance facility entered
into by Vesta Fire Insurance Corporation ("Vesta Fire") to provide capital
flexibility to take advantage of growth opportunities. Net premiums earned for
primary insurance increased $5.7 million, or 6.3% to $96.9 million for the
year ended December 31, 1996, from $91.2 million for the year ended
December 31, 1995.
Loss and loss adjustment expenses ("LAE") for primary insurance decreased by
$1.2 million, or 2.5% to $46.8 million for the year ended December 31, 1996,
from $48.0 million for the year ended December 31, 1995. Loss and LAE ratio
for primary insurance for the year ended December 31, 1996 was 48.3% as
compared to 52.6% for the year ended December 31, 1995.
Policy Acquisition Expenses and Other Operating Expenses. Policy acquisition
expenses increased by $40.5 million, or 46.6% to $127.5 million for the year
ended December 31, 1996, from $87.0 million for the year ended December 31,
1995. Other operating expenses include administrative costs not directly
related to the generation of premium revenue, premium taxes and fees, interest
on debt and goodwill amortization. Administrative costs (designated as
operating expenses on the statement of operations) increased $2.4 million.
Premium taxes and fees decreased $109 thousand. Interest on debt increased
$4.8 million. Goodwill amortization increased $220 thousand.
Net Investment Income. Net investment income increased by $5.1 million, or
28.3%, to $23.1 million for the year ended December 31, 1996, from $18.0
million for the year ended December 31, 1995. The weighted average yield on
invested assets (excluding realized and unrealized gains) was 5.6 % for the
year ended December 31, 1996, compared with 5.8% for the year ended December
31, 1995. The increase in net investment income is primarily attributable to
an increase in average invested assets relating to the receipt of proceeds
from the sale by the Company of $100 million of its 8.75% Senior Debentures
due 2025 and operating cash flow.
Federal Income Taxes. Federal income taxes increased by $3.9 million, or
18.5%, to $25.0 million for the year ended December 31, 1996. The effective
rate on pre-tax income increased only slightly from 33.1% to 33.2 % for the
year ended December 31, 1996.
Net Income. For the reasons discussed above, net income increased by $7.5
million, or 17.6%, to $50.2 million for the year ended December 31, 1996, from
$42.7 million for the year ended December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company whose principal asset is its investment in
the capital stock of the companies constituting the Vesta Group, a group of
wholly owned property and casualty insurance companies including Vesta Fire.
The several insurance company subsidiaries comprising Vesta Group are
individually supervised by state insurance regulators. Vesta Fire is the
principal operating subsidiary of the Company.
25
As a holding company with no other business operations, the Company relies
primarily upon dividend payments from Vesta Fire and Shelby to meet its cash
requirements (including its debt service) and to pay dividends to its
stockholders. Transactions between Vesta Fire, Shelby and the Company,
including the payment of dividends by Vesta Fire and Shelby, are subject to
certain limitations under the insurance laws of Alabama. Specifically, Alabama
and Texas law permits the payment of dividends in any year which, together
with other dividends or distributions made within the preceding 12 months, do
not exceed the greater of 10% of statutory surplus as of the end of the
preceding year or the net income for the preceding year, with larger dividends
payable only after receipt of prior regulatory approval. Hawaii law limits
dividends to the lesser of 10% of statutory surplus as of the end of the
preceding year or the net income for the preceding year without prior
approval. Based upon restrictions presently in effect, the maximum amount
available for payment of dividends to the Company by its insurance
subsidiaries in 1998 without prior approval of regulatory authorities is
approximately $35.5 million.
The principal uses of funds at the holding company level are to pay
operating expenses, interest on outstanding indebtedness and dividends to
stockholders. During the last three years, the insurance subsidiaries of the
Company have produced operating results sufficient to fund the needs of the
Company. There can be no assurance as to the ability of the Company's
insurance subsidiaries to continue to pay dividends at current levels.
However, the Company is not aware of any demands or commitments of the
insurance subsidiaries that would prevent the payment of dividends to the
Company sufficient to meet the anticipated needs (including debt service) of
the Company over the next twelve months. See "Business--Regulation."
During 1997, the Company paid approximately $2.8 million in dividends on its
common stock, and it is expected that the Company will pay approximately $2.8
million in 1998. The Company is also required to make semi-annual interest
payments of $4.4 million on its $100 million of 8.75% Senior Debentures due
2025, and semi-annual interest payments of $4.3 million on its $100 million of
8.525% Junior Subordinated Deferrable Interest Debentures issued to Vesta
Capital Trust I in connection with its sale of $100 million of 8.525% Capital
Securities.
In order to provide further liquidity, the Company increased its line of
credit to $200 million from $100 million effective April 8, 1997. The Credit
Agreement relating to this line of credit contains certain covenants that
require, among other things, the Company to maintain a certain consolidated
net worth, maintain a certain amount of investment income available for the
payment of interest expense, cause each insurance subsidiary to maintain a
certain total adjusted capital and which limit the amount of indebtedness the
Company can have. The Company is in compliance with these covenants.
The principal sources of funds for the Company's insurance subsidiaries are
premiums, investment income and proceeds from the sale or maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions and the purchase of investments. On a consolidated
basis, net cash provided from (used in) operations for the year ended December
31, 1997 and 1996, was $(59.2) million and $13.8 million, respectively. The
negative cash flow from operations in 1997 related primarily to the return of
a loss reserve portfolio relating to a pro rata reinsurance contract commuted
at the end of 1996 and the Shelby unearned premium portfolio transfer to the
reinsurance facility. These transactions had the combined effect of reducing
cash flow from operations by $73.2 million in 1997. Cash flow during 1996 was
adversely affected by the settlement of the unearned premium portfolio
transfer on the Company's pro rata reinsurance facility. This transaction had
the effect of reducing cash flow from operations by $17.6 million in 1996.
As of December 31, 1997, the Company's investment portfolio consisted of
cash and short-term investments (21.4%), U.S. Government securities (13.1%),
mortgage-backed securities (9.3%), corporate bonds (29.9%), foreign government
securities (0.6%), municipal bonds (22.6%) and equity securities (3.1%).
According to Moody's, 95.2% of the Company's portfolio is rated A or better.
The
26
Company expects current cash flow to be sufficient to meet operating needs,
although invested assets have been categorized as available for sale in the
event short-term cash needs exceed available resources. The Company adjusts
its holdings of cash, short-term investments and invested assets available for
sale according to its seasonal cash flow needs. Beginning in June of each
year, the Company begins to increase its holdings of cash and short-term
investments. This practice facilitates the Company's ability to meet its
higher short-term cash needs during the hurricane season. See "Business--
Investments."
On November 1, 1996, the Company instituted a stock repurchase program under
which the Company may purchase up to two million shares of its common stock in
the open market at prevailing prices or in privately negotiated transactions,
depending on market conditions, stock price and other factors. In 1996, the
Company purchased a total of 375,000 shares of its common stock under this
program for an aggregate purchase price of $10.2 million (average cost of
$27.31 per share). In 1997, the Company purchased a total of 370,900 shares of
its common stock for an aggregate purchase price of $21.1 million (average
cost of $57.06 per share). Purchases to date have been funded from available
working capital and the repurchased shares are being held in treasury to be
used for ongoing stock issuances such as issuances under the Company's
incentive compensation and stock option programs.
On January 31, 1997, Vesta Capital Trust I, a Delaware business trust
controlled by the Company, sold $100 million of its 8.525% Capital Securities.
These securities have a 30 year maturity and are not redeemable except in
certain limited circumstances. These securities were sold in a private
placement transaction to qualified institutional buyers and were not
registered under Securities Act of 1933 pursuant to an exemption from
registration provided by Rule 144A promulgated thereunder. A portion of the
proceeds from the sale of these capital securities were used to repay
indebtedness under the Company's existing lines of credit and the remainder is
for general corporate purposes.
After the close of business on June 30, 1997, the Company completed its
acquisition of Shelby, which are property and casualty insurance companies
headquartered in Ohio for $260.9 million. The acquired subsidiaries had $648
million of assets and approximately $217 million of stockholders' equity at
June 30, 1997. The Company funded the payment of the purchase price for this
acquisition with available cash on hand, short term investments, cash
available from its insurance subsidiaries and with funds available under its
line of credit. The Company does not believe that the payment of the purchase
price as described above will have an adverse impact on the Company's
liquidity.
The company is heavily dependent upon computer systems for all phases of its
operations. The year 2000 issue--common to most corporations--concerns the
inability of certain software and databases to properly recognize date
sensitive information beginning January 1, 2000. This problem could result in
a material disruption to the company's operations, if not corrected. The
company has assessed and developed a detailed strategy to prevent or at least
minimize problems related to the year 2000 issue. In 1997 resources were
committed and implementation began to modify the affected information systems.
Total costs related to the project are estimated to be approximately $3.5
million, of which $1.1 million was spent in 1997. Substantially all remaining
costs will be expended in 1998. Implementation is currently on schedule. The
degree of success of this project cannot be determined at this time. However,
management believes that the final outcome will not have a material adverse
affect on the operations of the company.
INFLATION
The Company does not believe its results have been materially affected by
inflation due in part to the predominantly short-tail nature of its business.
The potential adverse impacts of inflation include: (i) a decline in the
market value of the Company's fixed maturity investment portfolio; (ii) an
increase in the ultimate cost of settling claims which remain unresolved for a
significant period of time; and (iii) an increase in the Company's operating
expenses. Historically, the effect of inflation on the Company's reserves has
not been material.
27
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described
in the Company's filings with the Securities and Exchange Commission,
including its most recent Annual Report of 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.
28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Independent Auditors' Report.............................................. 30
Consolidated Balance Sheets at December 31, 1996 and 1997................. 31
Consolidated Statements of Operations for each of the years in the three-
year period
ended December 31, 1997.................................................. 32
Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period
ended December 31, 1997.................................................. 33
Consolidated Statements of Cash Flows for each of the years in the three-
year period
ended December 31, 1997.................................................. 34
Notes to Consolidated Financial Statements................................ 35
29
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Vesta Insurance Group, Inc.
Birmingham, Alabama:
We have audited the consolidated financial statements of Vesta Insurance
Group, Inc. and subsidiaries as listed in Item 8 and the supporting schedules
as listed in Item 14(a)(2). These financial statements and financial statement
schedules are the responsibility of Vesta's management. Our responsibility is
to express an opinion on these financial statements and financial statement
schedules 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 and
financial statement schedules are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vesta
Insurance Group, Inc. and subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Birmingham, Alabama
March 27, 1998
30
VESTA INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
AT DECEMBER 31,
----------------------
1996 1997
---------- ----------
Assets:
Investments:
Fixed maturities available for sale--at fair value
(cost: 1996--$306,026; 1997--$488,923)............. $ 308,898 $ 495,566
Equity securities--at fair value: (cost: 1996--
$4,365; 1997--$10,921)................................. 8,326 20,424
Short-term investments............................... 105,415 119,025
---------- ----------
Total investments................................... 422,639 635,015
Cash.................................................. 4,637 21,801
Accrued investment income............................. 5,392 15,799
Premiums in course of collection (net of allowances
for losses of
$70 in 1996 and $654 in 1997)........................ 259,275 331,155
Reinsurance balances receivable....................... 115,768 315,534
Reinsurance recoverable on paid losses................ 69,698 84,500
Deferred policy acquisition costs..................... 75,532 101,299
Property and equipment................................ 3,920 18,093
Income tax receivable................................. 2,110 26,474
Other assets.......................................... 47,271 29,874
Goodwill.............................................. 7,339 96,141
---------- ----------
Total assets........................................ $1,013,581 $1,675,685
========== ==========
Liabilities:
Reserves for:
Losses and loss adjustment expenses.................. 247,224 520,340
Unearned premiums.................................... 228,325 365,052
---------- ----------
475,549 885,392
Deferred income taxes................................. 21,463 52,002
Reinsurance balances payable.......................... 51,162 74,466
Other liabilities..................................... 26,425 52,320
Short term debt....................................... 22,000 45,000
Long term debt........................................ 98,279 98,602
---------- ----------
Total liabilities................................... 694,878 1,207,782
Commitments and contingencies
Deferrable Capital Securities.......................... -- 100,000
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, none
issued................................................. -- --
Common stock, $.01 par value, 32,000,000 shares
authorized,
issued: 1996--18,970,695 shares; 1997--18,970,695.... 190 190
Additional paid-in capital............................ 161,037 162,550
Unrealized investment gains, net of applicable taxes.. 4,442 9,829
Retained earnings..................................... 166,795 224,641
Receivable from issuance of restricted stock.......... (3,207) (3,891)
Treasury stock........................................ (10,554) (25,416)
---------- ----------
Total stockholders' equity.......................... 318,703 367,903
---------- ----------
Total liabilities and stockholders' equity.......... $1,013,581 $1,675,685
========== ==========
See accompanying Notes to Consolidated Financial Statements.
31
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
Revenues:
Net premiums written........................... $459,228 $540,632 $531,164
(Increase) decrease in unearned premiums....... (77,426) (28,720) (8,817)
-------- -------- --------
Net premiums earned............................ 381,802 511,912 522,347
Net investment income.......................... 17,972 23,148 35,960
Realized investment gains (losses)............. 276 32 3,283
Other.......................................... 216 188 2,094
-------- -------- --------
Total revenues............................... 400,266 535,280 563,684
Expenses:
Losses incurred................................ 206,513 273,090 252,098
Loss adjustment expenses incurred.............. 12,578 21,830 24,864
Policy acquisition expenses.................... 87,022 127,503 122,743
Operating expenses............................. 18,747 21,167 38,913
Premium taxes and fees......................... 6,037 5,928 9,086
Interest on debt............................... 5,273 10,059 10,860
Goodwill amortization.......................... 264 484 4,007
-------- -------- --------
Total expenses............................... 336,434 460,061 462,571
Net income before income taxes.................. 63,832 75,219 101,113
Income taxes.................................... 21,133 24,982 35,420
Deferrable capital securities interest, net of -- -- 5,050
income tax......................................
-------- -------- --------
Net income.................................... $ 42,699 $ 50,237 $ 60,643
======== ======== ========
Basic net income per common share............. $ 2.27 $ 2.66 $ 3.26
======== ======== ========
Diluted net income per common share........... $ 2.25 $ 2.62 $ 3.18
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
32
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
RECEIVABLE
ADDITIONAL FROM
PREFERRED COMMON PAID-IN UNREALIZED RETAINED TREASURY RESTRICTED
STOCK STOCK CAPITAL GAINS/(LOSSES) EARNINGS STOCK STOCK
--------- ------ ---------- -------------- -------- -------- ----------
Balance, December 31,
1994.................. -- 188 158,051 (258) 79,271 -- (3,377)
Net income.............. -- -- -- -- 42,699 -- --
Issuance of stock....... -- 1 1,297 -- -- -- --
Change in restricted
stock receivable....... -- -- -- -- -- -- 215
Treasury stock
acquisitions........... -- -- -- -- -- (520) --
Common dividends
declared
(0.20 per share)....... -- -- -- -- (2,512) -- --
Net change in unrealized
gains.................. -- -- -- 5,463 -- -- --
Tax Benefit from
exercise of stock
options................ -- -- 101 -- -- -- --
----- --- ------- ----- ------- ------- ------
Balance, December
31,1995............... -- 189 159,449 5,205 119,458 (520) (3,162)
Net income.............. -- -- -- -- 50,237 -- --
Issuance of stock....... -- 1 1,188 -- -- -- --
Change in restricted
stock receivable....... -- -- -- -- -- -- (45)
Treasury stock
acquisitions........... -- -- -- -- -- (10,597) --
Treasury stock issued
for options exercised.. -- -- 63 -- (64) 563 --
Common dividends
declared (0.15 per
share)................. -- -- -- -- (2,836) -- --
Net change in unrealized
gains.................. -- -- -- (763) -- -- --
Tax benefit from
exercise of stock
options................ -- -- 337 -- -- -- --
----- --- ------- ----- ------- ------- ------
Balance, December
31,1996............... -- 190 161,037 4,442 166,795 (10,554) (3,207)
Net income.............. -- -- -- -- 60,643 -- --
Change in restricted
stock receivable....... -- -- -- -- -- -- (684)
Treasury stock
acquisitions............ -- -- -- -- -- (21,164) --
Treasury stock issued
for options exercised.. -- -- (1,061) -- -- 6,302 --
Common dividends
declared (0.15 per
share)................. -- -- -- -- (2,797) -- --
Net change in unrealized
gains.................. -- -- -- 5,387 -- -- --
Tax benefit from
exercise of stock
options................ -- -- 2,574 -- -- -- --
----- --- ------- ----- ------- ------- ------
Balance, December
31,1997............... -- 190 162,550 9,829 224,641 (25,416) (3,891)
===== === ======= ===== ======= ======= ======
See accompanying Notes to Consolidated Financial Statements
33
VESTA INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1995 1996 1997
--------- ------- ---------
Operating Activities:
Net income.................................... $ 42,699 $50,237 $ 60,643
Adjustments to reconcile net income to cash
provided from operations:
Changes in:
Loss and LAE reserves....................... 63,986 47,910 (27,199)
Unearned premium reserves................... 67,514 59,813 38,350
Accrued income taxes........................ 5,887 3,794 (2,140)
Reinsurance balances payable................ (214) (18,201) 23,304
Other liabilities........................... 3,868 14,126 3,327
Premiums in course of collection............ (110,088) (74,558) (165,188)
Reinsurance recoverable on paid losses...... (16,295) (25,363) (9,790)
Other assets................................ (5,195) (39,632) 25,747
Policy acquisition costs deferred............ (73,466) (60,797) (112,900)
Policy acquisition costs amortized........... 38,419 53,096 105,209
Investment (gains) losses.................... (276) (32) (3,283)
Amortization and depreciation................ 3,229 3,562 4,803
Loss on disposition of property, plant, (213) (115) (38)
equipment......................................
--------- ------- ---------
Net cash provided from (used in) operations. 19,855 13,840 (59,155)
Investing Activities:
Investments sold or matured:
Fixed maturities held to maturity--matured, 18,316 -- --
called....................................
Fixed maturities available for sale--sold..... 7,664 -- 283,723
Fixed maturities available for sale--matured, 46,940 43,811 --
called....................................
Equity securities............................. 2,738 -- 2,291
Real estate................................... 554 -- --
Investments acquired:
Fixed maturities available for sale........... (138,680) (37,239) (52,871)
Equity securities............................. (82) (7,326) --
Net cash paid for acquisition(1).............. (35,974) -- (245,811)
Net (increase) in short-term investments...... (17,571) (9,490) (13,610)
Additions to property and equipment........... (2,604) (1,754) (4,182)
Dispositions of property and equipment........ 533 236 289
--------- ------- ---------
Net cash used in investing activities....... (118,166) (11,762) (30,171)
Financing Activities:
Long-term borrowing........................... (28,000) -- --
Issuance of long & short term debt and 113,162 7,116 123,321
deferrable capital securities..................
Issuance of treasury stock.................... -- 563 6,302
Acquisition of treasury stock................. (520) (10,597) (21,164)
Dividends paid................................ (2,512) (2,836) (2,797)
Exercise of stock options..................... 1,614 1,481 828
--------- ------- ---------
Net cash provided from (used in) financing 83,744 (4,273) 106,490
activities.....................................
--------- ------- ---------
Increase (decrease) in cash.................... (14,567) (2,195) 17,164
Cash at beginning year......................... 21,399 6,832 4,637
--------- ------- ---------
Cash at end of year............................ $ 6,832 $ 4,637 $ 21,801
========= ======= =========
- --------
(1) Vesta acquired The Hawaiian Insurance & Guaranty Company, Limited on June
19, 1995 and the operating subsidiaries of Anthem Casualty Insurance Group,
Inc. on June 30, 1997.
See accompanying Notes to Consolidated Financial Statements.
34
VESTA INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation: Vesta Insurance Group, Inc. (Vesta) was
incorporated by Torchmark Corporation on July 9, 1993 and capitalized on July
16, 1993 with a $50 million contribution from Torchmark and the contribution
from Torchmark of all of the outstanding common stock of J. Gordon Gaines,
Inc., Liberty National Reinsurance Company, Ltd, and Vesta Fire Insurance
Corporation and its wholly-owned subsidiaries. On November 18, 1993, the
Company completed an initial public offering of common stock which resulted in
proceeds to the Company of approximately $51 million. At year-end 1997,
Torchmark held approximately 28% of the outstanding common stock of the
Company with the balance publicly traded.
Nature of Operations: The Company is a holding company for a group of
property and casualty insurance companies (the "Vesta Group") that offer
treaty reinsurance and primary insurance on personal and commercial risks. The
lead insurer in the Vesta Group is Vesta Fire Insurance Corporation ("Vesta
Fire"). In both its reinsurance and primary insurance operations, the Company
focuses primarily on property coverages. Gross premiums written by the Company
in 1997 totalled $870.9 million. Gross premiums written in the reinsurance
line were $532.4 million in 1997, substantially all of which were on personal
(including automobile) risks and commercial property risks. Also, property
(including auto physical damage) risks accounted for approximately 86% of the
Company's gross premiums written in all lines in 1997.
The availability and cost of reinsurance and retrocessional coverage may
vary significantly over time and are subject to prevailing market conditions.
Pricing on both assumed and ceded reinsurance weakened slightly due to
increased availability of reinsurance market capacity.
Use of Estimates in the Preparation of the Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. These estimates and
assumptions are particularly important in determining the premiums in course
of collection, reserves for losses and loss adjustment expenses and deferred
policy acquisition costs.
Investments: Investment securities are classified in three categories at
date of purchase and accounted for as follows: (i) Debt securities which are
purchased with the positive intent and ability to hold to maturity are
classified as held-to-maturity and reported at amortized cost; (ii) Debt and
equity securities which are bought and held principally for the purpose of
selling them in the near term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in earnings;
and (iii) Debt and equity securities which are not classified as either held-
to-maturity or trading securities are classified as available for sale and
reported at fair value, with unrealized gains and losses excluded from
earnings and reported in a separate component of stockholders' equity.
Short-term investments are carried at cost and include investments in
certificates of deposit and other interest-bearing time deposits with original
maturities of one year or less. If an investment becomes permanently impaired,
such impairment is treated as a realized loss and the investment is adjusted
to net realizable value.
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains and losses realized on the disposition of investments are recognized as
revenues and are determined on a specific identification basis. Unrealized
gains and losses on equity securities and fixed maturities available for sale,
net of deferred income taxes, are reflected directly in stockholders' equity.
Determination of Fair Values of Financial Instruments: Fair values for cash,
short-term investments, short-term debt, receivables and payables approximate
their carrying value. Fair values for investment securities and long-term debt
are based on quoted market prices where available. Otherwise, fair values are
based on quoted market prices of comparable instruments.
Cash: Cash consists of balances on hand and on deposit in banks and financial
institutions.
Recognition of Premium Revenue: Earned premiums on primary business are
generally recognized as revenue on a pro rata basis over the policy term.
Earned premiums on assumed reinsurance are recognized as revenue when reported
by the cedant. Also, due to the delay in reporting from its reinsurance
cedants, the Company accrues unreported premium revenue on its assumed
reinsurance business based on historical experience. Historically, the Company
has made estimates for its reinsurance reports received subsequent to a period
end on a combined underwriting and accident year basis. These accrued premiums
are necessarily based on estimates and, while management believes that the
accruals are reasonable, the ultimate reported premium may be less than or in
excess of the amounts accrued.
Losses and Loss Adjustment Expenses: The liability for losses and loss
adjustment expenses includes an amount determined from loss reports and
individual cases. It also includes an amount for losses incurred but not
reported which is based on past experience. Such liabilities are necessarily
based on estimates and, while management believes that the amount is adequate,
the ultimate liability may be in excess of or less than the amounts provided.
The methods for making such estimates and for establishing the resulting
liabilities are continually reviewed, and any adjustments are reflected in
earnings currently. These reserves are established on an undiscounted basis and
are reduced for estimates of salvage and subrogation.
Deferred Acquisition Costs: Commissions and other costs of acquiring
insurance that vary with and are primarily related to the production of new and
renewal business are deferred and amortized over the terms of the policies or
reinsurance treaties to which they relate. Anticipated investment income is
considered in determining recoverability of deferred acquisition costs on
certain lines.
Reinsurance: Reinsurance enables an insurance company, by assuming or ceding
reinsurance, to diversify its risk and limit its financial exposure to risk and
catastrophic events. However, reinsurance does not ordinarily relieve the
primary insurer from its obligations to the insured. In the ordinary course of
business, Vesta assumes business from other insurance organizations and also
reinsures certain risks with other insurance organizations.
Income Taxes: Vesta accounts for income taxes using the asset and liability
method under which deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Property and Equipment: Property and equipment is reported at cost less
allowances for depreciation. Depreciation is recorded primarily on the straight
line method over the estimated useful lives of these assets which range from 2
to 5 years for equipment. Ordinary maintenance and repairs are charged to
income as incurred.
Goodwill: The company amortizes goodwill straight-line over a period of 15
years.
Reclassification: Certain amounts in the financial statements presented have
been reclassified from amounts previously reported in order to be comparable
between years. These reclassifications have no effect on previously reported
stockholders' equity or net income during the period involved.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Split: On January 22, 1996 Vesta distributed one share for every two
shares owned by shareholders of record as of January 5, 1996 in the form of a
stock dividend. All prior year share and per share data has been restated to
give effect for the dividend.
Income Per Share: The Company adopted SFAS 128, "Earnings per share,"
effective year end 1997. This standard requires the dual presentation of basic
and diluted earnings per share ("EPS") on the face of the income statement and
a reconciliation of basic EPS to diluted EPS. As required by SFAS 128, all
prior-period EPS data has been restated for comparability. Basic EPS is
computed by dividing income available to common stockholders by the weighted
average common shares outstanding for the period. Weighted average common
shares outstanding for each period are as follows: 1997 18,600,000, 1996
18,860,000, 1995 18,842,000. Diluted EPS is calculated by adding to shares
outstanding the additional net effect of potentially dilutive securities or
contracts which could be exercised or converted into common shares. Weighted
average diluted shares outstanding for each period are as follows: 1997
19,053,000, 1996 19,157,000, 1995 18,970,000.
Recently Issued Accounting Standards: In June 1997, the FASB issued
Financial Accounting Statement No. 130, Reporting Comprehensive Income,
("FAS130") and Financial Accounting Statement No. 131, Disclosures about
Segments of an Enterprise and Related Information, ("FAS131"). FAS130
establishes reporting and presentation standards for comprehensive income and
its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances arising from nonowner sources. FAS130 is effective for both
interim and annual financial statements issued for periods beginning after
December 15, 1997, and also applies to financial statements presented for
prior periods. FAS131 requires that financial and descriptive information be
disclosed for each reportable operating segment based on the management
approach. The management approach focuses on financial information that an
enterprise's decision makers use to assess performance and make decisions
about resource allocation. The statement also prescribes the enterprise-wide
disclosures to be made about products, services, geographic areas and major
customers. FAS131 is effective for annual financial statements issued for
periods beginning after December 15, 1997, and for interim financial
statements in the second year of application. The Company adopted FAS130 and
FAS131 on January 1, 1998.
NOTE B--STATUTORY ACCOUNTING
Insurance subsidiaries of Vesta are required to file statutory financial
statements with state insurance regulatory authorities. Accounting principles
used to prepare these statutory financial statements differ from GAAP. The
tables set forth below reflect the effect of a one-time charge in certain
statutory accounts in 1997 following discussion with the Alabama Department of
Insurance during its current routine examination. Consolidated net income and
stockholders' equity on a statutory basis for the insurance subsidiaries were
as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
Net income..................................... $ 14,745 $ 46,745 $ 1,529
Stockholders' equity........................... 318,997 352,695 355,345
The excess, if any, of stockholders' equity of the insurance subsidiaries on
a GAAP basis over that determined on a statutory basis is not available for
distribution to its stockholders without regulatory approval.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE B--STATUTORY ACCOUNTING (CONTINUED)
A reconciliation of Vesta's insurance subsidiaries' statutory net income to
Vesta's consolidated GAAP net income is as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
Statutory net income................... $ 14,745 $ 46,745 $ 1,529
Premium and expense accrual............ -- -- 6,903
Deferral of acquisition costs.......... 73,466 60,797 112,156
Amortization of acquisition costs...... (38,419) (53,096) (105,210)
Differences in insurance policy (571) 1,104 13,177
liabilities............................
Reinsurance premium and loss accrual... -- -- 44,936 (1)
Deferred income taxes.................. (6,609) (5,499) (10,709)
Income of non-insurance entities....... 3 670 1,592
Investment gains....................... 348 -- 276
Goodwill amortization.................. (263) (484) (4,007)
-------- -------- ---------
GAAP net income........................ $ 42,699 $ 50,237 $ 60,643
======== ======== =========
A reconciliation of Vesta's insurance subsidiaries' statutory stockholders'
equity to Vesta's consolidated GAAP stockholders' equity is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
--------- -------- ---------
Statutory stockholder's equity........ $ 318,997 $352,695 $ 355,345
Differences in insurance policy
liabilities........................... 1,273 2,376 22,456
Deferred acquisition costs............ 67,831 75,532 101,298
Deferred income taxes................. (16,089) (21,463) (28,523)
Nonadmitted assets.................... (1,111) 1,267 297
Goodwill.............................. 7,522 7,339 96,141
Net liabilities of non-insurance
entities.............................. (103,198) (101,915) (230,231)
Reinsurance premium and loss accrual.. -- -- 44,936 (1)
Unrealized gain on investments........ 5,394 2,872 6,184
--------- -------- ---------
GAAP stockholders' equity............. $ 280,619 $318,703 $ 367,903
========= ======== =========
- --------
(1) Effective with its year end 1997 statutory filings, Vesta Fire has revised
its statutory accounting for its assumed reinsurance business to reflect
only accident/calendar year information. The adjustments essentially
reversed, in the form of a one-time charge, the cumulative effect of the
Company's prior practice of making estimates for reinsurance assumed on a
combined underwriting and accident year basis, the accounting practice
consistently applied over prior years.
NOTE C--INVESTMENT OPERATIONS
Investment income is summarized as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
Fixed maturities............................... $13,839 $16,668 $23,876
Equity securities.............................. 108 199 248
Short-term investments......................... 4,566 6,982 12,763
------- ------- -------
18,513 23,849 36,887
Less investment expense........................ (541) (701) (927)
------- ------- -------
Net investment income.......................... $17,972 $23,148 $35,960
======= ======= =======
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE C--INVESTMENT OPERATIONS (CONTINUED)
An analysis of gains (losses) from investments is as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
Realized investment gains (losses) from:
Fixed maturities............................ $ (78) $ (139) $ 3,000
Real estate................................. 300 -- --
Equity securities........................... 54 171 283
------- ------- -------
276 32 3,283
======= ======= =======
Net change in unrealized investment gains
(losses) on:
Fixed maturities available for sale......... $ 7,402 $(2,523) $ 3,772
Equity securities available for sale........ 1,001 1,349 5,542
Applicable tax.............................. (2,940) 411 (3,927)
------- ------- -------
Net change in unrealized gains (losses)...... $ 5,463 $ (763) $ 5,387
======= ======= =======
Net increase (decrease) in fair value
relative to amortized cost of fixed
maturities during the year.................. $12,985 $(2,523) $ 3,772
======= ======= =======
A summary of fixed maturities and equity securities by amortized cost and
estimated fair value at December 31, 1995 and 1996 is as follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
1996: COST GAINS LOSSES VALUE
- ----- --------- ---------- ---------- --------
Fixed maturities available for sale:
United States Government............. $ 37,398 $ 246 $ 69 $ 37,576
States, municipalities and political
subdivisions........................ 155,966 1,705 48 157,623
Foreign governments.................. 2,000 6 0 2,006
Corporate............................ 102,902 1,187 78 104,011
Mortgage-backed securities, GNMA
collateral.......................... 7,760 13 91 7,682
-------- ------- ---- --------
Total Fixed Maturities.............. 306,026 3,157 286 308,898
Equity securities..................... 4,365 3,961 0 8,326
-------- ------- ---- --------
Total portfolio..................... $310,391 $ 7,118 $286 $317,224
======== ======= ==== ========
1997:
- -----
Fixed maturities available for sale:
United States Government............. $ 84,896 $ 1,348 $ 96 $ 86,148
States, municipalities and political
subdivisions........................ 145,567 2,891 0 148,458
Foreign governments.................. 3,643 102 0 3,745
Corporate............................ 194,672 1,844 107 196,409
Mortgage-backed securities, GNMA
collateral.......................... 60,145 743 82 60,806
-------- ------- ---- --------
Total Fixed Maturities.............. 488,923 6,928 285 495,566
Equity securities..................... 10,921 9,503 0 20,424
-------- ------- ---- --------
Total portfolio..................... $499,844 $16,431 $285 $515,990
======== ======= ==== ========
A schedule of fixed maturities held for investment by contractual maturity
at December 31, 1997 is shown below on an amortized cost basis and on a fair
value basis. Actual maturities could differ from contractual maturities due to
call or prepayment provisions.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE C--INVESTMENT OPERATIONS (CONTINUED)
AMORTIZED FAIR
COST VALUE
--------- --------
Due in one year or less................................ $ 99,960 $100,201
Due from one to five years............................. 210,805 213,262
Due from five to ten years............................. 117,617 120,843
Due in ten years or more............................... 396 454
-------- --------
428,778 434,760
Mortgage backed securities, including
GNMA's and GNMA collateral............................ 60,145 60,806
-------- --------
Total.................................................. $488,923 $495,566
======== ========
Proceeds from sales of fixed maturities were $8 million in 1995, $40 million
in 1996 and $284 million in 1997. Gross gains realized on those sales were
$273 thousand in 1995, $23 thousand in 1996 and $3,386 thousand in 1997. Gross
losses on those sales were $351 thousand in 1995, $161 thousand in 1996 and
$329 thousand in 1997.
NOTE D--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- --------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION COST DEPRECIATION
------ ------------ ------- ------------
Building and real estate......... $ -- $ -- $16,518 $ 8,415
Data processing equipment........ 2,610 1,990 7,383 2,557
Furniture and office equipment... 3,099 1,467 3,952 1,776
Other............................ 2,035 367 3,744 756
------ ------ ------- -------
$7,744 $3,824 $31,597 $13,504
====== ====== ======= =======
Depreciation expense on property and equipment used in the business was
$1,037 thousand, $1,415 thousand, and $2,940 thousand in each of the years
1995, 1996, 1997.
NOTE E--DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs for the years ended December 31, 1995 1996
and 1997 are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- -------- ---------
Balance at beginning of year.............. $ 32,784 $ 67,831 $ 75,532
Deferred policy acquisition costs acquired
from Anthem Casualty Group............... -- -- 18,076
Deferred during period.................... 73,466 60,797 112,900
Amortized during period................... (38,419) (53,096) (105,209)
-------- -------- ---------
Balance at end of year.................... $ 67,831 $ 75,532 $ 101,299
======== ======== =========
Commissions comprise the majority of the additions to deferred policy
acquisition costs in each year.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE F--RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The table below presents a reconciliation of beginning and ending loss and
loss adjustment expense reserves for the last three years:
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
-------- --------- --------
Losses and LAE reserves at beginning of $120,980 $ 199,314 $247,224
year........................................
Increases (decreases) in provision for
losses and LAE for claims incurred:
Current year............................... 217,293 291,812 296,325
Prior year................................. 1,798 3,109 (19,363)
Losses and LAE payments for claims incurred:
Current year............................... (92,924) (158,408) (26,754)
Prior year................................. (47,833) (88,603) 22,908
-------- --------- --------
Gross loss and LAE reserves................. $199,314 $ 247,224 $520,340
======== ========= ========
NOTE G--RELATED PARTY TRANSACTIONS
Vesta leases office space from Torchmark Development Corporation, a wholly
owned subsidiary of Torchmark. Rent expense of $494 thousand, $566 thousand
and $718 thousand was charged to operations for the years ended December 31,
1995, 1996 and 1997, respectively, related to this lease agreement.
Waddell & Reed Asset Management Company, a subsidiary of Torchmark
("WRAMCO"), provides investment advice and services to the Company and its
subsidiaries in connection with the management of their respective portfolios
pursuant to an Investment Services Agreement. The Company paid $222 thousand,
$409 thousand and $394 thousand in fees to WRAMCO pursuant to the Investment
Services Agreement in 1995, 1996 and 1997, respectively.
On September 13, 1993, Vesta Fire Insurance Corporation, a wholly owned
subsidiary of the Company ("Vesta Fire"), and Liberty National Life Insurance
Company ("Liberty National"), a wholly owned subsidiary of Torchmark, entered
into a Marketing and Administrative Services Agreement, pursuant to which
Vesta Fire marketed certain of its industrial fire insurance products through
agents of Liberty National. Under this agreement, Liberty National pays to
Vesta Fire an amount equal to all premiums collected by Liberty National after
deducting all expenses incurred by Liberty National which are directly
attributable to the industrial fire insurance products and after deducting a
fee for administrative services. Such fee for 1995, 1996 and 1997 was $2,305
thousand, $1,702 thousand and $1,353 thousand, respectively. This agreement
was terminated effective April 30, 1995, and these products are no longer
marketed through Liberty National agents. However, Liberty National continues
to service the existing business.
NOTE H--COMMITMENTS AND CONTINGENCIES
Litigation: The Company, through its subsidiaries, is routinely a party to
pending or threatened legal proceedings and arbitrations. These proceedings
involve alleged breaches of contract, torts, including bad faith and fraud
claims and miscellaneous other causes of action. These lawsuits may include
claims for punitive damages in addition to other specified relief. Based upon
information presently available, and in light of legal and other defenses
available to the Company and its subsidiaries, management does not consider
liability from any threatened or pending litigation to be material.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE H--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Leases: The Company leases office space for its home office and HIG under
operating lease arrangements. These leases contain various renewal options and
escalation clauses. Rental expense for operating leases was $706 thousand,
$1,014 thousand, and $1,206 thousand, for the years ending December 31, 1995,
1996, and 1997, respectively. Future minimum rental commitments required under
these leases are approximately $1.5 million per year.
Restrictions on Dividends: Vesta relies on dividends from its subsidiaries
to meet its cash requirements and to pay dividends to its stockholders. The
payment of dividends by Vesta's insurance subsidiaries are subject to certain
limitations imposed by the insurance laws of the States of Alabama, Indiana,
Ohio, Hawaii and Texas. The restrictions are generally based on certain levels
of surplus, investment income and operating income, as determined under
statutory accounting practices. Alabama, Indiana, Ohio, Texas and most other
states that regulate Vesta's operations permit dividends in any year which
together with other dividends or distributions made within the preceding 12
months, do not exceed the greater of (i) 10% of statutory surplus as of the
end of the preceding year or (ii) the net income for the preceding year, with
larger dividends payable only upon prior regulatory approval. Hawaii law
limits dividends to the lesser of (i) and (ii) without prior approval. Certain
other extraordinary transactions between an insurance company and its
affiliates, including sales, loans or investments which in any twelve-month
period aggregate at least 3% of its admitted assets or 25% of its statutory
capital and surplus, also are subject to prior approval by the Department of
Insurance. Based upon restrictions presently in effect, the maximum amount
available for payment of dividends to the Company by its insurance
subsidiaries in 1998 without prior approval of regulatory authorities is
approximately $35.5 million.
Risk-Based Capital Requirements. The NAIC adopted risk-based capital
requirements that require insurance companies to calculate and report
information under a risk-based formula which attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. The formula is designed to allow state insurance
regulators to identify potential weakly capitalized companies. Under the
formula, a company determines its "risk-based capital" ("RBC") by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer's
liabilities (including underwriting risks related to the nature and experience
of its insurance business). Risk-based capital rules provide for different
levels of regulatory attention depending on the ratio of a company's total
adjusted capital to its "authorized control level" ("ACL") of RBC. Based on
calculations made by the Company, the risk-based capital levels for each of
the Company's insurance subsidiaries did not trigger regulatory attention.
Concentrations of Credit Risk: Vesta maintains a highly-diversified
investment portfolio with limited concentrations in any given region,
industry, or economic characteristic. At December 31, 1997, the investment
portfolio consisted of securities of the U.S. government or U.S. government
backed securities (13.1%); mortgage backed securities, GNMA collateral (9.3%);
investment grade corporate bonds (29.9%); cash and short-term investments
(21.4%); securities of state and municipal governments (22.6%); securities of
foreign governments (.6%); and corporate common stocks (3.1%). Corporate
equity and debt investments are made in a wide range of industries. All of
Vesta's investments at year-end 1997 were rated investment-grade.
At December 31, 1997, the Company has unsecured reinsurance recoverables
from six reinsurers that are in excess of 2% of statutory surplus, the largest
of which is $34 million.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE I--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
The following table summarizes Vesta's non-cash transactions, which are not
reflected on the Statement of Cash Flow, as required by GAAP:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
--------- -------------
Paid in capital from tax benefit of stock option $ 101 $ 337 $ 2,574
exercises.........................................
Transfer of fixed maturities from held to maturity
to available for sale............................ $121,627 $ -- $ --
The following table summarizes certain amounts paid during the period as
required by GAAP:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
Interest paid.................................. $ 5,253 $ 9,494 $15,113
Income taxes paid.............................. $14,989 $21,500 $22,571
NOTE J--REINSURANCE
Vesta engages in reinsurance ceded transactions as part of its overall
underwriting and risk management strategy. Vesta's reinsurance ceded programs
include coverages which limit the amount of individual claims to a fixed
amount or percentage and which limit the amount of claims related to
catastrophes.
The effect on premiums earned and losses and loss adjustment expenses
incurred of all reinsurance ceded transactions are as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
Reinsurance ceded:
Premiums ceded................................. $117,654 $195,202 $300,968
Losses and loss adjustment expenses recovered
and recoverable............................... 90,522 134,756 361,774
The amounts deducted from reserves for unpaid losses and loss adjustment
expenses and unearned premiums that Vesta would remain liable for should
reinsuring companies be unable to meet their obligations are as follows:
YEAR ENDED DECEMBER 31,
------------------------
1996 1997
----------- ------------
Losses and loss adjustment expense............... $ 60,343 $ 215,780
Unearned premiums................................ 55,477 94,253
Vesta engages in assumed reinsurance transactions as part of its overall
business strategy. The effect on premiums earned and losses and loss
adjustment expenses of all assumed reinsurance transactions, including
involuntary pools, are as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
Premiums assumed................................ $359,546 $545,290 $535,595
Losses and loss adjustment expenses assumed..... 201,152 331,972 331,497
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE J--REINSURANCE (CONTINUED)
The effect of reinsurance on premiums written and earned is as follows:
1995 1996 1997
-------------------- -------------------- ------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
--------- --------- --------- --------- -------- --------
Direct.................. $ 163,005 $ 139,910 $ 153,413 $ 161,824 $294,950 $287,720
Assumed................. 423,777 359,546 616,173 545,290 575,959 535,595
Ceded................... (127,554) (117,654) (228,954) (195,202) (339,745) (300,968)
--------- --------- --------- --------- -------- --------
Net premiums.......... $ 459,228 $ 381,802 $ 540,632 $ 511,912 $531,164 $522,347
========= ========= ========= ========= ======== ========
NOTE K--INCOME TAXES
Income tax expense for the years ended December, 1995, 1996 and 1997 was
allocated as follows:
1995 1996 1997
------- ------- -------
Operating income..................................... $21,133 $24,982 $35,420
Deferrable Capital Securities........................ -- -- (2,719)
Stockholder's equity, for unrealized gains (losses).. 2,941 (413) 3,927
Stockholder's equity, for compensation expense for
tax purposes in excess of amounts recognized for
financial reporting purposes........................ 101 337 (2,574)
------- ------- -------
$24,175 $24,906 $34,054
======= ======= =======
Income tax expense attributable to income from operations consists of:
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
Current tax expense................................ $13,406 $19,483 $ 4,012
Deferred tax expense............................... 7,727 5,499 31,408
------- ------- -------
Total............................................. $21,133 $24,982 $35,420
======= ======= =======
Vesta's effective income tax rate differed from the statutory income tax
rate as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
AMOUNT % AMOUNT % AMOUNT %
------- --- ------- --- ------- ---
Statutory federal income tax rate. $22,433 35% $26,496 35% $35,930 35%
Increases (reductions) in tax
resulting from:
Tax exempt investment income..... (1,974) (3) (2,240) (3) (2,019) (2)
State income tax................. -- -- -- -- 337 --
Other............................ 674 1 726 1 1,712 2
------- --- ------- --- ------- ---
$21,133 33% $24,982 33% $35,420 35%
======= === ======= === ======= ===
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE K--INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities included in
other liabilities at December 31, 1996 and 1997 are presented below:
1996 1997
------- -------
Deferred tax assets:
Unearned and advance premiums............................. $12,099 $17,023
Discounted unpaid losses.................................. 4,325 9,795
------- -------
Total gross deferred tax assets............................ $16,424 $26,818
======= =======
Deferred tax liabilities:
Deferred acquisition costs................................ $26,436 $35,455
Contingent commissions.................................... 8,010 6,008
Unrealized gains.......................................... 2,390 6,317
Reinsurance recoverables.................................. -- 23,888
Fixed assets.............................................. 100 1,470
Contingent receivables.................................... -- 2,467
Goodwill.................................................. -- 2,252
Other..................................................... 951 963
------- -------
Total gross deferred tax liabilities....................... $37,887 $78,820
------- -------
Net deferred tax liability................................. $21,463 $52,002
======= =======
A valuation allowance for deferred tax assets, as of December 31, 1996 and
1997, was not necessary.
NOTE L--RETIREMENT PLANS
Vesta has a defined contribution retirement and savings plan and a
supplemental executive retirement plan. These plans are fully funded at year-
end 1997. Vesta's total cost for benefits under these plans since the Offering
date was $319,337 for 1995, $348,125 for 1996 and $721,693 for 1997.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE M--SEGMENT INFORMATION
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1996 1997
-------- ---------- ----------
Revenues
Reinsurance Operations
Net premiums earned......................... $290,657 $ 415,028 $ 332,333
Net investment income....................... 13,682 18,767 23,014
Investment gains ........................... 210 26 2,101
-------- ---------- ----------
Total reinsurance.......................... 304,549 433,821 357,448
Primary insurance operations
Net premiums earned......................... 91,145 96,884 190,014
Net investment income....................... 4,290 4,381 12,946
Investment gains ........................... 66 6 1,182
-------- ---------- ----------
Total primary.............................. 95,501 101,271 204,142
Other operations revenues.................... 216 188 2,094
-------- ---------- ----------
Total revenues............................. $400,266 $ 535,280 $ 563,684
======== ========== ==========
Total pretax income from operations
Reinsurance Operations
Underwriting gain .......................... $ 35,786 $ 55,712 $ 50,345
Net investment income....................... 13,682 18,767 23,014
Investment gains ........................... 210 26 2,101
-------- ---------- ----------
Total reinsurance.......................... 49,678 74,505 75,460
Primary insurance operations
Underwriting gain .......................... 15,119 6,682 24,297
Net investment income....................... 4,290 4,381 12,946
Investment gains ........................... 66 6 1,182
Goodwill.................................... (264) (484) (4,007)
-------- ---------- ----------
Total primary.............................. 19,211 10,585 34,418
Other operations
Other income................................ 216 188 2,094
Interest expense............................ (5,273) (10,059) (10,860)
-------- ---------- ----------
Total other (expense)...................... (5,057) (9,871) (8,765)
-------- ---------- ----------
Total pretax income from operations........ $ 63,832 $ 75,219 $ 101,113
======== ========== ==========
Total identifiable assets
Reinsurance operations...................... $614,708 $ 815,052 $1,049,701
Primary operations.......................... 202,916 197,529 599,771
-------- ---------- ----------
Total identifiable assets.................. $817,624 $1,013,581 $1,649,472
======== ========== ==========
NOTE N--DEBT
On July 19, 1995, the Company issued $100 million of its 8.75% Senior
Debentures due July 15, 2025. The Debentures are not subject to redemption or
any sinking fund prior to maturity. The Debentures are unsecured and rank on
parity with all of its other unsecured and unsurbordinated indebtedness. The
Debentures contain covenants that limit the ability of the Company or its
subsidiaries to issue, sell or otherwise dispose of shares of voting common
stock of any Restricted Subsidiary and limit the ability of the Company or its
subsidiaries to pledge the shares of capital stock of any subsidiary. The
Debentures also place certain limitations on the Company's ability to
consolidate or merge with or sell its assets substantially as an entirety. The
Company used the
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE N--DEBT (CONTINUED)
proceeds from the sale to repay a $28,000,000 loan from a Torchmark affiliate,
and to increase the capital and surplus of its principal insurance subsidiary,
Vesta Fire Insurance Corporation.
On January 31, 1997, Vesta Capital Trust I, a Delaware business trust
controlled by the Company, sold $100 million of its 8.525% Deferrable Capital
Securities. These securities have a 30 year maturity and are not redeemable
except in certain limited circumstances. These securities were sold in a
private placement transaction to qualified institutional buyers and were not
registered under Securities Act of 1933 pursuant to an exemption from
registration provided by Rule 144A promulgated thereunder. A portion of the
proceeds from the sale of these securities were used to repay indebtedness
under the Company's existing lines of credit and for general corporate
purposes.
In April of 1997, Vesta increased the size of its line of credit to $200
million from $100 million. The interest charge on the funds borrowed is either
(i) the London Interbank Rate plus 0.25% or (ii) the higher of the prime rate
and the Federal Funds rate plus 0.5%, at the Company's discretion. At December
31, 1997 the London Interbank three month rate was 5.91% and the Federal Funds
rate was 5.56%.There was a balance of $45 million under this line of credit at
December 31, 1997. The line of credit contains covenants which (1) restricts
the Company from incurring consolidated indebtedness greater than 42.5% of the
sum of the Company's consolidated indebtedness and consolidated net worth, (2)
requires the Company to maintain consolidated net worth to be equal to or
greater than $350,000,000 plus 50% of the aggregate of consolidated net income
for each fiscal quarter ending after September 30, 1996 up to and including
the fiscal quarter then ending minus the aggregate amount of all dividends
paid with respect to the Company's equity securities at any time after
September 30, 1996, (3) requires the Company to maintain a ratio of
consolidated income before interest and taxes to consolidated interest expense
of 3.0 to 1.0, and (4) requires the Company to maintain total adjusted capital
(within the meaning of Risk-Based Capital for Insurers Model Act ("Model
Act")) of Vesta Fire to be equal to or greater than 150% of the applicable
"Company Action Level RBC" (within the meaning of the model act).
NOTE O--STOCK OPTIONS
During 1995, the Financial Accounting Standards Board issued Financial
Accounting Statement No. 123, Accounting for Stock-Based Compensation ("FAS
123"). The Statement defines a fair value based method of accounting for an
employee stock option. It also allows an entity to continue using the
intrinsic valued based accounting method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company
has continued to use this method to account for its stock options. However,
FAS 123 requires entities electing to remain with the intrinsic method of
accounting to provide pro forma disclosures of net income and earnings per
share as if the fair value based method of accounting had been applied as well
as other disclosures about the Company's stock-based employee compensation
plans. Information about the Company's stock option plans and the related
required disclosures follow.
Prior to completion of the Company's initial public offering, the Company's
stockholders approved the Vesta Insurance Group, Inc. Long Term Incentive Plan
("Plan"), which provided for grants to the Company's executive officers of
restricted stock, stock options, stock appreciation rights, and deferred stock
awards, and in certain instances grants of options to directors. The Company's
stockholders approved certain amendments to the Plan effective May 16, 1995,
including an amendment to increase the shares of the Company's common stock
available for awards under the Plan from 1,091,400 shares to 2,221,998 shares
and an amendment to delete the provision for the grant of options to non-
employee directors. The Company's stockholders also approved the Vesta
Insurance Group, Inc.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE O--STOCK OPTIONS (CONTINUED)
Non-Employee Director Stock Plan ("Director Plan") effective May 16, 1995,
which provides for grants to the Company's non-employee directors of stock
options and restricted stock.
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997, respectively; risk-free interest rates of 6.37
percent and 5.75 percent; dividend yields of .37 and .27 percent; volatility
factor of the expected market price of the Company's common stock of 34.0 and
38.75; and a weighted-average expected life of the options of ten years for
both years.
The Company's actual and pro forma information follows (in thousands except
for earnings per share information):
YEAR ENDED
DECEMBER 31,
---------------
1996 1997
------- -------
NET INCOME:
As reported............................................. $50,237 $60,643
Pro forma............................................... 47,444 57,359
BASIC NET INCOME PER COMMON SHARE:
As reported............................................. $ 2.66 $ 3.26
Pro forma............................................... 2.52 3.08
DILUTED NET INCOME PER COMMON SHARE:
As reported............................................. $ 2.62 $ 3.18
Pro forma............................................... 2.48 3.01
The following summary sets forth activity under the Plan for the years ended
December 31:
1995 1996 1997
------------------- ------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
Outstanding--beginning
of the year............ 828,896 $16.06 1,055,699 $18.37 1,022,872 $20.38
Granted................. 414,409 21.98 129,394 31.93 135,085 51.64
Exercised............... 42,750 15.63 55,667 15.51 220,506 17.15
Forfeited............... 144,856 16.31 106,554 16.99 -- --
--------- ------ --------- ------ --------- ------
Outstanding--end of the
year................... 1,055,699 $18.37 1,022,872 $20.38 937,451 $25.65
========= ====== ========= ====== ========= ======
Weighted-average fair
value of options
granted during the
year................... $ 28.37 $ 25.85 $ 36.89
Of the 937,451 outstanding options at December 31, 1997, 549,087 were
exercisable with the remaining having varying vesting periods. Exercise prices
for options outstanding as of December 31, 1997 ranged from $14.88 to $55.44.
Unexercised options with exercise prices of less than $25.00 for 589,852
shares had a weighted average contractual life of 6.9 years and a weighted
average exercise price of $18.13 while unexercised options with exercise
prices greater than $25.00 for 347,599 shares had a weighted average
contractual life of 9.2 years and a weighted average exercise price of $38.42.
In 1993, the Company entered into restricted stock agreements under which
Vesta granted 153,300 shares of common stock at $10.26 per share to officers
of the Company in exchange for
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE O--STOCK OPTIONS (CONTINUED)
promissory notes. In 1994, an additional 60,000 shares of Common Stock at
$18.92 per share were issued to an officer of the Company under a restricted
stock agreement in exchange for a promissory note. The common stock is being
held by the Company as security for repayment of the notes. A portion of the
shares will be released to the officers annually as they repay the promissory
notes. The Company intends to pay cash bonuses each year in amounts sufficient
to reduce the notes by the amount of the purchase price for the shares which
are earned in that year. During 1995 the company acquired 31,192 shares of its
common stock with respect to previously granted awards of restricted stock in
exchange for release of indebtedness of $320 thousand. The balance of the
notes at December 31, 1995 was $3,162 thousand. During 1996 the Company
acquired 19,564 shares of its common stock with respect to previously granted
awards of restricted stock in exchange for release of indebtedness of
$169 thousand. The balance of the notes at December 31, 1996 was $3,207
thousand. During 1997 the Company did not acquire any shares of its common
stock with respect to previously granted awards of restricted stock. The
balance of the notes at December 31, 1997 was $3,891 thousand. The promissory
notes and the unearned compensation are shown as deductions from stockholders
equity.
In 1995, the Company entered into restricted stock agreements under which
the Company granted 23,333 shares of restricted common stock to certain
officers of the Company. The Company entered into restricted stock agreements
under which the Company granted 23,144 and 20,915 shares of restricted common
stock to certain employees of the Company and 5,664 and 9,632 shares of
restricted common stock to certain directors of the Company in 1996 and 1997,
respectively. The common stock with respect to all awards of restricted stock
is being held by the Company until the restrictions lapse.
NOTE P--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data, in thousands except
per share data:
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
Gross premiums written............ $203,831 $203,043 $244,513 $219,522
Net premiums written.............. 131,316 137,186 114,405 148,257
Premiums earned................... 125,620 133,717 153,287 109,723
Net investment income............. 6,147 7,178 10,363 12,251
Operating costs and expenses...... 108,850 112,673 134,372 91,788
Net income........................ 12,558 15,088 19,460 13,537
-------- -------- -------- --------
Per Share Data:
Net income........................ 0.68 0.81 1.04 0.73
Stockholders' equity per share.... 17.72 18.62 19.79 19.94
Cash dividends per share.......... 0.0375 0.0375 0.0375 0.0375
-------- -------- -------- --------
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1996 1996
--------- -------- ------------- ------------
Gross premiums written............ $194,460 $185,567 $173,884 $215,675
Net premiums written.............. 152,509 165,494 67,568 155,061
Premiums earned................... 145,136 167,135 88,344 111,297
Net investment income............. 4,946 6,057 6,102 6,040
Operating costs and expenses...... 131,965 147,750 71,748 98,055
Net income........................ 10,509 15,141 13,412 11,174
-------- -------- -------- --------
Per Share Data:
Net income........................ 0.56 0.80 0.71 0.60
Stockholders' equity per share.... 15.28 16.01 16.72 17.16
Cash dividends per share.......... 0.0375 0.0375 0.0375 0.0375
-------- -------- -------- --------
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE Q--BUSINESS ACQUISITION
After the close of business on June 30, 1997, the Company completed its
acquisition of all the issued and outstanding stock of the operating
subsidiaries of Anthem Casualty Insurance Group, Inc., each of which are
property and casualty insurance companies headquartered in Ohio, for $260.9
million. The acquired subsidiaries had $648 million of assets and
approximately $217 million of stockholders' equity at June 30, 1997. The
acquisition was accounted for as a purchase and the results of operations
since the acquisition date were consolidated. Goodwill from the transaction is
being amortized straight line over 15 years.
A summary of net assets acquired follows:
Assets acquired:
Investments....................................................... $419,271
Cash.............................................................. 15,069
Goodwill.......................................................... 83,341
Other Assets...................................................... 166,944
--------
Total............................................................ 684,625
Liabilities Assumed
Loss and loss adjustment expenses................................. 300,315
Unearned premiums................................................. 98,378
Other............................................................. 25,052
--------
Total............................................................ $423,745
Purchase price.................................................... $238,750
Acquisition expenses.............................................. 22,130
Less cash acquired................................................ (15,069)
Aggregate purchase price.......................................... 245,811
The above table represents the purchase price plus acquisition costs through
December 31, 1997.
The table below presents supplemental pro forma information for 1996 and
1997 as if the Anthem acquisition were made at January 1, 1996, based on
estimates and assumptions considered appropriate:
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------
1997 1996
--------- ---------
Revenues.................................................. 714,332 857,434
Net income................................................ 65,515 55,775
Basic net income per common share......................... 3.52 2.96
Diluted net income per common share....................... 3.44 2.91
NOTE R--NET INCOME PER COMMON SHARE
During 1996, the FASB issued Financial Accounting Statement No. 128,
Earnings per Share, ("FAS128"). FAS128 specifies the computation, presentation
and disclosure requirements for earnings per share, replacing the presentation
of primary earnings per share with the presentation of basic earnings per
share. For entities with complex capital structures, the presentation of fully
diluted earnings per share is replaced with diluted earnings per share. FAS128
is effective for both interim and annual financial statements issued for
periods ending after December 15, 1997, with earlier adoption prohibited. The
Company adopted FAS128 on December 31, 1997, and, as required, all periods
presented in the consolidated financial statements have been restated to
reflect the adoption of the statement.
50
Presented below is a summary of the components used to calculate basic and
diluted net income per share for the year ended December 31, 1997, 1996 and
1995:
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
BASIC NET INCOME PER SHARE:
Weighted average common shares outstanding............ 18,600 18,860 18,842
Net income............................................ $60,643 $50,237 $42,699
Basic net income per share............................ $ 3.26 $ 2.66 $ 2.27
DILUTED NET INCOME PER SHARE:
Weighted average common shares outstanding............ 18,600 18,860 18,842
Net effect of the assumed exercise of stock options
and nonvested restricted stock--based on the treasury
stock method using average market price for the year. 453 297 128
------- ------- -------
Total weighted average common shares and common stock
equivalents outstanding.............................. 19,053 19,157 18,970
Net income............................................ $60,643 $50,237 $42,699
Diluted net income per share.......................... $ 3.18 $ 2.62 $ 2.25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or
practices or financial statement disclosure have been reported on a Form 8-K
within the twenty-four months prior to the date of the most recent financial
statements.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference from the
sections entitled "Election of Directors," "Profiles of Directors and
Nominees," "Executive Officers" and "Compensation and Other Transactions with
Executive Officers and Directors" in the Proxy Statement for the Annual
Meeting of Stockholders to be held May 19, 1998 (the "Proxy Statement"), which
is to be filed with the Securities and Exchange Commission.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the
section entitled "Compensation and Other Transactions with Executive Officers
and Directors" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)Security ownership of certain beneficial owners:
Information required by this item is incorporated by reference from the
section entitled "Principal Stockholders" in the Proxy Statement.
(b)Security ownership of management:
Information required by this item is incorporated by reference from the
section entitled "Stock Ownership" in the Proxy Statement.
(c)Changes in control:
The Company knows of no arrangements, including any pledges by any person
of its securities, the operation of which may at a subsequent date result
in a change of control.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the
section entitled "Compensation Committee Interlocks and Insider Participation;
Other Transactions" in the Proxy Statement.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index of documents filed as a part of this report:
Page of
this
Report
-------
(1) Financial Statements:
Vesta Insurance Group, Inc.
Independent Auditors' Report......................................... 30
Consolidated Balance Sheets at December 31, 1996 and 1997............ 31
Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 1997........................... 32
Consolidated Statements of Stockholders' Equity for each of the years
in the three-year
period ended December 31, 1997...................................... 33
Consolidated Statements of Cash Flow for each of the years in the
three-year period ended December 31, 1997........................... 34
Notes to Consolidated Financial Statements........................... 35
(2) Schedules Supporting Financial Statements for the three years
ended December 31, 1997:
II.Condensed Financial Information of Registrant (Parent Company)..... 55
III.Supplemental Insurance Information (Consolidated)................. 58
IV.Reinsurance (Consolidated)......................................... 60
V.Valuation and Qualifying Accounts (Consolidated).................... 61
Schedules not referred to have been omitted as inapplicable or not required by
Regulation S-X.
(3) Exhibits
Exhibits are listed in the index of Exhibits at page 47.
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the
last quarter of the period covered by this report.
52
EXHIBITS INDEX
Exhibit
No. Description
------- -----------
3.1 Restated Certificate of Incorporation of the Company, dated
September 1, 1993 (filed as an exhibit to Amendment No. 1 to
the Registration Statement on Form S-1 (Registration No. 33-
68114) of Vesta Insurance Group, Inc., filed on October 18,
1993 and incorporated herein by reference (File No. 1-12338))
3.2 By-Laws of the Company (Amended and Restated as of October 1,
1993) (filed as an exhibit to Amendment No. 1 to the Registra-
tion Statement on Form S-1 (Registration No. 33-68114) of
Vesta Insurance Group, Inc., filed on October 18, 1993 and in-
corporated herein by reference (File No. 1-12338))
4.1 Indenture between the Company and Southtrust Bank of Alabama,
National Association, dated as of July 19, 1995 (filed as an
exhibit to the Company's Form 10-K for the year ended December
31, 1995, filed on March 28, 1996 and incorporated herein by
reference (File No. 1-12338))
4.2 Supplemental Indenture between the Company and Southtrust Bank
of Alabama, National Association, dated July 19, 1995 (filed
as an exhibit to the Company's Form 10-K for the year ended
December 31, 1995, filed on March 28, 1996 and incorporated
herein by reference (File No. 1-12338))
4.3 Indenture dated as of January 31, 1997, between the Company
and First Union National Bank of North Carolina, as trustee
(filed as an exhibit to the Company's Form 10-Q for the quar-
ter ended March 31, 1997, filed on May 13, 1997 and incorpo-
rated herein by reference (File No. 1-12338))
4.4 Amended and Restated Declaration of Trust, dated as of January
31, 1997, of Vesta Capital Trust I (filed as an exhibit to the
Company's Form 10-Q for the quarter ended March 31, 1997,
filed on May 13, 1997 and incorporated herein by reference
(File No. 1-12338))
4.5 Capital Securities Guarantee Agreement, dated as of January
31, 1997, between the Company and First Union National Bank of
North Carolina, as trustee (filed as an exhibit to the
Company's Form 10-Q for the quarter ended March 31, 1997,
filed on May 13, 1997 and incorporated by reference (File No.
1-12338))
10.1 Separation and Public Offering Agreement between Torchmark
Corporation and the Company dated September 13, 1993 (filed as
an exhibit to the Company's Form 10-K for the year ended De-
cember 31, 1993, filed on March 28, 1994 and incorporated
herein by reference (File No. 1-2338))
10.2 Marketing and Administrative Services Agreement between Lib-
erty National Fire Insurance Company, Liberty National Insur-
ance Corporation and Liberty National Life Insurance Company
dated September 13, 1993 (filed as an exhibit to the Company's
Form 10-K for the year ended December 31, 1993, filed on March
28, 1994 and incorporated herein by reference (File No. 1-
2338))
10.3 Investment Services Agreement between Waddell & Reed Asset
Management Company and the Company (filed as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-68114) of Vesta Insurance Group, Inc.,
filed on October 18, 1993 and incorporated herein by reference
(File No. 1-12338)) dated September 13, 1993.
10.5 Management Agreement between J. Gordon Gaines, Inc., Liberty
National Fire Insurance Company, Sheffield Insurance Corpora-
tion, Liberty National Insurance Corporation and Vesta Insur-
ance Corporation dated November 15, 1994 (filed as an exhibit
to the Company's Form 10-K for the year ended December 31,
1993, filed on March 28, 1994 and incorporated herein by ref-
erence (File No. 1-2338))
53
Exhibit
No. Description
------- -----------
10.6 Form of Restricted Stock Agreement (filed as an exhibit to the
Registration Statement on Form S-1 (Registration No. 33-68114)
of Vesta Insurance Group, Inc., filed on August 31, 1993 and
incorporated herein by reference (File No. 1-12338))
10.7* The Company's Long Term Incentive Plan as amended effective as
of May 16, 1995 (filed as an exhibit to the Company's Form 10Q
for the quarter ended June 30, 1995, filed on August 14, 1995
and incorporated herein by reference (File No. 1-12338))
10.8* Form of Non-Qualified Stock Option Agreement entered into by
and between the Company and certain of its executive officers
and directors (filed as an exhibit to the Company's Form 10-K
for the year ended December 31, 1995, filed on March 28, 1996
and incorporated herein by reference (File No. 1-12338))
10.9* Cash Bonus Plan of the Company (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1993,
filed on March 28, 1994 and incorporated herein by reference
(File No. 1-2338))
10.10* J. Gordon Gaines, Inc. Post Retirement Benefits Plan (filed as
an exhibit to the Company's Form 10-K for the year ended De-
cember 31, 1994, filed on March 29, 1995 and incorporated
herein by reference (File No. 1-12338))
10.11* J. Gordon Gaines, Inc. Retirement Savings Plan (filed as an
exhibit to the Company's Form 10-K for the year ended December
31, 1994, filed on March 29, 1995 and incorporated herein by
reference (File No. 1-12338))
10.12* The Company's Non-Employee Director Stock Plan (filed as an
exhibit to the Company's
10-Q for the quarter ended June 30, 1995, filed on August 14,
1995 and incorporated herein by reference (File No. 1-12338))
10.13 Office Lease between the Company and Torchmark Development
Corporation, dated as of April 20, 1992 (filed as an exhibit
to the Company's Form 10-K for the year ended December 31,
1993, filed on March 28, 1994 and incorporated herein by ref-
erence (File No. 1-12338))
10.14 Agency Agreement between Liberty National Fire Insurance Com-
pany, Vesta Insurance Corporation, Sheffield Insurance Corpo-
ration, and Overby-Seawell Company (filed as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1
(Registration No. 33-68114) of Vesta Insurance Group, Inc.,
filed on October 18, 1993 and incorporated herein by reference
(File No. 1-12338))
10.15 Commercial/Personal Property Risk Excess Reinsurance Con-
tracts, dated July 1, 1993,
constituting the Company's Direct Per Risk Treaty Program, be-
tween Vesta Fire Insurance Corporation and its subsidiary and
affiliated companies and various reinsurers (filed as an ex-
hibit to Amendment No. 1 to the Registration Statement on Form
S-1 (Registration No. 33-68114) of Vesta Insurance Group,
Inc., filed on October 18, 1993 and incorporated herein by
reference (File No. 1-12338)) Renewed July 1, 1997.
10.16 Catastrophe Reinsurance Contracts, dated July 1, 1995, consti-
tuting the Company's Direct Property Catastrophe Program, be-
tween Vesta Fire Insurance Corporation and its subsidiary and
affiliated companies and various reinsurers (filed as an ex-
hibit to the Company's Form 10-K for the year ended December
31, 1994, filed on March 29, 1995 and incorporated herein by
reference (File No. 1-12338)). Renewed July 1, 1997.
10.17 Specific Regional Catastrophe Excess Contracts, dated January
1, 1996, constituting the Company's Regional Property Catas-
trophe Program, between Vesta Fire Insurance Corporation and
various reinsurers (filed as an exhibit to the Company's Form
10-K for the year ended December 31, 1995, filed on March 28,
1996 and incorporated herein by reference (File No. 1-12338)).
Renewed January 1, 1997.
54
Exhibit
No. Description
------- -----------
10.18 Casualty Excess of Loss Reinsurance Agreements, dated January
1, 1994, constituting the Company's Casualty Excess of Loss
Reinsurance Program, between Vesta Fire Insurance Corporation,
Vesta Insurance Corporation, Sheffield Insurance Corporation,
Vesta Lloyds Insurance Company and various reinsurers (filed
as an exhibit to the Company's Form 10-K for the year ended
December 31, 1993, filed on March 28, 1994 and incorporated
herein by reference (File No. 1-12338)). Renewed January 1,
1997.
10.19 Amendment to Catastrophe Reinsurance Contracts, dated July 1,
1995, constituting the Company's Direct Property Catastrophe
Program, between Vesta Fire Insurance Corporation, Vesta
Insurance Corporation, Sheffield Insurance Corporation, Vesta
Lloyds Insurance Company, Hawaiian Insurance & Guaranty
Company, Limited and various reinsurers. (Filed as an exhibit
to the Company's Form 10-Q for the quarter ended September 30,
1995, filed on November 14, 1995 and incorporated herein by
reference (File No. 1-12338)). Renewed July 1, 1997.
10.20 Amendment to Catastrophe Reinsurance Contracts, dated January
1, 1996, constituting the Company's Direct Property
Catastrophe Program, between Vesta Fire Insurance Corporation,
Vesta Insurance Corporation, Sheffield Insurance Corporation,
Vesta Lloyds Insurance Company, Hawaiian Insurance & Guaranty
Company, Limited and various reinsurers (filed as an exhibit
to the Company's Form 10-K for the year ended December 31,
1995, filed on March 28, 1996 and incorporated herein by
reference (File No. 1-12338)). Renewed January 1, 1997.
10.21 Amended and Restated Credit Agreement between Vesta Insurance
Group, Inc. and Southtrust Bank of Alabama, N.A., ABN Amro
Bank B.V., Bank of Tokyo-Mitsubishi Trust Company, The First
National Bank of Chicago, Wachovia Bank of Georgia, N.A. and
First Union National Bank of North Carolina (as agent), dated
April 8, 1997 (filed as an exhibit to the Company's Form 10-Q
for the quarter ended March 31, 1997, filed on May 13, 1997,
and incorporated herein by reference (File No. 1-12338))
10.22 Quota Share Reinsurance Contract, dated July 1, 1996, covering
all lines of business written by Vesta Fire Insurance
Corporation and its subsidiary and affiliated companies and
various reinsurers (filed as an exhibit to the Company's Form
10-Q for the quarter ended September 30, 1996, filed on
November 14, 1996 and incorporated herein by reference (File
No. 1-12338)). Renewed July 1, 1997.
10.23 Stock Purchase Agreement between Anthem Casualty Insurance
Group, Inc., and Vesta Insurance Group, Inc., dated April 23,
1997 (filed as an exhibit to the Company's Form
10-Q for the year ended September 30, 1997, filed on November
13, 1997 and incorporated herein by reference (File No. 1-
12338))
10.24 Business Transfer and Management Agreement between Vesta Fire
Insurance Corporation and its affiliated companies and CIGNA
Property and Casualty Insurance Company and its affiliated
companies, dated January 28, 1998 (filed as an exhibit to the
Company's Form 10-K for the year ended December 31, 1997,
filed on March 27, 1998 (File No. 1-12338))
11 Computation of Net Income Per Common Share.
21 List of Subsidiaries of the Company.
23 Consent of KPMG Peat Marwick LLP.
- --------
*These are the Company's compensatory plans.
55
VESTA INSURANCE GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
AT DECEMBER 31,
------------------
1996 1997
-------- --------
Assets
Investment in affiliates................................. $433,632 $618,144
Short-term investments................................... 6,980 7,015
-------- --------
Total investments...................................... 440,612 625,159
Cash..................................................... 5 8
Other assets............................................. 2 9,507
-------- --------
Total assets........................................... $440,619 $634,674
======== ========
Liabilities
Other liabilities........................................ $ 1,637 $ 20,353
Short term debt.......................................... 22,000 45,000
Long term debt........................................... 98,279 201,418
-------- --------
Total liabilities...................................... 121,916 266,771
Stockholders' equity
Preferred stock, 5,000,000 shares authorized, none -- --
issued.....................................................
Common stock, $.01 par value, 32,000,000 shares
authorized,
issued: 1995--18,878,190 shares; 1996--18,970,695
shares................................................ 190 190
Additional paid-in capital............................... 161,037 162,550
Unrealized investment gains, net of applicable taxes..... 4,442 9,829
Retained earnings........................................ 166,795 224,641
Receivable from issuance of restricted stock............. (3,207) (3,891)
Treasury stock........................................... (10,554) (25,416)
-------- --------
Total stockholders' equity............................. 318,703 367,903
-------- --------
Total liabilities and stockholders' equity............. $440,619 $634,674
======== ========
57
VESTA INSURANCE GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
Revenues:
Net investment income.................... $ 385 $ 213 $ (5,224)
---------- ---------- -----------
Total revenues......................... 385 213 (5,224)
Expenses:
Interest expenses........................ 5,273 10,059 10,901
Operating expenses....................... 1,918 (6,745) (10,327)
---------- ---------- -----------
Total expenses......................... 7,191 3,314 574
---------- ---------- -----------
Net income before income tax and equity
in earnings of affiliates................ (6,806) (3,101) (5,757)
Income tax................................ 2,356 1,330 1,932
---------- ---------- -----------
Income before equity in earnings of (4,450) (1,771) (3,866)
affiliates................................
Equity in earnings of affiliates.......... 47,149 52,008 64,509
---------- ---------- -----------
Net income................................ $42,699 $ 50,237 $ 60,643
========== ========== ===========
58
VESTA INSURANCE GROUP, INC. (PARENT COMPANY)
SCHEDULE II--CONDENSED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
---------- ---------- -----------
Cash provided from operations............. $6,131 $ 11,181 $ 45,345
Cash used in investing activities:
Contribution to investments in (90,000) -- (154,616)
affiliates................................
Net (increase) decrease in short-term 195 (6,980) (35)
investments...............................
---------- ---------- -----------
Cash used in investing activities......... (83,674) 4,201 (109,306)
Cash provided from financing activities:
Dividends paid........................... (2,512) (2,836) (2,797)
Acquisition of treasury stock............ (520) (10,034) (14,862)
Capital Contributions.................... 1,614 1,481 828
Issuance of debt and deferrable capital 113,162 7,116 126,139
securities................................
Retirement of debt....................... (28,000) -- --
---------- ---------- -----------
Cash provided from financing activities... 83,744 (4,273) 109,308
Net increase (decrease) in cash........... 70 (72) 2
Cash balance at beginning of period....... 7 77 5
---------- ---------- -----------
Cash balance at end of period............. $ 77 $ 5 $ 7
========== ========== ===========
59
VESTA INSURANCE GROUP, INC.
SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION (CONSOLIDATED)
AS OF DECEMBER 31, 1996 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
RESERVES FOR
DEFERRED UNPAID CLAIMS
POLICY AND CLAIM
ACQUISITION ADJUSTMENT UNEARNED
COSTS EXPENSES PREMIUMS
----------- ------------- --------
As of December 31, 1996:
Reinsurance................................ $ 56,232 $203,913 $170,798
Primary.................................... 19,300 43,311 57,527
-------- -------- --------
$ 75,532 $247,224 $228,325
======== ======== ========
As of December 31, 1997:
Reinsurance................................ $ 65,064 $157,164 $211,684
Primary.................................... 36,235 363,176 153,368
-------- -------- --------
$101,299 $520,340 $365,052
======== ======== ========
60
VESTA INSURANCE GROUP, INC.
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION--(continued) (CONSOLIDATED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (DOLLAR AMOUNTS IN
THOUSANDS)
CLAIM AND
CLAIM
NET NET ADJUSTMENT AMORTIZATION OTHER NET
EARNED INVESTMENT EXPENSES OF OPERATING PREMIUMS
PREMIUMS INCOME INCURRED DAC EXPENSES WRITTEN
-------- ---------- ---------- ------------ --------- --------
Year Ended December 31,
1995:
Reinsurance............ $290,657 $13,682 $171,132 $ 27,251 $ 56,488 $358,289
Primary................ 91,145 4,290 47,959 11,168 16,900 100,939
-------- ------- -------- -------- -------- --------
$381,802 $17,972 $219,091 $ 38,419 $ 73,388 $459,228
======== ======= ======== ======== ======== ========
Year Ended December 31,
1996:
Reinsurance............ $415,028 $18,767 $248,142 $ 38,724 $ 72,450 $446,062
Primary................ 96,884 4,381 46,778 14,372 29,052 94,570
-------- ------- -------- -------- -------- --------
$511,912 $23,148 $294,920 $ 53,096 $101,502 $540,632
======== ======= ======== ======== ======== ========
Year Ended December 31,
1997:
Reinsurance............ $332,333 $23,014 $171,771 $ 57,797 $ 52,517 $348,785
Primary................ 190,014 12,946 105,191 47,412 12,994 182,379
-------- ------- -------- -------- -------- --------
$522,347 $35,960 $276,962 $105,209 $ 65,511 $531,164
======== ======= ======== ======== ======== ========
61
VESTA INSURANCE GROUP, INC.
SCHEDULE IV--REINSURANCE (CONSOLIDATED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
GROSS CEDED TO ASSUMED PERCENTAGE OF
DIRECT OTHER FROM OTHER NET AMOUNT ASSUMED
PREMIUMS EARNED AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- --------------- -------- --------- ---------- -------- --------------
1995...................... $139,910 $117,654 $359,546 $381,802 94.2%
1996...................... 161,824 195,202 545,290 511,912 106.5%
1997...................... 287,720 300,968 535,595 522,347 102.5%
62
VESTA INSURANCE GROUP, INC.
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (DOLLAR AMOUNTS IN
THOUSANDS)
BALANCE ADDITIONS-- BALANCE
AT CHARGED AT END
BEGINNING TO COSTS AND OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------- --------- ------------ ---------- -------
Allowance for premiums of
collection:
1995.................... 70 60 60 70
1996.................... 70 168 168 70
1997.................... 70 797 213 654
63
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Robert Y. Huffman
By___________________________________
Robert Y. Huffman
Its President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this
report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ R.K. Richey
- ------------------------------------
R.K. Richey Director, Chairman of the
Board March 16, 1998
/s/ Robert Y. Huffman
- ------------------------------------
Robert Y. Huffman Director, President and March 16, 1998
Chief Executive Officer
(Principal Executive
Officer)
/s/ Barry A Patrick
- ------------------------------------
Barry A. Patrick Senior Vice President, March 16, 1998
Administration (Principal
Financial Officer)
/s/ Mary Beth Heibein
- ------------------------------------
Mary Beth Heibein Controller and Principal March 16, 1998
Accounting Officer
/s/ Walter M. Beale, Jr.
- ------------------------------------
Walter M. Beale, Jr. Director March 16, 1998
/s/ Ehney A. Camp, III
- ------------------------------------
Ehney A. Camp, III Director March 16, 1998
/s/ Robert A. Hershbarger
- ------------------------------------
Robert A. Hershbarger Director March 16, 1998
/s/ Clifford F. Palmer
- ------------------------------------
Clifford F. Palmer Director March 16, 1998
/s/ Jarvis W. Palmer
- ------------------------------------
Jarvis W. Palmer Director March 16, 1998
/s/ Norman L. Rosenthal
- ------------------------------------
Norman L. Rosenthal Director March 16, 1998
/s/ C.B. Hudson
- ------------------------------------
C.B. Hudson Director March 16, 1998
64