Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-12338
VESTA INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 63-1097283 |
| (State of other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
| 3760 River Run Drive | 35243 |
| Birmingham, Alabama | (Zip Code) |
| (Address of principal executive offices) |
(205) 970-7000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |X| Yes |_| No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares outstanding of the registrant's common stock,
$.01 par value, as of May 9, 2003
36,678,060
Vesta Insurance Group, Inc.
Index
| Part I | Financial Information | Page |
|---|---|---|
| Item 1. | Financial Statements: | |
| Consolidated Balance Sheets at March 31, 2003 and December 31, 2002 | 1 | |
| Consolidated Statements of Income and Comprehensive Income for the | ||
| Three Months ended March 31, 2003 and 2002 | 2 | |
| Consolidated Statements of Cash Flows for three months ended March 31, 2003 and 2002 | 3 | |
| Notes to Consolidated Financial Statements | 4 | |
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 10 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 15 |
| Item 4. | Controls and Procedures | 15 |
| Part II | Other Informaton | |
| Item 1. | Legal Proceedings | 16 |
| Item 2. | Changes in Securities | 18 |
| Item 3. | Defaults Upon Senior Securities | 18 |
| Item 4. | Submission of Matters to a Vote of Securities | 18 |
| Item 5. | Other Information | 18 |
| Item 6. | Exhibits and Reports on Form 8-K | 19 |
| Certifications | 21 |
| March 31, 2003 |
December 31, 2002 | |||||||
|---|---|---|---|---|---|---|---|---|
| (unaudited) | ||||||||
| Assets: | ||||||||
| Fixed maturities available for sale - at fair value (cost: 2003 - $856,810; | ||||||||
| 2002 - $829,682) | $ | 877,098 | $ | 863,695 | ||||
| Equity securities-at fair value: (cost: 2003- $29,781; 2002- $26,072) | 30,158 | 27,055 | ||||||
| Mortgage loans | 9,999 | 12,124 | ||||||
| Policy loans | 61,325 | 61,278 | ||||||
| Short-term investments | 35,881 | 9,679 | ||||||
| Other invested assets | 36,084 | 36,759 | ||||||
| Total investments | 1,050,545 | 1,010,590 | ||||||
| Cash | 77,309 | 140,593 | ||||||
| Accrued investment income | 13,775 | 11,866 | ||||||
| Premiums in course of collection (net of allowances for losses | ||||||||
| of $897 in 2003 and 2002) | 128,441 | 128,799 | ||||||
| Reinsurance balances receivable | 356,127 | 355,054 | ||||||
| Reinsurance recoverable on paid losses | 91,521 | 79,334 | ||||||
| Deferred policy acquisition costs | 74,302 | 71,752 | ||||||
| Property and equipment | 20,552 | 22,123 | ||||||
| Deferred income taxes | 46,847 | 46,176 | ||||||
| Assets held for sale | 8,354 | 9,598 | ||||||
| Goodwill | 129,199 | 129,320 | ||||||
| Other intangible assets | 5,466 | 5,550 | ||||||
| Other assets | 40,330 | 32,103 | ||||||
| Total assets | $ | 2,042,768 | $ | 2,042,858 | ||||
| Liabilities: | ||||||||
| Policy liabilities | $ | 671,143 | $ | 678,419 | ||||
| Losses and loss adjustment expenses | 323,076 | 322,320 | ||||||
| Unearned premiums | 336,208 | 306,782 | ||||||
| Federal Home Loan Bank advances | 165,617 | 176,793 | ||||||
| Reinsurance balances payable | 99,674 | 100,860 | ||||||
| Short term debt | 30,000 | 30,000 | ||||||
| Long term debt | 55,798 | 55,795 | ||||||
| Liabilities held for sale | 6,435 | 5,632 | ||||||
| Other liabilities | 94,190 | 107,951 | ||||||
| Total liabilities | 1,782,141 | 1,784,552 | ||||||
| Commitments and contingencies: See Note B | ||||||||
| Deferrable Capital Securities | 22,445 | 22,445 | ||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $.01 par value, 5,000,000 shares authorized, issued: | ||||||||
| 2003 - 0 and 2002 - 0 | -- | -- | ||||||
| Common stock, $.01 par value, 100,000,000 shares authorized, issued: | ||||||||
| 2003 and 2002 - 38,143,037 | 381 | 381 | ||||||
| Additional paid-in capital | 248,372 | 248,372 | ||||||
| Accumulated other comprehensive income, (net of tax expense | ||||||||
| of $7,763 and $8,131 in 2003 and 2002, respectively) | 14,417 | 15,101 | ||||||
| Retained earnings | 85 | (2,698 | ) | |||||
| Treasury stock (2,464,977 shares at cost at March 31, 2003 and | ||||||||
| December 31, 2002, respectively) | (18,250 | ) | (18,250 | ) | ||||
| Unearned stock | (6,823 | ) | (7,045 | ) | ||||
| Total stockholders' equity | 238,182 | 235,861 | ||||||
| Total liabilities, deferrable capital securities | ||||||||
| and stockholders' equity | $ | 2,042,768 | $ | 2,042,858 | ||||
See accompanying Notes to Consolidated Financial Statements
1
| Three months ended March 31, |
|||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | ||||||||||
| (unaudited) | |||||||||||
| Revenues: | |||||||||||
| Net premiums written | $ | 132,353 | $ | 146,080 | |||||||
| Change in unearned premiums | (13,453 | ) | (39,306 | ) | |||||||
| Net premiums earned | 118,900 | 106,774 | |||||||||
| Policy fees | 7,638 | 3,418 | |||||||||
| Agency fees and commissions | 20,877 | 18,380 | |||||||||
| Net investment income | 11,615 | 13,568 | |||||||||
| Realized gains | 3,508 | 1,085 | |||||||||
| Other | 1,943 | 2,135 | |||||||||
| Total revenues | 164,481 | 145,360 | |||||||||
| Expenses: | |||||||||||
| Policyholder benefits | 5,090 | 7,828 | |||||||||
| Losses and loss adjustment expenses incurred | 79,957 | 70,694 | |||||||||
| Policy acquisition expenses | 21,955 | 19,794 | |||||||||
| Operating expenses | 45,737 | 40,880 | |||||||||
| Interest on debt | 3,158 | 3,951 | |||||||||
| Gain on debt extinguishment | -- | (1,380 | ) | ||||||||
| Other intangible amortization | 84 | 84 | |||||||||
| Total expenses | 155,981 | 141,851 | |||||||||
| Income (loss) from continuing operations before taxes, minority interest, | |||||||||||
| and deferrable capital securities | 8,500 | 3,509 | |||||||||
| Income tax expense | 2,976 | 1,272 | |||||||||
| Minority interest, net of tax | 286 | 424 | |||||||||
| Deferrable capital security distributions, net of tax | 311 | 129 | |||||||||
| Net income (loss) from continuing operations | 4,927 | 1,684 | |||||||||
| Gain (loss) from discontinued operations, net of tax | (1,253 | ) | 65 | ||||||||
| Net income (loss) | 3,674 | 1,749 | |||||||||
| Gain on redemption of preferred securities, net of tax | -- | 210 | |||||||||
| Net income (loss) available to common shareholders | $ | 3,674 | $ | 1,959 | |||||||
| Net income (loss) from continuing operations per share - Basic | $ | 0.14 | $ | 0.05 | |||||||
| Net income (loss) available to common shareholders per share - Basic | $ | 0.11 | $ | 0.06 | |||||||
| Net income (loss) from continuing operations per share - Diluted | $ | 0.14 | $ | 0.05 | |||||||
| Net income (loss) available to common shareholders per share - Diluted | $ | 0.11 | $ | 0.06 | |||||||
| Statements of Comprehensive Income (Loss) | |||||||||||
| Net income (loss) | $ | 3,674 | $ | 1,749 | |||||||
| Other comprehensive income, net of tax: | |||||||||||
| Unrealized holding (losses) gains on available-for-sale | |||||||||||
| securities net of tax of $559 and $(2,943), respectively | 1,596 | (5,465 | ) | ||||||||
| Less realized (losses) gains on available-for-sale | |||||||||||
| securities net of tax of $1,228 and $380, respectively | 2,280 | 705 | |||||||||
| (684 | ) | (6,170 | ) | ||||||||
| Gain on redemption of preferred securities, net of tax of | |||||||||||
| $0 and $113, respectively | -- | 210 | |||||||||
| Comprehensive (loss) income | $ | 2,990 | $ | (4,211 | ) | ||||||
See accompanying Notes to Consolidated Financial Statements
2
| Three months ended March 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 |
2002 | ||||||||||
| (unaudited) | |||||||||||
| Operating Activities: | |||||||||||
| Net income | $ | 3,674 | $ | 1,749 | |||||||
| Adjustments to reconcile net loss to cash provided by (used in) operations | |||||||||||
| Changes in: | |||||||||||
| Loss and LAE reserves, and future policy liabilities | (2,086 | ) | 19,604 | ||||||||
| Unearned premium reserves | 29,426 | 55,615 | |||||||||
| Reinsurance balances receivable | (1,072 | ) | (33,702 | ) | |||||||
| Premiums in course of collection | 358 | (28,187 | ) | ||||||||
| Reinsurance recoverable on paid losses | (12,187 | ) | (8,748 | ) | |||||||
| Reinsurance balances payable | (1,187 | ) | 31,183 | ||||||||
| Other assets and liabilities | (18,995 | ) | (11,856 | ) | |||||||
| Policy acquisition costs deferred | (24,506 | ) | (49,123 | ) | |||||||
| Policy acquisition costs amortized | 21,955 | 25,482 | |||||||||
| Realized gains | (3,508 | ) | (1,085 | ) | |||||||
| Amortization and depreciation | 1,566 | 1,079 | |||||||||
| Gain on extinguishment of debt | -- | (897 | ) | ||||||||
| Net cash provided by (used in) operations | (6,562 | ) | 1,114 | ||||||||
| Investing Activities: | |||||||||||
| Investments sold: | |||||||||||
| Fixed maturities available for sale | 64,731 | 48,068 | |||||||||
| Equity securities | 193 | 988 | |||||||||
| Investments acquired: | |||||||||||
| Fixed maturities available for sale | (120,880 | ) | (89,036 | ) | |||||||
| Equity securities | (2,375 | ) | (2,989 | ) | |||||||
| Maturities, paydowns, calls and other | |||||||||||
| Fixed maturities available for sale | 49,915 | 26,561 | |||||||||
| Net decrease in other invested assets | 2,752 | 1,693 | |||||||||
| Net cash received (paid) for acquisition | (12,000 | ) | 9,006 | ||||||||
| Net increase in short-term investments | (26,202 | ) | (421 | ) | |||||||
| Assets held for sale | (713 | ) | -- | ||||||||
| Additions to property and equipment | (861 | ) | (680 | ) | |||||||
| Disposal of property and equipment | 1,010 | 10 | |||||||||
| Net cash used in investing activities | (44,430 | ) | (6,800 | ) | |||||||
| Financing Activities: | |||||||||||
| Net change in FHLB borrowings | (11,176 | ) | 11,078 | ||||||||
| Change in long and short-term debt | 3 | (3 | ) | ||||||||
| Net deposits and withdrawals from insurance liabilities | (227 | ) | (5,441 | ) | |||||||
| Acquisition of common stock | -- | (821 | ) | ||||||||
| Dividends paid | (892 | ) | (925 | ) | |||||||
| Net cash provided by (used in) financing activities | (12,292 | ) | 3,888 | ||||||||
| Decrease in cash | (63,284 | ) | (1,798 | ) | |||||||
| Cash at beginning of period | 140,593 | 23,579 | |||||||||
| Cash at end of period | $ | 77,309 | $ | 21,781 | |||||||
See accompanying Notes to Consolidated Financial Statements
3
Note A-Significant Accounting Policies
Basis of Presentation:The accompanying unaudited interim financial statements have been prepared in conformity with accounting principles generally accepted in the United States and, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and related notes which have been issued by the Company and filed with the Securities and Exchange Commission.
Reclassifications: Certain amounts in the financial statements presented have been reclassified from amounts previously reported in order to be comparable between periods. These reclassifications have no effect on previously reported stockholders' equity or net income during the periods involved.
New Accounting Standards: Effective January 1, 2002, Vesta adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which had been issued by the FASB in October 2001. SFAS No. 144 provides a single model for treatment of the disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Adoption of SFAS No. 144 did not have a material impact on Vesta's financial position, results of operations or cash flows other than the classification of certain items in our statements of financial position, results of operations and cash flow.
Effective July 1, 2002, Vesta adopted SFAS No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which had been issued by the FASB in April 2002. SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion No. 30, will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 has been rescinded. SFAS No. 44 and the amended sections of SFAS No. 13 are not applicable to Vesta and, therefore, have no effect on our financial statements. In connection with our adopting SFAS No. 145 on July 1, 2002, we reclassified gains on the extinguishment of debt from extraordinary gain on debt extinguishment to other expense in our third quarter financial statements. These reclassifications decreased other expense by $.0 million and $1.4 million for the quarters ending March 31, 2003 and 2002, respectively.
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45, "Guarantor's Accounting and Disclosures Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies," related to a guarantors accounting for, and disclosures of, the issuance of certain types of guarantees. Vesta is required to adopt the provisions for initial recognition and measurement for all guarantees issued or modified after December 31, 2002 on a prospective basis. Management has determined that there will be no material impact on Vesta's financial position or results of operations related to the initial recognition and measurement guarantees of this Interpretation.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure". This statement is effective for 2003 and amends SFAS No. 123, "Accounting for Stock-Based Compensation" by providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires additional disclosures related to the effect of stock-based compensation on reported results. Vesta is currently reviewing its treatment of stock-based compensation as well as the impact of this pronouncement.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities" which clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." This Interpretation provides guidance on the identification and consolidation of variable interest entities ("VIEs"), whereby control is achieved through means other than through voting rights. Implementation of FIN 46 did not have a material impact on Vesta's financial position, results of operations or cash flows other than the classification of certain items in our statements of financial position, results of operations and cash flow.
In May 2002, the Derivatives Implementation Group of the FASB exposed for comment issue No. B36, "Bifurcation of Embedded Credit Derivatives" ("DIG B36"). DIG B36 would require the bifurcation of potential embedded derivatives within modified coinsurance and funds withheld coinsurance arrangements in which the terms require the future payment of a principal amount plus a return based on a specified proportion of the ceding company's return on either its general account assets or a specified block of those assets. The proposed effective date of the implementation guidance in DIG B36 is for the first fiscal quarter beginning after June 15, 2003 and would be applied on a prospective basis. The Company is currently evaluating the impact of this pronouncement.
Restricted Assets: As part of a modified coinsurance agreement with Employers Reinsurance Corporation, American Founders is holding $167.6 million of assets for the benefit of Employers, of which $165.8 million are included in fixed maturities available for sale herein.
Income per Share: Basic EPS is computed by dividing income available to common shareholders by the weighted average common shares outstanding for the period. Diluted EPS is calculated by adding to shares outstanding the additional net effect of potentially dilutive securities or contracts which could be exercised or converted into common shares except when the additional shares would produce anti-dilutive results.
4
Reconciliation of income available to common shareholders and average shares outstanding for the three months ending March 31, 2003 and 2002 are as follows:
| Three months ended March 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2003 | |||||||||||