PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report
July 10, 2001
(Date of earliest event reported)
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, Alabama | (Zip Code) |
| (Address of principal executive offices) |
(205) 970-7000
(Registrant's telephone number, including area code)
On July 10, 2001, Vesta Fire Insurance Corporation, an Illinois corporation ("Vesta Fire") and a wholly owned subsidiary of Vesta Insurance Group, Inc. completed its acquisition of 100% of the outstanding shares of capital stock of Florida Select Insurance Holdings, Inc. for approximately $64.5 million in cash. Vesta Fire acquired the stock of FSIH from FSIH's four stockholders - Centre Solutions (Bermuda) Limited, Mynd Corporation, Orienta Point Group, L.L.C., and Kamehameha Schools Bernice Pauahi Bishop Estate. The purchase price resulted from arms' length negotiation which took into consideration various factors, including Florida Select's book value at December 31, 2000 of approximately $31.5 million and net income for the twelve months ended December 31, 2001 of approximately $6.6 million. Vesta funded the acquisition with the proceeds of its recently completed supplemental stock offering, which raised net proceeds of approximately $64.7 million before offering expenses.
(a) Financial Statements of Business Acquired.
See Index on page 2.
(b) Pro Forma Financial Information.
See Index on page 2.
(c) Exhibits.
| Exhibit Number | Description | ||
|---|---|---|---|
| 2 | Stock Purchase Agreement by and among Vesta, Vesta Fire, Centre | ||
| Solutions (Bermuda) Limited, Mynd Corporation, Orienta Point Group, | |||
| L.L.C., and Kamehameha Schools Bernice Pauahi Bishop Estate, dated | |||
| April 18, 2001 (incorporated by reference from Exhibit 2 to Form S-3, | |||
| registration number 333-60634, filed May 10, 2001). |
| 23 | Consent of Ernst & Young LLP |
1
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
Dated as of July 18, 2001
VESTA INSURANCE GROUP, INC.
By: /s/ Donald W. Thornton
Its: Senior Vice President --
General Counsel and Secretary
2
Index to Financial Statements
Consolidated Financial Statements of Florida Select Insurance Holdings Inc. as of
December 31, 2000 and 1999 and for each of the three years ended December 31, 2000.
Report of Independent Auditors.......................................................................4
Consolidated Balance Sheets..........................................................................5
Consolidated Statements of Income....................................................................6
Consolidated Statements of Shareholders' Equity......................................................7
Consolidated Statements of Cash Flows................................................................8
Notes to Consolidated Financial Statements...........................................................9
Consolidated Financial Statements of Florida Select Insurance Holdings Inc. as of March 31, 2001
(unaudited) and December 31, 2000 and for the three months ended March 31, 2001 and 2000 (unaudited).
Consolidated Balance Sheets (unaudited)..............................................................20
Consolidated Statements of Income (unaudited)........................................................21
Consolidated Statements of Cash Flows (unaudited)....................................................22
Notes to Consolidated Financial Statements (unaudited)...............................................23
Unaudited Pro Forma Consolidated Financial Statements of Vesta Insurance Group, Inc as of and for
the three months ended March 31, 2001 and for the year ended December 31, 2000.
General Information..................................................................................24
Unaudited Pro Forma Consolidated Statements of Operations for the three months ended
March 31, 2001....................................................................................25
Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 2001..................................26
Unaudited Pro Forma Consolidated Statements of Operations for the year ended
December 31, 2000.................................................................................27
Notes to Unaudited Pro Forma Consolidated Financial Statements.......................................28
3
Board of Directors
Florida Select Insurance Holdings Inc.
We have audited the accompanying consolidated balance sheets of Florida Select Insurance Holdings Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
As described in Note 1, the Company changed its method of accounting for organizational costs.
/s/ Ernst & Young LLP
March 16, 2001
Tampa, Florida
4
FLORIDA SELECT INSURANCE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-------------
2000 1999
------ ------
ASSETS
INVESTMENTS:
Fixed maturities, held-to-maturity .................................................. $ 2,484,937 $ 470,064
Fixed maturities, available-for-sale ................................................ 46,627,215 36,357,501
Preferred stock 4,250,451 133,401
---------- -------
Total investments ................................................................. 53,362,603 36,960,966
Cash and cash equivalents ............................................................. 10,379,751 17,964,448
Premiums receivable (net of allowance for doubtful accounts of $160,391 and $152,423, . 3,961,825 3,222,580
respectively)
Amounts due from FRPCJUA in accordance with take-out agreement ........................ 1,979,791 9,227,838
REINSURANCE RECOVERABLES:
On paid losses and loss adjustment expenses ......................................... 1,961,275 2,532,007
On unpaid losses and loss adjustment expenses ....................................... 9,977,986 9,293,001
Prepaid reinsurance premiums ........................................................ 20,676,350 17,697,352
Receivable from affiliates ............................................................ -- 106,685
Accrued investment income ............................................................. 820,429 515,718
Deferred policy acquisition costs ..................................................... 1,814,789 859,458
Property and equipment (net of accumulated depreciation and amortization of $403,933
and $211,939, ......................................................................... 333,171 305,679
respectively)
Deferred taxes ........................................................................ 1,092,362 305,479
Other assets 284,988 105,726
-------- -------
Total assets ...................................................................... $106,645,320 $ 99,096,937
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Loss and loss adjustment expense reserves ........................................... $19,951,410 $ 18,547,264
Unearned premium reserve ............................................................ 36,321,138 32,824,958
Other policyholders' funds .......................................................... 3,569,868 4,033,688
Reinsurance balance payable ......................................................... 7,639,665 10,031,315
Accounts payable and accrued expenses ............................................... 4,473,200 3,129,851
Payable to affiliate ................................................................ 320,300 --
Dividends payable ................................................................... -- 6,000,348
Income taxes payable 2,892,790 449,291
---------- -------
Total liabilities ................................................................. 75,168,371 75,016,715
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 2,000 shares authorized; no shares issued and ...... -- --
outstanding
COMMON STOCK:
Class A, $.01 par value; 2,000 shares authorized; 784 shares issued--779 shares ... 8 8
outstanding
Class B, $.01 par value; 2,000 shares authorized; no shares issued and outstanding -- --
Class C, $.01 par value; 2,000 shares authorized; 156 shares issued and ........... 1 1
outstanding
Class D, $.01 par value; 2,000 shares authorized; 60 shares issued and outstanding 1 1
Additional paid in capital .......................................................... 10,606,051 10,606,051
Treasury stock ...................................................................... (105,000) (105,000)
Retained earnings (see Note 6 for dividend preference on Common Stock Class D) ...... 20,822,998 14,234,110
Accumulated other comprehensive income (deficit), net of deferred income tax
(expense) benefit of $(94,724) and $416,042, respectively ............................. 152,890 (654,949)
-------- ---------
Total shareholders' equity 31,476,949 24,080,222
----------- ----------
Total liabilities and shareholders' equity ........................................ $106,645,320 $ 99,096,937
============== =============
See accompanying notes.
5
FLORIDA SELECT INSURANCE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
---------------------------------
2000 1999 1998
------ ------ ------
REVENUE:
Premiums earned, net.................................................. $26,348,381 $24,042,029 $25,964,902
Net investment income................................................. 2,936,095 2,251,649 2,442,223
Other income.......................................................... 1,064,703 4,669,659 45,072
---------- ---------- ----------
Total revenue............................................................ 30,349,179 30,963,337 28,452,197
LOSSES AND EXPENSES:
Losses and loss adjustment expenses................................... 11,367,207 11,526,371 13,504,355
Other underwriting, general and administrative expenses............... 7,813,637 6,129,120 4,385,557
Amortization and depreciation......................................... 298,556 369,639 339,887
---------- ---------- ----------
Total losses and expenses................................................ 19,479,400 18,025,130 18,229,799
Income before income taxes and cumulative effect of a change in ---------- ---------- ----------
accounting principle..................................................... 10,869,779 12,938,207 10,222,398
Income tax expense....................................................... 4,280,891 4,877,662 3,970,821
Net income after tax and before cumulative effect of a change in ---------- ---------- ----------
accounting principle..................................................... 6,588,888 8,060,545 6,251,577
Cumulative effect of change in accounting principle (net of tax benefit
of $150,067)............................................................. -- (238,956) --
---------- --------- ----------
Net income............................................................... $6,588,888 $7,821,589 $6,251,577
========== ========== ==========
See accompanying notes.
6
FLORIDA SELECT INSURANCE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
Additional Other
Common Paid-In Treasury Retained Comprehensive
Stock Capital Stock Earnings Income(Deficit) Total
-------- ----------- -------- ---------- ---------------- -----------
Balance at January 1, 1998........... $ 10 $10,606,051 $ -- $6,161,292 $ 83,606 $16,850,959
Net income......................... -- -- -- 6,251,577 -- 6,251,577
Change in net unrealized appreciation
(depreciation) of available for
sale investments, net of tax of $581. -- -- -- -- (871) (871)
Comprehensive income............... 6,250,706
Purchase of treasury stock......... -- -- (105,000) -- -- (105,000)
-------- ----------- --------- --------- ---------------- ------------
Balance at December 31, 1998......... 10 10,606,051 (105,000) 12,412,869 82,735 22,996,665
Net income......................... -- -- -- 7,821,589 -- 7,821,589
Change in net unrealized appreciation
(depreciation) of available-for-sale
investments, net of tax of $510,766.. -- -- -- -- (737,684) (737,684) -----------
Comprehensive income............... 7,083,905
Cash dividends to shareholders--$600
per share............................ -- -- -- (6,000,348) -- (6,000,348)
------- ---------- --------- ----------- --------------- -------------
Balance at December 31, 1999............ 10 10,606,051 (105,000) 14,234,110 (654,949) 24,080,222
Net income............................ -- -- -- 6,588,888 -- 6,588,888
Change in net unrealized appreciation
of available-for-sale investments,
net of tax of $468,443............... 807,839 807,839
-------------
Comprehensive income.................. 7,396,727
Balance at December 31, 2000............ $ 10 $10,606,051 $(105,000) $20,822,998 $ 152,890 $31,476,949
======= =========== ========== =========== ============= =============
See accompanying notes.
7
FLORIDA SELECT INSURANCE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
----------------------------------
2000 1999 1998
---------- --------- ----------
OPERATING ACTIVITIES:
Net income.......................................................... $6,588,888 $7,821,589 $6,251,577
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation.................................. 596,469 652,265 515,507
Deferred income taxes.......................................... (1,282,887) 1,964,304 331,785
Policy acquisition costs deferred.............................. (6,769,927) (4,451,711) (5,667,012)
Policy acquisition costs amortized............................. 5,814,596 4,700,325 5,275,929
Net loss on sale of investments................................ 190,721 100,815 (272,745)
Increase in premiums receivable................................ (739,245) (2,202,841) 767,647
Decrease (increase) in amounts due from the FRPCJUA............ 7,248,047 (9,227,838) --
(Increase) decrease in reinsurance recoverable................. (3,093,251) 386,243 (3,919,202)
(Increase) decrease in accrued investment income............... (304,711) 147,525 (181,724)
Decrease (increase) in receivable from affiliate............... 426,985 (87,905) 3,041
(Increase) decrease in other assets............................ (179,262) 327,960 33,923
Increase in loss and loss adjustment expenses.................. 1,404,146 1,288,212 4,377,584
Increase (decrease) in unearned premium reserve................ 3,496,180 (2,023,444) 775,831
(Decrease) increase in other policyholders' funds.............. (463,820) (1,082,701) 1,180,545
(Decrease) increase in reinsurance balance payable............. (2,391,650) 4,421,366 1,367,587
Increase (decrease) in accounts payable and accrued expenses... 1,343,349 (845,474) (115,277)
Increase (decrease) in income tax payable...................... 2,443,499 348,293 (307,616)
----------- ---------- ----------
Net cash provided by operating activities........................... 14,328,127 2,236,983 10,417,380
INVESTING ACTIVITIES:
Purchase of securities held-to-maturity............................. (2,318,946) (168,717) --
Purchase of securities available-for-sale........................... (31,139,646)(35,127,279) (32,556,281)
Proceeds from securities held-to-maturity........................... 300,000 -- --
Proceeds from sale of securities available-for-sale................. 17,572,164 35,422,726 16,225,632
Decrease in note receivable from affiliate.......................... -- -- 1,893,026
Proceeds from sale of property and equipment........................ -- 2,400 11,972
Purchase of property and equipment.................................. (326,048) (163,749) (294,414)
--------- --------- ---------
Net cash used in investing activities............................... (15,912,476) (34,619) (14,720,065)
------------ --------- ------------
Financing activities
Repurchase of Treasury Stock........................................ -- -- (105,000)
Dividends paid...................................................... (6,000,348) -- --
----------- --------- ------------
Net cash used in financing activities............................... (6,000,348) -- (105,000)
----------- --------- ------------
Net (decrease) increase in cash and cash equivalents................ (7,584,697) 2,202,364 (4,407,685)
Beginning cash and cash equivalents................................. 17,964,448 15,762,084 20,169,769
----------- ---------- -----------
Ending cash and cash equivalents.................................... $ 10,379,751 $17,964,448 $15,762,084
============ ============= ===========
See accompanying notes.
8
Florida Select Insurance Holdings Inc. (the "Company") is incorporated in Delaware and has two wholly-owned subsidiaries: Florida Select Insurance Company ("FSIC"), a Florida domiciled property and casualty insurer, and Florida Select Insurance Agency Inc. ("FSIA"), a managing general agency. FSIA has two wholly-owned subsidiaries: Select Insurance Services Inc. ("SIS"), and Texas Select Lloyds Insurance Company ("TSLIC"), a Texas domiciled property and casualty insurer.
FSIC is licensed to underwrite homeowners, fire, allied lines, earthquake, other liability, glass, burglary and theft, and mobile home multiple peril and physical damage business. TSLIC is licensed to write fire, allied lines, rain, inland marine, automobile liability and physical damage, liability other than automobile, glass, burglary and theft, boiler and machinery, and reinsurance on all lines authorized to be written on a direct basis. Computer Science Corporation ("CSC") formerly known as Policy Management Systems Corporation, a shareholder of the Company, provides policy management services for FSIC and TSLIC including policy issuance, premium billing and collection, accounting, and various other services. Claims administration is provided by Risk Enterprise Management Limited, an affiliate of Centre Solutions (Bermuda) Ltd., a shareholder of the Company. The Zurich Group, which owns Centre Solutions (Bermuda) Ltd., provides quota share reinsurance coverage to the Company through its affiliates Centre Insurance Company (fiscal years ended 1999 and 2000) and Zurich Reinsurance (North America), Inc. (fiscal years 1996 through 1998). The Zurich Group also provides the Company certain excess of loss coverage through its affiliate Zurich Reinsurance (North America), Inc.
FSIA provides underwriting, production and marketing services for FSIC as their managing general agent. SIS provides similar services for TSLIC.
The accompanying consolidated financial statements include the accounts, after intercompany eliminations, of the Company and its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP"), which differ from statutory accounting practices prescribed or permitted by the respective Departments of Insurance.
The Company operates in the United States of America and in only one reportable segment, which is the provider of personalized property and casualty insurance coverage.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein.
9
Premium revenue is generally recognized ratably over the life of the related policies with a liability for unearned premiums established for the unexpired portion of the written premiums applicable to those policies.
Reinsurance premiums ceded are recognized on a pro rata basis over the life of the contract.
The Company considers all highly-liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2000 and 1999, FSIC had a certificate of deposit of $250,000 and $500,000, respectively, which was included in cash and cash equivalents that collateralizes a letter of credit held by the Florida Residential Property and Casualty Joint Underwriting Association ("FRPCJUA").
Fixed maturity investments are designated at purchase as held-to-maturity or available-for-sale. Held-to-maturity investments are reported at amortized cost. Investments classified as available-for-sale are reported at fair value with unrealized appreciation and depreciation, net of deferred taxes, included as a component of other comprehensive income. The Company has the intent and ability to hold to maturity those investments designated as held-to-maturity.
Realized gains and losses on sales of investments are recognized in operations on the specific identification basis.
Policy acquisition costs are expenses that vary with, and are directly related to, the production of new or renewal business, such as commissions, premium taxes, and other costs. These costs are deferred to the extent recoverable and are amortized over the period during which the related premiums are earned.
Property and equipment are stated at cost less accumulated depreciation. Expenditures for improvements are capitalized, and expenditures for maintenance and repairs are charged to operations as incurred. Upon sale or retirement, the cost and related accumulated depreciation and amortization are removed from the accounts and the resulting gain or loss, if any, is reflected in operations. Depreciation has been provided using the straight-line method over the estimated useful lives of the related assets of three to five years.
The Company had capitalized certain organizational costs associated with start up and formation of the Company and was amortizing those costs over five years. During 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires companies to expense start-up costs as incurred; this includes start-up costs previously capitalized and was effective for fiscal years beginning after December 15, 1998. The Company has adopted SOP 98-5 as of January 1, 1999. The unamortized asset was expensed and reported as the cumulative effect of a change in accounting principle, net of income tax, in the 1999 consolidated statement of operations.
10
Loss and loss adjustment expense reserves represent the estimated ultimate net cost of all reported and unreported losses incurred through December 31. The Company does not discount loss and loss adjustment expense reserves. The reserves for unpaid losses and loss adjustment expenses are estimated using individual case-basis valuations and industry statistical analyses. Those estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for losses and loss adjustment expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current income.
Income taxes have been provided using the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates.
FSIC and TSLIC are subject to assessments by several guaranty funds and residual market pools. The activities of these funds and pools include collecting funds from solvent insurance companies to cover losses resulting from the insolvency or rehabilitation of other insurance companies or deficits generated by residual market pools. There were no guaranty fund or residual market pool assessments levied on FSIC or TSLIC during 2000, 1999, or 1998. The Company's policy is to recognize its obligation for guaranty fund assessments when it writes the premiums that are subject to the guaranty fund assessments and to recognize its obligation for residual market pool assessments when the Company has the information available to reasonably estimate its liability.
The Company's insurance subsidiaries are currently licensed to write policies in the states of Florida, South Carolina and Texas. Accordingly, the Company could be adversely affected by economic downturns, natural disasters, and other conditions that may occur from time to time in Florida, South Carolina and Texas which may not as significantly affect more geographically diversified competitors.
Certain amounts in the financial statements as of and for the period ended December 31, 1999 and 1998 have been reclassified to conform with the presentation of the financial statements as of and for the year ended December 31, 2000.
11
The amortized cost and the fair value of fixed maturity investments are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
At December 31, 2000
Available-for-sale securities:
U.S. Treasury...................................... $5,957,106 $23,269 $79,079 $5,901,296
State and municipal obligations.................... 1,813,479 30,814 382 1,843,911
Mortgage-backed/asset backed securities............ 26,398,525 121,197 135,784 26,383,938
Industrial and miscellaneous securities............ 12,318,360 182,866 3,156 12,498,070
----------- --------- --------- ----------
Total fixed maturity investments available-for-sale... $46,487,470 $358,146 $218,401 $46,627,215
=========== ========= ========= ===========
Held-to-maturity securities:
U.S. Treasury...................................... $ 164,793 $ -- $ 1,654 $ 163,139
State and municipal obligations.................... 1,325,655 87,996 -- 1,413,651
Mortgage-backed/asset backed securities............ 251,680 8,715 -- 260,395
Industrial and miscellaneous securities............ 742,809 25,732 -- 768,541
------------- --------- --------- -----------
Total held-to-maturity securities:.................... $2,484,937 $122,443 $1,654 $2,605,726
========== ========= ========= ===========
Preferred stocks...................................... $4,145,065 $117,966 $12,580 $4,250,451
========== ========= ========= ===========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
At December 31, 1999
Available-for-sale securities:
U.S. Treasury...................................... $8,546,309 $ -- $ 447,840 $8,098,469
State & municipal obligations...................... 5,250,949 -- 79,805 5,171,144
Mortgage-backed/asset-backed securities............ 15,643,092 -- 427,423 15,215,669
Industrial and miscellaneous securities............ 7,967,547 -- 95,328 7,872,219
------------- ----------- ---------- -----------
Total fixed maturity investments available-for-sale... $37,407,897 $ -- $1,050,396 $36,357,501
============ =========== ========== ===========
Held-to-maturity securities:
U.S. Treasury...................................... $ 167,956 $ -- $ 11,487 $ 156,469
State & municipal obligations...................... 302,108 -- 773 301,335
------------ ----------- --------- -----------
Total held-to-maturity securities..................... $ 470,064 $ -- $ 12,260 $ 457,804
=========== =========== ========= ===========
Preferred stocks...................................... $ 149,278 $ -- $ 15,877 $ 133,401
=========== =========== ========= ===========
12
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2000, by contractual maturity, are shown in the following table. Actual maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
---------- -----------
Available-for-sale:
Years to maturity:
One or less................................. $1,499,410 $1,502,200
After one through five...................... 15,980,616 16,078,135
After five through ten...................... 2,608,919 2,662,942
Mortgage-backed/asset-backed securities..... 26,398,525 26,383,938
----------- -----------
Total available-for-sale securities.............. $46,487,470 $46,627,215
=========== ===========
Held-to-maturity:
Years to maturity:
After one through five...................... $ 907,602 $ 931,680
After five through ten...................... 506,091 532,582
After ten through fifteen................... 819,564 881,069
Mortgage-backed/asset-backed securities.......... 251,680 260,395
----------- -----------
Total held-to-maturity securities................ $2,484,937 $2,605,726
=========== ===========
Proceeds from the sales and maturities of available-for-sale fixed maturity investments during the years ended December 31, 2000, 1999, and 1998 were $17,872,164, $35,422,726, and $16,225,632, respectively. Gross gains of $13,471, $84,595, and $278,168 and gross losses of $204,192, $184,595, and $5,423 were realized in 2000, 1999, and 1998, respectively, on those sales and maturities.
Major categories of the Company's investment income are summarized as follows:
December 31,
---------------------------------------
2000 1999 1998
---------- ----------- ----------
Income:
Bonds......................... $2,266,694 $1,860,906 $1,729,046
Preferred stocks.............. 166,786 -- --
Cash and cash equivalents..... 652,178 580,109 914,295
Other......................... 1,134 6,962
----------- ----------- ------------
Gross investment income.......... 3,086,792 2,447,977 2,643,341
Investment expenses.............. 150,697 196,328 201,118
----------- ----------- ------------
Net investment income............ $2,936,095 $2,251,649 $2,442,223
========== ========== ==========
At December 31, 2000, FSIC and TSLIC had investments with a carrying value $2,786,769 held on deposit with their respective Departments of Insurance to satisfy regulatory requirements.
Certain premiums and losses are ceded to other insurance companies under quota share reinsurance agreements and various excess of loss reinsurance agreements. The ceded reinsurance agreements are intended to provide the Company's insurance subsidiaries with the ability to maintain its exposure to loss within its capital resources. These reinsurance agreements do not relieve FSIC or TSLIC from their primary obligation to policyholders, as they remain liable to their policyholders to the extent that any reinsurer does not meet its obligations for reinsurance ceded to it under reinsurance contracts. Therefore, the Company is subject to credit risk with respect to the obligations of its reinsurers, and any failure on the part of these reinsurers could have a material adverse effect on the Company's business, financial condition, and results of operations.
13
The Company minimizes its exposure to catastrophe through various excess of loss agreements in addition to FSIC's mandatory participation in the Florida Hurricane Catastrophe Fund, ("FHCF"). The first layer of excess of loss is composed of two contracts. The first contract provides $18 million of coverage in excess of $2.35 million (33%), and the second contract provides $14.85 million of coverage in excess of $5.5 million (67%). The annual limit (after reinstatement) for each contract is $36 million at 33% and $29.7 million at 67%, respectively. This layer covers up to the attachment point of the FHCF, plus the Company's 10% retention from the FHCF layer. The FHCF provides coverage for named hurricanes up to a maximum limit of 90% of the amount of the ultimate losses in the layer as determined by a premium formula. Additional layers of excess catastrophe reinsurance provide coverage up to the estimated loss from a 250 year event. Currently, such excess coverage amounts to 100% of $95 million per occurrence. The coverage attaches after recovery from the FHCF. The Company also maintains a 50% quota share agreement with its affiliate, Centre Insurance Company. All excess of loss and quota share coverage is provided by "A" rated reinsurers or better.
All excess of loss contracts inure to the benefit of the quota share treaty, so all amounts disclosed are shown before reductions for quota share cessions.
The Company's catastrophe reinsurance is intended to provide the following coverage in the event of a named hurricane:
Portion of
Layer Potential Ceded Under Total
Retained by Recoveries Excess of Loss Potential
Loss Layer Company from FHCF Treaties Losses in Layer
---------- ------------ ----------- ----------- ---------------
$0-$2,350,000................... $2,350,000 $ -- $ -- $ 2,350,000
$2,350,000-$20,350,000.......... 2,110,500 2,691,000 13,198,500 18,000,000
$20,350,000-$86,670,000......... 3,941,000 59,688,000 2,691,000 66,320,000
$86,670,000-$111,670,000........ -- -- 25,000,000 25,000,000
$111,670,000-$161,670,000....... -- -- 50,000,000 50,000,000
$161,670,000-$171,670,000....... -- -- 10,000,000 10,000,000
$171,670,000-$181,670,000....... -- -- 10,000,000 10,000,000
------------- ----------- ----------- ---------------
Total........................... $8,401,500 $62,379,000 $110,889,500 $181,670,000
========== =========== ============ ============
Direct and assumed, ceded and net insurance premiums on a written and earned basis, for the years ended December 31, are summarized as follows:
2000 1999 1998
----------- ----------- -----------
Gross direct and assumed premiums written............ $63,490,752 $53,264,029 $62,505,747
Reinsurance ceded.................................... (36,625,185) (30,059,630) (35,872,547)
------------ ------------ ------------
Net premiums written................................. $26,865,567 $23,204,399 $26,633,200
=========== =========== ===========
Direct and assumed premiums earned................... $59,994,567 $55,287,481 $61,729,916
Reinsurance ceded.................................... (33,646,186) (31,245,452) (35,765,014)
------------ ------------ ------------
Net premiums earned.................................. $26,348,381 $24,042,029 $25,964,902
=========== =========== ===========
14
Losses and loss adjustment expenses incurred for the years ended December 31, are summarized as follows:
2000 1999 1998
------------ ------------- -----------
Direct losses and loss adjustment expenses........... $23,262,986 $23,225,197 $27,087,856
Reinsurance ceded.................................... (11,895,779) (11,698,826) (13,583,501)
------------ ------------- ------------
Net losses and loss adjustment expenses incurred..... $11,367,207 $11,526,371 $13,504,355
============ ============= ===========
The Company and its subsidiaries file a consolidated federal income tax return. The Company will collect from, or refund to, its subsidiaries the amount of income tax or benefit which would result if the entities filed separate returns.
The Company's income tax expense for the years ended December 31, is summarized as follows:
2000 1999 1998
---------- ---------- ----------
Federal:
Current.................................. $4,718,997 $2,341,372 $3,156,811
Deferred................................. (1,102,462) 1,593,697 236,000
State:
Current.................................. 844,781 421,919 482,225
Deferred................................. (180,425) 370,607 95,785
----------- ----------- ----------
Total....................................... $4,280,891 $4,727,595 $3,970,821
=========== =========== ==========
Income taxes paid by the Company totaled $2,183,000, $2,125,000, and $3,946,849 in 2000, 1999, and 1998, respectively.
The reconciliation of income tax expense for the years ended December 31, 2000 and 1999 attributable to continuing operations to the amount of income tax expense that would result from applying the U.S. Federal Statutory Tax rate is summarized as follows:
2000 1999 1998
--------- --------- ---------
Income tax at U.S. Federal Statutory Tax..... $3,638,523 $4,393,213 $3,577,839
Nontaxable/deductible income................. (52,098) (63,919) (3,809)
State income taxes........................... 388,466 537,193 375,707
Other........................................ 306,000 (138,892) 21,084
----------- ----------- -----------
Income tax expense........................... $4,280,891 $4,727,595 $3,970,821
=========== =========== ===========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
15
Significant components of the Company's deferred tax assets and liabilities as of December 31, are summarized as follows:
2000 1999
--------- ---------
Deferred tax assets:
Unearned premium reserve adjustment...................................... $1,177,427 $1,167,095
Discount on loss and loss adjustment expense reserves.................... 411,771 371,886
Advance premium collected................................................ 205,145 244,600
Reinsurance commission................................................... 372,774 1,846,300
Allowance for doubtful accounts.......................................... 60,355 58,797
Employee long-term incentives............................................ 354,450 --
Unrealized loss--available-for-sale investments........................... -- 416,042
Organizational costs..................................................... 33,056 91,977
---------- ---------
Total deferred tax assets.............................................. 2,614,978 4,196,697
Deferred tax liabilities:
Deferred acquisition expense............................................. 682,895 331,579
Amounts due from FRPCJUA in accordance with take-out agreement........... 744,997 3,559,639
Unrealized gain--available-for-sale investments........................... 94,724 --
---------- ---------
Total deferred tax liabilities......................................... 1,522,616 3,891,218
---------- ---------
Net deferred tax assets.................................................. $1,092,362 $ 305,479
========== =========
The Company's management believes that no valuation allowance on the deferred tax assets is necessary at December 31, 2000 and 1999. The Company is currently under examination by the Internal Revenue Service for 1996 through 1999. The ultimate determination of this examination has not been reached.
The following table provides a reconciliation of the beginning and ending reserve balances for losses and loss adjustment expenses ("LAE"):
2000 1999 1998
----------- ---------- ----------
Reserve for losses and LAE, at the beginning of year, gross of
reinsurance recoverable on unpaid losses and LAE................. $18,547,264 $17,259,052 $12,881,468
Less reinsurance recoverable on unpaid losses and LAE............... (9,293,001) (8,664,739) (6,440,734)
------------ ----------- -----------
Reserves for losses and LAE, at beginning of year, net of
reinsurance...................................................... 9,254,263 8,594,313 6,440,734
Add provision for claims occurring in:
The current year, net of reinsurance............................. 14,697,560 15,644,533 15,566,043
The prior years, net of reinsurance.............................. (3,330,353) (4,118,162) (2,061,688)
------------ ----------- -----------
Total incurred claims during year, net of reinsurance.......... 11,367,207 11,526,371 13,504,355
------------ ----------- -----------
Deduct payments for claims occurring in:
The current year, net of reinsurance............................. 8,020,332 7,908,934 8,979,002
The prior years, net of reinsurance.............................. 2,627,714 2,957,487 2,371,774
Total claims paid during the year, net of reinsurance.......... 10,648,046 10,866,421 11,350,776
------------ ----------- -----------
Reserves for losses and LAE, at end of year, net of reinsurance..... 9,973,424 9,254,263 8,594,313
Reinsurance recoverable on unpaid losses and LAE.................... 9,977,986 9,293,001 8,664,739
------------ ----------- -----------
Reserve for losses and LAE, gross of reinsurance recoverable on
unpaid losses and LAE............................................ $19,951,410 $18,547,264 $17,259,052
============ ============ ===========
16
The Company's estimate of required reserves for unpaid losses and LAE, net of related reinsurance recoverables for prior years were decreased during the years ended December 31, 2000, 1999, and 1998 by $3,330,353, $4,118,162, and $2,061,688, respectively. This change in estimate is due to the Company's actual loss experience emerging more favorably than expected. The Company's reserves for losses and loss adjustment expenses are estimated using individual case-basis valuations and statistical analyses. These estimates are subject to the effects of trends in loss severity and frequency. Due to the Company's lack of significant historical loss experience, the Company's reserves for losses and LAE are subject to significant variability. However, management believes that the reserves for losses and loss adjustment expenses are adequate. These estimates are reviewed regularly by management, and annually by an independent consulting actuary, and are adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
The Common Stock Class A and Class D have voting rights equal to one vote for each share of stock held. The Common Stock Class B and Class C are nonvoting.
The Common Stock Class D has a dividend preference equal to 50% of any dividends that are paid by FSIA to the Company. The amount of the dividend preference will accrue interest at 6% from the date the dividends are paid by FSIA to the Company, until the dividend preference is paid to the holders of the Common Stock Class D. At December 31, 1999, FSIA declared a dividend payment of $3,023,805 to FSIH, which was subsequently paid in January 2000.
In addition, FSIC declared dividends to FSIH in 2000, 1999, and 1998 of $3,010,462, $2,976,543, and $0, respectively. Payments were subsequently made in January 2001 and 2000 respectively.
The Company has issued a warrant to purchase 1,000 shares of the Common Stock Class B to Centre Solutions (Bermuda) Ltd. The warrant allows the holder of the warrant to purchase the shares for the book value of the stock on the date of exercise. In the event that the holder exercises the warrant, the holder is required to reduce the affiliated quota share reinsurance agreement accordingly.
The Company has also issued a warrant to purchase 60 shares of Common Stock Class B to the holder of the Common Stock Class D. This warrant is exercisable upon cancellation of the Common Stock Class D for a price equal to the book value of the Common Stock prior to cancellation of the Common Stock Class D.
Policyholders' surplus and net income for FSIC as determined in accordance with statutory accounting practices as of and for the years ended December 31, 2000, 1999, and 1998 were $18,640,356, $15,257,192, and $14,484,621 and $1,816,066, $3,684,943, and $3,040,681, respectively.
Policyholders' surplus and net income for TSLIC (incorporated in 2000) as determined in accordance with statutory accounting practices as of and for the year ended December 31, 2000 were $2,611,627 and $71,732.
In order to improve the regulation of insurer solvency, the National Association of Insurance Commissioners ("NAIC") issued a model law to implement risk-based capital ("RBC") requirements, which is expected to be adopted by Florida and Texas, the Company's insurance subsidiaries' states of
17
domicile. These requirements are designed to assess capital adequacy and to raise the level of protection that statutory equity provides for policyholder obligations. The RBC formula for property and casualty insurance companies measures the following major areas of risk facing property and casualty insurers: (i) underwriting, which encompasses the risk of adverse loss development and inadequate pricing; (ii) declines in asset values arising from credit risk; and (iii) declines in asset values arising from investment risks. Pursuant to the RBC requirements, insurers having less statutory equity than required by the RBC calculation will be subject to varying degrees of regulatory action, depending on the level of capital inadequacy. At December 31, 2000, FSIC and TSLIC exceeded the minimum risk-based capital requirements and no corrective action was required.
The NAIC revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The revised manual will be effective January 1, 2001. The domiciliary states of the Company's insurance subsidiaries have adopted or are anticipating adopting the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and will result in changes to the statements. Management believes that there will not be a negative impact from these changes to the Company and its insurance subsidiaries' statutory-basis capital and surplus as of January 1, 2001.
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
The Company's fair values of its financial instruments are summarized below:
December 31,
-------------------------------------------------------
2000 1999
-------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Cash and cash equivalents......... $10,379,751 $10,379,751 $17,964,448 $17,964,448
Investments available-for-sale.... 46,627,215 46,627,215 36,357,501 36,357,501
Investments held-to-maturity...... 2,484,937 2,605,726 470,064 457,804
Reinsurance recoverable........... 32,615,611 32,615,611 29,522,360 29,522,360
Premiums receivable............... 3,961,825 3,961,825 3,222,580 3,222,580
As discussed in Note 3, FSIC has a 50% quota share agreement with an affiliate of the Company and had ceded premiums of approximately $24,260,000, $20,806,000, and $23,200,000, losses of $11,367,000, $11,526,000, and $13,500,000 and has earned ceding commissions of $7,356,000, $6,986,000, and $8,028,000 under this agreement during 2000, 1999, and 1998, respectively.
18
As discussed in Note 1, CSC, an affiliate of the Company, provides policy management services to FSIC. Policy management fee expense incurred during 2000, 1999, and 1998 was approximately $3,104,000, $3,775,000, and $6,018,000 respectively. Amounts due to CSC for policy management fees at December 31, 2000 and 1999 were approximately $1,185,000 and $120,000, respectively. An affiliate of the Company, Risk Enterprise Management Limited, provides claims management services for the Company. The Company incurred approximately $1,812,000, $1,813,000, and $1,500,000 in claims management fees related to this arrangement during 2000, 1999, and 1998, respectively.
During 1996, FSIC entered into an agreement with the FRPCJUA to assume certain policies and associated risk pursuant to a depopulation plan. Under the terms of the agreement, FSIC receives a specific amount for each policy removed from the FRPCJUA. The amount is to be held by an escrow agent for three years. The Company has recognized revenue of approximately $1,880,000, $9,228,000, and $0 in 2000, 1999, and 1998, respectively, related to the take-out agreement. FSIC collected approximately $9,129,000 of the amounts recorded as of December 31, 2000.
Under the terms of the 50% quota share agreement with Centre Insurance Company, an affiliate, FSIC is required to cede 50% of the revenue recognized from the take-out agreement. The Company ceded approximately $940,000, $4,614,000, and $0 during 2000, 1999, and 1998, respectively.
The Company has implemented a long-term incentive plan in the form of an unfunded Stock Appreciation Rights ("SARs") plan for a select group of management or highly compensated employees of FSIH and its affiliates. This plan provides for vesting of the SARs upon the later of (i) the Participant's fifth anniversary of commencement of employment with the Employer or (ii) the third anniversary of the grant of the award. The plan allows that upon exercise of an award, the employer may deliver to the Participant a specified number of shares of Stock or a specified amount of cash, as determined in the sole discretion of the Employer. The Company granted 12,500 SARs in 2000 and 62,500 in 1999. Total compensation expense related to the SARs was approximately $348,000, $594,000, and $316,000 in 2000, 1999, and 1998, respectively.
The Company, in the normal course of business, is involved in various legal actions arising principally from the settlement of claims made under insurance policies and contracts. Those actions are considered by the Company in estimating the loss and LAE reserves. The Company's management believes that the resolution of those actions will not have a material effect on the Company's financial position or results of operations.
19
FLORIDA SELECT INSURANCE HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2001 2000
---------- ------------
(unaudited)
ASSETS
INVESTMENTS:
Fixed maturities.................................................................. $47,000,561 $49,112,152
Preferred stock................................................................... 5,273,153 4,250,451
----------- ----------
Total investments............................................................... 52,273,714 53,362,603
Cash and cash equivalents........................................................... 9,427,953 10,379,751
Premiums receivable (net of allowance for doubtful accounts of $178,766 and $160,391, 2,972,758 3,961,825
respectively).......................................................................
Amounts due from FRPCJUA in accordance with take-out agreement...................... 2,624,831 1,979,791
REINSURANCE RECOVERABLES:
On paid losses and loss adjustment expenses....................................... 3,935,667 1,961,275
On unpaid losses and loss adjustment expenses..................................... 10,088,742 9,977,986
Prepaid reinsurance premiums...................................................... 18,788,153 20,676,350
Accrued investment income........................................................... 755,838 820,429
Deferred policy acquisition costs................................................... 1,779,960 1,814,789
Property and equipment.............................................................. 320,605 333,171
Deferred taxes...................................................................... 767,563 1,092,362
Other assets........................................................................ 426,234 284,988
----------- -----------
Total assets.................................................................... $104,162,018 $106,645,320
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Loss and loss adjustment expense reserves......................................... $20,132,974 $19,951,410
Unearned premium reserve.......................................................... 35,100,504 36,321,138
Other policyholders' funds........................................................ 1,435,483 3,569,868
Reinsurance balance payable....................................................... 7,357,828 7,639,665
Accounts payable and accrued expenses............................................. 2,655,084 4,793,500
Income taxes payable.............................................................. 3,303,669 2,892,790
---------- ---------
Total liabilities............................................................... 69,985,542 75,168,371
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value; 2,000 shares authorized; no shares issued and
outstanding......................................................................... -- --
Common stock:
Class A, $.01 par value; 2,000 shares authorized; 784 shares issued--779 shares 8 8
outstanding.........................................................................
Class B, $.01 par value; 2,000 shares authorized; no shares issued and outstanding -- --
Class C, $.01 par value; 2,000 shares authorized; 156 shares issued and 1 1
outstanding.........................................................................
Class D, $.01 par value; 2,000 shares authorized; 60 shares issued and outstanding 1 1
Additional paid in capital........................................................ 10,606,051 10,606,051
Treasury stock.................................................................... (105,000) (105,000)
Retained earnings................................................................. 23,137,202 20,822,998
Accumulated other comprehensive income (deficit).................................. 538,213 152,890
----------- -----------
Total shareholders' equity...................................................... 34,176,476 31,476,949
----------- ----------
Total liabilities and shareholders' equity...................................... $104,162,018 $106,645,320
=========== ===========
See accompanying notes.
20
FLORIDA SELECT INSURANCE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the Three Months
Ended March 31,
--------------------
2001 2000
---------- ----------
REVENUE:
Premiums earned, net........................................ $6,780,130 $6,267,496
Net investment income....................................... 954,193 746,553
Other income................................................ 1,363,137 376,281
----------- -----------
Total revenue.................................................. 9,097,460 7,390,330
LOSSES AND EXPENSES:
Losses and loss adjustment expenses......................... 3,051,384 2,744,988
Other underwriting, general and administrative expenses..... 2,238,641 1,679,653
Amortization and depreciation............................... 85,027 92,410
---------- -----------
Total losses and expenses...................................... 5,375,052 4,517,051
---------- ----------
Income before income taxes..................................... 3,722,408 2,873,279
Income tax expense............................................. 1,408,204 1,088,217
----------- ----------
Net income..................................................... $2,314,204 $1,785,062
=========== ===========
See accompanying notes.
21
FLORIDA SELECT INSURANCE HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the
Three Months Ended March 31,
----------------------------
2001 2000
------------- -----------
OPERATING ACTIVITIES:
Net income........................................................................... $2,314,204 $ 1,785,062
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and depreciation..................................................... 80,882 127,134
Deferred income taxes............................................................. 92,324 (1,492,711)
Policy acquisition costs.......................................................... 34,830 1,885,022
Net (gain) loss on sale of investments............................................ (17,363) 13,259
Increase in premiums receivable................................................... 989,067 661,530
Decrease (increase) in amounts due from the FRPCJUA............................... (645,040) 7,538,377
(Increase) decrease in reinsurance recoverable.................................... (196,951) (13,997)
(Increase) decrease in accrued investment income.................................. 64,591 (118,269)
Decrease (increase) in receivable from affiliate.................................. (320,300) 106,097
(Increase) decrease in other assets............................................... (141,246) (150,605)
Increase in loss and loss adjustment expenses..................................... 181,564 590,392
Increase (decrease) in unearned premium reserve................................... (1,220,634) 593,768
Decrease in other policyholders' funds............................................ (2,134,385) (2,870,608)
(Decrease) increase in reinsurance balance payable................................ (281,837) (7,907,734)
Increase (decrease) in accounts payable and accrued expenses...................... (1,818,116) (1,120,132)
Increase in income tax payable.................................................... 410,879 2,025,927
------------- -----------
Net cash provided by operating activities............................................ (2,607,531) 1,652,512
INVESTING ACTIVITIES:
Purchase of investment securities.................................................... (6,428,216) (10,651,007)
Proceeds from sale and maturity of investment securities............................. 8,098,694 4,436,111
Purchase of property and equipment................................................... (14,745) (1,172)
------------- ------------
Net cash used in investing activities................................................ 1,655,733 (6,216,068)
------------- ------------
FINANCING ACTIVITIES:
Dividends paid....................................................................... -- (6,000,348)
--------------- -----------
Net cash used in financing activities................................................ -- (6,000,348)
--------------- -----------
Net (decrease) increase in cash and cash equivalents................................. (951,798) (10,563,904)
Beginning cash and cash equivalents.................................................. 10,379,751 17,964,448
---------------- -----------
Ending cash and cash equivalents..................................................... $9,427,953 $7,400,544
=============== ============
22
The accompanying unaudited interim financial statements include the accounts of Florida Select Insurance Holdings Inc. and 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 in the Company's audited consolidated balance sheet as of December 31, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in period ended December 31, 2000.
23
The following presentation sets forth the unaudited pro forma consolidated financial statements of Vesta as of and for the three months ended March 31, 2001 and as of and for the year ended December 31, 2000, giving effect to our proposed acquisition of Florida Select Insurance Holdings Inc. ("Florida Select"), our acquisition of American Founders Financial Corporation ("American Founders") on June 30, 2000, and the issuance of 8.625 million shares of common stock pursuant to an offering as if the transactions had occurred at the beginning of each period. The acquisitions are accounted for as purchases.
The following transactions have been reflected in the accompanying unaudited pro forma consolidated balance sheet for March 31, 2001 and the unaudited pro forma consolidated statements of operations as of the three months ended March 31, 2001 and as of the year ended December 31, 2000 as if those transactions had occurred at the beginning of each respective period:
| • | On January 31, 2000, American Founders acquired Securus Financial Corporation (“Securus”). Prior to the acquisition of Securus, American Founders had no material operations. As a part of the transaction, Securus paid approximately $43.9 million to its former parent, which included effectively repaying the $33.5 million surplus note payable. American Founders accounted for the acquisition under the purchase method of accounting and, accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. The purchase price of Securus and Subsidiaries included 50,000 shares of convertible preferred stock (Series A) with a stated value of $50 million and an estimated fair value of approximately $39.3 million and common stock warrants with an estimated fair value of approximately $5.7 million. |
| • | On June 30, 2000, we acquired a controlling interest in American Founders (approximately 71% voting control). American Founders received $25 million in cash in exchange for $25 million of 9.5% convertible subordinated notes (immediately convertible into common stock of American Founders) and 25 shares of special voting preferred stock. This preferred stock does not provide for dividends; however, it does allow Vesta to vote the number of shares of common stock that the convertible subordinated notes are convertible into. We accounted for the transaction under the purchase method of accounting and, accordingly, the purchase price has been allocated to the tangible and identifiable intangible assets and liabilities of American Founders on the basis of their respective fair values on the acquisition date. |
| • | On April 18, 2001, Vesta agreed to acquire, subject to regulatory approval, Florida Select for a cash payment equal to approximately $61.5 million. Vesta also agreed to pay an additional $3 million commutation fee to Centre Insurance Company, an affiliate of one of the stockholders of Florida Select, in connection with the commutation of a reinsurance agreement between Florida Select and Centre Insurance Company. Vesta will account for the transaction under the purchase method of accounting, and accordingly, the purchase price will be allocated to the tangible and identifiable intangible assets and liabilities of Florida Select on the basis of their respective fair values on the acquisition date. The transaction was completed on July 10, 2001. |
| • | In connection with the transaction, Florida Select commuted its 50% quota share reinsurance treaty with Centre Insurance Company as of January 1, 2001. |
The pro forma information should be read in conjunction with the historical financial statements of Vesta, Securus, American Founders and Florida Select and the related notes thereto. The following presentation is not necessarily indicative of the results of operations that would have resulted had the relevant transactions been consummated at the periods indicated, nor is it necessarily indicative of the results of operations of future periods.
24
VESTA INSURANCE GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
For the Three Months Ended March 31, 2001
----------------------------------------------
Historical Pro Forma
----------------- --------------------
Florida Pro Forma Pro Forma
Vesta Select Adjustments Vesta
---------- ------- ------------- ----------
REVENUES:
Net premiums earned........................................... $65,395 $6,780 $ 6,168(1) $ 78,343
Policy fees................................................... 1,253 -- -- 1,253
Net investment income......................................... 15,603 954 382(2) 16,939
Realized (losses) gains....................................... 1,706 -- -- 1,706
Other . 2,146 1,363 1,363(1) 4,872
---------- --------- ----------- -----------
Total revenues........................................... 86,103 9,097 7,913 103,113
EXPENSES:
Policyholder benefits......................................... 8,057 -- -- 8,057
Losses and loss adjustment expenses incurred.................. 38,701 3,051 2,928(1) 44,680
Policy acquisition expenses................................... 14,402 1,101 1,611(1) 17,114
Operating expenses............................................ 14,653 1,138 499(1) 16,290
Interest on debt.............................................. 4,658 -- -- 4,658
Goodwill and other intangible amortization.................... 526 85 525(4) 1,136
---------- -------- ---------- -----------
Total expenses........................................... 80,997 5,375 5,563 91,935
Income (loss) from continuing operations before taxes, minority
interest, and deferrable capital securities..................... 5,106 3,722 2,350 11,178
Income tax expense (benefit)....................................... 1,787 1,408 907(5) 4,102
Minority interest, net of tax...................................... 249 -- -- 249
Deferrable capital security distributions, net of tax.............. 383 -- 383
----------- -------- ---------- -----------
Income (loss) from continuing operations........................... $ 2,687 $2,314 $ 1,443 $6,444
=========== ======== ========== ===========
Income from continuing operations per share--basic.................. 0.14 0.23(7)
Income from continuing operations per share--diluted................ 0.13 0.21(7)
See accompanying notes.
25
VESTA INSURANCE GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
March 31, 2001
------------------------------------------------------
Purchase
Florida Accounting Pro Forma
Vesta Select Adjustments Vesta
-------- --------- ------------ -----------
ASSETS
INVESTMENTS:
Fixed maturities available for sale--at fair value
(cost: 2001--$760,245) ................................ $ 766,386 $47,001 -- $ 813,387
Equity securities--at fair value: (cost: 2001--$15,520).. 16,584 5,273 -- 21,857
Mortgage and collateral loans............................ 59,272 -- -- 59,272
Policy loans............................................. 61,952 -- -- 61,952
Short-term investments................................... 21,573 -- -- 21,573
Other invested assets.................................... 37,741 37,741
---------- ---------- ----------- ------------
Total investments................................. 963,508 52,274 -- 1,015,782
Cash..................................................... 31,104 9,428 21,838 (8) 62,370
Accrued investment income................................ 14,551 756 -- 15,307
Premiums in course of collection (net of allowances for
losses of $3,937 in 2001).............................. 26,847 2,973 -- 29,820
Reinsurance balances receivable.......................... 354,067 28,877 (22,900)(9) 360,044
Reinsurance recoverable on paid losses................... 59,572 3,936 -- 63,508
Deferred policy acquisition costs........................ 44,208 1,780 -- 45,988
Deferred income taxes.................................... 17,376 767 -- 18,143
Other assets............................................. 99,309 3,371 31,824(10) 134,504
---------- ---------- ----------- -----------
Total assets...................................... $ 1,610,542 $ 104,162 $ 30,762 $ 1,745,466
=========== ========== ============ ============
LIABILITIES
Policy liabilities....................................... $ 664,214 -- -- $ 664,214
Losses and loss adjustment expenses...................... 262,474 $20,133 -- 282,607
Unearned premiums........................................ 104,110 35,101 -- 139,211
Federal Home Loan Bank advances.......................... 147,922 -- -- 147,922
Short-term debt.......................................... 14,997 -- -- 14,997
Long-term debt........................................... 86,423 -- -- 86,423
Other liabilities........................................ 96,579 14,752 $ 1,500 (11) 112,831
------------ --------- ------------- -------------
Total liabilities................................. 1,376,719 69,986 1,500 1,448,205
Commitments and contingencies
Deferrable Capital Securities............................... 29,750 -- -- 29,750
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000 shares
authorized, issued: 2001--0................................ 0 -- -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, issued: 2001--24,864,322................... 249 86 (12) 335
Additional paid-in capital............................... 150,464 10,606 52,746 (12),(13) 213,816
Accumulated other comprehensive income, net of tax
(benefit) expense of $2,522............................ 4,683 538 (538)(13) 4,683
Retained earnings........................................ 60,503 23,137 (23,137)(13) 60,503
Treasury stock (439,576 shares at cost) at March 31, 2001 (3,397) (105) 105 (13) (3,397)
Unearned stock........................................... (8,429) -- -- (8,429)
----------- --------- ------------- ------------
Total stockholders' equity........................ 204,073 34,176 29,262 267,511
----------- --------- ------------- ------------
Total liabilities, deferrable capital securities
and stockholders equity $ 1,610,542 $ 104,162 $30,762 $ 1,745,466
=========== ========== ============= ===========
See accompanying notes.
26
VESTA INSURANCE GROUP, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
For the Year Ended December 31, 2000
----------------------------------------------------------------------
Historical Pro Forma
----------------------------------------- --------------------------
Florida American Pro Forma Pro Forma
Vesta Select Founders/Securus(a) Adjustments Vesta
---------- ---------- ------------------- ------------ ---------
REVENUES:
Net premiums earned.................... $216,999 $26,348 $ 1,954 $23,743 (1) $269,044
Investment product policy fees......... 2,209 -- 2,614 -- 4,823
Net investment income.................. 45,903 2,936 21,784 756 (2) 71,379
Realized (losses) gains................ (2,061) -- (1,298) 1,298 (3) (2,061)
Other.................................. 2,103 1,065 1,153 940 (1) 5,261
---------- ---------- ------------------- ------------ ----------
Total revenues.................... 265,153 30,349 26,207 26,737 348,446
EXPENSES:
Policyholder benefits.................. 9,610 -- 10,026 -- 19,636
Losses and loss adjustment expenses
incurred............................ 125,432 11,367 11,367 (1) 148,166
Policy acquisition expenses............ 52,247 3,292 1,039 5,602 (1) 62,180
Operating expenses..................... 43,574 4,522 4,956 1,922 (1) 54,974
Interest on debt....................... 15,105 -- 6,029 (288)(2) 20,846
Goodwill and other intangible
amortization........................ 1,591 298 -- 2,372 (4) 4,261
---------- ---------- ------------------- ------------ ---------
Total expenses.................... 247,559 19,479 22,050 20,975 310,063
Income from continuing operations before
taxes, minority interest, and deferrable
capital securities....................... 17,594 10,870 4,157 5,762 38,383
Income tax expense.......................... 5,664 4,281 1,781 1,901 (5) 13,627
Minority interest, net of tax............... 1,595 -- 1,645 (6) 3,240
Deferrable capital security distributions,
net of tax............................... 1,986 -- -- -- 1,986
---------- --------- ------------------- ------------ ---------
Income from continuing operations........... $ 8,349 $6,589 $ 2,376 $2,216 $19,530
========== ========= =================== ============ =========
Income from continuing operations per
share--basic............................. $ 0.46 $0.73 (7)
Income from continuing operations per
share--diluted........................... $ 0.34 $0.59 (7)
(a) Represents the historical results of American Founders and its predecessor for the period January 1, 2000 through June 30, 2000.
See accompanying notes.
27
Florida Select Acquisition............................................................. $(64.5) million
Less common stock offering net proceeds (see footnote 12).............................. $ 63.4 million
Less settlement of balances pursuant to commutation of Centre Insurance Company
and Florida Select treaty........................................................... $ 22.9 million
--------------
Net cash impact........................................................................ $ 21.8 million
28
We consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 33-74160, 33-81114, 33-81126, 33-80385, 33-80387, 33-80395, and 333-53810), the Registration Statement on Form S-3 (No.333-58764), and the Registration Statement on Form S-8 pertaining to the 2001 Incentive Compensation Plan of Vesta Insurance Group, Inc. of our report dated March 16, 2001, with respect to the consolidated financial statements of Florida Select Holdings Inc. for the year ended December 31, 2000 included in the Current Report (Form 8K) dated July 18, 2001.
/s/ Ernst & Young LLPTampla, Florida
July 13, 2001