Edgar Filing: VESTA INSURANCE GROUP INC

FILED PURSUANT TO
RULE 424(b)(4)
FILE NO: 333-60634
PROSPECTUS

7,500,000 Shares
[Vesta Logo]

VESTA INSURANCE GROUP, INC.

Common Stock

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Vesta Insurance Group, Inc. is offering 7,500,000 shares of its common
stock.

Our common stock currently trades on the New York Stock Exchange under the
symbol "VTA." On June 20, 2001, the last reported sale price of the common
stock on the New York Stock Exchange was $8.55 per share.

Investing in our stock involves risks. See "Risk Factors" beginning on page
10.

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Neither the U.S. Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined that
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

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Per Share Total
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Public Offering Price..................................... $8.00 $60,000,000
Underwriting Discount..................................... $0.50 $ 3,750,000
Proceeds to Vesta......................................... $7.50 $56,250,000
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The underwriters may purchase up to an additional 1,125,000 shares at the
public offering price, less the underwriting discount, from us within 30 days
from the date of this prospectus to cover over-allotments.

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William Blair & Company Cochran, Caronia Securities LLC

The date of this prospectus is June 20, 2001.

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that which
is set forth in this prospectus. We are offering to sell shares of common stock
and seeking offers to buy shares of common stock only in jurisdictions where
offers and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of the prospectus or of any sale of common stock.

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TABLE OF CONTENTS

Prospectus Summary.......................................................... 3
Risk Factors................................................................ 10
Use of Proceeds............................................................. 15
Price Range of Common Stock and Dividends................................... 16
Capitalization.............................................................. 17
Selected Historical Financial and Operating Data............................ 18
Selected Pro Forma Financial and Operating Data............................. 20
Business.................................................................... 22
Management.................................................................. 42
Security Ownership of Management and Principal Stockholders................. 44
Underwriting................................................................ 46
Legal Matters............................................................... 47
Experts..................................................................... 48
Where You Can Find More Information......................................... 48
Index to Financial Statements............................................... F-1

This prospectus and the documents incorporated by reference into this
prospectus contain "forward-looking statements" within the meaning of the
federal securities laws. Generally, when we use terms such as "anticipate,"
"believe," "could," "estimate," "intend," "expect," "plan," "would," and
similar expressions, we are making a forward-looking statement. Certain
statements contained in this prospectus that are not historical facts, or that
concern expected financial performance, on-going business strategies, and
possible future action that we intend to pursue are also forward-looking
statements. Factors that might cause actual results to differ from the forward-
looking statements include the following:

. Catastrophic weather events;

. Our ability to achieve the earnings expectations related to the
businesses that we have recently acquired or may acquire in the future,
which in turn depends on numerous factors including the ability to
achieve in a timely manner anticipated cost savings and revenue
enhancements with respect to acquired operations and the assimilation of
acquired operations into Vesta's corporate culture;

. Our inability to reinsure risks or collect on existing reinsurance for
losses that occur;

. Changes in the laws or regulations affecting our operations;

. Changes in our relationship with independent agents;

. Changes in the retail marketplace, our competitors' business tactics or
strategies, or our industry ratings;

. Pending or future litigation or arbitration, including arbitration of
reinsurance treaties, against us;

. Changing market forces that necessitate, in the opinion of our
management, changes in our plans, strategies or tactics; and

. Other factors that we discuss in the section of this prospectus entitled
"Risk Factors" beginning on page 10.

A forward-looking statement expresses our expectations on the date we make
it. We will not update any forward-looking statement to reflect events or
circumstances arising after the date on which we made it. Actual results,
performance, or achievements can differ materially from results suggested by
these forward-looking statements because of a variety of factors including
those described in the section of this prospectus entitled "Risk Factors"
beginning on page 10.

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For North Carolina residents: the Commissioner of Insurance of the State of
North Carolina has not approved or disapproved this offering nor has the
Commissioner passed upon the accuracy or adequacy of this prospectus.

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The laws of various states prohibit any person or entity from directly or
indirectly acquiring 10% or more (5% or more in Alabama and Florida) of the
voting control of any domestic insurance holding company without approval of
such states' respective Commissioner of Insurance.

PROSPECTUS SUMMARY

This summary highlights some of the information contained in this
prospectus. It is not complete and may not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully. When we refer to "Vesta," the "Company," "we,"
"us," or "our" in this prospectus, we are referring to Vesta Insurance Group,
Inc., a Delaware corporation, and all of its subsidiaries.

The Company

Vesta is an insurance holding company that offers a wide range of personal
insurance products. Our largest business segment is the standard property and
casualty insurance segment, which underwrites and sells personal automobile and
homeowners insurance products distributed through approximately 1,600
independent sales agencies. As of December 31, 2000, we reported consolidated
assets of approximately $1.6 billion and stockholders' equity of approximately
$215.1 million. For the year ended December 31, 2000, we reported net written
premiums of approximately $210.7 million and income from continuing operations
of approximately $8.3 million.

Business Strategy

Our strategy is to grow operating earnings and strengthen our capital
position. We do this by aggressively managing our core property and casualty
insurance business and pursuing strategic opportunities that permit us to offer
personal insurance products which complement our existing product lines and
distribution channels. The principal elements of our strategy include:

. Focus on the Profitability of the Core Standard Property and Casualty
Operations. We seek to establish disciplined underwriting programs that
will result in sustainable underwriting profits. During the past two
years, we have initiated a number of actions to improve the performance
of our standard property and casualty operations. These include
initiating rate increases in a number of key markets, reducing the
number of active agencies from 2,800 to 1,600, migrating from multiple
policy processing platforms to a primary integrated platform, and
significantly reducing personnel and other expenses by consolidating
regional offices into our principal office in Birmingham, Alabama.
Management believes that these initiatives will result in lower loss and
expense ratios as well as enhanced premium growth.

. Expansion into New Geographic Markets. We continuously seek expansion
opportunities that allow us to leverage our underwriting capabilities
and product expertise in new markets. While we are currently licensed in
48 states, ten core states accounted for over 70% of our premium volume
during 2000. We believe there are significant opportunities to expand
our homeowners programs outside the ten core states where established
carriers are at capacity due to geographic concentrations. In April
2001, we entered into a definitive agreement to acquire Florida Select
Insurance Holdings Inc. ("Florida Select"), the eighth largest insurer
of residential property in Florida. We intend to use Florida Select's
expertise in selecting and managing risk in catastrophe-prone areas to
expand our homeowners program in such states as Texas, California, and
various northeastern states.

. Expansion of New Personal Lines Products. Since June 2000, we have
acquired or made significant investments in three insurance operations
that will allow us to offer life and annuity, accident and health, and
non-standard automobile insurance products. These strategic investments
include:

-- purchase of a 71% interest in American Founders Financial Corporation
("American Founders"), a holding company for two life insurance
companies in Texas with approximately $2.1 billion of traditional
life, universal life, and annuity products and policies in force as
of December 31, 2000;

-- acquisition of Aegis Financial Corporation, a holding company for an
accident and health insurance company in Texas with approximately
$16.5 million of accident and health premiums in force as of December
31, 2000; and

-- purchase of a 52% interest in Instant Insurance Holdings, Inc.
("Instant Auto"), a holding company for a group of insurance agencies
specializing in the direct marketing and distribution of non-standard
auto insurance products written by other carriers.

. Expansion of Fee-Based Opportunities. We are positioned to generate fee-
based income by acting as a fronting carrier for other insurers and
reinsurers for fees and by marketing and distributing non-standard auto
insurance products through an agency for commissions.

-- Specialty Lines. As a holding company for 14 insurers licensed in 48
states, we seek opportunities to issue policies under our name and
then reinsure substantially all of the risk back to another carrier
or reinsurance company in exchange for a fee. We are focused on
offering these "fronting" services, which we report as specialty
lines, to insurance companies rated "A" or higher by the A.M. Best
Company ("A.M. Best"). During 2000, we contracted for over
$100 million in annual premiums under fronting arrangements,
principally for auto policies. To strengthen our relationship with
reinsurers who may purchase these services, we have acquired an
approximate 9.9% interest in Chaucer Holdings PLC, the United Kingdom
based, publicly-traded holding company of Chaucer Syndicates Limited,
a managing agency at Lloyd's of London. We purchased approximately
8.3 million ordinary shares of Chaucer for approximately $8.2 million
and we will have a seat on Chaucer Holdings' Board of Directors.

-- Non-Standard Auto Insurance. Our acquisition of Instant Auto provides
us with a platform to earn commission income through the direct
marketing and sale of other carriers' non-standard auto insurance
products. This platform includes a highly-integrated call center to
field customer inquiries, facilitate policy applications, and
administer the issuance of new policies. We believe this processing
platform will enable us to execute our growth strategy of acquiring
other non-standard agencies and attracting reinsurers with seasoned
books of business.

Strategic Repositioning

During the past three years, we have completed a strategic repositioning
that will permit us to more aggressively pursue our business strategy. Our
repositioning consisted of changing our senior management, exiting certain
lines of business, and restructuring our balance sheet. Key events in this
repositioning are highlighted below:

. Management Additions: Since 1998, we have made significant changes in
our senior management. In July 1998, James E. Tait joined us as a
Director, Executive Vice President, and Chief Financial Officer and was
subsequently named Chairman in 2000 and occupies the Office of the
Chairman with Norman W. Gayle, III. Mr. Tait is a former Partner at
Coopers & Lybrand LLP, where he served as Managing Partner for the
Midstates Region, responsible for all operations in the Business
Assurance, Tax, and Financial Advisory Services segments delivered to
regional clients. He also held a number of other positions at Coopers &
Lybrand LLP, including Partner-in-Charge of its national Insurance
Industry Team and Partner-in-Charge of the Central Region Financial
Services Team.

In 1998, William P. Cronin joined us as Senior Vice President and
Controller and was subsequently named Chief Financial Officer in 2000.
Mr. Cronin is a former Senior Manager with Ernst & Young LLP where he
worked principally with insurance and healthcare clients.

In addition, Norman W. Gayle, III, who served as our Executive Vice
President and Chief Operating Officer from 1995 through 1998, was named
President and elected a Director in 1998 and has occupied the Office of
the Chairman with Mr. Tait since 2000.

. Exit from the Reinsurance and Commercial Property and Casualty
Segments: During 1999 and 2000, we experienced downgrades in our A.M.
Best ratings. In light of these rating actions and the increasing
competitiveness of the reinsurance and commercial marketplaces, we
anticipated a significant loss of reinsurance premiums going forward,
and we determined that the corrective actions necessary to return the
commercial segment to profitability were not justifiable. Accordingly,
during 1999 and 2000, we entered into a series of transactions in order
to exit the reinsurance assumed and commercial property and casualty
businesses.

. Debt Exchanges and Convertible Preferred Stock Repurchases: During 2000
and the first quarter of 2001, we engaged in a series of debt exchanges
and repurchases to reduce our annual interest expense obligations and
improve our debt-to-capital ratio. As a result of these transactions, we
have reduced our outstanding debt by approximately $68.7 million, our
ongoing annual interest obligations by approximately $7.5 million, and
our debt-to-total capital ratio from approximately 48.5% as of December
31, 1999 to approximately 39.1% as of March 31, 2001. Additionally,
during the first quarter of 2001, we repurchased 5.9 million shares of
our common stock issued upon conversion of 2.95 million shares of our
Series A convertible preferred stock with a face value of approximately
$25.1 million, eliminating approximately $2.3 million in annual dividend
payments.

. Improved Ratings: On February 25, 2000, we received an upgrade from A.M.
Best in our insurance subsidiaries ratings to "B+" (Very Good) from "B"
(Fair). The "B+" rating places us in the "secure" category of A.M.
Best's classifications, reflecting our improved financial condition,
including reduced debt and greater financial flexibility. Additionally,
Moody's Investor Service recently revised its outlook for the ratings of
the Company to "Positive" from "Negative."

We believe these positive developments have enabled us to overcome the
challenges that arose in the spring of 1998. At that time, we discovered that
certain reserves and premium estimates in our assumed reinsurance business may
have been inappropriately recorded during the first quarter ended March 31,
1998 and the fourth quarter ended December 31, 1997. Following a voluntary
internal investigation, we concluded that inappropriate amounts had, in fact,
been recorded, and we decided to restate our financial statements for these two
quarters. While not the subject of the investigation, we and our auditors at
that time also reexamined during this time the method of accounting that we had
historically used in computing the earned reinsurance premiums included in our
financial statements. This reexamination led us to conclude that the method of
accounting was not in accordance with generally accepted accounting principles,
and to correct this error we restated our financial statements for 1997 and all
prior periods. The cumulative effect of these restatements resulted in a
decrease to stockholders' equity of approximately $75.2 million through March
31, 1998.

Following the restatement of our financial statements in 1998, several
lawsuits were filed against Vesta and certain of its directors and officers,
including federal class action suits that have been consolidated in the United
States District Court for the Northern District of Alabama. We cannot predict
the ultimate outcome of this litigation and have therefore not set aside any
financial reserves. In addition, we are currently in arbitration with certain
of our reinsurers. For more detailed information, see the section of this
prospectus entitled "Risk Factors" beginning on page 10 as well as the section
entitled "Business--Litigation" beginning on page 39.

Florida Select Acquisition

As part of our strategy to seek expansion opportunities that allow us to
leverage our underwriting capabilities and grow our core property and casualty
business in new markets, on April 18, 2001, we and our wholly-owned subsidiary,
Vesta Fire Insurance Corporation, an Illinois domiciled insurer ("Vesta Fire"),
entered into a stock purchase agreement to acquire all of the issued and
outstanding capital stock of Florida Select Insurance Holdings Inc. ("Florida
Select"), the parent company of Florida Select Insurance Company, a Florida
domiciled insurer that offers residential homeowners insurance. The majority of
Florida Select

Insurance Company's policyholders are former customers of the Florida
Residential Property and Casualty Joint Underwriting Association ("JUA"), a
state-sponsored insurer created by the Florida Legislature following Hurricane
Andrew in 1992 to provide homeowners insurance coverage to customers who were
otherwise unable to purchase it in the private market. By 1996, the JUA had
issued almost one million policies insuring approximately $100 billion of
residential property, and it initiated various incentive programs designed to
encourage carriers to assume these policies and return these risks to the
private market. These incentives included attractive rates and the promise of
bonuses to be paid after the assuming company had renewed, or offered to renew,
the policies for at least three years. Florida Select was originally organized
for the purpose of assuming policies from the JUA pursuant to these incentive
programs.

We or Vesta Fire (at our option) will purchase all of the issued and
outstanding capital stock of Florida Select from that company's existing
stockholders for a cash payment equal to approximately $61.5 million plus
interest on this amount accumulating at a rate of 6% per annum from January 1,
2001 until the closing date. If we do not complete this offering or fail to
raise at least $30 million in net proceeds from this offering prior to the
closing of the Florida Select acquisition, we have the right to pay up to $30
million of the consideration in the form of unsecured promissory notes that
mature 60 days after issuance and bear interest at a rate of prime plus 0.25%.
As a condition precedent to closing, we agreed to make an additional cash
payment of $3 million to Centre Insurance Company, an affiliate of Centre
Solutions (Bermuda) Limited, one of the stockholders of Florida Select, in
connection with the commutation of a reinsurance agreement between Centre
Insurance Company and Florida Select Insurance Company.

As of the year ended December 31, 2000, Florida Select had consolidated
assets of approximately $106.6 million, stockholders' equity of approximately
$31.5 million, gross written premiums of approximately $63.5 million, and net
income of approximately $6.6 million. Among other things, we expect our
acquisition of Florida Select to supplement our income stream, provide
opportunities in a market where we have not previously concentrated, and add
expertise that will complement our business in other geographic markets,
especially in the northeastern United States and Hawaii. For more detailed
information, see the section of this prospectus entitled "Risk Factors"
beginning on page 10 and the section entitled "Business--Florida Select
Acquisition" beginning on page 22.

Recent Developments

We recently announced the results of operations for the quarter ended March
31, 2001. We had an approximate $3.4 million increase in net operating earnings
from continuing operations for the first quarter of 2001 compared to the same
period in 2000. Net operating earnings from continuing operations were
approximately $1.7 million, or $0.08 per diluted share, for the quarter ended
March 31, 2001 compared to a loss of approximately $1.7 million, or $0.07 per
diluted share, for the corresponding period in 2000. We announced net income
from continuing operations of approximately $2.7 million, or $0.13 per diluted
share in the first quarter of 2001, compared to an approximate $1.7 million
loss, or a $0.07 per diluted share loss in the corresponding period in 2000.

In addition, our Board of Directors declared a quarterly cash dividend for
the period ended March 31, 2001 of $0.025 per share, a 100% increase over the
prior quarter. The dividend was paid on June 15, 2001 to stockholders of record
on May 30, 2001.

On May 17, 2001, we announced that American Founders, our majority-owned
life insurance subsidiary, agreed to acquire Washington Life Insurance Company
of America for $7.5 million in cash, subject to regulatory approval. Washington
Life has approximately $200 million (face value) of life insurance products in
force.

Our principal offices are located at 3760 River Run Drive, Birmingham,
Alabama 35243 and our telephone number at that address is (205) 970-7000.

The Offering

Total shares of common stock
offered by this prospectus....... 7,500,000 shares (1)

Shares of common stock
outstanding as of March 31,
2001............................. 24,427,946 shares (2)

Shares of common stock to be
outstanding after the offering... 31,927,946 shares (1)(2)

Use of proceeds................... We intend to apply the proceeds to the
acquisition of Florida Select. Any
proceeds from this offering in excess of
the amount applied to the purchase price
of Florida Select will be used for
general corporate purposes. See the
section of this prospectus entitled "Use
of Proceeds" beginning on page 15.

NYSE symbol....................... VTA
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(1) Excludes the issuance of 1,125,000 shares of common stock pursuant to the
underwriters' over-allotment option.

(2) Includes 750,000 shares of issued and outstanding common stock held by the
Vesta Agents Stock Incentive Plan Trust. Excludes (i) 2,322,061 shares of
common stock authorized for future option awards or stock grants under our
current Long Term Incentive Plan and our 2001 Incentive Compensation Plan
as of March 31, 2001, and (ii) 221,478 additional shares of common stock
reserved for issuance for stock options outstanding as of March 31, 2001.

Unless otherwise stated, all information in this prospectus assumes that the
underwriters' over-allotment option is not exercised.

Summary Historical Financial and Operating Data

Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------------ -----------------------
1996 1997 1998 1999 2000(1) 2000 2001
-------- ---------- ---------- -------- ---------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except per share data and ratios)

Statement of Operations
Data: (2)
Net Premiums Earned..... $ 63,206 $ 132,333 $ 247,063 $248,076 $ 216,999 $56,565 $ 65,395
Net Investment Income... 21,374 31,960 26,565 25,949 45,903 7,003 15,603
Policy Fees............. -- -- -- -- 2,209 239 1,253
Other................... 188 2,094 5,473 4,527 2,103 88 2,146
Realized Gains
(Losses)............... 32 3,283 3,272 12,756 (2,061) -- 1,706
-------- ---------- ---------- -------- ---------- -------- ----------
Total Revenues......... 84,800 169,670 282,373 291,308 265,153 63,895 86,103
Policyholder Benefits,
Losses and LAE (3)..... 25,631 69,645 167,413 165,014 135,042 39,779 46,758
Policyholder Acquisition
and Other Underwriting
Expenses............... 35,366 63,702 132,032 87,451 95,821 22,428 29,055
Loss on Asset
Impairment............. -- -- 65,496 -- -- -- --
Goodwill and Other
Intangible
Amortization........... 484 3,065 5,177 2,118 1,591 151 526
Interest on Debt........ 10,059 10,859 14,054 13,215 15,105 3,403 4,658
-------- ---------- ---------- -------- ---------- -------- ----------
Total Operating
Expenses.............. 71,540 147,271 384,172 267,798 247,559 65,761 80,997
Income (Loss) from
Continuing Operations
Before Taxes, Minority
Interest and Deferrable
Capital Securities..... 13,260 22,399 (101,799) 23,510 17,594 (1,866) 5,106
Income Taxes (Benefit).. 4,307 7,973 (29,395) 7,129 5,664 (778) 1,787
Minority Interest, Net
of Tax................. -- -- -- -- 1,595 249
Deferrable Capital
Securities, Net of
Tax.................... -- 5,051 5,449 5,632 1,986 571 383
-------- ---------- ---------- -------- ---------- -------- ----------
Net Income (Loss) from
Continuing Operations.. $ 8,953 $ 9,375 $ (77,853) $ 10,749 $ 8,349 $ (1,659) $ 2,687
======== ========== ========== ======== ========== ======== ==========
Diluted Net Income
(Loss) from Continuing
Operations Per Share... $ 0.47 $ 0.49 $ (4.20) $ 0.53 $ 0.34 $ (0.07) $ 0.13
Net Operating Income
(Loss) (4)............. 8,932 7,241 (37,407) 2,457 9,689 (1,659) 1,691
Net Operating Income
(Loss) Per Diluted
Share.................. 0.47 0.38 (2.02) 0.12 0.40 (0.07) 0.08
Shares Used in Diluted
Per Share Calculation.. 19,157 19,053 18,549 20,202 24,255 24,765 21,094

Balance Sheet Data:
Total Investments and
Cash................... $427,276 $ 656,816 $ 634,668 $483,997 $1,019,266 $406,878 $ 994,612
Total Assets............ 871,385 1,636,859 1,347,702 915,809 1,621,999 823,662 1,610,542
Reserves for Losses, LAE
and Future Policy
Benefits............... 173,275 596,797 504,911 354,709 923,973 331,221 926,688
Outstanding Debt........ 120,279 143,602 168,302 146,876 91,419 107,116 101,420
Federal Home Loan Bank
Advances............... -- -- -- -- 150,691 -- 147,922
Deferrable Capital
Securities............. -- 100,000 100,000 41,225 33,225 41,225 29,750
Stockholders' Equity.... 271,919 297,336 158,027 200,065 215,111 207,459 204,073
Standard Property and
Casualty Operating
Data:
Net Premiums Written.... $ 70,803 $ 150,526 $ 264,839 $227,807 $ 205,461 $ 49,127 $ 52,225
Statutory Capital and
Surplus (5)............ 352,695 317,875 213,251 271,986 275,270 283,155 296,696
Net Premiums Written to
Statutory Surplus...... 0.20x 0.47x 2.31x 0.98x 0.76x 0.69x 0.70x
GAAP (6) Loss Ratio..... 40.1% 52.6% 67.8% 66.5% 58.6% 70.0% 66.3%
GAAP Expense Ratio...... 56.0 48.1 48.5 30.3 37.1 34.8 32.2
-------- ---------- ---------- -------- ---------- -------- ----------
GAAP Combined Ratio..... 96.1% 100.7% 116.3% 96.8% 95.7% 104.8% 98.5%
======== ========== ========== ======== ========== ======== ==========

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(1) Includes the results of American Founders for the third and fourth
quarters of 2000.

(2) As a result of Vesta's decision in 2000 to discontinue its reinsurance
assumed business and its decision in 1999 to discontinue its commercial
lines segment, all periods presented have been reclassified to present
operations on a continuing and discontinued basis.

(3) Loss adjustment expenses.

(4) Represents income (loss) from continuing operations excluding net realized
investment gains or losses, net of federal income taxes.

(5) Statutory data have been derived from the financial statements of Vesta
prepared in accordance with statutory accounting principles ("SAP") and
filed with insurance regulatory authorities.

(6) Generally accepted accounting principles.

Summary Pro Forma Financial and Operating Data

Historical Financial Pro Forma Financial Historical Financial Pro Forma Financial
Information for the Information for the Information for the Information for the
Year Ended Year Ended Three Months Ended Three Months Ended
December 31, 2000(1) December 31, 2000(2) March 31, 2001 March 31, 2001(2)
-------------------- -------------------- -------------------- -------------------
(unaudited) (unaudited) (unaudited)
(in thousands, except per share data and ratios)

Statement of Operations Data:
(3)
Net Premiums Earned............ $ 216,999 $ 269,044 $ 65,395 $ 78,343
Net Investment Income.......... 45,903 71,013 15,603 16,870
Policy Fees.................... 2,209 4,823 1,253 1,253
Other.......................... 2,103 5,261 2,146 4,872
Realized Gains (Losses)........ (2,061) (2,061) 1,706 1,706
---------- ---------- ---------- ----------
Total Revenues................ 265,153 348,080 86,103 103,044
Policyholder Benefits, Losses
and LAE (4)................... 135,042 167,802 46,758 52,737
Policyholder Acquisition and
Other Underwriting Expenses... 95,821 117,154 29,055 33,404
Goodwill and Other Intangible
Amortization.................. 1,591 4,261 526 1,136
Interest on Debt............... 15,105 20,846 4,658 4,658
---------- ---------- ---------- ----------
Total Operating Expenses...... 247,559 310,063 80,997 91,935
Income (Loss) from Continuing
Operations Before Taxes,
Minority Interest and
Deferrable Capital Securities.. 17,594 38,017 5,106 11,109
Income Taxes (Benefit)......... 5,664 13,512 1,787 4,074
Minority Interest, Net of Tax.. 1,595 3,240 249 249
Deferrable Capital Securities,
Net of Tax.................... 1,986 1,986 383 383
---------- ---------- ---------- ----------
Net Income (Loss) from
Continuing Operations......... $ 8,349 $ 19,279 $ 2,687 $ 6,403
========== ========== ========== ==========
Diluted Net Income (Loss) from
Continuing
Operations Per Share.......... $ 0.34 $ 0.61 $ 0.13 $ 0.22
Net Operating Income (Loss)
(5)........................... 9,689 20,619 1,691 5,294
Net Operating Income (Loss) Per
Diluted Share................. 0.40 0.65 0.08 0.19
Shares Used in Diluted Per
Share Calculation............. 24,255 31,755 21,094 28,594
Balance Sheet Data:
Total Investments and Cash..... $1,019,266 $1,096,408 $ 994,612 $1,069,714
Total Assets................... 1,621,999 1,753,667 1,610,542 1,737,028
Reserves for Losses, LAE and
Future Policy Benefits........ 923,973 943,924 926,688 946,821
Outstanding Debt............... 91,419 91,419 101,420 101,420
Federal Home Loan Bank
Advances...................... 150,691 150,691 147,922 147,922
Deferrable Capital Securities.. 33,225 33,225 29,750 29,750
Stockholders' Equity........... 215,111 270,111 204,073 259,073
Standard Property and Casualty
Operating Data:
Net Premiums Written........... $ 205,461 $ 265,392 $ 52,225 $ 65,892
Statutory Capital and Surplus
(6)........................... 275,270 275,270 296,696 296,696
Net Premiums Written to
Statutory Surplus............. 0.76x 0.97x 0.70x 0.89x
GAAP (7) Loss Ratio............ 58.6% 55.5% 66.3% 61.7%
GAAP Expense Ratio............. 37.1 35.7 32.2 32.0
---------- ---------- ---------- ----------
GAAP Combined Ratio............ 95.7% 91.2% 98.5% 93.7%
========== ========== ========== ==========

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(1) Includes the results of American Founders for the third and fourth
quarters of 2000.
(2) Reflects the unaudited pro forma consolidated financial data of Vesta as
of and for the year ended December 31, 2000 and as of and for the three
months ended March 31, 2001, as if the Florida Select acquisition, the
American Founders acquisition and the issuance of common stock had
occurred at the beginning of each period. See Vesta's unaudited pro forma
consolidated financial statements beginning on page F-2 and Florida
Select's consolidated financial statements beginning on page F-7.
(3) As a result of Vesta's decision in 2000 to discontinue its reinsurance
assumed business and its decision in 1999 to discontinue its commercial
lines segment, all periods presented have been reclassified to present
operations on a continuing and discontinued basis.
(4) Loss adjustment expenses.
(5) Represents income (loss) from continuing operations excluding net realized
investment gains or losses, net of federal income taxes.
(6) Statutory data have been derived from the financial statements of Vesta
prepared in accordance with statutory accounting principles ("SAP") and
filed with insurance regulatory authorities.
(7) Generally accepted accounting principles.

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we may face. If any of the following risks actually occur, our
business, financial condition, or results of operations could be materially and
adversely affected. In such case, the trading price of our common stock could
decline, and you may lose all or part of your investment.

We Are Vulnerable to Catastrophic Property Loss

The greatest risk of loss we face in the ordinary course of our business is
property damage resulting from catastrophic events, particularly hurricanes and
tropical storms affecting Hawaii and hurricanes affecting the northeastern
United States. Our exposure to these sorts of risks will increase as a result
of our proposed acquisition of Florida Select Insurance Holdings Inc. ("Florida
Select"), whose subsidiary, Florida Select Insurance Company, specializes in
writing residential homeowners insurance in Florida, an area historically known
for hurricane risk. Because catastrophic loss events are by their nature
unpredictable, historical results of operations may not be indicative of future
results of operations. The occurrence of one or more major catastrophes in any
given period could have a material and adverse impact on our results of
operations and could result in substantial outflows of cash as losses are paid.

We May Be Unable to Consummate the Florida Select Acquisition or to Realize
Expected Benefits from the Acquisition

We cannot guarantee that we will consummate our acquisition of Florida
Select or, if we successfully consummate the transaction, that we will realize
the financial benefits that we hope to realize from the acquisition. The
consummation of the acquisition is subject to certain conditions that must be
satisfied by both us and the sellers of Florida Select. Such conditions
include, without limitation, our receipt of certain regulatory approvals, the
absence of any material adverse changes to the net value of Florida Select
and/or its subsidiaries, compliance by all parties to the stock purchase
agreement with their respective covenants and performance of their respective
obligations, the completion of certain payments by us and an affiliate of one
of the selling stockholders, and the cancellation of certain agreements to
which Florida Select or the selling stockholders are parties prior to or on the
closing date of the acquisition. Additionally, if the conditions are not
satisfied by August 1, 2001, the stock purchase agreement may be terminated by
any of the selling stockholders unless all parties to the agreement mutually
agree to extend such termination date.

We expect the acquisition of Florida Select to have a positive impact on our
operating results. Therefore, failure to consummate the acquisition of Florida
Select may have an adverse effect on our operating results. However, even if we
do consummate the acquisition of Florida Select, we might experience adverse
effects to our operating results for numerous reasons. Acquisitions typically
entail many risks and can result in difficulties in assimilating and
integrating operations, personnel, technologies, products, and information
systems and may require additional infusions of capital. Certain anticipated
costs savings may or may not be realized. As a result, the acquisition could
have an adverse impact on our financial condition and results of operations
which will likely have an adverse effect on our stock price.

We Are Currently Defending Class Action Litigation Seeking Unspecified but
Potentially Significant Damages

We are currently defending a consolidated stockholder class action lawsuit
pending in the United States District Court for the Northern District of
Alabama that alleges violations of certain provisions of the federal securities
laws and also a derivative action pending in Alabama state court. See the
section of this prospectus entitled "Business--Litigation--Securities
Litigation" beginning on page 39. The consolidated class action is in the
discovery stage with a current trial date of November 5, 2001. The damages
claimed by the stockholder class are substantial. We are vigorously defending
this litigation but there is no assurance of the outcome of the litigation or
of the range of potential adverse damage judgments if the plaintiffs are
successful. The parties have conducted settlement discussions, but have not
been successful in reaching any resolution. The derivative action has been
placed on the administrative docket.

We have several layers of directors' and officers' liability insurance
coverage ("D&O insurance"), the terms of which may cover all or a portion of
the damages or settlement costs of the class action. These policies provide up
to $100 million in D&O insurance to cover damages or settlement costs and an
additional policy provides another layer of $10 million to cover additional
damages awarded by a court in these actions. The primary policy that provides
the first $25 million of D&O insurance was issued by Cincinnati Insurance
Company ("Cincinnati"). Federal Insurance Company (The Chubb Group of Insurance
Companies) issued an excess D&O insurance policy which provides coverage for
the second $25 million in losses, if necessary. The balance of the coverage is
provided by a group of insurers and was purchased after the class actions
comprising the consolidated class action were filed. After these actions were
filed, Cincinnati, which provides the primary D&O insurance coverage, filed a
lawsuit seeking to rescind the policy and avoid the coverage. That action was
dismissed for lack of subject matter jurisdiction, and we then filed an action
in state court against Cincinnati to enforce the policy and for damages.
Cincinnati filed an answer and counterclaim in that action, seeking to rescind
the policy and avoid the coverage. This action is in the early phases of
discovery and the outcome is uncertain. There is no assurance that the primary
insurance coverage will ultimately be available for any damages or settlement
costs incurred. The outcome of this litigation may also materially affect the
availability of the excess policy issued by The Chubb Group. The damages
claimed by the stockholder plaintiffs in the consolidated class action are
substantial. If the damages or settlement costs actually incurred in connection
with the consolidated class action and derivative action are ultimately
determined not to be covered by our D&O insurance policies for any reason, or
are in excess of our policy limits, we may incur a substantial and material
loss that could have a material and adverse impact on our financial condition
and results of operations.

For a more detailed discussion, see the section of this prospectus entitled
"Business--Litigation" beginning on page 39.

We Face a Risk of Non-Collection of Reinsurance Recoverables Involving
Substantial Amounts

Although we reinsure a significant portion of potential losses on the
policies that we issue, we initially must pay all claims and then seek to
recover the reinsured losses from our reinsurers. Although we report as assets
the amount of claims paid that we expect to recover from reinsurers, we can
never be certain that we will be able to ultimately collect those amounts. The
reinsurer may be unable to pay the amounts recoverable, may dispute our
calculation of the amounts recoverable, or may dispute the terms of the
reinsurance treaty.

We are in disputes with several reinsurers concerning the amounts that we
believe to be recoverable under three reinsurance treaties. These reinsurers
have sought to rescind these treaties and therefore avoid their obligations
under these treaties or, in the alternative, to dispute the terms of the
contracts. The total amount disputed among the parties under these various
treaties is substantial, and we are currently involved in arbitration
proceedings in connection with each of the treaties. These arbitrations are in
the early stages and there is no assurance as to their outcome or whether these
amounts will ultimately be collected, in whole or in part. We are also involved
in an arbitration proceeding with an insurance carrier where we assumed certain
reinsurance risks from the carrier. The insurance company believes that we owe
it funds for claims under the treaty and we are seeking recovery of all
improper payments and expense allocations under the contract. The ultimate
outcome of these various proceedings cannot be determined at this time. If the
amounts recoverable under the relevant treaties are ultimately determined to be
materially less than the amounts that we have reported as recoverable, we may
incur a significant and material loss that could have a material and adverse
impact on our financial condition and results of operations. See the section of
this prospectus entitled "Business--Litigation--Arbitration" beginning on page
40.

Our Acquisition Strategy May Require Us to Make Significant Capital Infusions,
May Be Dilutive to Our Existing Stockholders, and May Result in Difficulties in
Assimilating and Integrating the Operations, Personnel, Technologies, Products,
and Information Systems of Acquired Companies

We have implemented a strategy to maximize our returns through mergers,
acquisitions, and strategic investments. Over the last 12 months we have
completed four transactions that will serve as platforms for

growth in our life and health segment as well as our newly-established non-
standard auto segment. These transactions include our acquisition of Aegis
Financial Corporation and significant investments in American Founders Finance
Corporation, Instant Insurance Holdings, Inc., and Chaucer Holdings PLC. In
addition, we have entered into a stock purchase agreement to acquire Florida
Select, and we plan to pursue similar opportunities in the future. See the
sections of this prospectus entitled "Business--Florida Select Acquisition"
beginning on page 22 and "Business--Business Segments" beginning on page 24.
Acquisitions may require significant capital infusions, and they typically
entail many risks. These risks include difficulties in assimilating and
integrating the operations, personnel, technologies, products, and information
systems of the acquired company. We may also encounter unanticipated
expenditures, changing or loss of relationships with customers, suppliers, and
strategic partners, or contractual, intellectual property, or employment
issues. In addition, the key personnel of the acquired company may decide not
to work for us. The acquisition of another company or its products and
technologies may also require us to enter into a geographic or business market
in which we have little or no prior experience. These challenges could disrupt
our ongoing business, distract our management and employees, and increase our
expenses. In addition, acquisitions may materially and adversely affect our
results of operations because they may require large one-time write-offs,
increased debt and contingent liabilities, substantial depreciation or deferred
compensation charges, or the amortization of expenses related to goodwill and
other intangible assets. We may seek to account for acquisitions under the
pooling-of-interests accounting method, but that method may not be available.
Any of these events could cause the price of our common stock to decline.
Furthermore, if we issue equity or convertible debt securities to pay for an
acquisition, the issuance may be dilutive to our existing stockholders.
Finally, the equity or debt securities that we may issue could have rights,
preferences, or privileges senior to those of the holders of our common stock.

The Personal Lines Insurance Business is Highly Competitive, and We May Not Be
Able to Compete Effectively Against Larger, Better Capitalized Companies

We compete with dozens of property and casualty insurance companies in the
personal lines insurance business, many of which are better capitalized than us
and have higher ratings from A.M. Best than us. We also believe that the
superior capitalization of many of our competitors enables them to withstand
lower profit margins and, therefore, to offer lower rates, which enables them
to market their products more aggressively and to take advantage more quickly
of new marketing opportunities, such as the Internet. Our competition may
become increasingly better capitalized in the future as the traditional
barriers between insurance companies and banks and other financial institutions
erode and as the property and casualty industry continues to consolidate. We
believe that our ability to compete against our larger, better capitalized
competitors depends on our ability to deliver superior service and our strong
relationships with our independent agency force.

Regulatory Actions Could Impair Our Business

Our insurance subsidiaries are subject to regulation under the insurance
laws of states in which they operate. These laws provide safeguards for
policyowners and are not intended to protect the interests of stockholders.
Regulation and supervision of each insurance subsidiary is administered by a
state insurance commissioner. State insurance commissioners have broad
statutory powers to grant and revoke licenses, approve premium rates, forms of
insurance contracts, and types and amounts of business which an insurance
company may conduct in light of its statutory capital and surplus. The statutes
of most states provide for filing premium rate schedules and other information
with the insurance commissioner, either directly or through rating
organizations. Insurance commissioners generally have the authority to
disapprove filings. Insurance commissioners can also make changes to rates if
rates are found to be excessive, inadequate, or unfairly discriminatory. The
determination of rates is based on various factors, including loss and loss
adjustment expense experience. The failure to obtain, or delay in obtaining,
the required approvals from applicable departments of insurance could have a
material adverse effect on the operations of our insurance subsidiaries.

The National Association of Insurance Commissioners has adopted a number of
model laws and regulations which apply to both life and property and casualty
insurance companies. One model law attempts to ensure that all insurance
companies have acceptably low expectations of becoming financially impaired.
The

model law provides for increasing levels of regulatory intervention as the
ratio of an insurer's total adjusted capital and surplus decreases relative to
its capital which is at risk. A state department of insurance can take control
of an insurance company domiciled in that state if the ratio is too low. Based
on 2000 results, all of our insurance subsidiaries exceed the minimum
applicable risk-based capital calculations. We cannot guarantee that all of our
subsidiaries will continue to satisfy these requirements.

Our Subsidiaries May Be Unable to Pay Dividends

We are organized as a holding company. Almost all of our operations are
conducted by subsidiaries, and we cannot pay dividends to our stockholders and
meet our other obligations unless we receive dividends from our subsidiaries.

Payment of dividends by our insurance subsidiaries is regulated under state
insurance laws. The regulations in the states where each insurance company
subsidiary is domiciled limit the amount of dividends that can be paid without
prior approval from state insurance regulators. Without regulatory approval,
the maximum amount of dividends that can be paid in 2001 to us by our insurance
company subsidiaries is approximately $27.3 million. The aggregate maximum
amount of dividends permitted by law to be paid by an insurance company does
not necessarily indicate an insurance company's actual ability to pay
dividends. The actual ability to pay dividends may be further constrained by
business and regulatory considerations, such as the impact of dividends on
surplus, that could affect an insurance company's ratings, competitive
position, amount of premiums that can be written, and ability to pay future
dividends. In addition, state departments of insurance have broad discretion to
limit the payment of dividends by insurance companies. A prolonged, significant
decline in insurance subsidiary profits or regulatory action limiting dividends
could subject us to shortages of cash because our subsidiaries will not be able
to pay us dividends.

If We Cannot Maintain and Improve Our Ratings from A.M. Best, We May Not Be
Able to Maintain Premium Volume in Our Insurance Operations Sufficient to
Attain Our Financial Performance Goals

Our ability to retain our existing business or to attract new business in
our insurance operations depends largely on our ratings from A.M. Best Company
("A.M. Best"). Although A.M. Best upgraded our rating to "B+" in February,
2000, we believe we must further improve our rating in order to more
effectively compete in the highly competitive personal lines insurance market.
Although we intend to work towards a higher rating, A.M. Best has ultimate
discretion over its rating assignments. If we are unable to achieve a higher
rating from A.M. Best, we may not be able to grow our premium volume
sufficiently to attain our financial performance goals. If A.M. Best were to
downgrade our rating, we could lose significant premium volume.

We Depend on Agents Who May Discontinue Sales of Our Policies at Any Time

Our relationship with our independent agents is perhaps the most important
component of our current competitive profile. If these independent agents find
it easier to do business with our competitors, it would be difficult to renew
our existing business or attract new business in our personal lines business
segment. Although we believe we enjoy good relationships with our independent
agents and are striving to make doing business with us as easy as possible, we
cannot be sure that these agents will continue to sell our insurance to the
individuals they represent.

If Our Competitors Decided to Target Our Customer Base by Offering Lower-Priced
Insurance, We May Not Be Able to Respond Competitively

We price our insurance based on estimated profit margins, and we do not
expect to be able to significantly reduce our current estimated profit margins
in the near future. Many of our competitors, however, are better capitalized
than we are and may be able to withstand significant reductions in their
estimated profit margins. If our competitors decide to target our customer base
by offering lower-priced insurance, we may not be able to respond
competitively.

We May Be Unable to Reinsure Insurance Risks

We use reinsurance to attempt to limit the risks associated with our
insurance products. The availability and cost of reinsurance are subject to
prevailing market conditions. Poor conditions in the reinsurance market could
cause us to reduce our volume of business and impact our profitability. If any
of our reinsurers cannot pay their reinsurance obligations, we will still have
to pay losses to our insureds.

If Loss Reserves Prove to Be Inadequate, then We Would Incur a Charge to
Earnings

We maintain reserves to cover our estimated ultimate liability for losses
and related expenses with respect to reported and unreported claims incurred.
To the extent that reserves prove to be inadequate in the future, we would have
to increase our reserves and incur a charge to earnings in the period such
reserves are increased, which could have a material and adverse impact on our
financial condition and results of operations. The establishment of appropriate
reserves is an inherently uncertain process, and we cannot be sure that
ultimate losses and related expenses will not materially exceed our reserves.
Reserves are estimates involving actuarial and statistical projections at a
given time of what we expect to be the cost of the ultimate settlement and
administration of claims based on facts and circumstances then known, estimates
of future trends in claims severity and other variable factors such as
inflation. As of December 31, 2000, our aggregate loss reserves totaled
approximately $264 million.

Anti-Takeover Effects of Provisions of the Restated Certificate of
Incorporation and Bylaws

Certain provisions of our Restated Certificate of Incorporation (the
"Certificate") and Bylaws may be deemed to have anti-takeover effects and may
delay, defer, or prevent a takeover attempt that a stockholder might consider
to be in its best interest. Such provisions also may adversely affect
prevailing market prices for our common stock. These provisions, among other
things, (i) classify the Board of Directors of Vesta into three classes, each
of which serves for different three-year periods, (ii) provide that a director
of Vesta may be removed only for cause and only by a vote of 80% of the common
stock of Vesta then outstanding, (iii) provide that only the Board of Directors
or the Chairman of the Board of Directors of Vesta may call special meetings of
the stockholders, (iv) eliminate the ability of the stockholders to take any
action without a meeting, and (v) provide that the stockholders may amend or
repeal the Bylaws or any of the foregoing provisions of the Certificate only by
a vote of 80% of the common stock of Vesta then outstanding. In addition, the
Bylaws establish certain advance notice procedures for nomination of candidates
for election as directors and for stockholder proposals to be considered at
stockholders' meetings. Finally, we recently instituted a preferred stock
purchase rights plan to permit us to better manage potential strategic
transactions which may have the effect of delaying, deferring, or preventing an
unsolicited change in control of Vesta. The effect of this plan may be to
discourage potential acquirors from attempting to acquire control of us without
the consent of our Board of Directors.

USE OF PROCEEDS

Vesta is selling 7,500,000 shares of its common stock. Vesta will receive
net proceeds of approximately $55,000,000, (approximately $63,437,500 if the
underwriters' over-allotment option is exercised in full) based on an offering
price of $8.00 per share of common stock. The net proceeds are calculated by
deducting the underwriting discount and the estimated offering expenses from
the gross proceeds.

We intend to apply the proceeds to the acquisition of Florida Select. Any
proceeds from this offering in excess of the amount applied to the purchase
price of Florida Select will be used for general corporate purposes. For
additional information on our Florida Select acquisition, see the section of
this prospectus entitled "Business--Florida Select Acquisition" beginning on
page 22.

PRICE RANGE OF COMMON STOCK AND DIVIDENDS

Our common stock trades on the New York Stock Exchange under the symbol
"VTA."

The following table sets forth the per share high and low trading prices of
our common stock as reported by the New York Stock Exchange and the per share
dividends paid on our common stock for the periods indicated:

Cash
High Low Dividends
----- ----- ---------

1999
First quarter........................................... $8.38 $3.38 $0.0375
Second quarter.......................................... 6.38 3.88 --
Third quarter........................................... 5.63 4.13 --
Fourth quarter.......................................... 4.88 3.63 --
2000
First quarter........................................... $7.88 $3.44 $0.0125
Second quarter.......................................... 7.19 4.56 0.0125
Third quarter........................................... 6.94 4.13 0.0125
Fourth quarter.......................................... 5.81 4.25 0.0125
2001
First quarter........................................... $8.39 $4.50 $0.0125
Second quarter (through June 20, 2001).................. 9.98 6.00 0.0250

On June 20, 2001, the last reported sale price of the common stock on the
New York Stock Exchange was $8.55 per share. As of March 31, 2001, Vesta had
192 holders of record of its common stock.

Our Board of Directors has discretion to declare and pay dividends. The
payment of dividends depends on many factors, including our financial condition
and earnings, the capital requirements of our operating subsidiaries, legal
requirements, and regulatory constraints. See the section of this prospectus
entitled "Risk Factors--Our Subsidiaries May Be Unable to Pay Dividends"
beginning on page 13.

Illinois, Ohio, Hawaii, and Texas (and Florida, following the acquisition of
Florida Select Insurance Holdings Inc.) impose restrictions on the payment of
dividends to us by our insurance subsidiaries under their regulatory authority
in excess of certain amounts without prior regulatory approval. See the section
of this prospectus entitled "Business--Regulation--Restrictions on Dividends to
Stockholders" beginning on page 38.

CAPITALIZATION

The following table sets forth the capitalization of Vesta as of March 31,
2001 on an actual basis, on an as adjusted basis to reflect the issuance of
the 7,500,000 shares of common stock to be sold by Vesta in this offering
(after deducting underwriting discounts and estimated offering expenses), and
on a pro forma as adjusted basis to reflect both this stock offering and the
acquisition of Florida Select Insurance Holdings Inc. You should read this
table in conjunction with Vesta's consolidated financial statements and
related notes contained in our Quarterly Report on Form 10-Q for the three
months ended March 31, 2001, and with Vesta's consolidated financial
statements and related notes contained in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2000, which are incorporated in this
prospectus by reference, Vesta's unaudited pro forma consolidated financial
statements included in this prospectus beginning on page F-2, and Florida
Select's consolidated financial statements included in this prospectus
beginning on page F-7. Also, see the section of this prospectus entitled
"Selected Historical Financial and Operating Data" beginning on page 18.

As of March 31, 2001
-----------------------------------------
Pro Forma
As Adjusted as Adjusted
for this Including
Actual Offering Florida Select
----------- -------------- --------------
(unaudited) (unaudited) (unaudited)
(in thousands)

Short-term debt...................... $ 14,997 $ 14,997 $ 14,997
Long-term debt....................... 86,423 86,423 86,423
-------- -------- --------
Total outstanding debt.............. 101,420 101,420 101,420
-------- -------- --------

Capital deferrable securities........ 29,750 29,750 29,750
-------- -------- --------

Stockholders' equity:
Preferred stock, $.01 par value:
5,000,000 shares authorized;
no shares are issued and
outstanding....................... -- -- --
Common stock, $.01 par value:
100,000,000 shares authorized;
24,864,322 shares issued and
outstanding; 32,364,322 shares
issued and outstanding, as
adjusted (1)...................... 249 324 324
Additional paid-in capital......... 150,464 205,389 205,389
Accumulated other comprehensive
income............................ 4,683 4,683 4,683
Retained earnings.................. 60,503 60,503 60,503
Treasury stock, at cost............ (3,397) (3,397) (3,397)
Unearned stock..................... (8,429) (8,429) (8,429)
-------- -------- --------
Total stockholders' equity....... 204,073 259,073 259,073
-------- -------- --------
Total capitalization............. $335,243 $390,243 $390,243
======== ======== ========

--------
(1) Includes 750,000 shares of issued and outstanding common stock held by the
Vesta Agents Stock Incentive Plan Trust. Excludes (i) the issuance of
1,125,000 shares of common stock pursuant to the underwriters' over-
allotment option, (ii) 2,322,061 shares of common stock authorized for
future option awards or stock grants under our current Long Term Incentive
Plan and our 2001 Incentive Compensation Plan as of March 31, 2001, and
(iii) 221,478 additional shares of common stock reserved for issuance for
stock options outstanding as of March 31, 2001.

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following table sets forth selected consolidated financial data of Vesta
as of and for the years ended December 31, 1996 through 2000 and as of and for
the three months ended March 31, 2000 and 2001. The financial data for 1996 and
1997 are derived from the financial statements audited by KPMG Peat Marwick
LLP, independent certified public accountants. The financial data from 1998,
1999, and 2000 are derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent certified public accountants. The
financial information for the interim period as of and for the three months
ended March 31, 2000 and March 31, 2001 has not been audited and, in the
opinion of management, reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of such information.
Results for the three months ended March 31, 2001 are not necessarily
indicative of results which may be expected for any other interim period or for
the year as a whole. This table is a summary and should be read in conjunction
with Vesta's consolidated financial statements and related notes contained in
our Quarterly Report on Form 10-Q for the three months ended March 31, 2001 and
Vesta's consolidated financial statements and related notes contained in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2000, which
are incorporated in this prospectus by reference.

Three Months Ended
Year Ended December 31, March 31,
----------------------------------------------- -----------------------
1996 1997 1998 1999 2000(1) 2000 2001
------- -------- ---------- -------- -------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except per share data and ratios)

Statement of Operations
Data: (2)
Net Premiums Earned..... $63,206 $132,333 $ 247,063 $248,076 $216,999 $56,565 $65,395
Net Investment Income... 21,374 31,960 26,565 25,949 45,903 7,003 15,603
Policy Fees............. -- -- -- -- 2,209 239 1,253
Other................... 188 2,094 5,473 4,527 2,103 88 2,146
Realized Gains
(Losses)............... 32 3,283 3,272 12,756 (2,061) -- 1,706
------- -------- ---------- -------- -------- ------- -------
Total Revenues......... 84,800 169,670 282,373 291,308 265,153 63,895 86,103
Policyholder Benefits,
Losses and LAE (3)..... 25,631 69,645 167,413 165,014 135,042 39,779 46,758
Policyholder Acquisition
and Other Underwriting
Expenses............... 35,366 63,702 132,032 87,451 95,821 22,428 29,055
Loss on Asset
Impairment............. -- -- 65,496 -- -- -- --
Goodwill and Other
Intangible
Amortization........... 484 3,065 5,177 2,118 1,591 151 526
Interest on Debt........ 10,059 10,859 14,054 13,215 15,105 3,403 4,658
------- -------- ---------- -------- -------- ------- -------
Total Operating
Expenses.............. 71,540 147,271 384,172 267,798 247,559 65,761 80,997
Income (Loss) from
Continuing Operations
Before Taxes, Minority
Interest and Deferrable
Capital Securities..... 13,260 22,399 (101,799) 23,510 17,594 (1,866) 5,106
Income Taxes (Benefit).. 4,307 7,973 (29,395) 7,129 5,664 (778) 1,787
Minority Interest, Net
of Tax................. -- -- -- -- 1,595 -- 249
Deferrable Capital
Securities, Net of
Tax.................... -- 5,051 5,449 5,632 1,986 571 383
------- -------- ---------- -------- -------- ------- -------
Net Income (Loss) from
Continuing Operations.. 8,953 9,375 (77,853) 10,749 8,349 (1,659) 2,687
Income (Loss) from
Discontinued
Operations,
Net of Tax............. 27,860 27,485 (63,331) 12,706 (2,397) 3,913 5
Extraordinary Gain on
Debt Extinguishments,
Net of Tax............. -- -- -- -- 5,250 4,567 --
Preferred Stock
Dividend............... -- -- -- (563) (3,670) (563) (163)
Gain on Redemption of
Preferred Securities,
Net of Tax............. -- -- -- 9,548 9,190 -- 565
------- -------- ---------- -------- -------- ------- -------
Net Income (Loss)
Available to Common
Stockholders........... $36,813 $ 36,860 $ (141,184) $ 32,440 $ 16,722 $ 6,258 $ 3,094
======= ======== ========== ======== ======== ======= =======
Diluted Net Income
(Loss) from Continuing
Operations Per Share... $ 0.47 $ 0.49 $ (4.20) $ 0.53 $ 0.34 $ (0.07) $ 0.13
Diluted Net Income
(Loss) Available to
Common Stockholders Per
Share.................. 1.92 1.93 (7.61) 1.63 0.78 0.28 0.15
Net Operating Income
(Loss) (4)............. 8,932 7,241 (37,407) 2,457 9,689 (1,659) 1,691
Net Operating Income
(Loss) Per Diluted
Share.................. 0.47 0.38 (2.02) 0.12 0.40 (0.07) 0.08
Shares Used in Diluted
Per Share Calculation.. 19,157 19,053 18,549 20,202 24,255 24,765 21,094

Standard Property and
Casualty Operating
Data:
Net Premiums Written.... $ 70,803 $ 150,526 $ 264,839 $227,807 $ 205,461 $ 49,127 $ 52,225
Statutory Capital &
Surplus (5)............ 352,695 317,875 213,251 271,986 275,270 283,155 296,696
Net Premiums Written to
Statutory Surplus...... 0.20x 0.47x 2.31x 0.98x 0.76x 0.69x 0.70x
GAAP (6) Loss Ratio..... 40.1% 52.6% 67.8% 66.5% 58.6% 70.0% 66.3%
GAAP Expense Ratio...... 56.0 48.1 48.5 30.3 37.1 34.8 32.2
-------- ---------- ---------- -------- ---------- -------- ----------
GAAP Combined Ratio..... 96.1% 100.7% 116.3% 96.8% 95.7% 104.8% 98.5%
======== ========== ========== ======== ========== ======== ==========

--------
(1) Includes the results of American Founders for the third and fourth
quarters of 2000.

(3) Loss adjustment expenses.

(4) Represents income from continuing operations excluding net realized
investment gains or losses, net of federal income taxes.

(5) Statutory data have been derived from the financial statements of Vesta
prepared in accordance with statutory accounting principles ("SAP") and
filed with insurance regulatory authorities.

(6) Generally accepted accounting principles.

SELECTED PRO FORMA FINANCIAL AND OPERATING DATA

The following table sets forth selected unaudited pro forma financial
information of Vesta as of and for the year ended December 31, 2000 and as of
and for the three months ended March 31, 2001. The pro forma financial
information presented below should be read in conjunction with Vesta's
unaudited pro forma consolidated financial statements beginning on page F-2 and
Florida Select's consolidated financial statements beginning on page F-7. The
pro forma financial information 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.

Historical
Financial
Historical Information Pro Forma
Financial Pro Forma for the Financial
Information Financial Three Information
for the Information Months for the Three
Year Ended for the Year Ended Ended Months Ended
December 31, December 31, March 31, March 31,
2000(1) 2000(2) 2001 2001(2)
------------ ------------------ ----------- -------------
(unaudited) (unaudited) (unaudited)
(in thousands, except per share data and ratios)

Statement of Operations
Data: (3)
Net Premiums Earned..... $216,999 $269,044 $65,395 $78,343
Net Investment Income... 45,903 71,013 15,603 16,870
Policy Fees............. 2,209 4,823 1,253 1,253
Other................... 2,103 5,261 2,146 4,872
Realized Gains
(Losses)............... (2,061) (2,061) 1,706 1,706
-------- -------- ------- -------
Total Revenues......... 265,153 348,080 86,103 103,044
Policyholder Benefits,
Losses and LAE (4)..... 135,042 167,802 46,758 52,737
Policyholder Acquisition
and Other Underwriting
Expenses............... 95,821 117,154 29,055 33,404
Goodwill and Other
Intangible
Amortization........... 1,591 4,261 526 1,136
Interest on Debt........ 15,105 20,846 4,658 4,658
-------- -------- ------- -------
Total Operating
Expenses.............. 247,559 310,063 80,997 91,935
Income (Loss) from
Continuing Operations
Before Taxes, Minority
Interest and Deferrable
Capital Securities..... 17,594 38,017 5,106 11,109
Income Taxes (Benefit).. 5,664 13,512 1,787 4,074
Minority Interest, Net
of Tax................. 1,595 3,240 249 249
Deferrable Capital
Securities, Net of
Tax.................... 1,986 1,986 383 383
-------- -------- ------- -------
Net Income (Loss) from
Continuing Operations.. 8,349 19,279 2,687 6,403
Income (Loss) from
Discontinued
Operations,
Net of Tax............. (2,397) (2,397) 5 5
Extraordinary Gain on
Debt Extinguishments,
Net of Tax............. 5,250 5,250 -- --
Preferred Stock
Dividend............... (3,670) (3,670) (163) (163)
Gain on Redemption of
Preferred Securities,
Net of Tax............. 9,190 9,190 565 565
-------- -------- ------- -------
Net Income (Loss)
Available to Common
Stockholders........... $ 16,722 $ 27,652 $ 3,094 $ 6,810
======== ======== ======= =======
Diluted Net Income
(Loss) from Continuing
Operations Per Share... $ 0.34 $ 0.61 $ 0.13 $ 0.22
Diluted Net Income
(Loss) Available to
Common Stockholders Per
Share.................. 0.78 0.94 0.24 0.24
Net Operating Income
(Loss) (5)............. 9,689 20,619 1,691 5,294
Net Operating Income
(Loss) Per Diluted
Share.................. 0.40 0.65 0.08 0.19
Shares Used in Diluted
Per Share Calculation.. 24,255 31,755 21,094 28,594

Historical Historical Pro Forma
Financial Pro Forma Financial Financial
Information Financial Information Information
for the Information for the Three for the Three
Year Ended for the Year Ended Months Ended Months Ended
December 31, December 31, March 31, March 31,
2000(1) 2000(2) 2001 2001(2)
------------ ------------------ ------------- -------------
(unaudited) (unaudited) (unaudited)
(in thousands, except per share data and ratios)

Balance Sheet Data:
Total Investments and
Cash................... $1,019,266 $1,096,408 $ 994,612 $1,069,714
Total Assets............ 1,621,999 1,753,667 1,610,542 1,737,028
Reserves for Losses, LAE
and Future Policy
Benefits............... 923,973 943,924 926,688 946,821
Outstanding Debt........ 91,419 91,419 101,420 101,420
Federal Home Loan Bank
Advances............... 150,691 150,691 147,922 147,922
Deferrable Capital
Securities............. 33,225 33,225 29,750 29,750
Stockholders' Equity.... 215,111 270,111 204,073 259,073

Standard Property and
Casualty Operating
Data:
Net Premiums Written.... $ 205,461 $ 265,392 $ 52,225 $ 65,892
Statutory Capital &
Surplus (6)............ 275,270 275,270 296,696 296,696
Net Premiums Written to
Statutory Surplus...... 0.76x 0.97x 0.70x 0.89x
GAAP (7) Loss Ratio..... 58.6% 55.5% 66.3% 61.7%
GAAP Expense Ratio...... 37.1 35.7 32.2 32.0
---------- ---------- ---------- ----------
GAAP Combined Ratio..... 95.7% 91.2% 98.5% 93.7%
========== ========== ========== ==========

--------
(1) Includes the results of American Founders for the third and fourth
quarters of 2000.

(2) Reflects the unaudited pro forma consolidated financial data of Vesta as
of and for the year ended December 31, 2000 and as of and for the three
months ended March 31, 2001, as if the Florida Select acquisition, the
American Founders acquisition and the issuance of common stock had
occurred at the beginning of each period. See Vesta's unaudited pro forma
consolidated financial statements beginning on page F-2 and Florida
Select's consolidated financial statements beginning on page F-7.

(3) As a result of Vesta's decision in 2000 to discontinue its reinsurance
assumed business and its decision in 1999 to discontinue its commercial
lines segment, all periods presented have been reclassified to present
operations on a continuing and discontinued basis.

(4) Loss adjustment expenses.

(5) Represents income from continuing operations excluding net realized
investment gains or losses, net of federal income taxes.

(6) Statutory data have been derived from the financial statements of Vesta
prepared in accordance with statutory accounting principles ("SAP") and
filed with insurance regulatory authorities.

(7) Generally accepted accounting principles.

BUSINESS

The following information should be read together with the management's
discussion and analysis of financial condition and results of operations,
financial statements, and other information contained in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2000, and our Quarterly Report
on Form 10-Q for the three months ended March 31, 2001, which are incorporated
in this prospectus by reference, the financial information contained in Vesta's
unaudited pro forma consolidated financial statements included in this
prospectus beginning on page F-2, and Florida Select's consolidated financial
statements included in this prospectus beginning on page F-7.

Business Overview

Vesta is an insurance holding company that offers a wide range of personal
insurance products. Our largest business segment is the standard property and
casualty insurance segment, which underwrites and sells personal automobile and
homeowners insurance products distributed through approximately 1,600
independent sales agencies. Since 1999, we have developed and actively pursued
a number of strategic initiatives to grow operating earnings and strengthen our
capital position.

During the past three years, we have completed a strategic repositioning
that will permit us to more aggressively pursue our business strategy. Our
repositioning included changing our senior management, exiting certain lines of
business, and restructuring our balance sheet.

Our strategy is to grow operating earnings and strengthen our capital
position by aggressively managing our core property and casualty insurance
business and pursuing strategic opportunities that permit us to offer personal
insurance products which complement our existing product lines and distribution
channels. We have taken the following steps to implement our strategy:

. In our standard property and casualty insurance segment, we have
initiated rate increases in a number of key markets, reduced the number
of active agencies from approximately 2,800 to approximately 1,600,
migrated from multiple policy processing platforms to a primary
integrated platform, and reduced the number of employees and other
expenses by consolidating regional offices into our principal office in
Birmingham, Alabama.

. We have sought and will continue to seek expansion into new geographic
markets.

. We have acquired or made significant investments in three insurance
operations: a life insurer, an accident and health insurer, and a non-
standard automobile insurance agency, which we intend to use as
platforms for long-term growth.

. We have positioned ourselves to generate fee-based income by acting as a
"fronting" carrier for other insurers and reinsurers for fees and by
marketing and distributing non-standard auto insurance products through
an agency for commissions.

Vesta, a Delaware corporation, was founded in 1993 as a subsidiary of
Torchmark Corporation ("Torchmark") to be the holding company for Torchmark's
property and casualty subsidiaries. We completed our initial public offering in
1993, and, at that time, Torchmark retained ownership of approximately 25% of
our shares of capital stock and was our largest stockholder. Torchmark divested
its remaining shares of our capital stock in 2000.

Florida Select Acquisition

Company Overview

On April 18, 2001, we and our wholly-owned subsidiary, Vesta Fire Insurance
Corporation ("Vesta Fire"), entered into a stock purchase agreement to acquire
all of the issued and outstanding capital stock of Florida Select Insurance
Holdings Inc. ("Florida Select") from its four stockholders, Centre Solutions
(Bermuda) Limited, Mynd Corporation, Orienta Point Group, L.L.C., and
Kamehameha Schools Bernice Pauahi Bishop Estate.

Florida Select is the parent company of Florida Select Insurance Company, a
Florida domiciled insurer that offers residential homeowners insurance. The
majority of Florida Select Insurance Company's policyholders are former
customers of the Florida Residential Property and Casualty Joint Underwriting
Association ("JUA"), a state-sponsored insurer created by the Florida
Legislature following Hurricane Andrew in 1992 to provide homeowners insurance
coverage to customers who were otherwise unable to purchase it in the private
market. By 1996, the JUA had issued almost one million policies insuring
approximately $100 billion of residential property, and it initiated various
incentive programs designed to encourage carriers to assume these policies and
return these risks to the private market. These incentives included attractive
rates and the promise of bonuses to be paid after the assuming company had
renewed, or offered to renew, the policies for at least three years.

Florida Select was originally organized for the purpose of assuming policies
from the JUA pursuant to these incentive programs. As one of the first "take
out" companies to assume policies from the JUA, Florida Select achieved a
critical mass of premiums with its first assumption of policies, and it has
operated profitably since its inception. In addition to renewals of policies
assumed from the JUA, Florida Select produces new business through Florida
Select Insurance Agency Inc., a managing general agency that markets, solicits,
produces, underwrites, and binds policies on behalf of Florida Select Insurance
Company. As of and for the year ended December 31, 2000, Florida Select had
consolidated assets of approximately $106.6 million, stockholders' equity of
approximately $31.5 million, net income of approximately $6.6 million, and
gross written premiums of approximately $63.5 million.

Florida Select also owns all of the capital stock of Florida Select
Insurance Agency, Inc., and, indirectly through its ownership of Florida Select
Insurance Agency, Inc., Florida Select also owns Select Insurance Services Inc.
Select Insurance Services Inc. is the attorney-in-fact for Texas Select Lloyds
Insurance Company, which is a Texas unincorporated association.

Almost all of Florida Select's exposure is in Florida, an area that is
extremely vulnerable to catastrophic losses arising from hurricane events.
Florida Select has procured reinsurance coverage that its management believes
to be adequate to cover the probable maximum loss ("PML") arising from a 1-in-
250 year hurricane event, based on various modeling tools. This approach to
reinsurance is consistent with ours, and we believe that we will be able to
consolidate Florida Select's reinsurance program with ours at a significant
cost savings.

We believe that Florida Select's management team has developed an expertise
in selecting and managing risk in catastrophe-prone areas. This expertise has
contributed to Florida Select's strong historical underwriting results in
Florida, and we believe that this expertise may be applied to other catastrophe
prone areas where we do business, particularly in the northeastern United
States. We may also apply this expertise to other areas into which we may
expand in the future. We have entered into a two-year employment and non-
compete agreement with Stephen A. Korducki, President of Florida Select, to be
effective upon closing of the proposed transaction. We also expect to retain
the services of the other members of Mr. Korducki's executive management team
after the closing of the proposed transaction.

Stock Purchase Agreement

Pursuant to the terms of the stock purchase agreement, we or Vesta Fire (at
our option) will purchase all of the issued and outstanding capital stock of
Florida Select from that company's existing stockholders for a cash payment
equal to approximately $61.5 million plus interest on this amount accumulating
at a rate of 6% per annum from January 1, 2001 until the closing date. If we do
not complete this offering or fail to raise at least $30 million in net
proceeds in this offering prior to the closing of the Florida Select
acquisition, we have the right to pay up to $30 million of the consideration in
the form of unsecured promissory notes that mature 60 days after issuance and
bear interest at a rate of prime plus 0.25%. As a condition precedent to
closing, we agreed to pay an additional $3 million commutation fee to Centre
Insurance Company, an affiliate of Centre Solutions (Bermuda) Limited, one of
the stockholders of Florida Select, in connection with the commutation of a
reinsurance agreement between Centre Insurance Company and Florida Select
Insurance Company.

The closing of the acquisition is to occur three business days following the
satisfaction or waiver of all conditions to closing described in the stock
purchase agreement. However, the acquisition will not occur prior to July 15,
2001 unless this offering has been completed or we agree to consummate the
acquisition before the completion of this offering. The stock purchase
agreement may be terminated by the selling stockholders if the closing has not
occurred by August 1, 2001, unless extended by mutual agreement of the parties.

We and the stockholders of Florida Select are required to complete the
acquisition only after the satisfaction (or waiver) of various conditions
including, but not limited to, the following conditions:

. We must receive regulatory approvals of the Florida Department of
Insurance and the Texas Department of Insurance, as well as approval
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.

. Our and Vesta Fire's representations and warranties set forth in the
stock purchase agreement must be true and accurate in all material
respects as of the closing date. The sellers' representations and
warranties set forth in the stock purchase agreement must be true and
accurate as of the closing date unless the effect of any and all
inaccuracies of their representations and warranties would not
reasonably be expected to cause us aggregate losses in excess of $5
million. The parties must perform all obligations and comply with all
covenants set forth in the stock purchase agreement, in all material
respects.

. There must be no action or proceeding, whether instituted or threatened,
against Florida Select or any of its subsidiaries or us, which would
either (i) prevent the consummation of the acquisition or
(ii) reasonably be expected to cause a material adverse change to
Florida Select or any of its subsidiaries.

. There must not be a material adverse change in Florida Select or any of
its subsidiaries' operations. A material adverse change will be deemed
to have occurred if the net diminution in value of Florida Select and
its subsidiaries exceeds, in the aggregate, $4 million prior to August
1, 2001 or $6 million thereafter, or if the net diminution in value of
an individual subsidiary or Florida Select exceeds $3 million prior to
August 1, 2001 or $4.5 million thereafter. Conversely, if we pay part of
the purchase price by promissory note, then there must be an absence of
any material adverse change in our operations, defined as a diminution
of our stockholders' equity of $28 million.

. Certain agreements to which Florida Select or the sellers are parties
shall be canceled prior to or as of the closing date of the acquisition.

. We and Centre Insurance Company, an affiliate of Centre Solutions
(Bermuda) Limited, will have performed certain obligations under a
commutation and settlement agreement, effective as of January 1, 2001,
relating to the commutation of a reinsurance agreement between Centre
Insurance Company and Florida Select Insurance Company. These
obligations include the payment by us to Centre Insurance Company of a
$3 million commutation fee and the reassumption by Florida Select
Insurance Company of all covered losses subject to that reinsurance
agreement. In addition, Centre Insurance Company will transfer to
Florida Select Insurance Company approximately $22.9 million,
representing all outstanding balances of unpaid losses and unearned
premium ceded to Centre Insurance Company under the reinsurance
agreement.

Business Segments

In 2000, we changed our segment reporting to reflect the start-up of the
specialty lines business and the entry into the life insurance markets. Each
segment is discussed in detail on the following pages.

Standard Property and Casualty

Overview. Beginning in 1999 and continuing through 2000, we pursued a more
disciplined approach to our standard property and casualty business,
accomplishing the following:

. State-by-state review of our product offering;

. Consolidation of the operations of our Shelby, Ohio office into our
Birmingham, Alabama office;

. Consolidation of information platforms resulting in a streamlined policy
processing system;

. Reduction in the number of employees; and

. Reduction of our independent agency force to approximately 1,600 core
agencies that have historically produced our most profitable business.

Through these actions, we believe we are positioned to achieve improved
operating results from our standard property and casualty segment, strengthen
our relationships with our most profitable independent agencies, and leverage
our capital and surplus to enter other lines of business that may generate
greater returns on equity.

The following table sets forth key operational ratios reflecting losses and
loss adjustment expenses ("LAE") and underwriting expenses, respectively, as a
percentage of net written premium.

Selected Operational Ratios for Standard Property and Casualty Segment

For the Year Ended December 31,
-----------------------------------
1998 1999 2000
----------- ---------- ----------

Loss and LAE ratio...... 67.8% 66.5% 58.6%
Underwriting expense
ratio.................. 48.5 30.3 37.1
----------- ---------- ----------
Combined ratio.......... 116.3% 96.8% 95.7%
=========== ========== ==========
Net premiums written to
surplus ratio.......... 2.31x 0.98x 0.76x
=========== ========== ==========

The following table sets forth the principal geographic distribution of our
gross premiums written in our standard property and casualty business for the
three years indicated. The geographic balance reflected allows for greater
profit protection and more cost effective management of the property
catastrophe exposures. The states listed below comprise the ten states with the
largest gross premiums written for the year ended December 31, 2000 and their
comparative amounts for prior years.

Standard Property and Casualty Segment
Gross Written Premiums

For the Year Ended December 31,
----------------------------------------------
1998 1999 2000
-------------- -------------- --------------
(in thousands, except percentages)

Pennsylvania.................... $ 50,185 14.5% $ 48,822 19.1% $ 40,305 18.0%
West Virginia................... 27,593 8.0 26,677 10.5 25,258 11.3
Hawaii.......................... 25,175 7.3 18,425 7.2 17,187 7.7
Ohio............................ 17,942 5.2 19,307 7.6 15,126 6.8
Tennessee....................... 24,924 7.2 20,065 7.9 14,971 6.7
Illinois........................ 20,029 5.8 15,936 6.2 11,642 5.2
North Carolina.................. 11,966 3.4 10,426 4.1 9,910 4.4
Alabama......................... 14,641 4.2 11,375 4.5 9,896 4.4
New York........................ 37 0.1 1,983 0.8 9,877 4.4
Mississippi..................... 11,398 3.3 9,883 3.9 6,164 2.8
All other....................... 143,102 41.2 72,092 28.3 63,000 28.2
-------- ----- -------- ----- -------- -----
Total......................... $346,992 100.0% $254,991 100.0% $223,337 100.0%
======== ===== ======== ===== ======== =====

Products. In our standard property and casualty segment, we write primarily
personal auto and homeowners insurance products along with other miscellaneous
products targeted for specific markets. The following table illustrates the
source of our premium revenue from our standard property and casualty lines
operations.

Standard Property and Casualty Segment
Gross Written Premiums

For the Year Ended December 31,
----------------------------------------
1998 1999 2000
------------ ------------ ------------
(in thousands, except percentages)

Personal Auto......................... $223,425 64% $141,868 56% $ 98,449 44%
Homeowners............................ 93,762 27 107,025 42 121,483 54
Other................................. 29,805 9 6,098 2 3,405 2
-------- --- -------- --- -------- ---
Total............................... $346,992 100% $254,991 100% $223,337 100%
======== === ======== === ======== ===

Personal Auto. Our standard personal auto products target drivers over age
thirty-five with above average driving records. Generally, we write policies
with liability limits up to $500,000, but personal umbrella liability coverage
is available up to $5 million. The vast majority of our personal umbrella
coverage is written with liability limits of $1 million or $2 million. We write
the majority of our standard personal auto policies in Ohio, Pennsylvania,
Tennessee, West Virginia, and Illinois through our subsidiary The Shelby
Insurance Company ("Shelby") and its affiliated companies. For the year ended
December 31, 2000, the renewal rate for our personal auto policies was
approximately 85%, and new policy applications among our active agencies
increased compared to our 1999 levels.

Homeowners. Our homeowner and dwelling insurance products cover the full
range of homes, with values ranging from $10,000 to $10 million. The majority
of our homeowners business covers properties valued between $40,000 and
$250,000. We write homeowners insurance through various insurance subsidiaries,
but we generally divide it into three books of business:

Property Plus Homeowners. We acquired this large book of homeowners
business from CIGNA Property and Casualty Insurance Company ("CIGNA") in
1997 through a reinsurance arrangement, coupled with CIGNA's commitment to
use reasonable efforts to cause policyholders to renew their coverage with
us. Our Property Plus book of business covers mid-to-high valued homes
primarily in the northeastern sections of the United States as well as a
limited amount across the entire country. In the northeastern United
States, we have attempted to minimize our exposure on the coastal regions.
Since we entered into this arrangement with CIGNA in 1997, approximately
nine out of every ten policyholders with policies coming up for renewal
have elected to renew coverage with us, for a renewal rate on these
Property Plus homeowners policies of approximately 88%. We expect the
process of conversion to our direct written policies to be completed in the
third quarter of 2001. For the year ended December 31, 2000, we wrote
approximately $45.0 million in annual premiums in this book of business.

Shelby Homeowners. We acquired this book of business in connection with
our acquisition of Shelby and its affiliates in 1997. This Shelby
homeowners business is concentrated in the midwestern and mid-Atlantic
sections of the United States, primarily covering homes from $100,000 to
$250,000 in value. For the year ended December 31, 2000, we had a renewal
rate on these Shelby homeowners policies of approximately 86%, and we wrote
approximately $94.7 million in annual premiums.

Hawaiian Homeowners. Our Hawaiian homeowners policies are primarily
written by our wholly-owned subsidiary, The Hawaiian Insurance and Guaranty
Company, Ltd., which we acquired in 1995. These policies generally cover
higher-valued dwellings against fire and other catastrophic loss. Until
recently, we did not underwrite significant wind or hurricane risk of loss
policies in Hawaii, because most policyholders procured that coverage
through a state-sponsored insurance pool. In 2000, the state insurance pool
disbanded, and many of our policyholders began purchasing wind, or
hurricane, coverage from us. Although this increases the total risk in our
Hawaiian portfolio, we have managed this risk through reinsurance coverage
procured in the capital markets as well as the traditional reinsurance

markets. For the year ended December 31, 2000, we wrote approximately $14.7
million in annual premiums in this book of business.

Other Personal Lines Products. We provide miscellaneous products to specific
target markets. The majority of these products are designed to protect the
interests of financial institutions in various instances in which the borrower
fails to insure a car or a home serving as collateral in accordance with a loan
or mortgage agreement with the financial institution, as well as coverage for
properties that are in the process of foreclosure. We also provide fire and
allied lines coverage on low-value dwelling, mobile home, and household
contents.

Marketing. We have chosen to distribute our products through independent
insurance agents. We strive to develop and maintain relationships with agencies
in rural or suburban areas and provide them with above-average compensation
when policies are issued through our companies. Our product offerings in the
standard property and casualty market fit the needs of a wide range of
consumers. We support our agency force through advertising and promotions aimed
to create top-of-mind awareness of the agencies and our companies as well as
creating business-to-business technology that has the potential to increase
agent productivity while decreasing our operating expenses.

We believe that the independent agent is best able to sell and service the
needs of consumers in our target markets because of the agent's close
relationship with customers. Consumers who use independent agents typically
keep using the services of the same independent agent. Consequently, once we
acquire a new customer, the likelihood that this particular customer will renew
his or her policy with us the following year is very high. We believe that this
will help to minimize our policy acquisition expenses over time.

Our agency force has a voice in Vesta through the Agency Advisory Council
("Council"). The Council was created to foster ideas and give the agents the
opportunity to suggest new initiatives to improve our businesses. In 2001, we
created the Vesta Agents Stock Incentive Plan so that top-performing agents
have the opportunity to acquire our common stock at a 10% discount to market
prices.

Our independent agents have limited authority to bind insurance coverages
without prior approval from us, so long as such coverages fit within our
established guidelines. However, our underwriting staff reviews all coverages
bound by these agents and ultimately decides whether to continue such
coverages. Because of the broad base of our independent agency force, the
contractual limitation on their authority to bind coverage, and our
underwriting review procedures, we do not believe that the authority of our
agents to bind us presents any material risk to our operations.

Underwriting. The goal of our underwriting operations is to manage the
quality of our book of business. Working in concert with our agency force, our
underwriting staff supports our agents on a daily basis. Our agency force
understands our underwriting philosophy and goals and, in turn, we rely on our
agents to exercise a high degree of underwriting knowledge in the field.

Our target market profile is a family with multiple insurance policies that
owns more than one automobile and that lives in a home valued between $100,000
and $250,000. Our underwriting staff is highly trained and operates in an
efficient manner in order to maintain and manage our underwriting expenses.

Claims. Claim costs represent actual payments made and changes in estimated
future payments to be made to or on behalf of policyholders, including expenses
required to settle claims and losses. These costs include a loss estimate for
future assignments and assessments. Claims arising under our policies are
managed by our claims department. When we receive notice of a loss, our claims
personnel open a claim file and establish a reserve with respect to the loss.
All claims are reviewed and all payments are made by our employees, with the
exception of claims on certain products, which are adjusted by a managing
general agency and periodically audited by our claims personnel. Management
believes that utilizing our trained employee adjusters permits faster, more
efficient service at a lower cost. In 2000, we added a reinspection manager and
a fraud examiner to our staff to increase controls and monitor our loss
notices.

Claims settlement authority levels are established for each adjuster or
manager based upon each employee's ability and level of experience. Upon loss
notification, each claim is reviewed and assigned to an adjuster or manager
based upon the type of claim. Home office litigation supervisors monitor
claims-related litigation. We emphasize prompt, fair, and equitable settlement
of meritorious claims, adequate reserving for claims, and controlling of claims
adjustment and legal expenses.

Management of Catastrophe Risk. In our standard property and casualty
segment, the greatest risk of loss we face in the ordinary course of business
is property damage resulting from catastrophic events, particularly hurricanes
and tropical storms affecting Hawaii and Florida (following our acquisition of
Florida Select) and hurricanes affecting the northeastern United States. Our
exposure to loss from other catastrophic events, such as tornadoes and
earthquakes, is not as significant, because we do not insure significant levels
of property in areas traditionally affected by these events. While we seek to
reinsure a significant portion of our risk of catastrophic losses, there can be
no assurance that our losses will be within the coverage limits of our
reinsurance programs.

We seek to manage our risk in our standard property and casualty insurance
segment through the purchase of reinsurance. We obtain reinsurance principally
to reduce our net liability on individual risks and to provide protection for
individual loss occurrences, including catastrophic losses, in order to
stabilize our underwriting results. In exchange for reinsurance, we pay to our
reinsurers a portion of the premiums received under the reinsured policies.

In addition to our traditional catastrophe reinsurance program, we have
obtained additional catastrophe coverage for potential hurricane and tropical
storm loss in Hawaii and hurricane loss in the northeastern United States
through a securitization transaction effected through the INEX insurance
exchange. We purchase traditional excess of loss reinsurance for our standard
property and casualty business up to a 100-year PML reinsured by traditional
reinsurance. The securitization transaction placed through INEX provides us
with more conservative coverage for a 250-year PML.

Although we reinsure a significant portion of potential losses on the
policies that we issue, we initially pay all claims and seek to recover the
reinsured losses from our reinsurers. Although we report as assets the amount
of claims paid which we expect to recover from reinsurers, there is no
guarantee that we will be able to collect those amounts. The possibility exists
that the reinsurer may be unable to pay the amounts recoverable, may dispute
our calculation of the amounts recoverable, or may dispute the terms of the
reinsurance treaty. In any of these circumstances, we will not have the
anticipated liquidity to pay the claims on the reinsured policies. We believe
that our procurement of a portion of our reinsurance through the capital
markets in the manner described above mitigates these credit and collection
risks inherent in the traditional reinsurance market.

Systems. Almost all of our policy administration functions are performed on
our own information systems. In recent years, we have upgraded our core
infrastructure and expanded the scope of our capabilities. While this work has
been our chief focus for several years, it was greatly accelerated in 2000 when
we determined that we should move all of our policy management systems in-
house. The policy information that is housed with a vendor is being converted
to our in-house mainframe system. The conversion began in the second quarter of
2000 and we anticipate that the project will be completed in 2001.

During the last year, we have intensified our efforts in e-commerce and
increased the resources devoted to Internet-based technology. To assist the
marketing and servicing capabilities of our agency force, we introduced
Internet-based programs that give agents the ability to quote, enter new
business, perform endorsements, and perform inquiries on policies, billing, and
claims. This information is exchanged through Vesta Internet Access ("VIA"),
which is located on our web site--www.vesta.com--and provides our agents with
fast, convenient access to product, policy, and claims information. In
addition, we initiated a video training program designed to assist our agents
in learning to operate the VIA Internet system. We are committed to utilizing
the latest electronic technology to allow our agency force to securely conduct
transactions, access information, and communicate with our insurance
subsidiaries.

Life and Health

We expanded our product offering by entering the life and health insurance
segment through several strategic acquisitions in 2000. In June 2000, we
acquired a 71% ownership interest in American Founders Financial Corporation
("American Founders"), a holding company for two life insurance companies
domiciled in Texas. We invested approximately $25 million in convertible
preferred stock and other instruments of American Founders, and we now hold
four of the seven seats on American Founders' board of directors. American
Founders offers traditional life products, universal products, and annuity
products and had policies with an aggregate face value of approximately $2.1
billion in force as of December 31, 2000.

We have also recently acquired Aegis Financial Corporation ("Aegis"), a
holding company for an accident and health insurance company domiciled in
Texas. We acquired all of the capital stock of Aegis for approximately $7.5
million in cash and approximately 950,000 shares of Vesta common stock. See the
section of this prospectus entitled "Business--Changes in Capitalization--
Acquisition of Shares Held by Torchmark" beginning on page 35. Aegis had
approximately $16.5 million of accident and health premiums in force as of
December 31, 2000.

Similar to the property and casualty insurance industry, life and health
insurance is a mature industry experiencing consolidation. One major
difference, however, is that as the overall population ages, individuals will
focus on efficiently transferring wealth between generations. As a result, we
believe that consumers will be attracted to savings-oriented products with tax-
advantaged status, such as annuity products, to both fund their retirement
years and protect their accumulated savings.

Even though the demand for life, annuity, and health products has increased
in recent years, this business remains extremely competitive. Access and
retention of distribution channels is a key factor to success in this business,
and we utilize an independent agency force to distribute these products.

Our life and health insurance segment is expected to have a different impact
on our earnings stream as compared to our property and casualty business.
Losses in the property and casualty segment are difficult to predict due to
potential catastrophes, such as hurricanes, tornadoes, and other weather-
related events. In addition, losses in the property and casualty segment can
take years to ultimately determine due to litigation and other factors. On the
other hand, financial results from our life and health insurance segment are
easier to predict, and the ultimate results from such segment can be reported
sooner. Accordingly, we believe that our earnings from our life and health
segment should be more predictable and consistent than our property and
casualty segment.

Primary Products. The primary products of our life and health segment
consist of traditional life products, universal life products, annuity and
pension contracts, and related products. Fixed-rate and variable annuities are
a substantial portion of our offerings. We also intend to offer a critical
illness product, a relatively new product that we believe is gaining acceptance
in the marketplace. The critical illness product is designed to bridge the gap
between disability insurance and life insurance by paying the face amount of
the policy at death or earlier in the event of the occurrence of certain non-
fatal critical illnesses, such as Alzheimer's disease, organ transplants, or
loss of sight.

Strategy. We believe our life and health insurance business is well
positioned for growth. We intend to grow this business by acquisitions, joint
ventures, and internal sales. The main drivers of these strategies are an
efficient and flexible operating and administrative system and maintaining
seasoned management with industry expertise to identify potential targets and
successfully integrate blocks of policies efficiently into the current
administrative system.

Marketing. We distribute our life and health products through agents
recruited and contacted directly by our life and health insurance subsidiaries,
American Founders and Aegis. The agents that have historically served these
companies are geographically diversified without any one dominant producer.

Reinsurance Ceded. We utilize reinsurance for our life insurance products to
appropriately spread reinsurance-ceded risks among reinsurers. American
Founders maintains excess of loss reinsurance agreements for more than $50,000
on policies issued prior to October 24, 1990 and for more than $250,000 on
policies issued subsequent to that date.

Systems. One of the key criteria in our strategy to grow our life and
health segment is to acquire effective information systems to support new
products offered. We believe that both American Founders and Aegis have
efficient and flexible administrative systems that have demonstrated the
ability to quickly and efficiently assimilate and provide administration for
acquired blocks of policies. The result is ongoing low-cost administration for
our insurance and annuity policies.

Specialty Lines

As a holding company for 14 insurance subsidiaries, we hold certificates of
authority to write various types of insurance in 48 states. In many states, we
have several insurance company subsidiaries licensed to write the same types of
insurance business, and we are licensed to write business in other states where
we are not actively underwriting business. We use our authority to write
business in these circumstances, which would otherwise go unused, to write
certain lines of business and reinsure the risks in exchange for fees. This can
be a valuable asset to reinsurance companies desiring to underwrite insurance
business in these states but which do not hold certificates of authority to do
so. We may also decide to retain some underwriting risk on selected business at
our discretion, and we report the underwriting results of that retention in
this segment. We pursue opportunities to provide this "specialty" type of
insurance primarily for reinsurance companies.

During 2000, our specialty lines operations contracted for approximately
$100 million in annualized premium, primarily in the private passenger auto
insurance segment. In addition, given our certificates of authority and
infrastructure, we believe we are well positioned internally to provide
specialty insurance for certain additional coverages. Due to external market
requirements, however, we believe our opportunities to provide additional types
of specialty insurance depends, in large part, on improved ratings from our
various rating agencies, including A.M. Best Company.

Non-Standard Auto

In December 2000, we acquired a 52% interest in Instant Insurance Holdings,
Inc. ("Instant Auto"), the parent of a group of insurance agencies specializing
in the distribution of non-standard auto insurance products written by other
carriers. We invested approximately $10 million in cash in Instant Auto in
exchange for 10 million shares of a newly created series of Instant Auto's
convertible preferred stock. We also acquired an additional three million
shares of Instant Auto's convertible preferred stock from one of its existing
stockholders in exchange for approximately 550,000 shares of Vesta common
stock. See the section of this prospectus entitled "Business--Changes in
Capitalization--Acquisition of Shares Held by Torchmark" beginning on page 35.
In addition to its on-line policy application capabilities, Instant Auto has
developed a highly integrated call center to field customer inquiries,
facilitate policy applications, and administer the process of issuing new
policies. We intend to use the Instant Auto platform to acquire a series of
traditional non-standard auto agencies and to build an efficient and
centralized processing platform.

Unlike the business of American Founders and Aegis, Instant Auto's principal
business is not underwriting insurance. Instant Auto operates as a non-standard
auto agency, distributing the insurance products of other carriers. Thus,
Instant Auto's principal revenue stream is agents' fees and commissions. Non-
standard auto insurance covers owners and drivers seeking to purchase insurance
as required by law, drivers with accidents or violations on their driving
records, new drivers, and drivers who own high-performance vehicles. Non-
standard auto insurance customers traditionally are higher risks than standard
customers and, therefore, non-standard customers' premiums are higher.
According to a recent A.M. Best Company ("A.M. Best") report, the non-standard
segment is approximately 18% of the overall personal auto insurance industry.
In recent years, the non-standard auto segment has become extremely
concentrated, putting additional financial pressure on

companies as they compete for market share. This industry shakeout has caused
high-cost operators to seek merger partners and has created an opportunity for
growth.

Although our investment in Instant Auto does not immediately diversify our
product offering, we believe that it is a necessary and important step towards
growing our existing insurance business through state of the art distribution
and processing methods. We also believe that it provides us with a platform to
develop fee income, both through traditional agency commissions and specialty
lines fees (as discussed above). Instant Auto has two fundamental assets that
we believe will enable us to accomplish these strategic goals:

. valuable technological assets which we believe can serve as a growth
engine for various types of insurance products; and

. seasoned management to build a significant non-standard auto general
agency.

We believe that having access to Instant Auto's call center is an important
step towards significant growth in our newly-acquired life and annuity
businesses. In addition, we believe this call center may ultimately be an
effective tool with which all of our independent agents may effectively cross-
market all of our personal lines products.

Corporate and Other

Our corporate and other segment primarily consists of net investment income
on capital, interest on debt, and certain overhead expenses not directly
associated with a particular segment.

Reserves

Our insurance subsidiaries maintain reserves to cover their estimated
ultimate liability for losses with respect to reported and unreported claims
incurred. To the extent that current reserves prove to be inadequate in the
future, we would have to increase such reserves and incur a charge to earnings
in the period such reserves are increased, which could have a material adverse
effect on our results of operations and financial condition. The establishment
of appropriate reserves is an inherently uncertain process, and there can be no
assurance that ultimate losses will not materially exceed our estimates.
Reserves are estimates involving actuarial and statistical projections at a
given point in time of what we expect to be the cost of the ultimate settlement
and administration of claims based on facts and circumstances then known,
estimates of future trends in claims severity, and other variable factors such
as inflation.

Reserves for Property and Casualty Business

With respect to reported claims, reserves are established on a case-by-case
basis. The reserve amounts on each reported claim are determined by taking into
account the circumstances surrounding each claim and policy provisions relating
to the type of loss. We review loss reserves on a regular basis, and as new
data becomes available, we make appropriate adjustments to our reserves.

With respect to losses that have been incurred but not yet reported to us, a
variety of methods have been developed in the insurance industry for
determining estimates of loss reserves. One common method of actuarial
evaluation, which we use, is the loss development method. This method uses the
pattern by which losses have been reported over time and assumes that each
accident year's experience will develop in the same pattern as the historical
loss development. We also rely on industry data to provide the basis for
reserve analysis on newer lines of business (lines written by us for less than
three years).

Provisions for inflation are implicitly considered in the reserving process.
Our reserves are carried at the total estimate for ultimate expected loss
without any discount to reflect the time value of money.

Reserves are computed based upon actuarial principles and procedures
applicable to the lines of business written by us. These reserve calculations
are reviewed regularly by management, and, as required by state law,

we engage an independent actuary to render opinions as to the adequacy of
statutory reserves established by management. The actuarial opinions are filed
with the various jurisdictions in which we are licensed. Based on our practices
and procedures, management believes that our reserves were adequate as of the
valuation date.

The following table provides a reconciliation of beginning and ending
property and casualty liability balances based on generally accepted accounting
principles ("GAAP") for the periods indicated:

For the Year Ended December
31,
-------------------------------
1998 1999 2000
--------- --------- ---------
(in thousands)

Gross losses and LAE reserves at beginning of
year........................................ $ 596,797 $ 504,911 $ 354,709
Reinsurance receivable....................... (204,336) (206,139) (186,559)
--------- --------- ---------
Net losses and LAE reserves at beginning of
year........................................ 392,461 298,772 168,150
Increases (decreases) in provisions for
losses and LAE claims incurred:
Current year............................... 396,091 268,931 169,333
Prior year................................. (769) (22,167) (5,862)
Losses and LAE payments for claims incurred:
Current year............................... (269,369) (198,503) (120,888)
Prior year................................. (219,642) (178,883) (117,094)
--------- --------- ---------
Net losses and LAE reserves at end of year... 298,772 168,150 93,639
Reinsurance receivable....................... 206,139 186,559 170,050
--------- --------- ---------
Gross loss and LAE reserves.................. $ 504,911 $ 354,709 $ 263,689
========= ========= =========

The reconciliation between statutory basis and GAAP basis reserves for each
of the three years in the period ended December 31, 2000, is shown below:

For the Year Ended
December 31,
----------------------------
1998 1999 2000
-------- -------- --------
(in thousands)

Statutory reserves.............................. $363,139 $207,351 $142,116
Adjustments for salvage and subrogation (1)..... (11,250) -- --
Retroactive reinsurance and other amounts....... (53,117) (39,201) (48,477)
Gross-up of amounts netted against reinsurance
recoverable.................................... 206,139 186,559 170,050
-------- -------- --------
Reserves on a GAAP basis........................ $504,911 $354,709 $263,689
======== ======== ========

--------
(1) Salvage and subrogation recoverable amounts were included in the 2000 and
1999 statutory reserves in accordance with Illinois Department of Insurance
regulations. Prior to 1999, we reported our statutory reserves under
Alabama regulations which do not allow such adjustments.

The following table shows the development of the reserves for unpaid losses
and LAE from 1990 through 2000 for our insurance subsidiaries on a GAAP basis
net of reinsurance recoveries. The top line of the table shows the liabilities
at the balance sheet date for each of the indicated years. This reflects the
estimated amounts of losses and LAE for claims arising in that year and all
prior years that are unpaid at the balance sheet date, including losses
incurred but not yet reported to us. The upper portion of the table shows the
cumulative amounts subsequently paid as of successive years with respect to the
liability. The lower portion of the table shows the reestimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year. The estimates change as more information becomes known about
the frequency and severity of claims for individual years. A redundancy
(deficiency) exists when the reestimated liability as of each December 31 is
less (greater) than the prior liability estimate. The "cumulative redundancy
(deficiency)"

depicted in the table, for any particular calendar year, represents the
aggregate change in the initial estimates over all subsequent calendar years.

For the Year Ended December 31,
------------------------------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
------- ------- -------- -------- -------- -------- -------- -------- -------- -------- -------
(in thousands)

Liability for
unpaid
losses and LAE... $27,823 $21,919 $ 21,976 $ 29,688 $ 66,648 $118,733 $112,932 $392,461 $298,772 $168,150 $93,639
Paid (cumulative)
as of
One year later.. 11,864 13,166 20,517 20,761 51,527 88,377 86,978 197,477 178,883 117,094
Two years later.. 14,949 17,054 20,272 28,766 65,360 116,388 114,704 253,109 236,301
Three years
later........... 17,096 16,810 20,281 34,776 66,490 125,299 131,342 287,385
Four years
later........... 18,093 16,622 23,272 33,139 72,273 137,081 137,926
Five years
later........... 19,206 18,140 20,994 38,222 81,156 139,485
Six years later.. 20,683 16,218 22,964 46,298 82,336
Seven years
later........... 20,391 17,922 31,006 47,185
Eight years
later........... 22,284 25,941 31,776
Nine years
later........... 30,299 26,417
Ten years later.. 30,772
Liability
reestimated as
of end of year.. 27,823 21,919 21,976 29,688 66,648 118,733 112,932 392,461 298,772 168,150 93,639
One year later... 28,779 21,853 28,530 28,930 61,033 127,790 99,708 391,692 276,605 162,289
Two years later.. 29,431 19,009 27,914 34,219 66,582 110,437 144,986 353,969 255,915
Three years
later........... 29,130 19,817 26,120 38,940 66,713 118,657 132,761 344,726
Four years
later........... 29,578 16,470 30,435 41,517 76,863 146,090 140,775
Five years
later........... 26,291 19,862 33,845 50,993 88,770 144,256
Six years later.. 29,493 23,760 40,317 53,330 86,357
Seven years
later........... 36,400 29,574 37,953 51,482
Eight years
later........... 40,568 33,388 35,850
Nine years
later........... 37,804 30,973
Ten years later.. 35,298
Cumulative redundancy/
(deficiency)..... (7,475) (9,054) (13,874) (21,794) (19,709) (25,523) (27,843) 47,735 42,857 5,862

We reinsured a number of casualty risks in the early 1980's which could
result in claims for coverage of asbestos-related and other environmental
impairment liabilities to the extent that such liabilities were not excluded
from the underlying policies. Our exposure to a significant loss from an
asbestos or environmental claim is minimal due to the fact that our
participation in the reinsurance treaties relating to these risks is only at
the higher levels and our percentage participation in those layers is
relatively low. In addition, we carry reinsurance which would mitigate the
effect of any losses under these treaties. While there exists a possibility
that we could suffer a material loss in the event of a high number of large
losses under these treaties, this is unlikely in management's judgment.

Life Insurance Reserves

Reserves for traditional life insurance contracts are generally calculated
using the net level premium method, based on assumptions as to mortality,
withdrawals, dividends, and investment yields ranging from 2.5% to 6.5%. These
assumptions are generally made at the time the contract is issued or at the
purchase date. These assumptions are based on projections from past experience,
making allowance for possible unfavorable deviation.

Our reserves for investment-type contracts are based either on the contract
account balance (if future benefit payments in excess of the account balance
are not guaranteed) or on the present value of future benefit payments (if such
payments are guaranteed).

Investments

Our consolidated investment portfolio consists primarily of investment grade
fixed income securities. Our portfolio is managed subject to investment
policies and guidelines established by management and the Board of

Directors. Our cash and investments as of December 31, 2000 totaled
approximately $1.0 billion and were classified as follows:

Amount at which
Shown on % of
Type of Investment Balance Sheet Portfolio
------------------ --------------- ---------
(in thousands)

Cash and short-term investments.................... $ 35,960 3.5%
Fixed maturity portfolio........................... 798,205 78.3
Equity securities.................................. 31,285 3.1
Mortgage and collateral loans...................... 63,060 6.2
Policy loans....................................... 61,413 6.0
Other invested assets.............................. 29,343 2.9
---------- -----
Total.............................................. $1,019,266 100.0%
========== =====

The value of the fixed maturities portfolio, classified by category, as of
December 31, 2000, was as follows:

Amortized Fair
Cost Value
--------- --------
(in thousands)

United States government securities...................... $ 80,235 $ 82,689
Asset-backed securities.................................. 381,099 377,383
Corporate................................................ 312,412 315,533
Municipals............................................... 21,372 22,600
-------- --------
Total.................................................... $795,118 $798,205
======== ========

The National Association of Insurance Commissioners ("NAIC") has a bond
rating system that assigns securities to classes called "NAIC designations"
that are used by insurers when preparing their annual statutory financial
statements. The NAIC assigns designations to publicly-traded as well as
privately-placed securities. The designations assigned by the NAIC range from
class one to class six, with a rating in class one being of the highest
quality. We invest our fixed maturities portfolio primarily in class one or two
securities as rated by the NAIC, which are considered investment grade. The
maturity and duration of our portfolio are managed to match the maturity and
duration of the underlying life insurance and property and casualty reserves.

Changes in Capitalization

Debt Exchanges and Repurchases

During the last 18 months, we have engaged in several transactions to reduce
annual interest expense obligations and improve our debt-to-capital ratio. As
of November 30, 1999, we had outstanding approximately $100 million face amount
of our 8.75% Senior Debentures due 2025, and Vesta Capital Trust I, our single
purpose finance subsidiary, had outstanding approximately $100 million
liquidation amount of its 8.525% Deferrable Capital Securities due 2027.

On December 30, 1999, we issued approximately $44.1 million face amount of
our 12.5% Senior Notes due 2005 in exchange for approximately $58.8 million
liquidation amount of the 8.525% Deferrable Capital Securities. In connection
with this exchange, we paid all accrued and unpaid distributions then owed on
the 8.525% Deferrable Capital Securities surrendered and issued certain
warrants to purchase shares of our common stock (which subsequently terminated
pursuant to their terms). In connection with these transactions, we recorded a
one-time after-tax gain of approximately $9.5 million and we reduced our
outstanding long-term indebtedness by approximately $14.7 million.

In March and April of 2000, we redeemed all $44.1 million principal amount
of our 12.5% Senior Notes for approximately $38.2 million plus accrued
interest. We funded these cash redemptions with internally-generated sources.
As a result of these redemptions, the warrants previously issued to the holders
of the 12.5% Senior Notes terminated pursuant to their terms.

Also during the first quarter of 2000, we redeemed approximately $13.1
million face amount of our 8.75% Senior Debentures for approximately $9.8
million plus accrued interest. We funded this cash redemption with internally
generated sources. As of December 31, 2000, approximately $86.9 million of
these 8.75% Senior Debentures remained outstanding.

Following our December 30, 1999 purchase of approximately $58.8 million
liquidation amount of Vesta Capital Trust I's 8.525% Deferrable Capital
Securities discussed above, approximately $41.2 million face amount of the
8.525% Deferrable Capital Securities remained outstanding. In the fourth
quarter of 2000 and the first quarter of 2001, we exchanged approximately 1.6
million shares of our common stock for approximately $11.5 million liquidation
amount of the 8.525% Deferrable Capital Securities in six separate
transactions. At the time of each transaction, we delivered shares from our
treasury having a market value (based on the five trading days preceding the
closing date of each transaction) equal to 75% of the total liquidation amount
of the 8.525% Deferrable Capital Securities exchanged. As of March 31, 2001,
approximately $29.7 million of the 8.525% Deferrable Capital Securities were
outstanding.

As a result of the series of transactions we undertook in 2000 and the first
quarter of 2001, we reduced our outstanding debt by approximately $68.7 million
and decreased our annual ongoing interest obligations by approximately $7.5
million. These transactions also helped reduce our debt-to-total capital ratio
from 48.5% as of December 31, 1999, to 36.7% as of December 31, 2000.

Acquisition of Shares Held by Torchmark

In 2000, we acquired approximately 5.1 million shares of our common stock
from Torchmark Corporation ("Torchmark") in two transactions for an aggregate
purchase price of approximately $32.7 million. This acquisition eliminated
Torchmark's holdings in Vesta. In one transaction, we acquired 1.38 million
shares from Torchmark, which we later reissued in privately negotiated
transactions for approximately $9 million. In another transaction, we acquired
3.75 million shares from Torchmark, which we later reissued to three
institutional investors for $23.6 million at the end of June 2000. At that
time, we entered into an agreement that gave us the right to repurchase all
3.75 million of these shares within six months. In December of 2000, we
exercised our right to repurchase all 3.75 million shares for $23.6 million
plus interest and reissued most of these shares in four separate transactions
completed in December 2000. These transactions included:

. Approximately 1.2 million shares issued in exchange for approximately $8
million liquidation amount of our 8.525% Deferrable Capital Securities;

. Approximately 950,000 shares issued in connection with our acquisition
of Aegis;

. 750,000 shares held in trust for allocation to our independent agents
pursuant to the Vesta Agents Stock Incentive Plan; and

. Approximately 550,000 shares issued in connection with our acquisition
of Instant Auto.

Conversion of Preferred Stock and Sale of Common Stock

On January 26, 2001, the holder of all 2.95 million shares of our Series A
Convertible Preferred Stock converted the preferred stock into 5.9 million
shares of common stock, and we then repurchased those shares of common stock
for approximately $15 million cash and a note for approximately $32.2 million.
This conversion eliminated an annual preferred stock dividend obligation of
approximately $2.3 million. We subsequently resold

5.5 million of the common shares in a registered supplemental offering to new
investors. We received proceeds from this offering of approximately $33.8
million and repaid the $32.2 million note in full on March 14, 2001.

Regulation

General

Our insurance companies are subject to regulation by governmental agencies
in the states in which they do business. The nature and extent of such
regulation varies by jurisdiction, but typically involves prior approval of the
acquisition of control of an insurance company or of any company controlling an
insurance company, regulation of certain transactions entered into by an
insurance company with any of its affiliates, approval of premium rates for
many lines of insurance, standards of solvency and minimum amounts of capital
and surplus which must be maintained, limitations on types and amounts of
investments, restrictions on the size of risks which may be insured by a single
company, licensing of insurers and agents, deposits of securities for the
benefit of policyholders, and reports with respect to financial condition and
other matters. In addition, state regulatory examiners perform periodic
examinations of insurance companies. Such regulation is generally intended for
the protection of policyholders rather than security holders.

In addition to the regulatory supervision of our insurance subsidiaries, we
are also subject to regulation under the Ohio, Illinois, Hawaii, Florida
(following our acquisition of Florida Select), and Texas Insurance Holding
Company System Regulatory Acts (collectively, the "Holding Company Acts").
These Holding Company Acts contain certain reporting requirements including
those requiring us to file information relating to our capital structure,
ownership, and financial condition and general business operations of our
insurance subsidiaries. These Holding Company Acts contain special reporting
and prior approval requirements with respect to transactions among affiliates.
The Illinois Holding Company Act is generally the most significant to us since
it governs our relationship with Vesta Fire, our principal insurance
subsidiary.

The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation, and federal taxation, do affect the insurance business. Recently, a
number of state legislatures have considered or have enacted legislative
proposals that alter, and in many cases increase, the authority of state
agencies to regulate insurance companies and holding company systems. In
addition, legislation has been introduced from time to time in recent years
which, if enacted, could result in the federal government assuming a more
direct role in the regulation of the insurance industry.

The insurance laws of most states generally provide that all property and
casualty insurance companies which do business in these states must belong to a
statutory property and casualty guaranty association. The purpose of these
guaranty associations is to protect policyholders by requiring solvent property
and casualty insurance companies to pay certain insurance claims of insolvent
insurers. The rules of such guaranty associations assess insurers
proportionately to such insurer's share of voluntary premiums written in the
given state in order to pay these claims. While most guaranty associations
provide a procedure for recoupment of assessments through rate increases, rate
surcharges, or premium tax credits, there is no assurance that insurers will
recover these assessments, and the time value of money becomes a cost to the
insurer assessed. Vesta's share of these assessments is not expected to have a
material impact on the business of Vesta's insurance subsidiaries.

Many states have formed statutory residual market associations or plans to
write certain higher risk property and casualty insurance. These associations
cover such risks as wind and water in coastal areas and assigned risk for
automobile. By statute, each private insurer writing voluntary business of the
type written under the residual market plans in the state must be a member of
these associations and, depending on the plan, may be required to accept
certain of these risks and also may be required to participate in the profit or
loss of the association or plan. Exposures under these plans are higher than
voluntary writings because the plans accept

higher risk business and rates charged for this business are often lower than
actuarially required due to political influence of the governmental agency
operating these plans.

Insurers also are required by the states to provide coverage to insureds who
would not otherwise be considered eligible by the insurers. Each state dictates
the types of insurance and the level of coverage which must be provided to such
involuntary risks. The rules of the programs in each state govern how
involuntary risks are shared on a pro rata basis by the companies who
underwrite similar risks voluntarily in the applicable states.

NAIC

In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles ("Codification") which, effective as of January 1, 2001, replaced
the NAIC Annual Statement Instructions and Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in other areas. Management does not
believe that the impact of the new Codification will be significant.

State insurance regulators and the NAIC periodically re-examine existing
laws and regulations and their application to insurance companies. In recent
years, the NAIC has approved and recommended to the states for adoption and
implementation several regulatory initiatives designed to decrease the risk of
insolvency of insurance companies. These initiatives include risk-based capital
requirements for determining the levels of capital and surplus an insurer must
maintain in relation to its insurance and investment risks. Other NAIC
regulatory initiatives impose restrictions on an insurance company's ability to
pay dividends to its stockholders. These initiatives may be adopted by the
various states in which our subsidiaries are licensed. The ultimate content and
timing of any statutes and regulations adopted by the states cannot be
determined at this time. It is not possible to predict the future impact of
changing state and federal regulation on our operations, and there can be no
assurance that existing insurance-related laws and regulations will not become
more restrictive in the future or that laws and regulations enacted in the
future will not be more restrictive.

Risk-Based Capital

The NAIC's risk-based capital rules require insurance companies to calculate
and report information under a risk-based formula that attempts to measure
statutory capital and surplus needs based on the risks in a company's mix of
products and investment portfolio. The formula is designed to allow state
insurance regulators to identify weakly capitalized companies. Under the
formula, a company determines its "risk-based capital" by taking into account
certain risks related to the insurer's assets (including risks related to its
investment portfolio and ceded reinsurance) and the insurer's liabilities
(including underwriting risks related to the nature and experience of its
insurance business). Risk-based capital rules provide for different levels of
regulatory attention depending on the ratio of a company's total adjusted
capital to its "authorized control level" of risk-based capital.

The NAIC's risk-based capital requirements are intended to be used as an
early warning tool to help insurance regulators identify deteriorating or
weakly capitalized companies in order to initiate regulatory action. Such
requirements are not intended as a mechanism for ranking adequately capitalized
companies. The formula defines a minimum capital standard which supplements the
low, fixed minimum capital, and surplus requirements previously implemented on
a state-by-state basis.

As of December 31, 2000, the total adjusted risk-based capital as a
percentage of authorized control level were as follows for our principal
insurance subsidiaries:

Vesta Fire Insurance Corporation..................................... 630%
American Founders Life Insurance Company............................. 492%

Restrictions on Dividends to Stockholders

Our insurance subsidiaries are subject to various state statutory and
regulatory restrictions, generally applicable to each insurance company in its
state of incorporation, which limit the amount of dividends or distributions by
an insurance company to its stockholders. The restrictions are generally based
on certain levels of surplus, and operating income, as determined under
statutory accounting practices. Ohio, Illinois, and Texas laws permit dividends
in any year which, together with other dividends or distributions made within
the preceding 12 months, do not exceed the greater of (i) 10% of statutory
surplus as of the end of the preceding year or (ii) the net income for the
preceding year, with larger dividends payable only after receipt of prior
regulatory approval. Hawaii law limits dividends to the lesser of (i) and (ii)
without prior approval. Certain other extraordinary transactions between an
insurance company and its affiliates also are subject to prior approval by the
department of insurance for the applicable states. Future dividends from our
subsidiaries may be limited by business and regulatory considerations.

IRIS Ratios

The NAIC has developed its Insurance Regulatory Information System ("IRIS")
to assist state insurance departments in identifying significant changes in the
operations of an insurance company, such as changes in its product mix, large
reinsurance transactions, increases or decreases in premiums received, and
certain other changes in operations. Such changes may not result from any
problems with an insurance company but merely indicate changes in certain
ratios outside ranges defined as normal by the NAIC. When an insurance company
has four or more IRIS ratios falling outside "normal ranges," state regulators
may investigate to determine the reasons for the variance and whether
corrective action is warranted. In 2000, Vesta Fire had three ratios which
varied unfavorably from the "usual value" range and American Founders had four
ratios which varied unfavorably from the "usual value" range. As of May 1,
2001, neither Vesta Fire nor American Founders had received any notice of
anticipated action as a result of these variances.

A.M. Best Rating

A.M. Best, which rates insurance companies based upon factors of concern to
policyholders, raised its rating on our property and casualty insurance
subsidiaries to "B+" (Very Good, in the Secure Rating Category) from "B" (Good,
in the Vulnerable Rating Category) in February, 2000. Some of the factors noted
by A.M. Best as contributing to the upgrade include our improved financial
condition, debt restructuring, elimination of non-core business units, and our
focus on our personal lines business. We believe that our current A.M. Best
rating of "B+" will assist us in increasing the number of new policy
applications and strengthen our retention ratios on our existing policies as
they come up for renewal. American Founders is also rated "B+" by A.M. Best.

To further strengthen our ability to increase new policy applications and
retain our existing policies, and to open up other opportunities, we believe we
must continue to work towards a higher rating from A.M. Best. To accomplish
that, we will focus on:

. Expanding our core book of business;

. Continuing to lower our debt-to-capital ratio; and

. Continuing to demonstrate the ability to operate profitably.

Each of these three goals is related to our future operating performance
which is subject to a host of uncertainties and risk factors more fully
discussed in the section of this prospectus entitled "Risk Factors" beginning
on page 10.

Competition

Direct writers are making a strong push in the personal lines arena. These
companies compete almost exclusively based on price. While there is a segment
of the population that is driven exclusively by price, we believe that many
consumers desire the advice and counsel of a professional agent. We have
developed a business strategy that focuses on this segment of the market.
Accordingly, our relationship with our independent agencies is perhaps the most
important component of our current competitive profile. In order to develop and
retain the independent agencies' loyalty, we have reaffirmed our commitment to
independent agency distribution by providing innovative solutions to agencies'
daily business issues, as well as by responding to agencies' needs as quickly
as possible. As another mechanism to maintain agency loyalty, we have created a
stock incentive plan for our top-performing agencies.

The property and casualty insurance industry is highly competitive on the
basis of both price and service. We compete for direct business with other
stock companies, specialty insurance organizations, mutual insurance companies,
and other underwriting organizations, some of which are substantially larger
and have greater financial resources than we have. In recent years, there has
been a trend in the property and casualty industry toward consolidation which
could result in even more competitive pricing. In the future, the industry,
including us, will face increasing insurance underwriting competition from
banks and other financial institutions.

Employees

As of January 10, 2001, we employed 486 persons. Our employees are neither
represented by labor unions nor are they subject to any collective bargaining
agreements. Management knows of no current efforts to establish labor unions or
collective bargaining agreements.

Litigation

Securities Litigation

Subsequent to the filing of our quarterly report on Form 10-Q for the period
ended March 31, 1998 with the U.S. Securities and Exchange Commission ("SEC" or
"Commission"), we commenced an internal investigation to determine the exact
scope and amount of certain reductions of reserves and overstatement of premium
income in our reinsurance assumed business that had been recorded in the fourth
quarter of 1997 and the first quarter of 1998. This investigation concluded
that inappropriate amounts had, in fact, been recorded and we determined that
we should restate our previously issued 1997 financial statements and first
quarter 1998 Form 10-Q. Additionally, during our internal investigation we were
advised by our then outside auditors that there was an error in the accounting
methodology used to recognize earned premium income in our reinsurance
business. We had historically reported certain assumed reinsurance premiums as
earned in the year in which the related reinsurance contracts were entered even
though the terms of those contracts frequently bridged two years. We determined
that reinsurance premiums should be recognized as earned over the contract
period and corrected the error in our accounting methodology by restating
previously issued financial statements. On June 1, 1998 and June 29, 1998, we
issued press releases, which were filed with the Commission, regarding the
matters addressed in this section.

We restated our previously-issued financial statements for 1995, 1996, and
1997 and our first quarter 1998 Form 10-Q for the above items by issuance of a
current report on Form 8-K dated August 19, 1998. These restatements resulted
in a cumulative decrease to stockholders' equity of approximately $75.2 million
through March 31, 1998. Commencing in June 1998, we and several of our current
and former officers and directors were named as defendants in several purported
class action lawsuits filed in the United States District Court for the
Northern District of Alabama. Several of our officers and directors also have
been named in a derivative action lawsuit in the Circuit Court of Jefferson
County, Alabama, in which Vesta is a nominal defendant. In addition, we
received various inquiries and requests for information from various state
departments of insurance and other regulatory authorities, including a subpoena
issued to Vesta on August 24, 1998 by the

Commission as part of a formal, non-public order of investigation. We fully
responded to such requests in 1998, and no further requests for information
from Vesta have been made by the Commission.

In March 1999, the actions filed in the United States District Court for the
Northern District of Alabama were consolidated into a single action in that
district and certified as a class action. Torchmark Corporation and KPMG Peat
Marwick LLP, our outside auditor at the time, were added as additional
defendants in the consolidated class action. The consolidated amended complaint
alleges violations of certain federal securities laws and seeks unspecified but
potentially substantial damages. The court has denied all motions to dismiss
and the class action is presently in discovery, with a trial date set for
November 5, 2001. We are vigorously defending this litigation but there is no
assurance of its outcome. The parties have conducted settlement discussions,
but have not been successful in reaching any resolution. The derivative case
has been stayed and placed on the administrative docket.

We have several layers of directors' and officers' liability insurance
coverage ("D&O insurance"), the terms of which may cover all or a portion of
the damages or settlement costs of the class action. These policies provide up
to $100 million in D&O insurance to cover damages or settlement costs and an
additional policy provides another layer of $10 million D&O insurance to cover
any damages awarded by a court in these actions. Cincinnati Insurance Company
("Cincinnati") issued the primary policy that provides the first $25 million of
D&O insurance. Federal Insurance Company (The Chubb Group of Insurance
Companies) issued an excess D&O insurance policy which provides coverage for
the second $25 million in losses, if necessary. The balance of the coverage is
provided by a group of insurers and was purchased after the class actions
comprising the consolidated class action were filed. In September 1998, after
these actions were filed, Cincinnati, which provides the primary insurance
policy, filed a lawsuit in the United States District Court for the Northern
District of Alabama seeking to rescind the policy and avoid the coverage. That
action was dismissed for lack of subject matter jurisdiction, and we then filed
an action against Cincinnati in the Circuit Court of Jefferson County, Alabama,
to enforce the policy and to recover damages arising out of Cincinnati's
actions. Cincinnati filed an answer and counterclaim in that action, seeking to
rescind the policy and avoid the coverage. This action is in the discovery
stage and the outcome is uncertain. There is no assurance that the primary
insurance coverage will ultimately be available for any damages or settlement
costs incurred. The outcome of this litigation may also materially affect the
availability of the excess policy issued by The Chubb Group. The damages sought
by stockholder plaintiffs in the consolidated class action, either at trial or
through settlement, may be substantial. If the damages or settlement costs
incurred in connection with the consolidated class action and derivative action
are ultimately determined not to be covered by our D&O insurance policies for
any reason, or are in excess of our policy limits, we may incur a significant
and material loss which could have a material and adverse impact on our
financial condition and results of operation.

The consolidated class action is in the discovery stage and the derivative
action has been placed on the administrative docket. The ultimate outcome of
these matters is uncertain. Accordingly, we have not currently set aside any
financial reserves relating to any of the above-referenced actions.

Indemnification Agreements and Liability Insurance

Pursuant to Delaware law and our Bylaws, we are obligated to indemnify our
current and former officers and directors for certain liabilities arising from
their employment with or services to Vesta, provided that their conduct
complied with certain requirements. Pursuant to these obligations, we have
agreed to advance costs of defense and other expenses on behalf of certain
current and former officers and directors, subject to an undertaking from such
individuals to repay any amounts advanced in the event a court determines that
they are not entitled to indemnification.

Arbitration

As discussed above, we corrected our accounting for assumed reinsurance
business through restatement of our previously-issued financial statements.
Similar corrections were made on a statutory accounting basis by recording
cumulative adjustments in Vesta Fire's 1997 statutory financial statements. The
impact of this

correction has been reflected in amounts ceded under our 20% whole account
quota share treaty which was terminated on June 30, 1998 on a run-off basis. We
believe such treatment is appropriate under the terms of this treaty and have
calculated the quarterly reinsurance billings presented to the three treaty
participants accordingly. The aggregate amount included herein as recoverable
from such reinsurers totaled approximately $55.2 million as of December 31,
2000. In addition, we have previously collected approximately $48.5 million
from the draw down of collateral on hand.

NRMA Insurance, Ltd. ("NRMA"), one of the participants in the 20% whole
account quota share treaty, filed a lawsuit in the United States District Court
for the Northern District of Alabama contesting our billings. NRMA sought
rescission of the treaty and a temporary restraining order to prevent us from
collecting approximately $34.5 million of the total $48.5 million of
collateral. In connection with the settlement of the temporary restraining
order and the related proceeding for an injunction, we collected the $34.5
million of drawn-down collateral in dispute and entered into a $25.0 million
letter of credit in favor of NRMA to fund any amounts NRMA may recover as a
result of the arbitration. We filed a demand for arbitration as provided for in
the treaty and also filed a motion to compel arbitration which was granted in
the United States District Court action. We have also filed for arbitration
against the other two participants in the treaty and all of these arbitrations
are in their early stages. While management believes its interpretation of the
treaty's terms and computations based thereon are correct, these matters are in
their early stages and their ultimate outcome cannot be determined at this
time.

During 1999, F&G Re (on behalf of USF&G), filed for arbitration under two
aggregate stop loss reinsurance treaties whereby F&G Re assumed certain risk
from us. F&G Re is seeking to rescind the treaties and avoid its obligation.
Under the terms of the two treaties, we believe we will be entitled to
recoveries of approximately $28.2 million as losses mature from prior accident
years. Vesta has recorded a reinsurance recoverable of approximately $28.2
million as of December 31, 2000 and 1999 related to these two treaties. This
arbitration is in its early stage and the ultimate outcome cannot be determined
at this time.

A dispute has also arisen with CIGNA Property and Casualty Insurance Company
("CIGNA") (now ACE USA) under a personal lines insurance quota share
reinsurance agreement, whereby we assumed certain risks from CIGNA. During
September 2000, CIGNA filed for arbitration under the reinsurance agreement,
seeking payment of the balances that CIGNA claims are due under the terms of
the treaty. In addition, during the fourth quarter, the treaty was terminated
on a cut-off basis. Vesta is seeking recoupment of all improper claims payments
and excessive expense allocations and charges from CIGNA. This arbitration is
in its early stages and the ultimate outcome cannot be determined at this time.

If the amounts recoverable under the relevant treaties are ultimately
determined to be materially less than the amounts that we have reported as
recoverable, we may incur a significant, material, and adverse impact on our
financial condition and results of operations.

Other Litigation

Vesta, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitration relating to the regular conduct of
its insurance business. These proceedings involve alleged breaches of contract,
torts (including bad faith and fraud claims), and miscellaneous other specified
relief. Based upon information presently available, and in light of legal and
other defenses available to us and our subsidiaries, management does not
consider liability from any threatened or pending litigation regarding routine
matters to be material.

MANAGEMENT

Directors and Executive Officers

Vesta's Board of Directors is divided into three classes with the members of
each class serving three-year terms expiring at the third annual meeting of the
stockholders after their elections, upon the election and qualification of
their successors. The following table sets forth information as of the date of
this prospectus concerning Vesta's directors and executive officers.

Term as
Name Age Position Director Expires
---- --- -------- ----------------

James E. Tait............... 51 Chairman of the Board of 2002
Directors
Norman W. Gayle, III........ 47 President, Director 2002
Robert B.D. Batlivala....... 61 Director 2004
Walter M. Beale, Jr. ....... 55 Director 2003
Ehney A. Camp, III.......... 58 Director 2004
Alan S. Farrior............. 47 Director 2003
Stephen R. Windom........... 51 Director 2003
K. Gerald Barron............ 51 Senior Vice President--
Insurance Operations of
Vesta Fire Insurance
Corporation
William P. Cronin........... 41 Senior Vice President--
Chief Financial Officer
John W. McCullough.......... 35 Vice President--Associate
General Counsel
Hopson B. Nance............. 30 Vice President--
Controller
Stephen P. Russell.......... 41 Senior Vice President--
Actuarial of Vesta Fire
Insurance Corporation
Stephen P. Solimine......... 50 Senior Vice President--
Marketing of Vesta Fire
Insurance Corporation
Donald W. Thornton.......... 53 Senior Vice President--
General Counsel and
Secretary

James E. Tait has served as a Director of Vesta since 1998. Mr. Tait was
named the Chairman of the Board of Directors in 2000 and has occupied the
Office of Chairman with Norman W. Gayle, III since 2000. Mr. Tait served as
Executive Vice President and Chief Financial Officer of Vesta from 1998 to
2000. Mr. Tait is also currently President of Tait Advisory Services, LLC, a
subsidiary of Vesta. Previously, Mr. Tait served as President of Inex Insurance
Exchange from 1996 to 1999, and was a Partner at Coopers & Lybrand LLP from
1980 to 1996.

Norman W. Gayle, III has served as a Director and President of Vesta since
1998 and has occupied the Office of the Chairman with Mr. Tait since 2000.
Previously, Mr. Gayle was Executive Vice President and Chief Operating Officer
of Vesta from 1995 to 1998.

Robert B.D. Batlivala, Ph.D. has served as a Director of Vesta since 1999.
Mr. Batlivala retired on October 1, 1999 from the position of Director,
Regulatory Economics and Corporate Strategic Planning for BP Amoco, where he
served in various capacities since 1964.

Walter M. Beale, Jr. has served as a Director of Vesta since 1993. Mr. Beale
is a Partner in the law firm of Balch & Bingham LLP and has been in that
position since 1976.

Ehney A. Camp, III has served as a Director of Vesta since 1993. Mr. Camp
has been a Principal of Addison Investments, L.L.C. since 1996. From 1975 to
1996, Mr. Camp was the President and Chief Executive Officer of Camp & Company,
a mortgage banking company located in Birmingham, Alabama.

Alan S. Farrior has served as a Director of Vesta since 2000. Mr. Farrior is
the President of Lowder New Homes/Colonial Homes and has been in that position
since 1978.

Stephen R. Windom has served as a Director of Vesta since 2000. Mr. Windom
is a Partner in the law firm of Sirote & Permutt, P.C. and has been in that
position since prior to 1996. Mr. Windom currently serves as Lieutenant
Governor of the State of Alabama. Prior to becoming Lieutenant Governor in
1999, Mr. Windom served as a member of the Alabama State Senate.

K. Gerald Barron has served as Senior Vice President--Insurance Operations
of Vesta Fire Insurance Corporation since 1999. From March 1997 to October
1999, Mr. Barron was Executive Vice President of Audubon Insurance Group in
Baton Rouge, Louisiana. From March of 1993 to March of 1997, Mr. Barron was
Vice President of Hanover Insurance Company in Worcester, Massachusetts.

William P. Cronin has served as Senior Vice President and Chief Financial
Officer of Vesta since 2000. Mr. Cronin has also served as Senior Vice
President--Controller of Vesta from 1998 to 2000. Mr. Cronin has served as
President of Tait Advisory Services, LLC, a subsidiary of Vesta, since March
2001. From 1997 to 2001, Mr. Cronin was Vice President, Audit and Regulatory
Affairs of Tait Advisory Services, LLC. Prior to joining Vesta, Mr. Cronin was
a Senior Manager at Ernst & Young LLP from 1993 to 1997.

John W. McCullough has served as Vice President and Associate General
Counsel of Vesta since 2000. From 1996 to 2000, Mr. McCullough was an Associate
and Partner with the law firm of Balch & Bingham LLP.

Hopson B. Nance has served as Vice President and Controller of Vesta since
2000. Prior to joining Vesta, Mr. Nance was an Audit Manager and held other
positions with PricewaterhouseCoopers LLP from 1993 to 2000.

Stephen P. Russell has served as Senior Vice President--Actuarial of Vesta
Fire Insurance Corporation since 1998. From 1982 to 1998, Mr. Russell was a
Director and Senior Actuary of Allstate Insurance Company, Northbrook,
Illinois.

Stephen P. Solimine has served as Senior Vice President--Marketing of Vesta
Fire Insurance Corporation since 2000. From 1995 to 2000, Mr. Solimine was Vice
President--Marketing of Vesta Fire Insurance Corporation.

Donald W. Thornton has served as Senior Vice President, General Counsel and
Secretary of Vesta since 1995.

There are no family relationships between any of the directors or executive
officers of Vesta.

SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS

Security Ownership of Management

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of March 31, 2001 and as adjusted to reflect
the sale of our common stock offered hereby, with respect to: (i) each of our
directors and each of our named executive officers; and (ii) all our directors
and our named executive officers as a group. As of March 31, 2001, Vesta had
24,427,946 shares of common stock outstanding. Except as otherwise indicated,
each of the stockholders listed below has sole voting and investment power over
the shares beneficially owned.

Percentage of
Shares Owned
-----------------
Shares Prior to After
Name Owned Offering Offering
---- --------- -------- --------

K. Gerald Barron............................... 0 * *
Robert B.D. Batlivala.......................... 5,000(1) * *
Walter M. Beale, Jr............................ 45,499(2) * *
Ehney A. Camp, III............................. 47,830(3) * *
William P. Cronin.............................. 52,806(4) * *
Alan S. Farrior................................ 6,789(5) * *
Norman W. Gayle, III........................... 345,514(6) 1.4% 1.1%
James E. Tait.................................. 293,835(7) 1.2% *
Donald W. Thornton............................. 181,085(8) * *
Stephen R. Windom.............................. 5,000(9) * *
--------- --- ---
All Directors and Executive Officers as a Group
(14 persons).................................. 1,012,416 4.1% 3.2%
========= === ===

--------
* Less than 1%
(1) Includes 5,000 shares subject to the exercise of options exercisable on or
prior to June 30, 2001 granted pursuant to our Non-Employee Director Stock
Plan.
(2) Includes (i) 5,000 shares subject to the exercise of options exercisable on
or prior to June 30, 2001, granted pursuant to our Non-Employee Director
Stock Plan, and (ii) 30,000 shares of restricted stock.
(3) Includes (i) 5,000 shares subject to the exercise of options exercisable on
or prior to June 30, 2001 and 3,325 shares of restricted stock granted
pursuant to our Non-Employee Director Stock Plan, (ii) 5,150 shares held in
the name of Sterne, Agee & Leach, Inc., custodian for Ehney A. Camp, III
Individual Retirement Account, and (iii) 22,500 shares of restricted stock.
(4) Includes 1,556 shares allocated to Mr. Cronin's 401(k) plan account and
50,000 shares of restricted stock awarded under our Long Term Incentive
Plan.
(5) Includes 5,000 shares subject to the exercise of options exercisable on or
prior to June 30, 2001 and 1,789 shares of restricted stock granted
pursuant to our Non-Employee Director Stock Plan.
(6) Includes (i) 52,500 shares subject to the exercise of options exercisable
on or prior to June 30, 2001 granted under, and 198,032 shares of
restricted stock awarded under our Long Term Incentive Plan and (ii) 10,080
shares allocated to Mr. Gayle's 401(k) plan account.
(7) Includes (i) 52,500 shares subject to the exercise of options exercisable
on or prior to June 30, 2001 granted under, and 195,000 shares of
restricted stock awarded under, our Long Term Incentive Plan, and
(ii) 11,279 shares allocated to Mr. Tait's 401(k) plan account.
(8) Includes (i) 27,500 shares subject to the exercise of options exercisable
on or prior to June 30, 2001 granted under, and 123,479 shares of
restricted stock awarded under our Long Term Incentive Plan and (ii) 10,617
shares allocated to Mr. Thornton's 401(k) plan account.
(9) Includes 5,000 shares subject to the exercise of options exercisable on or
prior to June 30, 2001 granted pursuant to our Non-Employee Director Stock
Plan.

Business Relationships between Vesta and Management

We have used the legal services of the law firm Balch & Bingham LLP, of
which Walter M. Beale, Jr., one of our directors, is a partner, from the
beginning of 2001 to the date of this prospectus, including legal services
provided to us in preparing this registration statement. We expect that Balch &
Bingham LLP will continue to render various legal services to us for the
remainder of 2001. We have used the legal services of the law firm Sirote &
Permutt, P.C., of which Stephen R. Windom, one of our directors, is a partner,
from the beginning of 2001 to the date of this prospectus. We expect that
Sirote & Permutt, P.C. will continue to render various legal services to us for
the remainder of 2001.

Principal Stockholders

The following table lists all persons known to us to be the beneficial owner
of more than 5% of our common stock as of March 31, 2001, and as adjusted to
reflect the sale of shares offered hereby, assuming no exercise of the
underwriters' over-allotment option.

Percentage of
Shares Owned
-----------------
Shares Prior to After
Name and Address Owned Offering Offering
---------------- --------- -------- --------

Wellington Management Company, LLP.............. 2,000,000(1) 8.2% 6.3%
75 State Street
Boston, MA 02109

R.K. Carvill (International Holdings), Ltd. .... 1,380,000(2) 5.6 4.3
Peerman Holdings, Ltd.
Clarendon House
2 Church Street
Hamilton HMCX, Bermuda

Dimensional Fund Advisors, Inc. ................ 1,309,650(3) 5.4 4.1
1299 Ocean Avenue
Santa Monica, CA 90401

--------
(1) Wellington Management Company, LLP, acting as investment adviser on behalf
of several accounts, acquired these shares of our common stock directly
from us in March 2001.

(2) The information on the number of shares of our common stock beneficially
owned by R.K. Carvill (International Holdings), Ltd. and Peerman Holdings,
Ltd. set forth herein is based on Schedule 13D/A, filed January 30, 2001 by
R.K. Carvill (International Holdings), Ltd., and Peerman Holdings, Ltd.

(3) The information on the number of shares of our common stock beneficially
owned by Dimensional Fund Advisors, Inc. set forth herein is based on
Schedule 13G filed February 2, 2001 by Dimensional Fund Advisors Inc.

UNDERWRITING

The several underwriters named below, for which William Blair & Company,
L.L.C., and Cochran, Caronia Securities LLC are acting as representatives, have
severally agreed, subject to the terms and conditions set forth in the
underwriting agreement by and between Vesta and the underwriters, to purchase
from Vesta the respective number of shares of common stock set forth opposite
each underwriter's name in the table below.

Number of
Underwriter Shares
----------- ---------

William Blair & Company, L.L.C. ................................... 5,575,000
Cochran, Caronia Securities LLC.................................... 1,125,000
Friedman, Billings, Ramsey & Co., Inc. ............................ 200,000
Keefe, Bruyette & Woods, Inc....................................... 200,000
Legg Mason Wood Walker, Incorporated............................... 200,000
The Robinson-Humphrey Company, LLC................................. 200,000
---------
Total............................................................ 7,500,000
=========

This offering will be underwritten on a firm commitment basis. In the
underwriting agreement, the underwriters have agreed, subject to the terms and
conditions set forth therein, to purchase the shares of common stock being sold
pursuant thereto at a price per share equal to the public offering price less
the underwriting discount specified on the cover page of this prospectus.
According to the terms of the underwriting agreement, the underwriters will
either purchase all of the shares or none of them. In the event of default by
any underwriter, in certain circumstances the purchase commitments of the non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated.

The representatives of the underwriters have advised Vesta that the
underwriters propose to offer the common stock to the public initially at the
public offering price set forth on the cover page of this prospectus and to
selected dealers at such price less a concession of not more than $0.30 per
share. The underwriters may allow, and such dealers may re-allow, a concession
not in excess of $0.10 per share to certain other dealers. The underwriters
will offer the shares subject to prior sale and subject to receipt and
acceptance of the shares by the underwriters. The underwriters may reject any
order to purchase shares in whole or in part. The underwriters expect that
Vesta will deliver the shares to the underwriters through the facilities of The
Depository Trust Company in New York, New York on or about June 26, 2001. At
that time, the underwriters will pay Vesta for the shares in immediately
available funds. If all of the shares are not sold at the initial offering
price, the public offering price and other selling terms may be changed by the
representatives.

Vesta has granted to the underwriters an option, exercisable within 30 days
after the date of this prospectus, to purchase up to an aggregate of 1,125,000
additional shares of common stock at the same price per share to be paid by the
underwriters for the other shares offered hereby for the purpose of covering
the sale of shares in excess of the shares initially allocated in the offering.
If the underwriters purchase any such additional shares pursuant to this
option, each of the underwriters will be committed to purchase such additional
shares in approximately the same proportion as set forth in the table above.
The underwriters may exercise the option only for the purpose of covering
excess sales, if any, made in connection with the distribution of the shares of
common stock offered hereby.

The following table summarizes the underwriting discount to be paid by Vesta
to the underwriters. This information assumes either no exercise or full
exercise by the underwriters of their over-allotment option:

Total
-----------------------------
Per Without With
Share Over-Allotment Over-Allotment
----- -------------- --------------

Public offering price................... $8.00 $60,000,000 $69,000,000
Underwriting discount paid by Vesta..... $0.50 $ 3,750,000 $ 4,312,500

Vesta estimates that its share of the total expenses of this offering,
excluding the underwriting discount, will be approximately $1,250,000.

Vesta's directors and certain executive officers have agreed that for a
period of 180 days after the date of this prospectus, without the prior written
consent of William Blair & Company, L.L.C., they will not, directly or
indirectly, offer, sell, assign, transfer, encumber, pledge, contract to sell,
grant an option to purchase, or otherwise dispose of, other than by operation
of law, any shares of common stock or securities convertible or exchangeable
into, or exercisable for, common stock. Vesta may grant options and issue
common stock under existing stock option or stock purchase plans and issue
unregistered shares in connection with any outstanding convertible securities
or options during this lock-up period.

Vesta has agreed to indemnify the underwriters and their controlling persons
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect
thereof.

In connection with this offering, the underwriters and other persons
participating in this offering may engage in transactions which affect the
market price of the common stock. These may include stabilizing and over-
allotment transactions and purchases to cover syndicate short positions.
Stabilizing transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the common stock. Over-allotment
involves selling more shares of the common stock in this offering than are
specified on the cover page of this prospectus, which results in a syndicate
short position. The underwriters may cover this short position by purchasing
common stock in the open market or by exercising all or part of their over-
allotment option. In addition, the representatives may impose a penalty bid.
This allows the representatives to reclaim the selling concession allowed to an
underwriter or selling group member if common stock sold by such underwriter or
selling group member in this offering is repurchased by the representatives in
stabilizing or syndicate short covering transactions. These transactions, which
may be effected on the New York Stock Exchange or otherwise, may stabilize,
maintain or otherwise affect the market price of the common stock and could
cause the price to be higher than it would be without these transactions. The
underwriters and other participants in this offering are not required to engage
in any of these activities and may discontinue any of these activities at any
time without notice. Vesta and the underwriters make no representation or
prediction as to whether the underwriters will engage in such transactions or
choose to discontinue any transactions engaged in or as to the direction or
magnitude of any effect that these transactions may have on the price of the
common stock.

From time to time, Cochran, Caronia & Co., an affiliate of Cochran, Caronia
Securities LLC, has provided, and continues to provide, investment banking
services to Vesta for which it has received customary fees and commissions.
Cochran, Caronia & Co. has also provided certain investment banking services to
Florida Select Insurance Holdings Inc. with respect to its proposed acquisition
by Vesta. Cochran, Caronia & Co. has received, and will receive when the
proposed acquisition is completed, customary fees from Florida Select for these
services.

LEGAL MATTERS

The validity of the issuance of the common stock offered hereby and certain
other legal matters related to the offering will be passed upon for Vesta by
Balch & Bingham LLP, Birmingham, Alabama. Walter M. Beale, Jr., a director of
Vesta, is a partner of Balch & Bingham LLP. As of March 31, 2001, Mr. Beale was
the beneficial owner of 45,499 shares of our common stock.

Certain legal matters related to the offering will be passed upon for the
underwriters by Alston & Bird LLP, Washington, D.C.

EXPERTS

The financial statements of Vesta Insurance Group, Inc. incorporated in this
prospectus by reference to our Annual Report on Form 10-K for the year ended
December 31, 2000, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

The financial statements of Florida Select Insurance Holdings Inc. as of
December 31, 2000 and 1999, and for each of the three years in the period ended
December 31, 2000, appearing in this prospectus, have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.

The consolidated financial statements of Securus Financial Corporation (the
predecessor of American Founders Financial Corporation) and subsidiaries as of
December 31, 1999 and 1998 and for each of the three years in the period ended
December 31, 1999, incorporated in this prospectus by reference to our Current
Report on Form 8-K/A filed September 12, 2000, have been so incorporated in
reliance on the report of Grant Thornton LLP, independent certified public
accountants, given on the authority of said firm as experts in auditing and
accounting.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended. Therefore, we file annual, quarterly and special
reports, proxy statements, and other information with the U.S. Securities and
Exchange Commission ("SEC"). Our SEC filings are available to the public over
the internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file at the SEC's public reference rooms at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of such material can also
be obtained for a fee by writing to the SEC's Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-
0330 for further information on the public reference rooms.

The SEC allows us to "incorporate by reference" the information we file with
them. This means that we can disclose important information to you by referring
you to documents we file with the SEC. The information incorporated by
reference is an important part of this prospectus. Information that we file
later with the SEC will automatically update and supersede this information.

The following documents (File No. 1-12338) are incorporated by reference in
this prospectus:

(a) Our Annual Report on Form 10-K for the fiscal year ended December 31,
2000, filed March 29, 2001;

(b) Our Current Reports on Form 8-K filed January 11, 2001, January 31,
2001, March 5, 2001, April 10, 2001, April 23, 2001, May 9, 2001, May
16, 2001, May 17, 2001, and June 19, 2001 and our amended Current
Report on Form 8-K/A filed September 12, 2000;

(d) The description of our common stock set forth in our registration
statement on Form 8-A/A, filed November 16, 1993, as supplemented by
the rights registered on Form 8-A, filed June 21, 2000, as amended on
July 13, 2000 and September 1, 2000.

All documents filed by Vesta under Sections 13(a), 13(c), 14, or 15(d) of
the Securities Exchange Act of 1934 after the date of this prospectus will be
deemed incorporated by reference into this prospectus and to be a part of this
prospectus from the date of filing of the documents.

If you request by writing or telephoning us at the following address or
telephone number, we will provide you with a copy of any of these documents we
are incorporating by reference at no cost.

Charles Lambert
Manager of Investor Relations
Vesta Insurance Group, Inc.
3760 River Run Drive
Birmingham, Alabama 35243
(205) 970-7000

You should rely only on the information incorporated by reference or
provided in this prospectus. We have not authorized anyone else to provide you
with any other information or any different information. We are not making an
offer of common stock in any state where the offer is not permitted. You should
not assume that the information in this prospectus is accurate as of any date
other than the date on the front of this document.

INDEX TO FINANCIAL STATEMENTS

Unaudited Pro Forma Consolidated Financial Statements of Vesta Insurance
Group, Inc. as of and for the three months ended March 31, 2001 and as of and
for the year ended December 31, 2000.

General Information................................................. F-2
Unaudited Pro Forma Consolidated Statements of Operations for the
three months ended March 31, 2001.................................. F-3
Unaudited Pro Forma Consolidated Balance Sheet as of March 31,
2001............................................................... F-4
Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 2000....................................... F-5
Notes to Unaudited Pro Forma Consolidated Financial Statements...... F-6

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)............................. F-7
Consolidated Statements of Income (unaudited)....................... F-8
Consolidated Statements of Cash Flows (unaudited)................... F-9
Notes to Consolidated Financial Statements (unaudited).............. F-10

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...................................... F-11
Consolidated Balance Sheets......................................... F-12
Consolidated Statements of Income................................... F-13
Consolidated Statements of Shareholders' Equity..................... F-14
Consolidated Statements of Cash Flows............................... F-15
Notes to Consolidated Financial Statements.......................... F-16

F-1

VESTA INSURANCE GROUP, INC.

GENERAL INFORMATION

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

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 7.5 million shares of common
stock pursuant to this offering as if the transactions had occurred at the
beginning of each period. The acquisitions are accounted for as purchases.

The following consummated and proposed 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.

. In connection with the proposed transaction, Florida Select will commute
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.

F-2

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................ 15,603 954 313(2) 16,870
Realized (losses) gains.............. 1,706 -- -- 1,706
Other................................ 2,146 1,363 1,363(1) 4,872
------- ------ ------ --------
Total revenues..................... 86,103 9,097 7,844 103,044
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 2,281 11,109
Income tax expense (benefit)........... 1,787 1,408 879(5) 4,074
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 $1,402 $ 6,403
Income from continuing operations per
share--basic.......................... 0.14 0.24(7)
Income from continuing operations per
share--diluted........................ 0.13 0.22(7)

See accompanying notes.

F-3

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 13,400 (8) 53,932
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 $22,324 $1,737,028
========== ======== ======= ==========
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 75 (12) 324
Additional paid-in
capital................ 150,464 10,606 44,319 (12),(13) 205,389
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 20,824 259,073
---------- -------- ------- ----------
Total liabilities,
deferrable capital
securities and
stockholders'
equity.............. $1,610,542 $104,162 $22,324 $1,737,028
========== ======== ======= ==========

See accompanying notes.

F-4

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 21,784 390 (2) 71,013
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 26,371 348,080

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 5,396 38,017
Income tax expense...... 5,664 4,281 1,781 1,786 (5) 13,512
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 $ 1,965 $ 19,279
======== ======= ======= ======= ========
Income from continuing
operations per share--
basic.................. $ 0.46 $ 0.75 (7)
Income from continuing
operations per share--
diluted................ $ 0.34 $ 0.61 (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.

F-5

VESTA INSURANCE GROUP, INC.

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

(1) Eliminates the effect of the 50% quota share with Centre Insurance
Company.

(2) Adds investment income earned on assets received from the stock offering,
net of assets transferred to third parties, based on an assumed rate of
7%, and eliminates interest expense on the $33.5 million note repaid by
American Founders on January 31, 2000.

(3) Eliminates realized losses based on marking the securities to market as
part of purchase accounting.

(4) Recognizes amortization of goodwill recorded as part of the Florida Select
and American Founders transactions over a 15-year life.

(5) Recognizes the tax effects of the adjustments as if they had occurred at
the beginning of the period using a blended tax rate of 33% as of December
31, 2000 and 38.6% as of March 31, 2001.
(6) Recognizes minority interest as if it had been applicable from beginning
of period.

(7) Calculated as if this 7.5 million share offering had occurred at the
beginning of the period. Pro forma basic shares outstanding are
approximately 25.7 million shares and 26.4 million shares for the year
ended December 31, 2000 and for the three months ended March 31, 2001,
respectively, and pro forma diluted shares outstanding are approximately
31.8 million shares and 28.6 million shares for the year ended December
31, 2000 and for the three months ended March 31, 2001, respectively.

(8) Reflects net cash effect to Vesta following the completion of this
offering and the closing of the acquisition of Florida Select.

Florida Select Acquisition................................. $(64.5 million)
Less common stock offering net proceeds (see footnote 12).. $ 55.0 million
Less settlement of balances pursuant to commutation of
Centre Insurance Company and Florida Select treaty........ $ 22.9 million
--------------
Net cash impact............................................ $ 13.4 million

(9) Reflects commutation of 50% quota share with Centre Insurance Company.

(10) Recognition of goodwill.

(11) Recognition of accrued expenses attributable to the Florida Select
transaction.

(12) Net proceeds of offering 7.5 million shares of common stock, less the paid
in capital attributable to Florida Select. The net proceeds of the
offering are calculated based on the sale price of $8.00 per share, or an
aggregate of $60,000,000, less underwriting discounts of $3,750,000 and
estimated offering expenses of $1,250,000.

(13) Recognition of removing historical equity accounts to reflect purchase
accounting.

F-6

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,
respectively).................................... 2,972,758 3,961,825
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 4,473,200
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 outstanding....... 8 8
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 outstanding............... 1 1
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.

F-7

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.

F-8

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
============= ==============

F-9

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

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.

F-10

REPORT OF INDEPENDENT AUDITORS

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

F-11

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, respectively)... 3,961,825 3,222,580
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, respectively)............................ 333,171 305,679
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 outstanding......... 8 8
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 outstanding................. 1 1
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.

F-12

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.

F-13

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 $16,580,959
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.

F-14

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.

F-15

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations and Significant Accounting Policies

Organization

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.

Consolidation and Presentation

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.

Segment Information

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.

Use of Estimates and Assumptions

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.

Recognition of Revenue

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.

F-16

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Cash and Cash Equivalents

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").

Investments

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.

Deferred Policy Acquisition Costs

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

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.

Organizational Costs

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.

Loss and Loss Adjustment Expenses

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.

F-17

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Income Taxes

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.

Guaranty Fund and Residual Market Pool Assessments

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.

Concentrations of Credit or Financial Risk

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.

Reclassification

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.

2. Investments

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
=========== ======== ======== ===========

F-18

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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
=========== ==== ========== ===========

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.

F-19

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

3. Reinsurance

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.

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.

F-20

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company's catastrophe reinsurance is intended to provide the following
coverage in the event of a named hurricane:

Portion of Ceded Under Total
Layer Potential Excess of Potential
Retained Recoveries Loss Losses in
Loss Layer by Company from FHCF Treaties 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
============ ============ ============

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
============ ============ ============

4. Income Taxes

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.

F-21

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

F-22

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

5. Losses and Loss Adjustment Expenses

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
=========== =========== ===========

F-23

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

6. Shareholders' Equity

Common Stock

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.

Common Stock Warrants

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.

Statutory Information

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 domicile.
These

F-24

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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.

7. Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:

. Cash and cash equivalents, short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate fair
values.

. Investment securities: Fair values for debt security investments are
based on quoted market prices.

. Reinsurance recoverable: The carrying amounts of the Company's
recoverables approximate fair values.

. Premiums receivable: The carrying amounts of the Company's receivables
approximate fair values.

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

8. Related Party Transactions

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.

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,

F-25

FLORIDA SELECT INSURANCE HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

$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.

9. FRPCJUA Take-Out Agreement

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.

10. Stock Appreciation Rights

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.

11. Commitments and Contingencies

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.

F-26

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7,500,000 Shares

[Vesta Logo]

VESTA INSURANCE GROUP, INC.

Common Stock

----------------

PROSPECTUS

June 20, 2001

----------------

William Blair & Company
Cochran, Caronia Securities LLC

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