<PAGE>
 
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                                UNITED STATES 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                                   FORM 10-Q
 
(MARK ONE)
 [X]        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
               FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
 
                                      OR
 
 [_]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
FOR THE TRANSITION PERIOD FROM ______________________TO _______________________
 
                        COMMISSION FILE NUMBER 1-12338
 
                          VESTA INSURANCE GROUP, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
               DELAWARE                              63-1097283
    (STATE OF OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
 
 
         3760 RIVER RUN DRIVE                           35243
          BIRMINGHAM, ALABAMA                        (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
 
                                (205) 970-7000
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                                NOT APPLICABLE
  (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
                                    REPORT)
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes  [_] No
 
  Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
 
      The number of shares outstanding of the registrant's common stock,
                   $.01 par value, as of September 30, 1996
                                  18,919,939
 
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<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                                     INDEX
 
<TABLE>
<CAPTION>
 PART I  FINANCIAL INFORMATION
 <C>     <S>                                                                 <C>
 Item 1. Financial Statements:
         Consolidated Balance Sheet at September 30, 1996 and
         December 31, 1995.................................................    1
         Consolidated Statement of Operations for the Three
         Months and Nine Months Ended September 30, 1996 and 1995..........    2
         Consolidated Statement of Cash Flows for the Nine
         Months Ended September 30, 1996 and 1995..........................    3
         Notes to Consolidated Financial Statements........................    4
 Item 2. Management's Discussion and Analysis of Financial
         Condition and Results of Operations...............................    5
<CAPTION>
 PART II OTHER INFORMATION
 <C>     <S>                                                                 <C>
 Item 1. Legal Proceedings.................................................   10
 Item 2. Changes in Securities.............................................   10
 Item 3. Defaults Upon Senior Securities...................................   10
 Item 4. Submission of Matters to a Vote of Security Holders...............   10
 Item 5. Other Information.................................................   11
 Item 6. Exhibits and Reports on Form 8-K..................................   12
</TABLE>
<PAGE>
 
                                     PART I
 
                          ITEM 1. FINANCIAL STATEMENTS
 
                          VESTA INSURANCE GROUP, INC.
 
                           CONSOLIDATED BALANCE SHEET
                  (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                      SEPTEMBER 30, DECEMBER 31
                                                          1996         1995
                                                      ------------- -----------
<S>                                                   <C>           <C>
                                                       (UNAUDITED)
Assets:
 Investments:
  Fixed maturities available for sale--at market
    (cost: 1996--$291,146;
    1995--$311,157)..................................  $   292,782   $316,551
  Equity securities--at market: (cost: 1996--$4,365;
1995--$595)..........................................        7,491      3,208
  Short-term investments.............................      136,986     95,927
                                                       -----------   --------
   Total investments.................................      437,259    415,686
 Cash................................................        5,101      6,832
 Accrued investment income...........................        5,722      5,548
 Premiums in course of collection ...................      221,690    184,717
 Reinsurance balances receivable.....................      110,708     74,153
 Reinsurance recoverable on paid losses..............       65,841     44,335
 Deferred policy acquisition costs...................       63,719     67,831
 Property and equipment..............................        3,851      3,682
 Other assets........................................       25,740      7,318
 Goodwill............................................        7,071      7,522
                                                       -----------   --------
   Total assets......................................  $   946,702   $817,624
                                                       ===========   ========
Liabilities:
 Reserves for:
  Losses and loss adjustment expenses................      227,481    199,314
  Unearned premiums..................................      194,376    168,512
                                                       -----------   --------
                                                           421,857    367,826
 Accrued income taxes................................       21,195     15,969
 Reinsurance balances payable........................       54,049     27,748
 Other liabilities...................................       19,948     12,299
 Short term debt.....................................       15,000     15,000
 Long term debt......................................       98,268     98,163
                                                       -----------   --------
   Total liabilities.................................      630,317    537,005
Commitments and contingencies
Stockholders' equity
 Preferred stock, 5,000,000 shares authorized, none
issued...............................................           --         --
 Common stock, $.01 par value, 32,000,000 shares
  authorized,
  issued: 1996--18,919,939 shares; 1995--18,878,190..          189        189
 Additional paid-in capital..........................      160,537    159,449
 Unrealized investment gains (losses), net of
applicable taxes.....................................        2,809      5,205
 Retained earnings...................................      156,336    119,458
 Receivable from issuance of restricted stock........       (2,612)    (3,162)
 Treasury stock......................................         (874)      (520)
                                                       -----------   --------
   Total stockholders' equity........................      316,385    280,619
                                                       -----------   --------
   Total liabilities and stockholders' equity........  $   946,702   $817,624
                                                       ===========   ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       1
<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                  (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                        THREE MONTHS ENDED   NINE MONTHS ENDED
                                           SEPTEMBER 30        SEPTEMBER 30
                                        -------------------  -----------------
                                          1996      1995       1996     1995
                                        --------- ---------  -------- --------
                                                     (UNAUDITED)
<S>                                     <C>       <C>        <C>      <C>
Revenues:
 Net premiums written.................. $  67,568 $ 150,153  $385,571 $338,434
 Decrease (Increase) in unearned
  premiums.............................    20,776   (24,519)   15,044  (58,570)
                                        --------- ---------  -------- --------
 Net premiums earned...................    88,344   125,634   400,615  279,864
 Net investment income.................     6,102     4,820    17,108   12,742
 Realized investment gains (losses)....        14       (40)       11      279
 Other.................................        47        53       133      162
                                        --------- ---------  -------- --------
    Total revenues.....................    94,507   130,467   417,867  293,047
Expenses:
 Losses incurred.......................    38,627    66,496   214,411  149,025
 Loss adjustment expenses incurred.....     7,938     2.281    15,158    6,064
 Policy acquisition expenses...........    21,696    28,696   103,067   63,178
 Operating expenses....................     1,946     5,715    13,870   15,262
 Premium taxes and fees................     1,541     1,835     4,958    4,504
 Interest on debt......................     2,568     1,833     7,557    2,687
 Goodwill..............................       211       133       466      133
                                        --------- ---------  -------- --------
    Total expenses.....................    74,527   106,989   359,487  240,853
Net income before income taxes.........    19,980    23,478    58,380   52,194
Income taxes...........................     6,568     7,774    19,318   17,038
                                        --------- ---------  -------- --------
    Net income......................... $  13,412 $  15,704  $ 39,062 $ 35,156
                                        ========= =========  ======== ========
Per share amounts:
    Net income......................... $   0 .71 $    0.83  $   2.06 $   1.88
                                        ========= =========  ======== ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
 
                                       2
<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                         (DOLLAR AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                        NINE MONTHS ENDED
                                                          SEPTEMBER 30
                                                        ------------------
                                                          1996      1995
                                                        --------  --------
                                                           (UNAUDITED)
<S>                                                     <C>       <C>       <C>
Operating Activities:
 Net Income............................................ $ 39,062  $ 35,156
 Adjustments to reconcile net income to cash provided
  from operations:
  Change in:
   Loss and LAE reserves...............................   28,167    74,354
   Unearned premium reserve............................   25,864    68,448
   Reinsurance balances payable........................   26,302    (3,822)
   Accrued income taxes................................    6,076     4,482
   Other liabilities...................................    7,649    18,589
   Premiums in course of collection....................  (36,974) (113,834)
   Reinsurance balances receivable.....................  (36,555)  (18,953)
   Reinsurance recoverable on paid losses..............  (21,505)  (21,736)
   Other assets........................................  (18,151)  (19,839)
  Policy acquisition costs deferred....................  (37,509)  (55,598)
  Policy acquisition costs amortized...................   41,622    23,049
  Amortization and depreciation........................    2,713     2,289
  Investment (gains) losses............................      (11)     (279)
  Gain (Loss) on disposition of property, plant and
   equipment...........................................      (67)     (209)
                                                        --------  --------
   Net cash provided from (used in) operations.........   26,683   (7,903)
Investing Activities:
 Investments sold or matured:
  Fixed maturities held to maturity-matured, called....      --      7,280
  Fixed maturities available for sale-matured, called..   30,566     5,423
  Fixed maturities available for sale, sold............      --     46,761
  Equity Securities....................................    3,726     2,738
  Real Estate..........................................      --        554
                                                        --------  --------
   Total investments sold or matured...................   34,292    62,756
 Investments acquired:
  Fixed maturities available for sale..................  (12,354) (111,044)
  Equity Securities....................................   (7,326)   (2,684)
                                                        --------  --------
   Total investments acquired..........................  (19,680) (113,728)
Net (increase) in short-term investments...............  (41,061)  (38,460)
Additions to property, plant and equipment.............   (1,341)   (2,708)
Dispositions of property, plant and equipment..........      172       533
                                                        --------  --------
   Net cash provided from (used in) investing activi-
    ties...............................................  (27,618)  (91,607)
Financing Activities:
 Dividends paid........................................   (2,121)   (1,884)
 Capital contributions.................................    1,220       895
 Issuance of long and short-term debt..................      --    113,533
 Increase in long-term debt............................      104       --
 Retirement of long-term debt..........................      --    (28,000)
                                                        --------  --------
   Net cash used in financing activities...............     (797)   84,544
Increase (decrease) in cash............................   (1,732)  (14,966)
Cash at beginning year.................................    6,833    21,399
                                                        --------  --------
Cash at end of year.................................... $  5,101  $  6,433
                                                        ========  ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
 
                                       3
<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         (DOLLAR AMOUNTS IN THOUSANDS)
 
  Basis of Presentation: The accompanying unaudited financial statements have
been prepared in conformity with generally accepted accounting principles 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 1995 Annual Report. Certain amounts in the
financial statements presented have been reclassified from amounts previously
reported in order to be comparable between years. These reclassifications have
no effect on previously reported stockholders' equity or net income during the
period involved.
 
  Stock Split: On January 22, 1996 Vesta Insurance distributed one share for
every two shares owned by shareholders of record as of January 5, 1996 in the
form of a stock dividend. All prior year share and per share data has been
restated to give effect for the dividend.
 
  Earnings Per Share: Net earnings per share is calculated by dividing net
income by weighted average number of common share and common equivalent shares
outstanding including the net effect of the restricted stock grants. The
weighted average number of common shares and common equivalent shares
outstanding for the nine month period ended September 30, 1996 and 1995 was
18,917,044 and 18,832,727, respectively. The weighted average number of common
shares and common equivalent shares outstanding for the three month period
ended September 30, 1996 and 1995 was 18,919,939 and 18,849,812.
 
  Subsequent Event: On November 1, 1996, the Company announced a stock
repurchase program under which the Company may purchase up to two million
shares of its common stock in the open market at prevailing prices or in
privately negotiated transactions, depending on market conditions, stock price
and other factors. The purchase will be funded from available working capital
and the repurchased shares will be held in treasury or used for ongoing stock
issuances such as issuances under the Company's incentive compensation and
stock option programs. As of November 13, 1996, the Company had purchased a
total of 375,000 shares of its common stock under this program for an
aggregate purchase price of $10,242 (average cost of $27.31 per share).
 
                                       4
<PAGE>
 
    ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                             RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
  Vesta Insurance Group, Inc. (the "Company" or "Vesta") is a holding company
for a group of property and casualty insurance companies (the "Vesta Group")
that offer treaty reinsurance and primary insurance on personal and commercial
risks. In both its reinsurance and primary insurance operations, the Company
focuses principally on property coverages, for which ultimate losses generally
can be more promptly determined than on casualty risks. The Company's revenues
from operations are derived primarily from net premiums earned on risks
written and reinsured by the Company, investment income and investment gains
or losses, while expenses consist primarily of payments for claims losses and
underwriting expenses, including agents' commissions and operating expenses.
 
Comparison of Third Quarter 1996 to Third Quarter 1995
 
  Net income decreased by $2.3 million, or 14.6%, to $13.4 million for the
quarter ended September 30, 1996, from $15.7 million for the quarter ended
September 30, 1995. On a per share basis, net income for the third quarter of
1996 was $.71 per share versus net income of $.83 per share for the third
quarter of 1995.
 
  Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written decreased by $28.3 million, or 14%, to $173.9 million for the
quarter ended September 30, 1996, from $202.2 million for the quarter ended
September 30, 1995, as gross premiums written on reinsurance risks decreased
by $6.9 million and gross premiums written on primary insurance risks
decreased by $21.3 million. Net premiums written decreased by $82.6 million,
or 55.0%, to $67.6 million for the quarter ended September 30, 1996, from
$150.2 million for the quarter ended September 30, 1995. The decrease in net
premiums written was largely attributable to a pro-rata reinsurance facility
entered into by Vesta Fire Insurance Corporation ("Vesta Fire") to provide
capital flexibility to take advantage of growth opportunities. This
reinsurance facility had the effect of reducing net premiums written by
approximately $58.2 million for the quarter ended September 30, 1996.
 
  Gross premiums written for reinsurance decreased by $6.9 million, or 4.9%,
to $134.2 million for the quarter ended September 30, 1996, from $141.1
million for the quarter ended September 30, 1995. This decrease was
attributable to a shift towards writing upper layers in excess catastrophe
programs, where the Company believes margins are better, and normal
fluctuation in pro-rata reinsurance volume. Net premiums written for
reinsurance decreased $56.4 million, or 50.5%, to $55.4 million for the
quarter ended September 30, 1996, from $111.8 million for the quarter ended
September 30, 1995. The substantial decrease in net premium written was
largely attributable to the pro-rata reinsurance facility discussed above.
 
  Gross premiums written for primary insurance decreased by $21.3 million, or
34.9%, to $39.7 million for the quarter ended September 30, 1996, from $61.1
million for the quarter ended September 30, 1995 due to declines in both
personal and commercial lines. Gross premiums written for personal products
decreased 37.5% to $28.7 million for the quarter ended September 30, 1996,
compared to $45.9 million for the quarter ended September 30, 1995. This
decrease in gross premiums written was largely attributable to the assumption
of the Hawaiian Insurance and Guaranty Company, Ltd. unearned premium
portfolio during the third quarter 1995. This portfolio had the one time
effect of increasing the third quarter 1995 gross premium written by
approximately $18.7 million and net premiums written by approximately $11.7
million. Gross premiums on commercial lines decreased 27.1%, from $15.1
million for the quarter ended September 30, 1995 to $11.0 million for the
quarter ended September 30, 1996. This decrease in gross premiums written was
primarily attributable to the Company's re-underwriting of its book of
business in an effort to increase profitability in commercial lines.
 
                                       5
<PAGE>
 
  Net premiums written for primary insurance decreased by $26.2 million, or
68.3%, to $12.2 million for the quarter ended September 30, 1996, from $38.3
million for the quarter ended September 30, 1995. The substantial decrease in
net premiums written was largely attributable to the pro-rata reinsurance
facility discussed above.
 
  Net premiums earned decreased by $37.3 million, or 29.7%, to $88.3 million
for the quarter ended September 30, 1996, from $125.6 million for the quarter
ended September 30, 1995.
 
  Net Investment Income. Net investment income increased by $1.3 million, or
26.6%, to $6.1 million for the quarter ended September 30, 1996, from $4.8
million for the quarter ended September 30, 1995. The weighted average yield
on invested assets (excluding realized and unrealized gains) was 5.6% for the
quarter ended September 30, 1996, compared with 6.0% for the quarter ended
September 30, 1995. The increase in net investment income is primarily
attributable to the increase in average invested assets resulting from cash
flow from operations.
 
  Losses and Loss Adjustment Expenses Incurred. Losses and loss adjustment
expenses ("LAE") decreased by $22.2 million, or 32.3%, to $46.6 million for
the quarter ended September 30, 1996, from $68.8 million for the quarter ended
September 30, 1995. The loss and LAE ratio for the quarter ended September 30,
1996 was 52.7% as compared to 54.7% for the quarter ended September 30, 1995.
The substantial decrease in losses and loss adjustment expenses was largely
attributable to the pro-rata reinsurance facility discussed above.
 
  Policy Acquisition and Other Underwriting Expenses. Policy acquisition and
other underwriting expenses decreased by $11.1 million, or 30.1%, to $25.2
million for the quarter ended September 30, 1996, from $36.3 million for the
quarter ended September 30, 1995. The underwriting expense ratio for the
quarter ended September 30, 1996, was 28.5%, as compared to 28.9% for the
quarter ended September 30, 1995. The substantial decrease in policy
acquisition and other underwriting expenses was largely attributable to the
pro-rata reinsurance facility discussed above.
 
  Federal Income Taxes. Federal income taxes decreased by $1.2 million, or
15.5%, to $6.6 million for the quarter ended September 30, 1996. The effective
rate on pre-tax income decreased from 33.1% to 32.9% for the quarter ended
September 30, 1996. This decrease was due primarily to a larger portion of
income from tax free municipal bonds in 1996 versus 1995.
 
 Comparison of Nine Months Ended September 30, 1996 with Nine Months Ended
    September 30, 1995
 
  The first nine months of 1996 resulted in net income of $39.1 million, an
increase of $3.9 million from the $35.2 million reported for the same period
in 1995. On a per share basis, net income for the first nine months of 1996
was $2.06 per share.
 
  Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross
premiums written increased by $124.4 million, or 29.0% to $553.9 million for
the nine month period ended September 30, 1996, from $429.5 million for the
nine month period ended September 30, 1995, as gross premiums written on
reinsurance risks increased by $109.8 million and gross premiums written on
primary insurance risks increased by $14.6 million.
 
  Gross premiums written for reinsurance increased by $109.8 million, or
33.4%, to $438.8 million for the first nine months of 1996, from $329.0
million for the first nine months of 1995. This growth was attributable to an
increase in gross premiums written on pro rata business. The Company has
continued to follow its strategy of increasing its writings in these areas.
The growth in pro rata reinsurance premiums written was due to growth in
existing accounts as well as the addition of new accounts during the first
nine months of 1996 as compared with the first nine months of 1995.
 
  Gross premiums written for primary insurance increased by $14.6 million, or
14.5%, to 115.1 million for the nine month period ended September 30, 1996,
from $100.5 million for the nine month
 
                                       6
<PAGE>
 
period ended September 30, 1995. Gross premiums written for personal products
increased 38.7%, to $80.7 million for the nine months ended September 30,
1996, compared to $58.2 million for the nine months ended September 30, 1995.
The growth was primarily attributable to the acquisition of the Hawaiian
Insurance and Guaranty Company, Ltd. in June 1995. Gross premiums on
commercial lines decreased by 18.4%, from $42.3 million for the nine month
period ended September 30, 1995 to $34.5 million for the nine month period
ended September 30, 1996. This decrease in gross premiums written was
primarily attributable to the Company's re-underwriting of its book of
business in an effort to increase profitability in commercial lines.
 
  Net premiums written increased by $47.2 million, or 13.9%, to $385.6 million
for the nine month period ended September 30, 1996, from $338.4 million for
the nine month period September 30, 1995. Net premiums written for reinsurance
increased by $53.8 million, or 20.4% to $317.4 million for the first nine
months of 1996, from $263.6 million for the first nine months of 1995 due to
the increased volume of gross premiums written. Net premiums written for
primary insurance decreased $6.8 million, or 9.1% to $68.1 million for the
nine month period ended September 30, 1996, from $74.9 million for the nine
month period ended September 30, 1995 due to the Company's re-underwriting of
its book of business and the pro rata reinsurance facility.
 
  Net premiums earned increased by $120.7 million, or 43.1%, to $400.6 million
for the nine month period ended September 30, 1996, from $279.9 million for
the nine month period ended September 30, 1995.
 
  Net Investment Income. Net investment income increased by $4.4 million, or
34.6%, to $17.1 million for the first nine months of 1996, from $12.7 million
for the first nine months of 1995. The weighted average pre-tax yield on
invested assets (excluding realized and unrealized gains) was 5.6% for the
nine month period ended September 30, 1996, compared with 5.7% for the nine
month period ended September 30, 1995. The increase in net investment income
is primarily attributable to the increase in average invested assets resulting
from cash flow from operations and the receipt of proceeds from the sale by
the Company of $100 million of its 8.75% Senior Debentures due 2025.
 
  Loss and Loss Adjustment Expenses Incurred. Losses and loss adjustment
expenses ("LAE") increased $74.5 million, or 48.0%, to $229.6 million at
September 30, 1996 from $155.1 million at September 30, 1995 due to a
significant increase in gross premiums written. The loss and LAE ratio for the
nine month period ended September 30, 1996 was 57.3% as compared to 55.4% at
September 30, 1995. During the first nine months of 1996, the Company incurred
catastrophe losses of approximately $12.1 million as compared to $8.6 million
during the first nine months of 1995. The increased loss and LAE ratio was due
principally to a greater percentage of pro-rata reinsurance in the overall
business mix.
 
  Policy Acquisition and Other Underwriting Expenses. Policy acquisition and
other underwriting expenses increased by $39.0 million, or 47.0%, to $121.9
million for the nine months ended September 30, 1996, from $82.9 million for
the nine months ended September 30, 1995. The underwriting expense ratio for
the nine months ended September 30, 1996 was 30.4%, as compared to 29.6% for
the nine months ended September 30, 1995.
 
  Federal Income Taxes. Federal income taxes increased by $2.3 million, or
13.5%, to $19.3 million for the nine month period ended September 30, 1996.
The effective rate on pre-tax income increased from 32.6% for the first nine
months of 1995 to 33.1% for the first nine months of 1996.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company is a holding company whose principal asset is its investment in
the capital stock of the companies constituting the Vesta Group, a group of
wholly-owned property and casualty insurance companies including Vesta Fire.
The several insurance company subsidiaries comprising Vesta Group are
individually supervised by state insurance regulators. Vesta Fire is the
principal operating subsidiary of the Company.
 
                                       7
<PAGE>
 
  As a holding company with no other business operations, the Company relies
primarily upon dividend payments from Vesta Fire to meet its cash requirements
(including its debt service) and to pay dividends to its stockholders.
Transactions between Vesta Fire and the Company, including the payment of
dividends by Vesta Fire, are subject to certain limitations under the
insurance laws of Alabama. Specifically, Alabama law permits the payment of
dividends in any year which, together with other dividends or distributions
made within the preceding 12 months, do not exceed the greater of 10% of
statutory surplus as of the end of the preceding year or the net income for
the preceding year, with larger dividends payable only after receipt of prior
regulatory approval. Based upon restrictions presently in effect, the maximum
amount available for payment of dividends to the Company by its insurance
subsidiaries in 1996 without prior approval of regulatory authorities is
approximately $32 million.
 
  The principal uses of funds at the holding company level are to pay
operating expenses, interest on outstanding indebtedness and dividends to
stockholders. During the last three years, the insurance subsidiaries of the
Company have produced operating results sufficient to fund the needs of the
Company. There can be no assurance as to the ability of the Company's
insurance subsidiaries to continue to pay dividends at current levels.
However, the Company is not aware of any demands or commitments of the
insurance subsidiaries that would prevent the payment of dividends to the
Company sufficient to meet the anticipated needs (including debt service) of
the Company over the next twelve months.
 
  During the first nine month period of 1996, the Company paid approximately
$2.1 million in dividends on its common stock, and it is expected that the
Company will pay approximately $2.8 million for all of 1996. The Company is
also required to make semi-annual interest payments of $4.4 million on its
$100 million of 8.75% Senior Debentures due 2025.
 
  The principal sources of funds for the Company's insurance subsidiaries are
premiums, investment income and proceeds from the sale or maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions and the purchase of investments. In order to provide
further liquidity, the Company increased its Line of Credit to $100 million
from $40 million. The Line of Credit is with a group of domestic banks
pursuant to a Credit Agreement, dated September 24, 1996 (the "Credit
Agreement"). As of September 30,1996, the Company has borrowed $15 million
under this line of credit for general corporate purposes. The Credit Agreement
contains several financial covenants relating to the Company's consolidated
net worth, a minimum capitalization ratio, a minimum fixed charge coverage
ratio and a minimum risk based capital ratio. The Company is in compliance
with these covenants.
 
  On a consolidated basis, net cash provided from (used in) operations for the
nine month period ended September 30, 1996 and 1995 was $26.7 million and
$(7.9) million, respectively. Net cash provided from operations for the nine
months ended September 30, 1996 was principally due to a increase in gross
premiums.
 
  Total assets of the Company increased by 16.2% to $925.4 million in 1996,
from $796.7 million in 1995. Cash and invested assets were $442.4 million at
September 30, 1996, increasing 4.7% from December 31, 1995.
 
  As of September 30, 1996, the Company's investment portfolio consisted of
cash and short-term investments (32.1%), U.S. Government securities (7.3%),
mortgage-backed securities (1.8%), corporate bonds (21.5%), foreign government
securities (0.5%), municipal bonds (35.1%) and equity securities (1.7%).
According to Moody's rating, 98.1% of the Company's portfolio is rated A or
better. The Company expects current cash flow to be sufficient to meet
operating needs, although, a certain amount of invested assets has been
categorized as available for sale in the event short-term cash
 
                                       8
<PAGE>
 
needs exceed available resources. The Company adjusts its holdings of cash,
short-term investments and invested assets available for sale according to its
seasonal cash flow needs. Beginning in June of each year, the Company begins
to increase its holdings of cash and short-term investments. This practice
facilitates the Company's ability to meet its higher short-term cash needs
during the hurricane season.
 
  During July, 1995, the Company completed a public offering of $100 million
of 30-year senior debentures bearing interest at 8.75%. A portion of the
proceeds from the sale of the debentures has been used to repay the $28
million loan from United Investors Management Company, a wholly owned
subsidiary of Torchmark Corporation. The remaining proceeds were used to
increase the capital and surplus of Vesta Fire Insurance Corporation, the
Company's primary insurance subsidiary.
 
  On November 1, 1996, the Company announced a stock repurchase program under
which the Company may purchase up to two million shares of its common stock in
the open market at prevailing prices or in privately negotiated transactions,
depending on market conditions, stock price and other factors. The purchase
will be funded from available working capital and the repurchased shares will
be held in treasury or used for ongoing stock issuances such as issuances
under the Company's incentive compensation and stock option programs. As of
November 13, 1996, the Company had purchased a total of 375,000 shares of its
common stock under this program for an aggregate purchase price of $10.2
million (average cost of $27.31 per share).
 
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
  Any statement contained in this report which is not a historical fact, or
which might otherwise be considered an opinion or projection concerning the
Company or its business, whether express or implied, is meant as and should be
considered a forward-looking statement as that term is defined in the Private
Securities Litigation Reform Act of 1996. Forward-looking statements are based
on assumptions and opinions concerning a variety of known and unknown risks,
including but not necessarily limited to changes in market conditions, natural
disasters and other catastrophic events, increased competition, changes in
availability and cost of reinsurance, changes in governmental regulations, and
general economic conditions, as well as other risks more completely described
in the Company's filings with the Securities and Exchange Commission,
including its most recent Annual Report on Form 10-K. If any of these
assumptions or opinions prove incorrect, any forward-looking statements made
on the basis of such assumptions or opinions may also prove materially
incorrect in one or more respects.
 
                                       9
<PAGE>
 
                                    PART II
 
                           ITEM 1. LEGAL PROCEEDINGS
 
  The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other specified relief. Based upon information presently
available, and in light of legal and other defenses available to the Company
and its subsidiaries, management does not consider liability from any
threatened or pending litigation to be material.
 
                         ITEM 2. CHANGES IN SECURITIES
 
  None.
 
                    ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
  None.
 
          ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                           ITEM 5. OTHER INFORMATION
 
  None.
 
                                       10
<PAGE>
 
                                 EXHIBITS INDEX
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
   3.1   Restated Certificate of Incorporation of the Company, dated September
         1, 1993 (filed as an exhibit to Amendment No. 1 to the Registration
         Statement on Form S-1 (Registration No. 33-68114) of Vesta Insurance
         Group, Inc., filed on October 18, 1993 and incorporated herein by ref-
         erence (File No. 1-12338)).
   3.2   By-Laws of the Company (Amended and Restated as of October 1, 1993)
         (filed as an exhibit to Amendment No. 1 to the Registration Statement
         on Form S-1 (Registration No. 33-68114) of Vesta Insurance Group,
         Inc., filed on October 18, 1993 and incorporated herein by reference
         (File No. 1-12338)).
   4.1   Indenture between the Company and Southtrust Bank of Alabama, National
         Association, dated as of July 19, 1995 (filed as an exhibit to the
         Company's Form 10-K for the year ended December 31, 1995, filed on
         March 28, 1996 and incorporated herein by reference (File No. 1-
         12338)).
   4.2   Supplemental Indebenture between the Company and Southtrust Bank of
         Alabama, National Association, dated July 19, 1995 (filed as an ex-
         hibit to the Company's Form 10-K for the year ended December 31, 1995,
         filed on March 28, 1996 and incorporated herein by reference (File No.
         1-12338)).
  10.1   Separation and Public Offering Agreement between Torchmark Corporation
         and the Company dated September 13, 1993 (filed as an exhibit to the
         Company's Form 10-K for the year ended December 31, 1993, filed on
         March 28, 1994 and incorporated herein by reference (File No. 1-
         2338)).
  10.2   Marketing and Administrative Services Agreement between Liberty Na-
         tional File Insurance Company, Liberty National Insurance Corporation
         and Liberty National Life Insurance Company dated September 13, 1993
         (filed as an exhibit to the Company's Form 10-K for the year ended De-
         cember 31, 1993, filed on March 28, 1994 and incorporated herein by
         reference (File No. 1-2338)).
  10.3   Investment Services Agreement between Waddell & Reed Asset Management
         Company and the Company (filed as an exhibit to Amendment No. 1 to the
         Registration Statement on Form S-1 (Registration No. 33-68114) of
         Vesta Insurance Group, Inc., filed on October 18, 1993 and incorpo-
         rated herein by reference (File No. 1-12338)) dated September 13,
         1993.
  10.5   Management Agreement between J. Gordon Gaines, Inc., Liberty National
         Fire Insurance Company, Sheffield Insurance Corporation, Liberty Na-
         tional Insurance Corporation and Vesta Insurance Corporation dated No-
         vember 15, 1994 (filed as an exhibit to the Company's Form 10-K for
         the year ended December 31, 1993, filed on March 28, 1994 and incorpo-
         rated herein by reference (File No. 1-2338)).
  10.6   Form of Restricted Stock Agreement (filed as an exhibit to the Regis-
         tration Statement on Form S-1 (Registration No. 33-68114) of Vesta In-
         surance Group, Inc., filed on August 31, 1993 and incorporated herein
         by reference (File No. 1-12338)).
  10.7*  The Company's Long Term Incentive Plan as amended effective as of May
         16, 1995 (filed as an exhibit to the Company's Form 10Q for the quar-
         ter ended June 30, 1995, filed on August 14, 1995 and incorporated
         herein by reference (File No. 1-12338)).
  10.8*  Form of Non-Qualified Stock Option Agreement entered into by and be-
         tween the Company and certain of its executive officers and directors
         (filed as an exhibit to the Company's Form 10-K for the year ended De-
         cember 31, 1995, filed on March 28, 1996 and incorporated herein by
         reference (File No. 1-12338)).
</TABLE>
 
 
                                       11
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.9*   Cash Bonus Plan of the Company (filed as an exhibit to the Company's
         Form 10-K for the year ended December 31, 1993, filed on March 28,
         1994 and incorporated herein by reference (File No. 1-2338)).
 10.10*  J. Gordon Gaines, Inc. Post Retirement Benefits Plan (filed as an ex-
         hibit to the Company's Form 10-K for the year ended December 31, 1994,
         filed on March 29, 1995 and incorporated herein by reference (File No.
         1-12338)).
 10.11*  J. Gordon Gaines, Inc. Retirement Savings Plan (filed as an exhibit to
         the Company's Form 10-K for the year ended December 31, 1994, filed on
         March 29, 1995 and incorporated herein by reference (File No. 1-
         12338)).
 10.12*  The Company's Non-Employee Director Stock Plan (filed as an exhibit to
         the Company's 10-Q for the quarter ended June 30, 1995, filed on Au-
         gust 14, 1995 and incorporated herein by reference (File No. 1-
         12338)).
 10.13   Office Lease between the Company and Torchmark Development Corpora-
         tion, dated as of April 20, 1992 (filed as an exhibit to the Company's
         Form 10-K for the year ended
         December 31, 1993, filed on March 28, 1994 and incorporated herein by
         reference
         (File No. 1-12338)).
 10.14   Agency Agreement between Liberty National Fire Insurance Company,
         Vesta Insurance Corporation, Sheffield Insurance Corporation, and
         Overby-Seawell Company (filed as an exhibit to Amendment No. 1 to the
         Registration Statement on Form S-1 (Registration No. 33-68114) of
         Vesta Insurance Group, Inc., filed on October 18, 1993 and incorpo-
         rated herein by reference (File No. 1-12338)).
 10.15   Commercial/Personal Property Risk Excess Reinsurance Contracts, dated
         July 1, 1993, constituting the Company's Direct Per Risk Treaty Pro-
         gram, between Vesta Fire Insurance Corporation, Sheffield Insurance
         Corporation, Vesta Insurance Corporation, Vesta Lloyds Insurance Com-
         pany and various reinsurers (filed as an exhibit to Amendment No. 1 to
         the Registration Statement on Form S-1 (Registration No. 33-68114) of
         Vesta Insurance Group, Inc., filed on October 18, 1993 and incorpo-
         rated herein by reference (File No. 1-12338)) Renewed July 1, 1996.
 10.16   Catastrophe Reinsurance Contracts, dated July 1, 1995, constituting
         the Company's Direct Property Catastrophe Program, between Vesta Fire
         Insurance Corporation, Vesta Insurance Corporation, Sheffield Insur-
         ance Corporation, Vesta Lloyds Insurance Company and various reinsur-
         ers (filed as an exhibit to the Company's Form 10-K for the year ended
         December 31, 1994, filed on March 29, 1995 and incorporated herein by
         reference (File No. 1-12338)).
 10.17   Specific Regional Catastrophe Excess Contracts, dated January 1, 1996,
         constituting the Company's Regional Property Catastrophe Program, be-
         tween Vesta Fire Insurance Corporation and various reinsurers (filed
         as an exhibit to the Company's Form 10-K for the year ended December
         31, 1995, filed on March 28, 1996 and incorporated herein by reference
         (File No. 1-12338)).
 10.18   Casualty Excess of Loss Reinsurance Agreements, dated January 1, 1994,
         constituting the Company's Casualty Excess of Loss Reinsurance Pro-
         gram, between Vesta Fire Insurance Corporation, Vesta Insurance Corpo-
         ration, Sheffield Insurance Corporation, Vesta Lloyds Insurance Com-
         pany and various reinsurers (filed as an exhibit to the Company's Form
         10-K for the year ended December 31, 1993, filed on March 28, 1994 and
         incorporated herein by reference (File No. 1-12338)). Renewed January
         1, 1996.
</TABLE>
 
 
                                       12
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  10.19  Quota Share Reinsurance Contract, dated December 31, 1994, covering
         the Company's Personal Lines Property and Mortgage Security Property
         business between Vesta Fire Insurance Corporation, Sheffield Insurance
         Corporation, Vesta Insurance Corporation, Vesta Lloyds Insurance Com-
         pany and various reinsurers (filed as an exhibit to the Company's Form
         10-K for the year ended December 31, 1994, filed on March 29, 1995 and
         incorporated herein by reference (File No. 1-12338)). Renewed January
         1, 1996.
  10.20  Credit Agreement between Vesta Insurance Group, Inc. and Compass Bank,
         Southtrust Bank of Alabama, N.A., First Union Bank and Compass Bank,
         as agent dated August 11, 1994 (filed as an exhibit to the Company's
         Form 10-Q for the quarter-ended September 30, 1994, filed on November
         9, 1994 and incorporated herein by reference (File No. 1-12338)).
  10.21  Amendment to Catastrophe Reinsurance Contracts, dated July 1, 1995,
         constituting the Company's Direct Property Catastrophe Program, be-
         tween Vesta Fire Insurance Corporation, Vesta Insurance Corporation,
         Sheffield Insurance Corporation, Vesta Lloyds Insurance Company, Ha-
         waiian Insurance & Guaranty Company, Limited and various reinsurers.
         (Filed as an exhibit to the Company's Form 10-Q for the quarter ended
         September 30, 1995, filed on November 14, 1995 and incorporated herein
         by reference (File No. 1-12338)). Renewed July 1, 1996.
  10.22  Amendment to Catastrophe Reinsurance Contracts, dated January 1, 1996,
         constituting the Company's Direct Property Catastrophe Program, be-
         tween Vesta Fire Insurance Corporation, Vesta Insurance Corporation,
         Sheffield Insurance Corporation, Vesta Lloyds Insurance Company, Ha-
         waiian Insurance & Guaranty Company, Limited and various reinsurers
         (filed as an exhibit to the Company's Form 10-K for the year ended De-
         cember 31, 1995, filed on March 28, 1996 and incorporated herein by
         reference (File No. 1-12338)).
  10.23  Credit Agreement between Vesta Insurance Group, Inc. and Southtrust
         Bank of Alabama, N.A., ABN Amro Bank B.V., Bank of Tokyo-Mitsubishi
         Trust Company, The First National Bank of Chicago, Wachovia Bank of
         Georgia, N.A. and First Union National Bank of North Carolina, as
         agent dated September 24, 1996.
  10.24  Quota Share Reinsurance Contract, effective July 1, 1996, covering all
         lines of business written by Vesta Fire Insurance Corporation,
         Sheffield Insurance Corporation, Vesta Insurance Corporation, Vesta
         Lloyds Insurance Company, The Hawaiian Insurance and Guaranty Company,
         Ltd. and various reinsurers.
</TABLE>
--------
*These are the Company's compensatory plans.
 
B) REPORTS ON FORM 8-K.
 
  None.
 
                                       13
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED
THEREUNTO DULY AUTHORIZED.
 
                                          VESTA INSURANCE GROUP, INC.
Date: November 14, 1996
 
                                                  /s/ Brian R. Meredith
                                          -------------------------------------
                                                    Brian R. Meredith
                                                 Vice President, Finance
                                              (Principal Financial Officer)
 
                                                  /s/ Mary Beth Heibein
                                          -------------------------------------
                                                    Mary Beth Heibein
                                                Controller and Principal
                                                   Accounting Officer
 
                                      14