<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 March 31, 1999
 
                                      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. [_] Yes [X] 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 March 31, 1999
                                  18,681,237
 
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<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                                     Index
 
<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
 <C>     <S>                                                                <C>
 PART I  FINANCIAL INFORMATION
 Item 1. Financial Statements:
         Consolidated Balance Sheets at March 31, 1999 and
         December 31, 1998................................................    1
         Consolidated Statements of Income and Comprehensive
         Income for the Three Months Ended March 31, 1999 and 1998........    2
         Consolidated Statements of Cash Flow for the Three Months Ended
         March 31, 1999 and 1998..........................................    3
         Notes to Consolidated Financial Statements.......................    4
 Item 2. Management's Discussion and Analysis of Financial
         Condition and Results of Operation...............................    8
 PART II OTHER INFORMATION
 Item 1. Legal Proceedings................................................   14
 Item 2. Changes in Securities............................................   15
 Item 3. Defaults Upon Senior Securities..................................   16
 Item 4. Submission of Matters to a Vote of Security Holders..............   16
 Item 5. Other Information................................................   16
 Item 6. Exhibits and Reports on Form 8-K.................................   17
</TABLE>
<PAGE>
 
                                     PART I
 
                          Item 1. Financial Statements
 
                          VESTA INSURANCE GROUP, INC.
 
                          CONSOLIDATED BALANCE SHEETS
             (Amounts in thousands except share and per share data)
 
<TABLE>
<CAPTION>
                                                         March 31   December 31
                                                           1999        1998
                                                        ----------  -----------
                                                        (Unaudited)
<S>                                                     <C>         <C>
Assets:
  Investments:
    Fixed maturities available for sale--at fair value
    (cost: 1999--$416,955; 1998--$446,516)............. $  424,252  $  457,219
    Equity securities--at fair value: (cost: 1999--
     $18,578; 1998--$18,127)...........................     22,093      21,099
    Short-term investments.............................    139,097     131,029
                                                        ----------  ----------
    Total investments..................................    585,442     609,347
  Cash.................................................     16,567      25,321
  Accrued investment income............................      6,533       7,194
  Premiums in course of collection (net of allowances
   for losses of $572 in 1999 and $1,712 in 1998)......    117,619     121,948
  Reinsurance balances receivable......................    283,292     265,903
  Reinsurance recoverable on paid losses...............     95,465     111,577
  Deferred policy acquisition costs....................     74,909     100,957
  Property and equipment...............................     18,411      18,442
  Income tax receivable................................     17,950      17,950
  Deferred income taxes................................     13,333      19,090
  Other assets.........................................     39,026      35,681
  Goodwill.............................................     14,022      14,292
                                                        ----------  ----------
    Total assets....................................... $1,282,569  $1,347,702
                                                        ==========  ==========
Liabilities:
  Reserves for:
    Losses and loss adjustment expenses................    483,942     504,911
    Unearned premiums..................................    261,988     309,515
                                                        ----------  ----------
    Total Reserves.....................................    745,930     814,426
  Deferred gain on retroactive reinsurance.............      9,248       9,848
  Reinsurance balances payable.........................     57,909      49,028
  Other liabilities....................................     36,746      48,071
  Short term debt......................................     70,000      70,000
  Long term debt.......................................     98,314      98,302
                                                        ----------  ----------
    Total liabilities..................................  1,018,147   1,089,675
Commitments and contingencies (Note C)
  Deferrable Capital Securities........................    100,000     100,000
Stockholders' equity
  Preferred stock, 5,000,000 shares authorized, none
   issued..............................................        --          --
  Common stock, $.01 par value, 32,000,000 shares au-
   thorized, issued: 1999--18,964,322 shares; 1998--
   18,964,322..........................................        190         190
  Additional paid-in capital...........................    154,001     156,465
Accumulated other comprehensive income, net of income
 tax of $3,784 and $4,786 in 1999 and 1998 respective-
 ly....................................................      7,028       8,889
Retained earnings......................................     18,212      10,120
Receivable from issuance of restricted stock...........     (1,961)     (2,045)
Treasury stock.........................................    (13,048)    (15,592)
                                                        ----------  ----------
    Total stockholders' equity.........................    164,422     158,027
                                                        ----------  ----------
    Total liabilities, deferrable capital securities
     and stockholders' equity.......................... $1,282,569  $1,347,702
                                                        ==========  ==========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements.
 
                                       1
<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
                  (Amounts in thousands except per share data)
 
                              STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                           Three months ended
                                                                March 31
                                                           ---------------------
                                                             1999       1998
                                                           --------  -----------
                                                               (Unaudited)
                                                                     (Restated)
<S>                                                        <C>       <C>
Revenues:
  Net premiums written.................................... $ 60,616  $ 131,885
  Decrease in unearned premiums...........................   63,541      7,408
                                                           --------  ---------
  Net premiums earned.....................................  124,157    139,293
  Net investment income...................................    8,409      9,300
  Gain on sale of assumed reinsurance renewal rights
   lines..................................................   15,000        --
  Other...................................................    1,335      1,250
                                                           --------  ---------
    Total revenues........................................  148,901    149,843
Expenses:
  Losses and loss adjustment expenses incurred............   73,204     90,397
  Policy acquisition expenses.............................   39,246     28,905
  Operating expenses......................................   16,067     17,256
  Premium taxes and fees..................................    1,586      3,135
  Interest on debt........................................    3,757      3,108
  Goodwill amortization...................................      270      1,669
                                                           --------  ---------
    Total expenses........................................  134,130    144,470
Income before income taxes and deferrable capital
 securities...............................................   14,771      5,373
Income taxes..............................................    4,616      1,940
Deferrable capital securities interest, net of income
 tax......................................................    1,362      1,362
                                                           --------  ---------
    Net income............................................ $  8,793  $   2,071
                                                           ========  =========
  Basic net income per common share....................... $    .47  $     .11
                                                           ========  =========
  Diluted net income per common share..................... $    .47  $     .11
                                                           ========  =========
  Dividends declared per common share..................... $    --   $     .04
                                                           ========  =========
 
                       STATEMENTS OF COMPREHENSIVE INCOME
Net income................................................ $  8,793  $   2,071
Other comprehensive income, net of tax:
  Unrealized gains (losses) on available-for-sale
   securities net of applicable taxes (benefit) of
   $(1,002) and $75 in 1999 and 1998, respectively........   (1,861)       139
                                                           --------  ---------
Comprehensive Income...................................... $  6,932  $   2,210
                                                           ========  =========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
 
                                       2
<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                         (Dollar amounts in thousands)
 
<TABLE>
<CAPTION>
                                                           Three months ended
                                                                March 31
                                                           --------------------
                                                             1999       1998
                                                           --------  ----------
                                                               (Unaudited)
                                                                     (restated)
<S>                                                        <C>       <C>
Operating Activities:
  Net Income.............................................. $  8,793   $  2,071
  Adjustments to reconcile net income to cash provided
   from operations:
    Change in:
      Loss and LAE reserves...............................  (20,969)   (56,958)
      Unearned premium reserve............................  (47,526)     7,665
      Reinsurance balances payable........................    8,881    (28,783)
      Accrued income taxes................................    7,507     30,444
      Other liabilities...................................  (11,928)    (1,459)
      Premiums in course of collection....................    4,330     44,537
      Reinsurance balances receivable.....................  (17,389)    62,678
      Reinsurance recoverable on paid losses..............   16,113    (35,357)
      Other assets........................................   (2,684)    (1,378)
    Policy acquisition costs amortized....................   39,246     27,945
    Policy acquisition costs deferred.....................  (13,198)   (31,402)
    Amortization and depreciation.........................    1,564      1,492
    Gain on disposition of property, plant and equipment..      (29)      (107)
                                                           --------   --------
      Net cash (used in) provided from operations.........  (27,289)    21,388
Investing Activities:
  Investments sold or matured:
    Fixed maturities available for sale--matured, called
     or sold..............................................   29,778     32,661
  Investments acquired:
    Fixed maturities available for sale...................   (1,000)   (27,824)
  Net increase in short-term investments..................   (8,068)   (23,615)
  Additions to property, plant and equipment..............     (924)    (1,056)
  Dispositions of property, plant and equipment...........       31        227
                                                           --------   --------
      Net cash provided from (used in) investing activi-
       ties...............................................   19,817    (19,607)
Financing Activities:
  Net change of long and short term debt..................      --      24,735
  Dividends paid..........................................     (698)      (691)
  Capital contributions and change in receivable from re-
   stricted stock.........................................     (584)       290
                                                           --------   --------
      Net cash (used in) provided from financing activi-
       ties...............................................   (1,282)    24,334
Increase (decrease) in cash...............................   (8,754)    26,115
Cash at beginning of period...............................   25,321     21,801
                                                           --------   --------
Cash at end of period..................................... $ 16,567   $ 47,916
                                                           ========   ========
</TABLE>
 
          See accompanying Notes to Consolidated Financial Statements
 
                                       3
<PAGE>
 
                          VESTA INSURANCE GROUP, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                         (Dollar amounts in thousands)
 
Note A--Significant Accounting Policies
 
  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 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 thereto in the Company's audited consolidated balance sheets as
of December 31, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1998 which were filed with the Securities and
Exchange Commission on Form 10-K dated April 20,1999. 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 except as noted in Note B.
 
  Income per share: Basic weighted average common shares outstanding for the
three month period ended March 31, 1999 and 1998 was 18,691,120 and
18,457,004, respectively. Basic EPS is computed by dividing income available
to common stockholders by the weighted average common shares outstanding for
the period. Diluted EPS is calculated by adding to shares outstanding the
additional net effect of potentially dilutive securities or contracts which
could be exercised or converted into common shares. Diluted weighted average
shares outstanding for the three month period ended March 31, 1999 and 1998
was 18,691,120 and 18,873,197, respectively.
 
  In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants Issued Statement of Position (SOP)
98-1 "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." This pronouncement is effective for periods beginning January
1, 1999 with early application encouraged. The Company implemented SOP 98-1 in
1998. The adoption of this standard did not have a material impact on the
Company's financial position, results of operations or cash flows.
 
Note B--Restatement
 
  The Company determined subsequent to the issuance of the 1997 financial
statements, that a specific reinsurance ceded contract entered into in 1997
contains retroactive elements as defined in the Statements of Financial
Accounting Standards (SFAS) No. 113 issued by the Financial Accounting
Standards Board. A contract is deemed retroactive when an assuming enterprise
agrees to reimburse a ceding enterprise for liabilities incurred as a result
of a past insurable events. For such contracts, SFAS 113 requires that any
initial gain and any benefit due from a reinsurer as a result of retroactively
covered losses be deferred in the financial statements of the ceding
enterprise and recognized into income over the settlement period of the
underlying claims. The Company erroneously recorded a gain on this contract in
the fourth quarter of 1997 and has adjusted its previously issued financial
statements to appropriately defer and recognize such gain. Analysis of this
contract under the recovery method resulted in the following adjustments to
the March 31, 1998 financial statements included herein:
 
<TABLE>
<CAPTION>
                                          As Previously
                                            Reported    Restatement As Restated
                                          ------------- ----------- -----------
   <S>                                    <C>           <C>         <C>
   Losses incurred......................    $ 87,627     $ (4,945)   $ 82,682
   Income taxes.........................         209        1,731       1,940
     Net income.........................      (1,146)       3,217       2,071
   Basic net income per common share....    $   (.06)         .17         .11
   Diluted net income per common share..    $   (.06)         .17         .11
   Deferred income taxes................      33,295       (4,200)     29,095
   Deferred gain on retroactive
    reinsurance.........................         --       (12,000)     12,000
   Retained earnings....................     161,958       (7,800)    154,158
</TABLE>
 
                                       4
<PAGE>
 
  The deferred gain, which is included in the accompanying balance sheet,
associated with this contract at December 31, 1998 and March 31, 1999 is $9.8
million and $9.2 million, respectively.
 
Note C--Contingencies
 
  Litigation: Subsequent to the filing of its quarterly report on Form 10-Q
for the period ended March 31, 1998 with the Securities and Exchange
Commission, the Company became aware of certain accounting irregularities
consisting of inappropriate reductions of reserves and overstatements of
premium income in the Company's reinsurance business that had been recorded in
the fourth quarter of 1997 and the first quarter of 1998. The Company promptly
commenced an internal investigation to determine the exact scope and amount of
such reductions and overstatements. This investigation concluded that
inappropriate amounts had, in fact, been recorded and the Company determined
it should restate its previously issued 1997 financial statements and first
quarter 1998 Form 10-Q. Additionally, during its internal investigation the
Company re-evaluated the accounting methodology being utilized to recognize
earned premium income in its reinsurance business. The Company 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. The Company determined
that reinsurance premiums should be recognized as earned over the contract
period and corrected the error in its accounting methodology by restating
previously issued financial statements. The Company issued press releases,
which were filed with the Securities and Exchange Commission, on June 1, 1998
and June 29, 1998 announcing its intention to restate its historical financial
statements.
 
  The Company restated its previously issued financial statements for 1995,
1996 and 1997 and its first quarter 1998 Form 10-Q for the above item by
issuance of a current report on Form 8-K dated August 19, 1998. These
restatements resulted in a cumulative decrease to stockholder's equity of
$75.2 million through March 31, 1998.
 
  Commencing in June, 1998, the Company and several of its current and former
officers and directors were named in several purported class action lawsuits
in the United States District Court for the Northern District of Alabama and
in one purported class action lawsuit in the Circuit Court of Jefferson
County, Alabama. Several of Vesta's 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.
 
  The class action lawsuit filed in the Circuit Court of Jefferson County,
Alabama has been dismissed and the derivative case has been place on the
administrative docket. The class actions filed in the United States District
Court for the Northern District of Alabama have been consolidated into a
single action in that district. The purported class representatives in that
action have filed (a) a consolidated amended complaint alleging that the
defendants violated the federal securities laws and (b) a motion for class
certification. The consolidated amended complaint also added as defendants
Torchmark Corporation and the Company's predecessor auditors, KPMG Peat
Marwick, LLP. The consolidated amended complaint alleges various violations of
the federal securities law and seeks unspecified but potentially significant
damages.
 
  The Company has notified its directors and officers liability insurance
companies of these lawsuits and the consolidated amended complaint. The
litigation is still in the preliminary stages and there has been no class
certification. The Company intends to vigorously defend this litigation and
intends to explore all available rights and remedies it may have under the
circumstances. In related litigation, in September, 1998, Cincinnati Insurance
Company ("Cincinnati"), one of the Company's directors and officers liability
insurance carriers, filed a lawsuit in the United States District Court for
the Northern District of Alabama seeking to avoid coverage under its directors
and officers liability and other policies. The Company filed a motion to
dismiss Cincinnati's complaint on jurisdictional grounds in federal court
(which was granted), and filed a lawsuit against Cincinnati in the Circuit
Court of Jefferson County, Alabama seeking damages arising out of Cincinnati's
actions. Cincinnati has filed an answer and counterclaim in that case again
seeking to avoid coverage.
 
  The Company intends to vigorously resist Cincinnati's efforts to avoid
coverage. Because these matters are in their early stages, their ultimate
outcome cannot be determined. Accordingly, no provision for any liability that
may result there from has been made in the accompanying consolidated financial
statements.
 
                                       5
<PAGE>
 
  As discussed above, the Company corrected its accounting for assumed
reinsurance business through restatement of its previously issued financial
statements. Similar corrections were made on a statutory accounting basis
through recording cumulative adjustments in Vesta Fire's 1997 statutory
financial statements. The impact of this correction has been reflected in
amounts ceded under the Company's 20 percent whole account quota share treaty
which was terminated on June 30, 1998 on a run-off basis. The Company believes
such treatment is appropriate under the terms of this treaty and has
calculated the quarterly reinsurance billings presented to the treaty
participants accordingly. The aggregate amount included herein as recoverable
from such reinsurers totaled $75.4 million at March 31, 1999. Two of the three
participants have notified the Company that they wish to audit the treaty
computations as allowed by the terms of the treaty. The other participant,
through various correspondence, has also expressed an interest in obtaining
additional data. While management believes its interpretation of the treaty's
terms and computations based thereon, are correct, the effects, if any, of
participant audits or other actions cannot be determined at this time.
 
  The Company, through its subsidiaries, is routinely a party to other pending
or threatened legal proceedings and arbitrations. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. Based upon information
presently available, and in light of legal and other defenses available to the
Company and its subsidiaries, management does not consider liability from any
threatened or pending litigation or arbitration to be material.
 
Note D--Sale of Assumed Reinsurance Business
 
  On March 24, 1999, the Company entered into an agreement to transfer certain
of its reinsurance assumed business to Hartford Fire Insurance Company (Hart
Re). The agreement calls for the Company to reinsure its North American
assumed business underwritten in the Birmingham office with a January 1, 1999
effective date to Hart Re under a 100% quota share treaty and for the Company
to use its best efforts to novate the policies to Hart Re and encourage
renewals with Hart Re for policies not novated. The Company received $15
million in consideration of the transaction, such payment having been
conditioned on certain Company employees entering into employment
relationships with Hart Re.
 
  The Company is exiting the reinsurance assumed business with this
transaction and continued conversion or commutation and termination of all
other assumed reinsurance business. First quarter results include recognition
of recoverables and payables under the terms of the Hart Re agreement and
recognition of $15 million as gain associated with the agreement.
 
Note E--Subsequent Event
 
  As previously reported in the Company's Form 10-K for the period ended
December 31, 1998, A.M. Best, which rates insurance companies based on factors
of concern to policyholders, lowered its rating on the Company's insurance
subsidiaries on February 24, 1999 to "B++" (Very Good, its fifth highest
rating category) from "A-" (Excellent, its fourth highest rating category).
Some of the factors noted by A.M. Best as contributing to the downgrade
include the Company's operating performance, which was affected in part by
heavy catastrophe losses, the Company's debt level, and the uncertainty
associated with the Company's then ongoing negotiations with its lenders to
amend its credit agreement in light of then existing covenant defaults. The
Company determined that the impact of the A.M. Best downgrade on the
commercial line of business would necessitate corrective actions in excess of
what the marketplace will accept. Therefore, the Company elected to withdraw
from certain commercial lines of business in the second quarter of 1999. The
Company also determined that the impact of the downgrade on the reinsurance
segment significantly impaired the Company's ability to compete effectively in
the current reinsurance marketplace. Therefore, effective March 24, 1999 the
Company sold certain reinsurance renewal rights to another reinsurer in
exchange for $15 million as disclosed in Note D.
 
  Subsequently on May 3, 1999, A.M. Best has further lowered its rating on the
Company's insurance subsidiaries from "B++" to "B" (Fair). As a result of the
further downgrade, the Company has elected to withdraw from its remaining
commercial lines. Also, the further downgrade may negatively impact the
Company's current homeowners lines, and remaining reinsurance lines of
business.
 
 
                                       6
<PAGE>
 
Note F--Segment Information
 
<TABLE>
<CAPTION>
                                                             Period Ended
                                                               March 31,
                                                         ----------------------
                                                            1999        1998
                                                         ----------  ----------
<S>                                                      <C>         <C>
Reinsurance operations
  Net premiums earned................................... $   33,166  $   58,356
  Net investment income and realized gain/(loss)........      2,368       3,408
  Other income..........................................     15,000         --
  Underwriting gain (loss)..............................     (3,926)     (2,737)
Personal operations
  Net premiums earned...................................     72,438      62,519
  Net investment income and realized gain/(loss)........      4,809       3,816
  Other income..........................................      1,063         966
  Underwriting gain (loss)..............................     (1,284)     (1,326)
Commercial operations
  Net premiums earned...................................     18,553      18,418
  Net investment income and realized gain/(loss)........      1,232       2,076
  Other income..........................................        272         284
  Underwriting gain (loss)..............................       (736)      3,663
Other operations
  Interest expense......................................      3,757       3,108
  Goodwill..............................................        270       1,669
                                                         ----------  ----------
    Total pretax income (loss) from operations.......... $   14,771  $    5,373
                                                         ==========  ==========
Total indentifiable assets
  Reinsurance operations
    Investments and other assets........................ $  393,400  $  451,667
    Deferred acquisition costs..........................     27,127      57,764
  Personal operations
    Investments and other assets........................    528,421     520,200
    Deferred acquisition costs..........................     39,644      35,465
  Commercial operations
    Investments and other assets........................    285,839     274,878
    Deferred acquisition costs..........................      8,138       7,728
                                                         ----------  ----------
      Total assets...................................... $1,282,569  $1,347,702
                                                         ==========  ==========
</TABLE>
 
                                       7
<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").
The Company writes treaty reinsurance and primary insurance on selected
personal and commercial lines risks. In its reinsurance operations, the
Company focuses principally on property coverages, for which ultimate losses
generally can be more promptly determined than on casualty risks. In the past,
the Company's primary operations have emphasized writing property coverages
more than liability. With the addition of the liability portions of the Shelby
automobile lines, the Company's writings are also now more evenly balanced
between property and liability exposures. The Company's revenues from
operations are derived primarily from net premiums earned on risks written or
reinsured by the Company, investment income and investment gains or losses,
while expenses consist primarily of payments for claim losses and underwriting
expenses, including agents' commissions and operating expenses.
 
Known Trends and Uncertainties
 
  The financial position, results of operations, and cash flows of property
and casualty insurers have historically been subject to significant
fluctuations due to competition, A.M. Best ratings, and other factors. Certain
known trends and uncertainties which may affect future results of the Company
are discussed more fully below.
 
  Competition: The property and casualty insurance industry is highly
competitive on the basis of both price and service. In recent years there has
been a trend in the property and casualty industry toward consolidation which
could result in even more competitive pricing. The Company also faces
competition from foreign insurance companies captive insurance companies and
risk retention groups. In the future, the industry, including the Company, may
face increasing insurance underwriting competition from banks and other
financial institutions.
 
  Adverse impacts of insurance rating downgrades: A.M. Best, which rates
insurance companies based on factors of concern to policy holders, recently
lowered it rating on the Company's insurance subsidiaries from "B++" to "B".
See Note E of consolidated financial statement for further information.
 
  Litigation: See Part II, Item 1 for discussion of current status of
litigation.
 
  Reliance on Performance of Reinsurers: The Company evaluates the credit
quality of the reinsurers and retrocessionaires to which it cedes business. No
assurance can be given regarding the future ability of any of the Company's
reinsurers to meet their obligations.
 
  Year 2000: The failure to correct a material Year 2000 ("Y2K") problem could
result in an interruption in, or failure of, the normal business operations of
the Company including the delay in premium or claim processing and the
disruption of service to its customers.
 
 Comparison of First Quarter 1999 to First Quarter 1998
 
  Net income increased by $6.7 million, or 324.6%, to $8.8 million for the
quarter ended March 31, 1999, from $2.1 million for the quarter ended March
31, 1998. On a diluted per share basis, net income for the first quarter of
1999 was $.47 per share versus net income of $.11 per share for the first
quarter of 1998. The increase in net income is primarily attributable to a
$9.8 million after tax gain from the sale of certain reinsurance renewal
rights in the reinsurance segment partially offset by declines in operating
income.
 
                                       8
<PAGE>
 
 Premiums, Loss and LAE--Personal Lines
 
  Gross premiums written for personal lines decreased by $12.7 million, or
14.7%, to $73.9 million for the quarter ended March 31, 1999, from $86.6
million for the quarter ended March 31, 1998. The decline in personal lines
gross written premiums is primarily attributable to declines in the Financial
Services.
 
  Net premiums written for personal lines increased by $4.7 million, or 7.7%,
to $65.9 million for the quarter ended March 31, 1999, from $61.2 million for
the quarter ended March 31, 1998. Net premiums earned for personal lines
increased $9.9 million, or 15.8% to $72.4 million for the quarter ended March
31, 1999, from $62.5 million for the quarter ended March 31, 1998. The
increase in net premiums written and net premiums earned was largely
attributable to the termination on a run off basis of the 20% whole account
quota share treaty effective July 1, 1998.
 
  Loss and loss adjustment expenses ("LAE") for personal lines increased by
$5.3 million, or 12.8%, to $46.6 million for the quarter ended March 31, 1999,
from $41.3 million for the quarter ended March 31, 1998. The loss and LAE
ratio for personal lines for the quarter ended March 31, 1999 was 64.3% as
compared to 66.1% at March 31, 1998. The increase in the loss and LAE is
primarily attributable to an increase in net earned premium.
 
 Premiums, Loss and LAE--Commercial Lines
 
  Gross premiums written for commercial lines decreased by $12.1 million, or
32.8%, to $24.8 million for the quarter ended March 31, 1999, from $36.9
million for the quarter ended March 31, 1998, The decrease in gross premiums
for commercial lines is primarily attributable to declining volume in the
Shelby operations.
 
  Net premiums written for commercial lines increased by $.4 million or 2.4%,
to $17.0 million for the quarter ended March 31, 1999, from $16.6 million for
the quarter ended March 31, 1998. Net premiums earned for commercial lines
increased by $.2 million, or 1.1%, to $18.6 million for the quarter ended
March 31, 1999, from $18.4 million for the quarter ended March 31, 1998.
 
  Loss and LAE for commercial lines increased by $4.5 million, or 64.3%, to
$11.5 million for the quarter ended March 31, 1999, from $7.0 million for the
quarter ended March 31, 1998. The loss and LAE ratio for the quarter ended
March 31, 1999 was 61.8% as compared to 38.0% for the quarter ended March 31,
1998. The increase in loss and LAE and the loss ratio is primarily
attributable to increased catastrophe losses of $2.4 million and increased
pricing pressure in the commercial insurance market.
 
 Premiums, Loss and LAE--Reinsurance
 
  Gross premiums written for reinsurance decreased by $80.2 million, or 73.1%
to $29.5 million for the quarter ended March 31, 1999 from $109.7 million for
the quarter ended March 31, 1998. The decrease was primarily attributable to
the renegotiation and commutation of several large reinsurance contracts.
 
  Net premiums written for reinsurance decreased by $76.4 million, or 141.2%
to ($22.3) million for the quarter ended March 31, 1999 from $54.1 million for
the quarter ended March 31, 1998. The decline in net written premiums for
reinsurance is primarily attributable to the decline in gross written premiums
and the 100% reinsurance quota share treaty entered into effective January 1,
1999. Net premiums earned decreased $25.2 million, or 43.1% to $33.2 million
for the quarter ended March 31, 1998, from $58.4 million for the quarter ended
March 31, 1998.
 
  Loss and LAE for reinsurance decreased by $27.0 million, or 64.1%, to $15.1
million for the quarter ended March 31, 1999, from $42.1 million for the
quarter ended March 31, 1998. The loss and LAE ratio for reinsurance for the
quarter ended March 31, 1999 was 45.6% as compared to 72.1% for the quarter
ended March 31, 1998. The decrease in the loss and LAE ratio was primarily due
to an increased percentage being ceded to the retrocessionares pursuant to the
Company's ceded reinsurance program including the 100% quota share reinsurance
treaty.
 
                                       9
<PAGE>
 
 Policy Acquisition Expenses and Other Expenses
 
  Policy acquisition expenses increased by $10.3 million, or 35.6% to $39.2
million for the quarter ended March 31, 1999, from $28.9 million for the
quarter ended March 31, 1998. The increase in policy acquisition expenses is
primarily attributable to write down of deferred acquisitions costs in
reinsurance due to large declines in unearned premium reserves, as well as low
loss ratios in the reinsurance lines which resulted in increased contingent
commissions for the quarter. Other expenses include operating expenses not
directly related to the generation of premium revenue, premium taxes and fees,
interest on debt and goodwill amortization. Operating expenses decreased $1.2
million. Premium taxes and fees decreased by $1.5 million. The decrease in
premium taxes and fees is directly related to the decrease in primary gross
premiums written. These factors caused the underwriting expense ratio to
increase from 35.4% in the first quarter of 1998 to 45.8% in the first quarter
of 1999. Goodwill amortization decreased $1.4 million. The decrease in
goodwill amortization is attributable to the effect of the 1998 fourth quarter
write down of $74.5 million of goodwill acquired on June 30, 1997 in
connection with the Shelby acquisition.
 
 Net Investment Income
 
  Net investment income decreased by $.9 million, or 9.7%, to $8.4 million for
the quarter ended March 31, 1999, from $9.3 million for the quarter ended
March 31, 1998. The weighted average yield on invested assets (excluding
realized and unrealized gains) was 6.0% for the quarter ended March 31, 1999,
compared with 5.93% for the quarter ended March 31, 1998. The decrease in net
investment income is primarily attributable to a decrease in average invested
assets.
 
 Federal Income Taxes
 
  Federal income taxes increased by $2.7 million, or 142.1%, to $4.6 million
for the quarter ended March 31, 1999. The effective rate on pre-tax income
decreased from 35.2% to 31.1% for the quarter ended March 31, 1999. The
decrease in the effective rate is primarily attributable to the decrease in
non-deductible goodwill amortization.
 
 Net Income
 
  For the reasons discussed above, net income increased by $6.7 million, or
324.6%, to $8.8 million for the quarter ended March 31, 1999, from $2.1
million for the quarter ended March 31, 1998.
 
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 insurance subsidiaries comprising the Vesta Group are individually
supervised by various state insurance regulators. Vesta Fire is the principal
operating subsidiary of the Company.
 
  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. In 1998, Vesta Fire voluntarily agreed that it will not
declare any dividends, except for those required to service the Company's
debt, until December 31, 1999, without the prior written approval of the
Alabama Department of Insurance.
 
  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. However, there can
 
                                      10
<PAGE>
 
be no assurance as to the ability of the Company's insurance subsidiaries to
continue to pay dividends at current levels. Except for the regulatory
restrictions described above, 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.
 
  The Company will not pay any common stock dividends in 1999. 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 "Senior Notes"). As
required by the Company's amended bank facility, the Company will defer the
semi-annual interest payments of $4.3 million on its $100 million of 8.525%
Junior Subordinated Deferrable Interest Debentures (the "Trust Debentures")
issued to Vesta Capital Trust I in connection with its sale of $100 million of
8.525% Capital Securities.
 
  As of March 31, 1999, the Company had borrowed $70 million under its $200
million line of credit for general corporate purposes and for a capital
contribution of $25 million to the Company's principal insurance subsidiary,
Vesta Fire. The credit agreement related to this line of credit contained
certain covenants that require, among other things, the Company to maintain a
certain consolidated net worth ("Consolidated Net Worth Covenant"), maintain a
certain amount of earnings before interest and taxes available for the payment
of interest and dividend expense, ("Fixed Charge Coverage Ratio"), cause each
insurance subsidiary to maintain a certain total adjusted statutory capital,
("Adjusted Statutory Capital Covenant"), and that limits the amount of
indebtedness of the companies. As of March 31, 1999, the Company was not in
compliance with all of its financial covenants.
 
  Subsequent to March 31, 1999, the Company's banks agreed to amend the
covenants and waive any event of default arising from non-compliance with the
covenants as of March 31, 1999. The amended credit facility was restructured
into a $70 million senior revolving credit facility, maturing July 31, 2000
(the "Amended Facility"). The interest rate on the Amended Facility will be
the prime rate plus 1%, provided that from and after September 30, 1999 the
rate shall be increased to the prime rate plus 3% if the Company has not made
permanent principal prepayments on the Amended Facility aggregating at least
$25 million. The Company will also pay the banks a 1% Commitment Fee on all of
the used and unused commitments under the Amended Facility.
 
  The Amended Facility required the Company to make a closing principal
prepayment of $15 million less transaction expenses, the net amount of which
reduces the obligation to make permanent principal payment aggregating $25
million. The amended Facility also provides for warrants equal to
approximately 6.6% of the Company's outstanding shares being issued to the
banks participating on the Amended Facility, which become exercisable in the
event the Company does not make $25 million, inclusive of the $15 million less
closing expenses paid at closing, of permanent principal prepayments on the
facility by March 15, 2000.
 
  The Amended Facility requires the Company to suspend dividends on its common
stock and defer payments of interest on its Trust Debentures unless the
Company has made $25 million of permanent principal prepayments on the Amended
Facility by March 15, 2000. The Amended Facility contains certain covenants
that require the Company to maintain minimum statutory surplus levels, minimum
cumulative statutory net income levels and minimum cumulative GAAP net income
levels.
 
  The principal sources of funds for the Company's insurance subsidiaries are
premiums, investment income and proceeds from the sale or maturity of invested
assets. Such funds are used principally for the payment of claims, operating
expenses, commissions and the purchase of investments. On a consolidated
basis, net cash (used in) provided from operations for the quarter ended March
31, 1999 and 1998, was ($26.7) million and $21.4 million, respectively.
 
  As of March 31, 1999, the Company's investment portfolio consisted of short-
term investments (23.7%), U.S. Government securities (12.0%), mortgage-backed
securities (14.5%), corporate bonds (25.8%), foreign government securities
(0.6%), municipal bonds (19.7%) and equity securities (3.8%). The Company
expects current cash flow to be sufficient to meet operating needs, although
invested assets have been categorized as
 
                                      11
<PAGE>
 
available for sale in the event short-term cash needs exceed available
resources. The Company adjusts its holdings of cash, short-term investments
and invested assets available for sale according to its seasonal cash flow
needs. Beginning in June of each year, the Company begins to increase its
holdings of cash and short-term investments. This practice facilitates the
Company's ability to meet its higher short-term cash needs during the
hurricane season.
 
  On January 31, 1997, Vesta Capital Trust I, a Delaware business trust
controlled by the Company, sold $100 million of its 8.525% Capital Securities.
These securities have a 30 year maturity and are not redeemable except in
certain limited circumstances. Theses securities were sold in a private
placement transaction to qualified institutional buyers and were not
registered under Securities Act of 1993 pursuant to an exemption from
registration provided by Rule 144A promulgated thereunder. A portion of the
proceeds from the sale of these capital securities were used to repay
indebtedness under the Company's existing lines of credit and the remainder is
for general corporate purposes. As noted earlier, the Company has agreed,
pursuant to the Amended Facility, to defer distributions on these Capital
Securities pending satisfaction of certain financial commitments to its
lenders.
 
Inflation
 
  The Company does not believe its results have been materially affected by
inflation due in part to the predominantly short-tail nature of its business.
The potential adverse impacts of inflation include: (i) a decline in the
market value of the Company's fixed maturity investment portfolio; (ii) an
increase in the ultimate cost of settling claims which remain unresolved for a
significant period of time; and (iii) an increase in the Company's operating
expenses. Historically, the effect of inflation on the Company's reserves has
not been material.
 
Market Risk of Financial Instruments
 
  Vesta's principal assets are financial instruments, which are subject to the
market risk of potential losses from adverse changes in market rates and
prices. The Company's primary risk exposures are interest rate risk on fixed
maturity investments and equity price risk for domestic stocks. Vesta manages
its exposure to market risk by selecting investment assets with
characteristics such as duration, yield and liquidity to reflect the
underlying characteristics of the related insurance.
 
Year 2000
 
  The Company and it subsidiaries are proceeding on schedule with efforts to
convert its computer systems to be Y2K compliant. The Company has implemented
a phased approach to transition computer systems to be Y2K compliant.
 
  The Company has completed the first six of seven phases of the transition
for its defined mission critical systems. Extraneous systems are either being
discontinued or are in the remediation phase at this time. Implementation of
Y2K compliance for these remaining systems is scheduled for completion by
third quarter of 1999.
 
  The Company began the assessment phase in October, 1996. From that time
forward, system development and major enhancements to existing systems took
Y2K process requirements into consideration. During the Assessment Phase, a
comprehensive inventory of systems was completed and all date related fields
and code that handled these dates were identified. The Assessment Phase was
completed in December, 1996.
 
  Once the Company had an understanding of the lines of code and number of
date fields that must be addressed to ensure systems would be made Y2K
compliant, the second phase, Methodology Development, began. The purpose of
this phase was to develop a methodology that would ensure the Company's
systems would be made Y2K compliant and at the same time allow the Company to
continue to address the day-to-day business needs. This phase was completed in
March, 1997.
 
  Part of the Methodology Development Phase was the selection of a business
partner (BP) to assist the Company in the Y2K Compliance effort. This BP had
proven experience in the migration of applications to
 
                                      12
<PAGE>
 
becoming Y2K compliant and would provide project management leadership and a
team of programming resources to perform the actual migration.
 
  The third phase of the Y2K effort was the Pilot Project Phase that purpose
of which was to test/prove the Y2K methodology developed in the prior phase.
The Company selected the reinsurance system as the application to be made Y2K
compliant as the Pilot System. This effort began in March, 1997 and was
completed in June, 1997.
 
  The fourth phase of the Y2K effort was the Accounting Project Phase the
purpose of which was to verify that the methodology would support the
integration of Y2K compliant systems with non-Y2K compliant systems. Since the
accounting systems interface with the core insurance processing systems in the
transfer of information, the development of interface modules to correctly
handle the translation of dates in both formats was begun and was completed in
October, 1997.
 
  The fifth phase of the Y2K effort was the All Systems Project Phase the
purpose of which was to convert the core insurance processing systems to Y2K
compliance. Additional personnel were added to the effort for the primary
purpose of testing and validating results. This effort, which was completed on
August 3, 1998 completed the conversion/migration of all the Company's in-
house developed system to Y2K compliance.
 
  The Post-Implementation Support and Assurance Phase includes continued
monitoring of Y2K compliance and executing programs to test compliance.
 
  The Shelby Insurance Companies (SIC) had migrated its commercial lines,
claims, and billing applications to Policy Management Systems Corporation's
(PMSC) Y2K compliant systems prior to its acquisition in 1997. SIC's personal
lines and other miscellaneous internally developed systems remain to be
converted to their Y2K counterpart. The migration effort was completed in
October, 1998. Presently, the core insurance processing systems for SIC are
Y2K compliant while work remains with respect to miscellaneous in-house
developed systems. PMSC will continue to test all systems through 1999.
 
  As of March 31, 1999, the Company had spent approximately $6.0 million to
bring its systems to Y2K compliance. The Company estimates it will incur an
additional $1.5 million to complete Y2K readiness efforts (i.e., upgrade PC
hardware, servers, routers, PC related software, etc.). These costs do not
include contingency planning and implementation of contingency plans.
 
  In January, 1999, the Company began its Non-Application Y2K Compliance
Phase. This phase consists of the activities for identifying, evaluating, and
remediating/replacing non mission critical hardware and software.
 
  As of the first of March, inventories have been completed for hardware and
corresponding systems. External service providers have been identified and
letters requesting the status of their Y2K compliance level have been sent and
responses are currently being received.
 
  The Company is currently developing it Y2K contingency plans for its
business areas by developing detailed plans to allow the Company to process
its business should one or more systems, internal and/or external, cause a
disruption in the normal daily processing. Such plans are scheduled to be
completed by June, 1999, and tested by the user community in the third quarter
of 1999.
 
  The failure to correct a material Y2K problem could result in an
interruption in, or failure of, the normal business operations of the Company
including the disruption or delay in premium or claim processing and the
disruption in service to its customers. Also the inability to be Y2K compliant
of significant third-party providers of the Company and SIC could result in an
interruption in the normal business operations. Due to the general uncertainty
inherent in the Y2K problem, such failures could materially and adversely
affect the Company's financial position, result of operations and liquidity.
 
 
                                      13
<PAGE>
 
  The Y2K issue is also a concern from an underwriting standpoint regarding
the extent of liability for coverage under various general liability, property
and directors and officers liability and product policies. The Company
believes that minimal as commercial lines business has historically excluded
any manufacturing risks which produce computer and computer dependent
products.
 
  The Insurance Services Office (ISO) recently developed policy language that
clarifies that there is no coverage for certain Y2K occurrences. The liability
exclusion has been accepted in over 40 states and a companion filing for
property has been accepted in at least 20 states at this time. Several states
have not adopted or approved the property exclusion form citing specifically
that there is no coverage under the current property contracts and therefore,
there is no reason to accept a clarifying endorsement. The Company is
currently addressing the Y2K issue by attaching the ISO exclusionary language
to all general liability policies with a rating classification the Company
believes could potentially have Y2K losses. The ISO exclusionary language
endorsement is included on all property policies. These actions should
minimize the Company's exposure to Y2K losses.
 
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.
 
                                    PART II
 
                           Item 1. Legal Proceedings
 
  Subsequent to the filing of its quarterly report on Form 10-Q for the period
ended March 31, 1998 with the Securities and Exchange Commission, the Company
became aware of certain accounting irregularities consisting of inappropriate
reductions of reserves and overstatements of premium income in the Company's
reinsurance business that had been recorded in the fourth quarter of 1997 and
the first quarter of 1998. The Company promptly commenced an internal
investigation to determine the exact scope and amount of such reductions and
overstatements. This investigation concluded that inappropriate amounts had,
in fact, been recorded and the Company determined it should restate its
previously issued 1997 financial statements and first quarter 1997 Form 10-Q.
Additionally, during its internal investigation the Company re-evaluated the
accounting methodology being utilized to recognize earned premium income in
its reinsurance business. The Company 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. The Company determined that reinsurance premiums
should be recognized as earned over the contract period and corrected the
error in its accounting methodology by restating previously issued financial
statements. The Company issued press releases, which were filed with the
Securities and Exchange Commission, on June 1, 1998 and June 29, 1998
announcing its intention to restate its historical financial statements.
 
  The Company restated its previously issued financial statements for 1995,
1996 and 1997 and its first quarter 1998 Form 10-Q for the above item by
issuance of a current report on Form 8-K dated August 19, 1998. These
restatements resulted in a cumulative decrease to stockholder' equity of $75.2
million through March 31, 1998.
 
 
                                      14
<PAGE>
 
  Commencing in June, 1998, the Company and several of its current and former
officers and directors were named in several purported class action lawsuits
in the United States District Court for the Northern District of Alabama and
in one purported class action lawsuit in the Circuit Court of Jefferson
County, Alabama. Several of Vesta's 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.
 
  The class action lawsuit filed in the Circuit Court of Jefferson County,
Alabama has been dismissed and the derivative case has been placed on the
administrative docket. The class actions filed in the United States District
Court for the Northern District of Alabama have been consolidated into a
single action in that district. The purported class representatives in that
action have filed (a) a consolidated amended complaint alleging that the
defendants violated the federal securities laws and (b) a motion for class
certification. The consolidated amended complaint also added as defendants
Torchmark Corporation and the Company's predecessor auditors, KPMG Peat
Marwick, LLP. The consolidated amended complaint alleges various violations of
the federal securities law and seeks unspecified but potentially significant
damages.
 
  The Company has notified its directors and officers liability insurance
companies of these lawsuits and the consolidated amended complaint. The
litigation is still in the preliminary states and there has been no discovery
or class certification. The Company intends to vigorously to defend this
litigation and intends to explore all available rights and remedies it may
have under the circumstances. In related litigation, in September, 1998,
Cincinnati Insurance Company ("Cincinnati"), one of the Company's directors
and officers liability insurance carriers, filed a lawsuit in the United
States District Court for the Northern District of Alabama seeking to avoid
coverage under its directors and officers liability and other policies. The
Company filed a motion to dismiss Cincinnati's complaint on jurisdictional
grounds in federal court (which was granted), and filed a law suit against
Cincinnati in the Circuit court of Jefferson County, Alabama seeking damages
arising out of Cincinnati's actions. Cincinnati has filed an answer and
counterclaim in that case again seeking to avoid coverage. The Company intends
to vigorously resist Cincinnati's efforts to avoid coverage. Because these
matters are in the early states, their ultimate outcome cannot be determined.
Accordingly, no provision for any liability that may result therefrom has been
made in the accompanying consolidated financial statements.
 
  As discussed above, the Company corrected its accounting for assumed
reinsurance business through restatement of its previously issued financial
statements. Similar corrections were made on a statutory accounting basis
through recording cumulative adjustments in Vesta Fire's 1997 statutory
financial statements. The impact of this correction has been reflected in
amounts ceded under the Company's 20 percent whole account quota share treaty
which was terminated on June 30, 1998 on a run-off basis. The Company believes
such treatment is appropriate under the terms of this treaty and has
calculated the quarterly reinsurance billings presented to the treaty
participants accordingly. The aggregate amount included herein as recoverable
from such reinsurers totaled $75.4 million at December 31, 1998. Two of the
three participants have notified the Company that they wish to audit the
treaty computations as allowed by the terms of the treaty. The other
participant, through various correspondence, has also expressed an interest in
obtaining additional data. While management believes its interpretation of the
treaty's terms and computations based thereon, are correct, the effects, if
any, of participants audits or other actions cannot be determined at this
time.
 
  The Company, through its subsidiaries, is routinely a party to pending or
threatened legal proceedings and arbitration. These proceedings involve
alleged breaches of contract, torts, including bad faith and fraud claims and
miscellaneous other causes of action. These lawsuits may include claims for
punitive damages in addition to other specified relief. Based upon information
presently available, and in light of legal and other defenses available to the
Company and its subsidiaries, management does not consider liability from any
threatened or pending litigation or arbitration to be material.
 
Item 2. Changes in Securities
 
  None.
 
                                      15
<PAGE>
 
Item 3. Defaults Upon Senior Securities
 
  As of December 31, 1998, the Company had borrowed $70 million under its $200
million line of credit for general corporate purposes and for a capital
contribution of $25 million to the Company's principal insurance subsidiary,
Vesta Fire. The credit agreement related to this line of credit contained
certain covenants that require, among other things, the Company to maintain a
certain consolidated net worth ("Consolidated Net Worth Covenant"), maintain a
certain amount of earnings before interest and taxes available for the payment
of interest and dividend expense, ("Fixed Charge Coverage Ratio"), cause each
insurance subsidiary to maintain a certain total adjusted statutory capital,
("Adjusted Statutory Capital Covenant"), and that limits the amount of
indebtedness of the companies. As of December 31, 1998, the Company was not in
compliance with all of its financial covenants.
 
  Subsequent to March 31, 1999, the Company's banks agreed to amend the
covenants and waive any event of default arising from non-compliance with the
covenants as of March 31, 1999. The amended credit facility was restructured
into a $70 million senior revolving credit facility, maturing July 31, 2000
("the "Amended Facility"). The interest rate on the Amended Facility will be
the prime rate plus 1%, Provided that from and after September 30, 1999 the
rate shall be increased to the prime rate plus 3% if the Company has not made
permanent principal prepayments on the Amended Facility aggregating at least
$25 million. The Company will also pay the banks a 1% Commitment Fee on all of
the used and unused commitments under the Amended Facility.
 
Item 4. Submission of Matters to a Vote of Security Holders
 
  None.
 
Item 5. Other Information
 
  None.
 
                                      16
<PAGE>
 
                                 EXHIBITS INDEX
 
<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
    2.1      Agreement, dated March 24, 1999, by and among Hartford Fire
             Insurance Company, J. Gordon Gaines, Inc. and Vesta Fire Insurance
             Corporation. (filed as an exhibit to the Company's Form 8-K, filed
             on March 25, 1999, and Incorporated herein by reference (File No.
             112338)).
 
    3.1      Restated Certificate of Incorporation of the Company, dated
             September 1, 1993 (filed as an exhibit to the Company's Form 10-Q
             for the quarter ended June 30, 1998, filed on June 16, 1998 and
             incorporated herein by reference (File No. 1-12338)).
 
    3.2      By-Laws of the Company (Amended and Restated as of October 1,
             1993) (filed as an exhibit to Amendment No. 1 to the 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 Indenture between the Company and Southtrust Bank of
             Alabama, National Association, dated July 19, 1995 (filed as an
             exhibit to the Company's Form 10-K for the year ended December 31,
             1995, filed on March 28, 1996 and incorporated herein by reference
             (File No. 1-12338)).
 
    4.3      Indenture dated as of January 31, 1997, between the Company and
             First Union National Bank of North Carolina, as trustee (filed as
             an exhibit to the Company's Form 10-Q for the quarter ended March
             31, 1997, filed on May 13, 1997 and incorporated herein by
             reference (File No. 1-12338)).
 
    4.4      Amended and Restated Declaration of Trust, dated as of January 31,
             1997, of Vesta Capital Trust I (filed as an exhibit to the
             Company's Form 10-Q for the quarter ended March 31, 1997, filed on
             May 13, 1997 and incorporated herein by reference (File No. 1-
             12338)).
 
    4.5      Capital Securities Guarantee Agreement, dated as of January 31,
             1997, between the Company and First Union National Bank of North
             Carolina, as trustee (filed as an exhibit to the Company's Form
             10-Q for the quarter ended March 31, 1997, filed on May 13, 1997
             and incorporated by reference (File No. 1-12338)).
 
   10.1      Separation and Public Offering Agreement between Torchmark
             Corporation and the Company dated September 13, 1993 (filed as an
             exhibit to the Company's Form 10-K for the year ended 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
             National Fire 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 December 31, 1993, filed on March 28, 1994 and
             incorporated herein by reference (File No. 1-2338)).
 
   10.3      Investment Services Agreement between Waddell & Reed Asset
             Management Company and the Company (filed as an exhibit to
             Amendment No. 1 to the Registration Statement on Form S-1
             (Registration No. 33-68114) of Vesta Insurance Group, Inc., filed
             on October 18, 1993 and incorporated herein by reference (File No.
             1-12338)) dated September 13, 1993.
</TABLE>
 
                                       17
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
   10.5      Management Agreement between J. Gordon Gaines, Inc., Liberty
             National Fire Insurance Company, Sheffield Insurance Corporation,
             Liberty National Insurance Corporation and Vesta Insurance
             Corporation dated November 15, 1994 (filed as an exhibit to the
             Company's Form 10-K for the year ended December 31, 1993, filed on
             March 28, 1994 and incorporated herein by reference (File No. 1-
             2338)).
 
   10.6      Form of Restricted Stock Agreement (filed as an exhibit to the
             Registration Statement on Form S-1 (Registration No. 33-68114) of
             Vesta Insurance Group, Inc., filed on August 31, 1993 and
             incorporated herein by reference (File No. 1-12338)).
 
   10.7*     The Company's Long Term Incentive Plan as amended effective as of
             May 16, 1995 (filed as an exhibit to the Company's Form 10-Q for
             the quarter ended June 30, 1995, filed on August 14, 1995 and
             incorporated herein by reference (File No. 1-12338)).
 
   10.8*     Form of Non-Qualified Stock Option Agreement entered into by and
             between the Company and certain of its executive officers and
             directors (filed as an exhibit to the Company's Form 10-K for the
             year ended December 31, 1995, filed on March 28, 1996 and
             incorporated herein by reference (File No. 1-12338)).
 
   10.9*     Cash Bonus Plan of the Company (filed as an exhibit to the
             Company's Form 10-K for the year ended December 31, 1993, filed on
             March 28, 1994 and incorporated herein by reference (File No. 1-
             2338)).
 
   10.10*    J. Gordon Gaines, Inc. Post Retirement Benefits Plan (filed as an
             exhibit to the Company's Form 10-K for the year ended 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 August 14, 1995 and incorporated herein by reference
             (File No. 1-12338)).
 
   10.13     Office Lease between the Company and Torchmark Development
             Corporation, dated as of April 20, 1992 (filed as an exhibit to
             the Company's Form 10-K for the year ended December 31, 1993,
             filed on March 28, 1994 and incorporated herein by 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
             incorporated 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 Program, between Vesta Fire Insurance Corporation, and its
             subsidiary and affiliated companies 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 incorporated herein by
             reference (File No. 1-12338)) renewed July 1, 1997.
 
   10.17     Specific Regional Catastrophe Excess Contracts, dated January 1,
             1996, constituting the Company's Regional Property Catastrophe
             Program, between Vesta Fire Insurance Corporation and various
             reinsurers (filed as an exhibit to the Company's Form 10-K for the
             year ended December 31, 1995, filed on March 28, 1996 and
             incorporated herein by reference (File No. 1-12338)). Renewed
             January 1, 1998.
</TABLE>
 
                                       18
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit No.                             Description
 -----------                             -----------
 <C>         <S>
   10.18     Casualty Excess of Loss Reinsurance Agreements, dated January 1,
             1998, constituting the Company's Casualty Excess of Loss
             Reinsurance Program, between Vesta Fire Insurance Corporation,
             Vesta Insurance Corporation, Sheffield Insurance Corporation,
             Vesta Lloyds Insurance Company and Employers Reinsurance
             Corporation, (filed as an exhibit to the Company's Form 10-Q for
             the quarter ended March 31, 1998, filed on May 13, 1998 and
             incorporated herein by reference (File No. 1-12338)).
 
   10.19     Amendment to Catastrophe Reinsurance Contracts, dated July 1,
             1995, constituting the Company's Direct Property Catastrophe
             Program, between Vesta Fire Insurance Corporation, Vesta Insurance
             Corporation, Sheffield Insurance Corporation, Vesta Lloyds
             Insurance Company, Hawaiian Insurance & Guaranty Company, Limited
             and various reinsurers. (Filed as an exhibit to the Company's Form
             10-Q for the quarter ended September 30, 1995, filed on November
             14, 1995 and incorporated herein by reference (File No. 1-12338)).
             Renewed July 1, 1997.
 
   10.20     Amendment to Catastrophe Reinsurance Contracts, dated January 1,
             1996, constituting the Company's Direct Property Catastrophe
             Program, between Vesta Fire Insurance Corporation, Vesta Insurance
             Corporation, Sheffield Insurance Corporation, Vesta Lloyds
             Insurance Company, Hawaiian Insurance & Guaranty Company, Limited
             and various reinsurers (filed as an exhibit to the Company's Form
             10-K for the year ended December 31, 1995, filed on March 28, 1996
             and incorporated herein by reference (File No. 1-12338)). Renewed
             January 1, 1998.
 
   10.21     Amended and Restated Credit Agreement between Vesta Insurance
             Group, Inc. and Southtrust Bank of Alabama, N.A., ABN Amro Bank
             B.V., Bank of Tokyo-Mitsubishi Trust Company, The First National
             Bank of Chicago, Wachovia Bank of Georgia, N.A. and First Union
             National Bank of North Carolina (as agent), dated April, 1997
             (filed as an exhibit to the Company's Form 10-Q for the quarter
             ended March 31, 1997, filed on May 13, 1997, and incorporated
             herein by reference (File No. 1-12338)).
 
   10.22     First amendment, dated April 14, 1999, to amended and Restated
             Credit Agreement between Vesta Insurance Group, Inc. and
             Southtrust Bank of Alabama, N.A., ABN Amro Bank B.V., Bank of
             Tokyo-Mitsubishi Trust Company, The First National Bank of
             Chicago, Wachovia Bank of Georgia, N.A. and First Union National
             Bank of North Carolina (as agent), dated April 8, 1997 (filed as
             an exhibit to the Company's Form 10-K for the period ended
             December 31, 1998, filed on April 19, 1999, and incorporated
             herein by reference (File No. 1-12338)).
 
   10.23     Stock Purchase Agreement between Anthem Casualty Insurance Group,
             Inc. and Vesta Insurance Group, Inc., Dated April 23, 1997 (filed
             as an exhibit to the Company's Form 10-Q for the year ended
             September 30, 1997, filed on November 13, 1997 and incorporated
             herein by reference (File No. 1-12338)).
 
   10.24     Business Transfer and Management Agreement between Vesta Fire
             Insurance Corporation and its affiliated Companies and CIGNA
             Property and Casualty Insurance Company and its affiliated
             companies, dated January 28, 1998 (filed as an exhibit to the
             Company's Form 10-K for the year ended December 31, 1997, filed on
             March 27, 1998 (File No. 1-12338)).
 
   10.25     Agreement for Data Processing Services between Shelby Insurance
             Company and Policy Management Systems Corporation, dated January
             1, 1998 (filed as an exhibit to the Company's Form 10-Q for the
             period from June 30, 1998, filed on August 20, 1998 and
             incorporated herein by reference (File No. 1-12338)).
</TABLE>
--------
*  These are the Company's compensatory plans.
 
                                       19
<PAGE>
 
b) Reports on Form 8-K.
 
  On March 25, 1999, the Company announced that Vesta Fire Insurance
Corporation and J. Gordon Gaines, Inc., each wholly owned subsidiaries of the
Company, consummated a transaction contemplated by an agreement with Hartford
Fire Insurance Company. Pursuant to the Agreement, Seller will use its best
efforts to cause all reinsurance assumed by seller under reinsurance contracts
presently in force, with certain exceptions, as well as a portion of Vesta's
retrocessinal program currently in effect and covering Vesta's potential
exposure under the 1999 contracts, to be transferred to Hartford Fire
Insurance Company.
 
Exhibit 11. Statement re computation of per share earnings
 
                          VESTA INSURANCE GROUP, INC.
 
                       COMPUTATION OF EARNINGS PER SHARE
 
<TABLE>
<CAPTION>
                                                                 Period Ended
                                                                  March 31,
                                                               ----------------
                                                                1999     1998
                                                               ------- --------
                                                                (in thousands
                                                               except per share
                                                                    data)
                                                                       restated
<S>                                                            <C>     <C>
BASIC EARNINGS PER SHARE:
 Weighted average common shares outstanding...................  18,691  18,457
 Net income................................................... $ 8,793 $ 2,071
 Basic earnings per share..................................... $  0.47 $  0.11
DILUTED EARNINGS PER SHARE:
 Weighted average common shares outstanding...................  18,691  18,457
 Net effect of the assumed exercise of stock options and
  nonvested restricted stock-based on the treasury stock
  method using average market price for the year..............       0     416
                                                               ------- -------
 Total weighted average common shares and common stock
  equivalents outstanding.....................................  18,691  18,873
 Net income................................................... $ 8,793 $ 2,071
 Diluted earnings per share................................... $  0.47 $  0.11
                                                               ======= =======
</TABLE>
 
                                      20
<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: May 14, 1999                                  /s/ James E. Tait
                                          _____________________________________
                                                      James E. Tait
                                                Executive Vice President
                                               and Chief Financial Officer
                                              (Principal Financial Officer)
 
 
Date: May 14, 1999                                 /s/ W. Perry Cronin
                                          _____________________________________
                                                     W. Perry Cronin
                                                  Senior Vice President
                                                     and Controller
                                             (Principal Accounting Officer)
 
                                      21