(1) Statutory data have been derived from the financial statements of Vesta Fire Insurance Corporation, prepared in accordance with statutory accounting principles and filed with insurance regulatory authorities.
• Settlement of employment contracts with former management (resulting in a pre-tax charge of $4.2 million);
• Reduction in investment income as a result of an overall decline in interest rates
For the year ended December 31, 2002, net premiums written for non-standard lines increased by $169.5 million, to $181.3 million from $11.8 million in 2001. For the same period, net premiums earned for non-standard lines increased by $151.3 million to $161.5 million from $10.2 million. The increase in net premiums written and net premiums earned was primarily attributable to new business produced by our affiliated agency operations, which acquired several agencies in late 2001 and early 2002.
In March, 2002, we amended our previous $30 million revolving credit agreements with First Commercial Bank of Birmingham, Alabama (“First Commercial”) to restructure the financial covenants contained therein. These credit agreements, which consisted of a $15 million unsecured line and a $15 million secured line, were due to expire in April 2003.
On a consolidated basis, net cash provided by (used in) operations for the year ended December 31, 2002 and 2001, was $122.6 million and $(11.1) million, respectively. Cash flow from operations was positive for the current period primarily due to increased residential writings in Texas and in our non-standard automobile segment. Net cash used in investing activities was $(1.1) million and $(45.0) million for the year ended December 31, 2002 and 2001, respectively as we invested cash generated by our operations in 2002 and used cash to purchase Florida Select in April, 2001. Net cash provided by (used in) financing activities was $(4.4) million and $66.3 million for the year ending December 31, 2002 and 2001, respectively. In 2002, our financing activities were essentially unchanged as we slightly increased our borrowings from the FHLB and repurchased long-term debt with cash. In 2001, we engaged in a number of stock transactions, including the issuance of 8.6 million shares of stock in a follow-on offering for approximately $64.0 million, net of underwriting discount and expenses.
The initial adoption and application of the provisions of SFAS No. 142 did not result in the recognition of impairment losses for goodwill pursuant to a transitional impairment test. However, in the fourth quarter of 2002, we wrote off $9.1 million of goodwill associated with our discontinued health insurance ($7.9 million) and consulting ($1.2 million) business lines. The results for these lines, including the impairment charge for goodwill, are classified in discontinued operations in our Consolidated Financial Statements. For more information, please refer to Note R to our financial statements on page 80 of this report. With respect to remaining goodwill in our continuing operations, we determined that, as of December 31, 2002, there was no impairment.
Consolidated Statements of Operations and Comprehensive Income (loss) for each of the years in the three-year period ended December 31, 2002
Consolidated Statements of Stockholders’ Equity for each of the years in the three-year period ended December 31, 2002
As discussed in Note A to the Financial Statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangibles Assets” and SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets.” In addition, as discussed in Note A to the Financial Statements, effective July 1, 2002, the Company adopted SFAS No. 145, “Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”
Losses and Loss Adjustment Expenses: The liability for losses and loss adjustment expenses (‘‘LAE’’) includes an amount determined from loss reports and individual cases. It also includes an amount for losses incurred but not reported (“IBNR”) which is based on historical experience. Such liabilities are necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed, and any adjustments are reflected in earnings currently. These reserves are established on an undiscounted basis and are reduced for estimates of salvage and subrogation.
Minority Interest: Minority interest in consolidated subsidiaries totaled $14.8 million and $16.1 million and is included in other liabilities at December 31, 2002 and 2001, respectively.
Upon our initial adoption of SFAS No. 142, we identified three reporting units that would be tested for goodwill impairment: homeowners’ insurance operations; life insurance operations; and non-standard automobile insurance operations. In connection with our evaluation of goodwill, we engaged a third party regularly involved in the valuation of insurance companies to perform a valuation analysis of our reporting units. Based upon (a) the historical financial performance of each unit; (b) the most recent financial performance of each unit; (c) management’s financial forecast for each reporting unit; (d) information regarding publicly available financial terms of recent transactions in the insurance industry; (e) current and historical market prices of the common stock of comparable companies in the insurance industry; and (f) other publicly available information, management concluded that there was no goodwill impairment with respect to any of our reporting units. Accordingly, we were not required to perform the second test prescribed by SFAS No. 142.
The following is a summary of selected statutory financial information for our primary insurance subsidiaries at December 31, 2002 and 2001 (in thousands):
Our non-standard agency segment does not engage in underwriting activities. The primary focus of our agency segment is the distribution of non-standard auto insurance products for various retail and wholesale insurance carriers in exchange for commissions and fees. Our non-standard agencies primary target (1) individuals specifically required by law to purchase auto insurance; (2) individuals with accidents or violations on their driving records; (3) new drivers; and (4) drivers of high-performance vehicles. Typically, non-standard auto insurance customers are considered higher-risk than standard customers, and premiums for non-standard insurance are generally more expensive.
Our non-standard underwriting segment consists of two lines of business: (1) underwriting non-standard auto insurance products sold by our affiliated agency operations and (2) underwriting non-standard auto insurance sold by unaffiliated agencies. In each of these lines of business, we utilize quota share reinsurance to minimize our exposure to loss. The non-standard underwriting segment includes our fronting operations and any underwriting risk retained from premiums written through our non-standard auto agencies.
Advances from the Federal Home Loan Bank (“FHLB”) as of December 31, 2002 and 2001 are as follows (in thousands):
At December 31, 2002, Vesta has issued 981,807 shares of restricted stock. In addition, Vesta issued 74,307 shares to officers of Vesta in exchange for promissory notes. The common stock is being held by Vesta as security for the repayment of the notes. The balance of the unamortized restricted stock and unpaid note receivable at December 31, 2002 and 2001, was $7.1 million and $14.8 million, respectively, and are shown as reductions to stockholders’ equity. The restrictions on these shares expire in 2003 - 2011.