Vesta's accounting policies are critical to understanding the results of operations as reported in the consolidated financial statements. Significant accounting policies utilized by Vesta are discussed in more detail in the notes to the consolidated financial statements beginning on page 28.
Certain of these policies are considered to be important to the analysis of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. The following describes the more complex policies involving a significant amount of management judgments about the valuation and the application of complex accounting standards and interpretations.
Loss and loss adjustment expenses: Vesta has recorded liabilities for loss and loss adjustment expenses of $281.0 million at December 31, 2001. Vesta maintains property-casualty loss reserves to cover the estimated ultimate unpaid liability for losses and loss adjustment expenses with respect to reported and unreported claims incurred. Reserves do not represent an exact calculation of the ultimate liability, but instead represent estimates, generally utilizing actuarial projection techniques. These reserve estimates are expectations of what the ultimate settlement and administration of claims will cost based on an assessment of facts and circumstances then known, review of historical settlement patterns, estimates of trends in claims severity and frequency, estimates of reinsurance recoverables, estimates of salvage and subrogation and other factors. Vesta believes its liability for loss and loss adjustment expenses is adequate, however given the inherent uncertainty in reserve estimates, there can be no assurance that the ultimate amount of actual losses will not exceed the related amounts currently estimated. Furthermore, any such differences, either positive or negative, could have a material effect on our results of operations and could be material to our financial position.
Recoverability of other assets: Vesta has recorded amounts recoverable from other assets of $208.5 million at December 31, 2001, including deferred acquisition costs, deferred tax assets, and goodwill and other intangible assets. The methodologies and assumptions for determining the carrying value of these assets involve significant judgments made by management.
Fair value estimates: A significant amount of our recorded assets and liabilities are reported at fair value (and to a lesser extent at the lower of historical cost or fair value) including available for sale securities, equity securities, mortgage loans and collateral loans. Fair value is generally based on quoted market prices, however if such prices are not available, management utilizes other methods such as pricing models. The fair value estimate derived from pricing models may be different from the actual realized amount. Our valuation process is subjected to continuous management oversight and review. This review includes monitoring the credit quality of our invested assets and the adequacy of any underlying collateral.
Income available to common shareholders decreased by $39.1 million, to a loss of $22.4 million for the year ended December 31, 2001, from income of $16.7 million for the year ended December 31, 2000. On a diluted per share basis, income available to common shareholders for 2001 was a loss of $0.84 per share versus income of $.78 per share for 2000. The decrease in income available to common shareholders is primarily attributable to an after-tax discontinued operations charge of $20.0 million in 2001 versus an after-tax discontinued operations expense of $2.4 million in 2000 and the recognition of a $16.3 million after-tax charge for the settlement of our securities class action lawsuit in 2001.
In June, 2000, we entered the life and annuity business through a 71% investment in American Founders Financial Corporation, a holding company for two life insurance companies domiciled in Texas and we entered the health insurance business through the acquisition of Aegis Financial Corporation, a holding company for two life and health insurance companies domiciled in Texas, in December, 2000. American Founders and Aegis have approximately $2.5 billion (face value) of life and annuity products in force and $22.9 million of health insurance premiums in force at December 31, 2001. Life insurance premiums and policy fees were $14.1 million for the year ended December 31, 2001 compared to $5.3 million for the comparable prior period primarily due to the acquisition of Aegis in December 2000 and Washington Life in August 2001 and the inclusion of American Founders for a full year in 2001 versus six months in 2000. Health insurance premiums totaled $20.5 million for the year ended December 31, 2001 versus zero for the comparable prior period. Health insurance benefits incurred totaled $14.0 million for the year ended December 31, 2001 and health insurance commission expense was $6.3 million.
Income taxes decreased by $10.2 million, to a $4.5 million benefit for the year ended December 31, 2001. The effective rate on pre-tax income increased to 35% for the year ended December 31, 2001 versus 32.2% for the year ended December 31, 2000 due to lower tax exempt investment income and increased state income taxes in 2001 versus 2000.
Income available to common shareholders decreased by $15.7 million, or 48.4% to $16.7 million for the year ended December 31, 2000, from $32.4 million for the year ended December 31, 1999. On a diluted per share basis, income available to common shareholders for 2000 was $0.78 per share versus income of $1.63 per share for 1999. The decrease in income available to common shareholder is primarily attributable to $8.3 million of after tax realized gains recognized during 1999 and the recognition of a $1.1 million after tax loss from the sale of a building in Shelby, Ohio in 2000. Also, in the fourth quarter of 2000, our last active reinsurance assumed contract was cancelled and we are presenting its reinsurance assumed segment as a discontinued operation. In 1999, our discontinued operations, which include the former commercial and reinsurance assumed segments, reported net income of $12.7 million compared to a loss of $2.4 million in 2000. The 1999 results for our discontinued operations included a $15 million pre-tax gain related to the sale of the bulk of our reinsurance assumed operations.
Net investment income increased by $20.0 million, or 77.2%, to $45.9 million for the year ended December 31, 2000, from $25.9 million for the year ended December 31, 1999. The weighted average yield on invested assets (excluding realized and unrealized gains) was 6.7% for the year ended December 31, 2000, compared with 6.5% for the year ended December 31, 1999. The increase in investment income is primarily attributable to an increase in average invested assets from the American Founders acquisition and an increased investment yield resulting from a lower percentage of tax-exempt securities in the current portfolio.
Income taxes decreased by $1.4 million, or 19.7%, to $5.7 million for the year ended December 31, 2000. The effective rate on pre-tax income increased to 32.2% for the year ended December 31, 2000 versus 30.3% for the year ended December 31, 1999 due to lower tax exempt investment income in 2000 versus 1999.
The principal uses of funds at the holding company level are to pay operating expenses, principal and interest on outstanding indebtedness and deferrable capital securities and dividends to stockholders if declared by the Board of Directors. During the last three years, our insurance subsidiaries have produced operating results and paid management fees and dividends sufficient to fund our needs. As a holding company with no other business operations, we rely primarily on fees generated by our management agreement with our insurance subsidiaries and dividend payments from Vesta Fire to meet our cash requirements (including our debt service) and to pay dividends to our stockholders.
We believe that the Illinois Insurance Department's willingness to approve the payment of a dividend by Vesta Fire to our holding company will depend on a variety of factors, such as the impact to the holding company if the dividend is not paid and the impact to Vesta Fire if the dividend is paid. For example,the payment of a dividend may cause non-compliance with the Illinois Department of Insurance's "reserve reconciliation test," which requires Vesta Fire to maintain a minimum amount of liquid, high quality assets. At December 31, 2001, Vesta Fire's qualifying assets exceeded its minimum by approximately $8.8 million. If the payment of a dividend would jeopardize Vesta Fire's ability to comply with this reserve reconciliation test, then the Illinois Department of Insurance may not approve it. Accordingly, there can be no assurance that Vesta Fire will be able to obtain the requisite regulatory approval for the payment of dividends.
. an additional $15 million line which bears interest at First Commercial's prime rate, secured by a pledge of the revenues received under the management contract between our wholly owned management company, J. Gordon Gaines, Inc., and our operating insurance subsidiaries.
Future payments for interest and operating lease obligations at December 31, 2001 are as follows:
The provisions of SFAS No. 142 no longer allow the amortization of goodwill, and certain intangible assets that have indefinite useful lives, and requires that impairment of goodwill on those assets be tested annually. In addition, SFAS No. 142 requires the following additional disclosures for goodwill and other intangible assets:
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Vesta Insurance Group, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a)(2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
Vesta Insurance Group, Inc Consolidated Balance Sheets (amounts in thousands, except share data)
Vesta Insurance Group, Inc Consolidated Statements of Stockholders' Equity (amounts in thousands, except share data)
Use of Estimates in the Preparation of the Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. These estimates and assumptions are particularly important in determining the premiums in course of collection, reserves for losses and loss adjustment expenses, deferred policy acquisition costs and reinsurance recoverables.
Gains and losses realized on the disposition of investments are recognized as revenues and are determined on a specific identification basis. Unrealized gains and losses on equity securities and fixed maturities available for sale, net of deferred income taxes, are reflected directly in stockholders' equity. If an investment becomes other than temporarily impaired, such impairment is treated as a realized loss and the investment is adjusted to net realizable value.
. Earned premiums on property-casualty business are generally recognized as revenue on a pro rata basis over the policy term. Reinsurance premiums ceded are similarly pro-rated with the prepaid portion recorded as an asset in the Consolidated Balance Sheet. . Agency commission income is recognized at the later of the billing or effective date of the related insurance policies, net of an allowance for estimated policy cancellations. . Premiums on traditional life contracts are recognized as income when due. . Premiums for accident and health policies are recognized in proportion to the insurance protection provided over the period covered by the policies.
For investment contracts without mortality risk (such as deferred annuities and immediate annuities with benefits paid for a certain period), premium deposits and benefit payments are recorded as increases or decreases in a liability account, rather than as revenue and expense. We record as revenue any amounts charged against the liability account for the cost of insurance, policy administration, and surrender penalties. Any interest credited to the liability account and any benefit payments which exceed the contract liability account balance are recorded as expenses. As of December 31, 2001 and 2000, approximately $95.7 million and $72.5 million, respectively, of Vesta's annuity reserves are subject to discretionary withdrawal without surrender charges or other adjustments.
The costs to acquire blocks of life insurance representing the present value of future profits from such blocks of insurance is also included in deferred acquisition costs. We amortize the present value of future profits over the premium payment period. The unamortized present value of future profits was approximately $20.9 and $17.9 million at December 31, 2001 and 2000, respectively. During 2001 and 2000, $4.5 million and $19.2 million, respectively, of present value of future profits was capitalized (relating to acquisitions made during the year) and $1.5 million and $2.5 million was amortized.
Reinsurance: We report assets and liabilities related to insurance contracts before the effects of reinsurance. Reinsurance receivables and prepaid reinsurance premiums (including amounts related to insurance liabilities) are reported as assets. Estimated reinsurance receivables are recognized in a manner consistent with the liabilities related to the underlying reinsured contracts. Reinsurance recoverables represent amounts due from reinsurers for paid losses.
A summary of property and equipment used in the business is as follows (in thousands):
Reclassification: 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 total assets, total liabilities, stockholders' equity or net income during the period involved.
Income Per Share: Basic EPS is computed by dividing net 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. Reconciliation of net income available to common shareholders and average shares outstanding for years ending December 31 are as follows:
* In 2001, the shares had an anti-dilutive effect and were excluded in accordance with SFAS No. 128
New Accounting Standards: Effective January 1, 2001, Vesta adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. Those standards are based on consistent application of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, and derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. SFAS No. 140 also provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings.
Effective January 1, 2001, Vesta adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 and subsequent amendments standardize the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by requiring that an entity recognize those items as assets or liabilities in the financial statements and measure them at fair value. Management has evaluated our activities and determined that Vesta does not have any material derivative exposures and that the adoption of the SFAS No. 133 did not have a material impact on the financial statements.
Assets and liabilities acquired (in thousands except per share amounts and unaudited):
On October 1, 2001, our subsidiary Instant Insurance Holdings, Inc. ("Instant") acquired a 75% interest in Spacecoast Agencies of Florida for $3.7 million. On October 31, Instant acquired A-Affordable Insurance Agency of Texas for approximately $8.5 million. These transactions have been accounted for as a purchase. Summarized below is an allocation of assets and liabilities acquired (in thousands):
Liabilities acquired: Payables and other liabilities $ 4,590 ------- Total liabilities $ 4,590
Assets acquired: Invested assets $682,906 Value of business acquired 20,290 Reinsurance receivables 187,473 Other assets 20,156 -------- Total assets $910,825
Statutory net income: Vesta Fire Insurance Corporation $ 68,544 $ 41,611 American Founders Life $ 8,761 $ 12,444
(1) The realized loss from other assets is primarily attributable to a realized loss recorded on certain collateral loans held by Vesta's life insurance subsidiary, American Founders.
A summary of fixed maturities and equity securities by amortized cost and estimated fair value at December 31, 2001 and 2000 is as follows (in thousands):
Amortized Fair Cost Value --------- -------- (in thousands) Due in one year or less $ 22,074 $ 22,436 Due from one to five years 154,606 159,769 Due from five to ten years 139,739 143,479 Due in ten years or more 96,234 98,531 Mortgage backed securities 372,396 382,982 -------- --------
We maintain a mortgage loan portfolio consisting of first-lien residential and commercial mortgages. At December 31, 2001, our residential mortgages had carrying values of approximately $12.7 million and commercial mortgages had carrying values of approximately $4.2 million. Collateral loans totaled $27.1 million and were collateralized by the stock of 5 separate Mexican companies, whose only underlying assets supporting the loans consisted of real estate properties located in Mexico. The collateral loans were non-performing as of December 31, 2001, and we are taking the steps necessary to collect the amounts due on these loans from the borrowers. Although the loans are past due in terms of principal and interest payments, the Company does not believe them to be impaired and has not established an allowance against their carrying values due to the estimated value of the collateral being in excess of the combined carrying value of the principal and accrued interest at December 31, 2001.
(1) The adverse development of $34.4 million is primarily attributable to a $30.0 million pre-tax charge taken in our discontinued lines. See Note Q for further discussion.
On October 26, 2001, Vesta executed a definitive agreement to settle the securities litigation that had been pending since June 1998 against Vesta and certain current and former officers and directors. On December 10, 2001, the Court approved settlement of the consolidated class action securities litigation in U.S. District Court in Alabama as to Vesta and its officers and directors for a total of $61 million in cash. A related derivative action lawsuit in the Circuit Court of Jefferson County, Alabama was also dismissed with prejudice. Vesta funded $21.0 million towards the settlement and the Company's excess directors and officers liability carriers funded the remaining $40.0 million. Vesta used its line of credit to finance its portion of the settlement and recorded a pre-tax one-time charge of approximately $25 million against earnings to cover Vesta's contribution to the settlement and other expenses incurred. We have now filed a claim with two of our upper level excess D & O insurers for their part of the settlement and related expenses. We have recorded a receivable of $5.4 million, which represents the amount currently due from those two excess D&O insurers
As discussed in previous SEC filings, in 1998 we corrected our accounting for assumed reinsurance business through restatement of our previously issued financial statements. Similar corrections were made on a statutory accounting basis through recording cumulative adjustments in Vesta Fire's 1997 statutory financial statements. The impact of this correction has been reflected in amounts ceded under our 20 percent whole account quota share treaty which was terminated on June 30, 1998 on a run-off basis. We believe such treatment is appropriate under the terms of this treaty and have calculated the quarterly reinsurance billings presented to the three treaty participants accordingly. The aggregate amount included herein as recoverable from such reinsurers totaled $55.9 million at December 31, 2001. Additionally we have previously collected approximately $48.5 million from the drawdown of collateral on hand.
NRMA Insurance Ltd. ("NRMA"), one of the participants in the 20% whole account quota share treaty, filed a lawsuit in the United States District Court for the Northern District of Alabama contesting our billings. NRMA sought recession of the treaty and a temporary restraining order preventing us from drawing down approximately $34.5 of collateral. We filed a demand for arbitration as provided for in the treaty and also filed a motion to compel arbitration which was granted in the United States District action. Vesta reached an agreement with NRMA to collect the $34.5 million of collateral in exchange for posting a $25 million letter of credit in favor of NRMA to fund any amounts NRMA may recover as a result of the arbitration. We filed for arbitration against the other two participants on the treaty and all those arbitrations are in their document discovery stages. While management believes its interpretation of the treaty's terms and computations based thereon are correct, these matters are in arbitration and their ultimate outcome cannot be determined at this time.
During 1999, F&G Re (on behalf of USF&G), filed for arbitration under two aggregate stop loss reinsurance treaties whereby F&G Re assumed certain risk from the Vesta. F&G Re is seeking to cancel the treaties and avoid its obligation. Based on the terms of the two treaties, Vesta will be entitled to recoveries of approximately $30.0 million as losses from prior accident years mature. Vesta has recorded a reinsurance recoverable of $30.0 million at December 31, 2001 related to these two treaties. The hearing in this arbitration began on February 11, 2002. The hearing was adjourned on February 15, 2002 and rescheduled to resume on June 11, 2002. While management believes that USF&G is not entitled to recession, the ultimate outcome cannot be determined at this time.
We are in arbitration with CIGNA Property and Casualty Insurance Company (now ACE USA) under a personal lines insurance quota share reinsurance agreement, whereby we assumed certain risks from CIGNA. During September 2000, CIGNA filed for arbitration under the reinsurance agreement, seeking payment of the balances that CIGNA claims are due under the terms of the treaty. In addition, during the fourth quarter, the treaty was terminated on a cut-off basis. Vesta is seeking recoupment of all improper claims payments and excessive expense allocations and charges from CIGNA. The arbitration was bifurcated into two phases with phase one concentrating on the interpretation of the intent of the parties related to the expense reimbursement provisions of the treaty at the time it was entered and phase two related to any issues between the parties after the Company conducts an audit of expenses related to the treaty. The phase one hearing was held in February 2002 and the panel ruled that (i) the Company is responsible for the payment of ceding commissions provided for in the treaty and should pay any outstanding billings for commissions, and paid claims plus interest; and (ii) the Company may proceed with an audit of expenses ceded to the treaty and (iii) the parties should identify any further issues to be brought before the arbitration panel for phase two of the hearing.
As part of its ongoing reinsurance recoverable arbitrations, we have obtained letters of credit for the benefit of certain parties. Our principal operating subsidiary, Vesta Fire is contingently liable under the terms of these letters of credit. For our reinsurance arbitrations, we have obtained letters of credit totaling $33.7 million for which we are contingently liable. Additionally, as part of our specialty lines underwriting retained, we have obtained letters of credit or other pledges of securities totaling $29.2 million securing our obligations under the various reinsurance agreements. As part of our Federal Home Loan Bank Program, as more fully described in Note M, we have pledged securities with a market value of $176.8 million securing our obligation thereunder.
Year Ended December 31, 2001 2000 1999 ------- ------- ------- Cash paid for interest $19,642 $23,275 $10,174 Cash paid for income taxes 7,605 1,901 --
Year Ended December 31, 2001 2000 -------- -------- (in thousands) Losses and loss adjustment expense $167,281 $170,050 Policy benefits 152,235 170,766 Retroactive Reinsurance Receivable 599 599 Unearned premiums 37,712 12,534 -------- -------- $357,827 $353,949 ======== ========
During 2000, Vesta entered into a transaction with NeHi Re, L.P., a special purpose limited syndicate under the INEX Insurance Exchange, to provide $50.0 million of excess-of-loss reinsurance protection to potential losses arising in Hawaii and in the Northeast United States for a period of three years. We paid $3.0 million in annual premiums for this catastrophe reinsurance.
Statutory federal income tax rate 35.0% 35.0% 35.0% Increases (reductions) in tax resulting from: Tax exempt investment income (0.6) (4.0) (5.0) Goodwill 0.2 1.0 0.4 Other 0.4 1.9 0.6 ---- ---- ---- 35.0% 33.9% 31.0% ==== ==== ====
Deferred tax liabilities: Deferred acquisition costs 21,973 18,433 Unrealized gains (losses) 5,306 2,330 Fixed assets 2,384 1,874 Other 6,183 7,941 ------- ------- Total deferred tax liabilities 35,846 30,578
Vesta has a Shareholders' Rights Plan that provides for the payment of a dividend of one preferred stock purchase right to be attached for each outstanding share of common stock. Each Right, if and when it becomes exercisable, will entitle the registered holder to purchase from Vesta one one-hundreth (1/100) of a share of Vesta's Series B Junior participating Preferred Stock at a price of $30.00 per one one-hundreth of a share. The Rights will be excercisable only if a person or group acquires a beneficial ownership of 10% or more of the common stock. The Rights entitle the holder to purchase one one-hundreth of a share of a new series of preferred stock at an exercisable price of $30.00 and will expire on June 15, 2010.
In the fourth quarter of 2000, Vesta redeemed preferred stock of a subsidiary with a stated value of $21 million and a carrying value of $18 million for $7.0 million including a $3.5 million contingent payable. In addition, we redeemed $8 million of Deferrable Capital Securities in exchange for 1.2 million shares of common stock. The resulting after-tax gain from these transactions of $9.2 million was recorded directly to equity in accordance with EITF 86-32 "Early Extinguishment of a Subsidiary's Mandatorily Redeemable Preferred Stock."
We operate several segments, which are distinguishable by their product offerings. The accounting policies of the operating segments are described in Note A. Segment pre-tax income is generally income before income tax and minority interest. Premiums, policy fees, other income, loss and benefit expenses, operating expenses, and policy acquisition expenses are attributed directly to each operating segment. Net investment income and interest expense are allocated only to those segments for which such amounts are considered an integral part of the financial results for that segment.
The standard property-casualty segment primarily consists of the marketing and distribution of personal lines products including residential property and private passenger auto coverages. Vesta's products are distributed primarily through approximately 1,500 independent agencies in 24 states. Our standard personal auto line targets drivers over age thirty-five with above average driving records and our residential property products cover the full range of homes.
Specialty lines include our fronting operations and any underwriting risk retained from premiums written through our non-standard auto agencies. In fronting arrangements, we write targeted property-casualty insurance coverages and reinsure substantially all of the risks to reinsurers in exchange for fees. This business takes advantage of our certificates of authority granting us license to write insurance in many states. Income from fronting arrangements is primarily generated on a fee-for-service basis. For the premium written through our non-standard auto agencies, we determine based on market conditions,
and the prospective results of the underlying business, whether to keep 100% of the underwriting risk or reinsure this risk to various reinsurers. Our decision on how much underwriting risk to retain is dependent on the current rating environment and the amount of commissions offered by the reinsurers.
The non-standard auto agency segment consists of our non-standard auto agency retail and wholesale operations. The primary sources of revenue are agent's commissions and fees collected by retailers and fees and commissions collected by wholesalers. These revenue streams are not risk-bearing.
8.525% Deferrable Capital Securities, issued by Vesta Capital Trust I, due January 15, 2027 $23,250 $33,225 ======= =======
Vesta's short-term debt outstanding at December 31, 2001 and 2000 is as follows (in thousands):
Annual maturities of borrowings from FHLB as of December 31, 2001 are as follows (in thousands):
2002 $ 88,401 2003 15,337 2004 5,249 2005 3,290 2006 2,582 Thereafter 53,755 -------- $168,614 ========
Prior to completion of our initial public offering, our stockholders approved the Vesta Insurance Group, Inc. Long Term Incentive Plan ("Plan"), which provided for grants to our executive officers of restricted stock, stock options, stock appreciation rights, and deferred stock awards, and in certain instances grants of options to directors. Our stockholders approved certain amendments to the Plan effective August 27, 1999 and May 16, 1995, including an amendment to increase the shares of common stock available for awards to 2,221,998 shares and an amendment to delete the provision for the grant of options to non-employee directors. The stockholders also approved the Vesta Insurance Group, Inc. Non-Employee Director Stock Plan ("Director Plan") effective May 16, 1995, which provides for grants to Vesta's non-employee directors of stock options and restricted stock.
Pro forma information regarding net income and earnings per share is required by SFAS 123 and has been determined as if Vesta had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions for 2001, 2000 and 1999, respectively: risk-free interest rates of 5.13%, 6.50% and 6.22%; dividend yields of 1.0%, 1.0% and 1.67% percent; volatility factor of the expected market price of Vesta's common stock of 88.97, 78.39 and 67.02; and a weighted-average expected life of the options of ten years for all years.
Of the 867,977 outstanding options at December 31, 2001, 460,477 were exercisable.
The following table shows expiration dates and weighted average exercise price for all outstanding options and options currently exercisable at December 31, 2001. Weighted Expiration Date Number of Average Options Shares Exercise Price Exercisable - --------------- --------- -------------- -----------
As discussed in Note Q, Vesta discontinued its commercial operations effective in the fourth quarter of 1999 and its reinsurance assumed operations, effective the fourth quarter of 2000. Quarters prior to such effective dates have been reclassified in accordance with Accounting Principal Board Opinion No. 30 (APB 30) for presentation of discontinued operations.
. Equity Securities - The carrying value of unaffiliated common stock, except for stock of FHLB, approximates fair value. Because FHLB shares are not publicly traded, the market value of the stock was considered to be equivalent to its cost due to the fact that FHLB has historically redeemed the shares at the original cost.
In 1999, we elected to exit the assumed reinsurance business and ceased accepting new contracts. We sold the majority of our reinsurance assumed operations, including most renewal rights to Hartford Fire Insurance Company in the first quarter of 1999 for $15 million. In the fourth quarter of 2000, the last active reinsurance contract was commuted. Such commutation represented the measurement date for treatment of the reinsurance assumed business as a discontinued operation under Accounting Principles Board Opinion 30. Therefore, the reinsurance assumed operations have been segregated from continuing operations herein for all periods presented. Vesta will continue to pay losses on policies with coverage periods prior to the measurement date as those losses become due.
In June of 2001, the Company settled a contingent liability with three of its executives under the Executive Officer Incentive Compensation Plan, by issuing 1.25 million shares of restricted stock and giving the executives total loans of $5.0 million. The restricted stock, which is recorded as Unearned Stock at December 31, 2001, vest over a 10 year period. The loans, which are recorded as Other Assets at December 31, 2000, will be forgiven over a 10 year period. The Company will record the vesting of the restricted stock and the forgiveness of the loans as compensation expense in the appropriate periods. In addition, the Company has made a loan of $250 thousand to the Chairman of the Board related to his residential property in Alabama.