We lease approximately 8,140 square feet for our Hawaiian operations at 1001 Bishop Street Pacific Tower, Honolulu, Hawaii under a long-term operating lease. We consider the office facilities to be suitable and adequate for our current and anticipated level of operations in Hawaii.
The Company writes primary insurance on selected Personal lines risks only, balanced between risks of property damage (which is susceptible to faster determination of ultimate loss but is highly unpredictable) and casualty exposure (which is more predictable but takes longer to determine the ultimate loss).
In the past, we also wrote primary insurance on a variety of Commercial Lines risks, as well as treaty Reinsurance for small and mid-size insurance companies and regional specific Reinsurance for large insurance companies. In each of these segments, we focused principally on property coverages, for which ultimate losses generally can be more promptly determined than on casualty risks. In 1999, we sold the rights to a substantial portion of our reinsurance assumed business for a pretax gain of $15 million(a large block of policies 100% reinsured from CIGNA was retained and is being converted from assumed to direct), and decided to discontinue our commercial lines segment. The commercial lines segment is discussed herein as a discontinued operation. Additionally, we sold Vesta County Mutual, a predominately personal auto carrier, for a pretax gain of $4.8 million. Direct written premiums assumed by the Company from Vesta County Mutual were $15.5 million, $72.6 million and $41.8 million in 1999, 1998 and 1997 respectively.
Gross premiums written for Personal lines decreased by $92.0 million, or 26.5%, to $255.0 million for the year ended December 31, 1999, from $347.0 million for the year ended December 31, 1998. The decrease of was primarily due to the declines in the Financial Services, and Personal Auto lines (which includes the sale of Vesta County Mutual), partially offset by the continued rollover of the CIGNA homeowners business from the assumed reinsurance lines.
Loss and LAE for Personal lines remained flat from 1999 to 1998 at $165.0 million. The loss and LAE ratio for Personal lines for the year ended December 31, 1999 was 66.5% as compared to 66.7% at December 31, 1998.
Policy acquisition expenses from continuing operations decreased by $61.3 million, or 40.9%, to $88.6 million for the year ended December 31, 1999, from $149.9 million for the year ended December 31, 1998. The decrease in policy acquisition expenses from continuing operations is primarily attributable to reductions in earned premiums. Other operating expenses include administrative costs not directly related to the generation of premium revenue, interest on debt and goodwill and other intangibles amortization. Administrative costs from continuing operations (designated as operating expenses on the statement of operations) decreased $32.7 million. The decrease in administration costs is primarily attributable to the consolidation of the Shelby operations into the Birmingham office and other cost reductions enacted by the Company in response to reduction in premium volume from assumed reinsurance. Premium taxes and fees also decreased as a result of decreased earned premium. The decrease in goodwill and other intangibles amortization is attributable to the write off of $74.5 million ($65.5 million of which related to continuing operations) of goodwill related to the Shelby acquisition in the fourth quarter of 1998.
Net investment income from continuing operations decreased by $2.0 million, or 6.9%, to $26.9 million for the year ended December 31, 1999, from $28.9 million for the year ended December 31, 1998 due to lower average invested assets. The weighted average yield on invested assets (excluding realized and unrealized gains) was 6.5% for the year ended December 31, 1999, compared with 5.8% for the year ended December 31, 1998.
Federal income taxes from continuing operations increased by $62.2 million to an expense of $13.6 million for the year ended December 31, 1999, from a $48.6 million benefit for the year ended December 31, 1998. The Company's effective tax rate for 1999 was 30.7% versus 28.9% in 1998. The
Net premiums earned from the discontinued Commercial Lines decreased $16.2 million, or 23.7%, to $52.2 million for the year ended December 31, 1999, from $68.4 million for the year ended December 31, 1998 as the Company exited this business in 1999.
For the reasons discussed above, net income increased by $164.7 million, to income of $23.5 million for the year ended December 31, 1999, from a $141.2 million loss for the year ended December 31, 1998.
Included in the Reinsurance results for 1998, were two large 100% Quota share Reinsurance treaties for CIGNA and HomePlus which cover selected homeowners lines. As the covered business is renewed it will be transferred to Vesta Fire as the issuing carrier. In 1998, these treaties accounted for $107.4 million in gross written premiums.
Policy acquisition expenses increased by $16.7 million, or 13.1%, to $149.9 million for the year ended December 31, 1998, from $133.2 million for the year ended December 31, 1997. The increase in policy acquisition costs is primarily attributable to additional marketing staff salaries and additional agents incentives. Other operating expenses from continuing operations include administrative costs not directly related to the generation of premium revenue, premium taxes and fees, interest on debt and goodwill amortization. Administrative costs from continuing operations (designated as operating expenses on the statement of operations) increased $44.7 million. The increase in administration costs is primarily attributable to increased costs related to the Shelby operations and increased information system costs. The increase in premium taxes and fees is directly related to the increase in direct premiums written. The increase in goodwill amortization is attributable to a full year of amortization of the goodwill related to the Shelby acquisition versus six months of amortization in 1997.
Net investment income decreased by $3.1 million, or 9.7%, to $28.9 million for the year ended December 31, 1998, from $32.0 million for the year ended December 31, 1997. The weighted average yield on invested assets (excluding realized and unrealized gains) was 5.8% for the year ended December 31, 1998, compared with 5.8% for the year ended December 31, 1997.
Loss and LAE for Commercial Lines increased $30.7 million, or 127.9%, from $24.0 million for the year ended December 31, 1997 to $54.7 million for the year ended December 31, 1998. The loss and LAE ratio for Commercial Lines for the year ended December 31, 1998, was 80.0% as compared to 55.9% for the year ended December 31, 1997. The increase in loss ratio was primarily attributable to increased market competition and catastrophe losses for the year ended December 31, 1998. Policy acquisition expenses increased $6.4 million as a result of the increased earned premium. Operating expenses increased $7.8 million from $8.3 million for the year ended December 31, 1997 to $16.1 million for the year ended December 31, 1998. The increase was largely attributable a full year of Shelby operations in 1998 versus six months in 1997. In 1998, $9 million of the loss on asset impairment was attributed to the commercial lines segment.
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 dividends sufficient to fund our needs. Except for the regulatory restrictions described above, we are not aware of any demands or commitments of the insurance subsidiaries that would prevent them from paying dividends sufficient to meet our anticipated needs (including debt service) for at least the next twelve months. See, "Business-- Regulation."
As a holding company with no other business operations, we rely primarily upon dividend payments from Vesta Fire to meet our cash requirements (including its debt service) and to pay dividends to our stockholders. Transactions between Vesta and its insurance subsidiaries, including the payment of dividends to Vesta by such subsidiaries, are subject to certain limitations under the insurance laws of those subsidiaries' domiciliary states. The insurance laws of the state of Illinois, where Vesta Fire is domiciled, permit 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.
On March 24, 1999 the Company sold its reinsurance assumed business (with the exception of the CIGNA homeowner's reinsurance business that is currently being converted to primary operations) to The Hartford Fire Insurance Company ("Hart Re"). The Company received $15 million in exchange for its commitment to (a) enter into a 100% quota share treaty, effective January 1, 1999 for all business written on or after that date; (b) use its best efforts to novate to the purchaser or renew on the purchaser's paper, all assumed treaties except those currently being converted to primary business and; (c) facilitate the hiring by Hart Re of several of the Company's reinsurance employees.
On September 30, 1999, the Company issued 2,950,000 shares of its Series A Convertible Preferred Stock to a single investor in exchange for cash proceeds of approximately $25 million. The terms of this Preferred Stock are discussed below under "--Long Term Debt and Preferred Stock."
On September 30, 1999, we established collateralized revolving credit facilities in the aggregate amount of $20 million with The Banc Corporation and its banking subsidiary The Bank, consisting of a $15 million loan from The Bank and a $5 million loan from The Banc Corporation.
Each of these credit facilities bore interest at The Bank's prime rate and were to mature on December 29, 2001. As of December 31, 1999, we had borrowed all $5 million available under the unsecured line, and we had not borrowed any amounts under the $10 million secured line. Subsequent to December 31, 1999, we repaid the $5 million outstanding on the unsecured line of credit, and we cancelled the credit agreements related to both lines of credit effective February 29, 2000.
Each of these newly established credit facilities mature on December 31, 2002. In addition, the credit agreements related to these facilities contain typical financial covenants which require us to maintain certain financial standards. As of March 30, 2000, all $15 million under these lines of credit was available for general corporate purposes.
ten years. We exercised this right of deferral with respect to the semi-annual payment originally due July 15, 1999. While we have elected to resume payment on these capital securities effective January 15, 2000, including all accrued amounts due since July 15, 1999, we may elect to defer payments again in the future. In the event we elect to defer such payments again in the future, we will not be permitted to pay any dividends on our common stock or other equity securities, including the preferred stock held by the Birmingham Investment Group, LLC. As of December 31, 1999, approximately $41 million of these 8.525% Deferrable Capital Securities remained outstanding, after giving effect to the exchange involving the Company's 12.5% Senior Notes at December 30, 1999 (discussed below).
On September 30, 1999, we issued approximately $25 million of our Series A Convertible Preferred Stock to the Birmingham Investment Group, LLC in which we sold 2,950,000 shares of our preferred stock at $8.50 per share. Each share of the preferred stock is convertible into two shares of our common stock and carries a cumulative dividend rate of 9%, compounded semi-annually. The preferred stock will automatically be converted into shares of common stock at the date at which our common stock achieves an average closing price of $8.00 per share for twenty consecutive trading days. As of December 31, 1999, all $25 million of this preferred stock remained outstanding. Upon resumption of the distributions payable on the capital securities described above, we expect to declare dividends on this preferred stock of approximately $1.1 million semi-annually.
Subsequent to December 31, 1999, the Company re-purchased $4.5 million of the 8.75% Senior Debentures due 2025 for approximately $3.3 million plus accrued interest through March 14, 2000. Also subsequent to December 31, 1999, the Company re-purchased approximately $21.5 million of its 12.5% Senior Notes due 2005 for approximately $17.7 million plus accrued interest through March 14, 2000.
The Credit Agreements and Indentures related to the Company's commercial credit facilities and long term debt described above contain various covenants which restrict the Company's ability to incur additional indebtedness, issue additional preferred stock, dispose of certain assets and pay dividends on its common stock in excess of $.15 per share on an annual basis. In addition, these agreements require Vesta to maintain certain minimum levels of consolidated net income, statutory consoldiated net income and statutory surplus, which levels vary from quarter to quarter over the term of the credit agreement, and also require Vesta Fire's "total adjusted capital" to be at least 150% of the applicable
The Company has historically followed a practice of reinsuring a portion of in its primary business to reduce the variability of its earnings. The Company's loss reserve levels historically have remained relatively stable from year to year despite changes in premium volume. The Company is continuing to cede portions of insurance risks while using its capital base to gradually increase, on a selective basis, its retention of certain property risks.
Other certain known trends and uncertainties which may affect our future results 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. We also face competition from foreign insurance companies, captive insurance companies and risk retention groups. In the future, the industry, including us, may face increasing insurance underwriting competition from banks and other financial institutions. See, "Business--Competition".
Insurance Ratings: See "Summary," "Risk Factors" and "Business--A.M. Best Rating" for further discussion.
Litigation: See "Business--Legal Proceedings" and Note J to the Consolidated Financial Statements for discussion of the current status of litigation.
The Insurance Services Office ("ISO") recently developed policy language providing that there is no coverage for certain Y2K occurrences. The liability exclusion has been accepted in over forty states and a companion filing for property has been accepted in at least twenty states at this time. Several states have not adopted or approved the property exclusion form citing specifically that, because there is no coverage under the current property contracts, there is no reason to accept a clarifying endorsement. We addressed the Y2K issue by attaching the ISO exclusionary language to all general liability policies with a rating classification which we believed could potentially have Y2K losses. The Insurance Services Office exclusionary language endorsement is included on all property policies. We believe these actions should minimize our exposure to Y2K losses.
The foregoing information constitutes a Year 2000 Readiness Disclosure pursuant to the Year 2000 Information and Readiness Disclosure Act.
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. Our 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 insurances.
The following table sets forth the estimated market values of our fixed maturity investments and equity investments resulting from a hypothetical immediate 100 basis point increase in interest rates and a 10% decline in market prices for equity exposures, respectively from levels prevailing at December 31, 1999.
The decrease in fair value of equity securities based on a decrease in the market prices of all equity securities was estimated as 10% of the fair value.
Birmingham, Alabama March 27, 1998, except as to the statements of comprehensive income which is as of April 19, 1999 and Note N and Note S which are as of March 30, 2000
VESTA INSURANCE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Financial Statement Presentation: Vesta Insurance Group, Inc. (Vesta), and subsidiaries (the Company), was incorporated by Torchmark Corporation ("Torchmark") on July 9, 1993 and capitalized on July 16, 1993 with a $50 million contribution from Torchmark and the contribution from Torchmark of all of the outstanding common stock of J. Gordon Gaines, Inc., Liberty National Reinsurance Company, Ltd, and Vesta Fire Insurance Corporation (Vesta Fire) and its wholly-owned subsidiaries. On November 18, 1993, the Company completed an initial public offering of common stock which resulted in proceeds to the Company of approximately $51 million. At year-end 1999, Torchmark held approximately 5.1 million of the outstanding common stock of the Company with the balance publicly traded.
Use of Estimates in the Preparation of the Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles 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.
Investments: Investment securities are classified as available for sale and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity.
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 permanently impaired, such impairment is treated as a realized loss and the investment is adjusted to net realizable value.
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 past 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.
Deferred Acquisition Costs: Commissions and other costs that vary with and are primarily related to the production of new and renewal business are deferred and amortized over the terms of the policies or reinsurance treaties to which they relate. Anticipated investment income is considered in determining recoverability of deferred acquisition costs.
Property and Equipment: Property and equipment is reported at cost less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from 1 to 9 years. Ordinary maintenance and repairs are charged to income as incurred.
Income Per Share: Basic EPS is computed by dividing income available to common stockholders by the weighted average common shares outstanding for the period. Weighted average common shares outstanding for each period are as follows: 1999-18,698,773, 1998-18,548,612, 1997-18,600,000. 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. Weighted average diluted shares outstanding for each period are as follows: 1999-20,202,061, 1998-18,548,612, 1997-19,053,000.
New Accounting Standard. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value, In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133. This statement defers the effective date of SFAS No. 133. As a result, SFAS No. 133 will not be effective for the Company, until the year 2001. The impact of the reporting requirements of SFAS No. 133 on the Company will depend on the nature and amount of derivative instruments the Company might have at date of implementation. The Company does not currently believe the impact will be material.
A reconciliation of Vesta's insurance subsidiaries' reported statutory net income (loss) to Vesta's consolidated GAAP net income (loss) is as follows:
The Company's insurance subsidiaries are subject to regulation by the insurance departments of states in which they are licensed and undergo examinations by those departments. The Alabama Department of Insurance ("ADOI") completed its examination of Vesta Fire's 1997 statutory report and issued its report on December 18, 1998. The ADOI completed a target examination on Vesta Fire's 1998 filing and issued its report on July 9, 1999. On November 30, 1999, Vesta Fire, Vesta Insurance Corporation and Sheffield Insurance Corporation and redomesticated from Alabama to Illinois and Shelby Casualty Insurance Company redomesticated from Indiana to Illinois for regulatory purposes.
Restrictions on Dividends to Stockholders. The Company's insurance subsidiaries are subject to various state statutory and regulatory restrictions, generally applicable to each insurance company in its state of incorporation, which limit the amount of dividends or distributions by an insurance company to its stockholders. The payment of dividends by Vesta Fire is subject to certain limitations imposed by the insurance laws of the State of Illinois. The restrictions are generally based on certain levels of surplus, investment income and operating income, as determined under statutory accounting practices. Illinois and most other states that regulate Vesta Fire's operations permit dividends in any year which together with other dividends or distributions made within the preceding 12 months, do not exceed the greater of (i) 10% of statutory surplus as of the end of the preceding year or (ii) the statutory net income for the preceding year, with larger dividends payable only upon prior regulatory approval. Certain other extraordinary transactions between an insurance company and its affiliates, including sales, loans or investments which in any twelve-month period aggregate at least 3% of its admitted assets or 25% of its statutory capital and surplus, also are subject to prior approval by the Department of Insurance.
A summary of fixed maturities and equity securities by amortized cost and estimated fair value at December 31, 1999 and 1998 is as follows:
A schedule of fixed maturities held for investment by contractual maturity at December 31, 1999 is shown below on an amortized cost basis and on a fair value basis. Actual maturities could differ from contractual maturities due to call or prepayment provisions.
Proceeds from the sale of equity securities were $22 million, $4 million and $2 million in 1999, 1998 and 1997, respectively. Gross gains realized on those sales were $8.2 million, $3.1 million and $.3 million in 1999, 1998 and 1997, respectively. Proceeds from sales, maturities and calls of fixed maturities were $294 million in 1999, $156 million in 1998 and $284 million in 1997. Gross gains realized on those sales were $1.7 million in 1999, $.2 million in 1998 and $3.4 million in 1997. Gross losses on those sales were $2 million in 1999, $.02 million in 1998 and $.3 million in 1997.
The favorable development of $22.2 million is primarily attributable to positive development on personal lines and on the run out of the assumed reinsurance lines, commutation gains and additional ceded recoveries.
On September 13, 1993, Vesta Fire Insurance Corporation, a wholly owned subsidiary of the Company ("Vesta Fire"), and Liberty National Life Insurance Company ("Liberty National"), a wholly owned subsidiary of Torchmark, entered into a Marketing and Administrative Services Agreement, pursuant to which Vesta Fire marketed certain of its industrial fire insurance products through agents of Liberty National. Under this agreement, Liberty National pays to Vesta Fire an amount equal to all premiums collected by Liberty National after deducting all expenses incurred by Liberty National which are directly attributable to the industrial fire insurance products and after deducting a fee for administrative services. Such fee for 1999, 1998 and 1997 was $1 thousand, $.9 million and $1.4 million, respectively. This agreement was terminated effective April 30, 1995, and these products are no longer marketed through Liberty National agents.
Pursuant to Delaware law and by-laws, the Company is obligated to indemnify its current and former officers and directors for certain liabilities arising from their employment with or service to the Company. The Company believes that these indemnification obligations extend to its current and former officers' and directors' costs of defense and other liabilities which may arise out of the securities litigation described above.
Subsequent to the initiation of the class actions described above, the Company secured additional excess D&O insurance providing coverage for losses in excess of $50 million up to $110 million, or additional excess coverage of $60 million for the class actions. The Company paid for this additional excess policy in full in 1998.
These matters are in their early stages and their ultimate outcome cannot be determined. Accordingly, the Company has not currently set aside any financial reserves relating to any of the above-referenced actions.
NRMA, one of the participants in the 20 percent whole account quota share treaty, has filed a lawsuit in the United States District Court for the Northern District of Alabama contesting the Company's claim and the validity of the treaty, and is seeking return of the $34.5 million. The Company has filed a demand for arbitration as provided for the treaty and has filed a motion to compel arbitration which was recently granted in a United States District Court action. The Company has filed for arbitration against the other two participants on the treaty and those arbitrations are in their early stages. While management believes its interpretation of the treaty's terms and computations based thereon are correct, these matters are in their early stages and their ultimate outcome cannot be determined at this time.
While management believes its interpretation of the treaties' terms and computations based thereon are correct, this arbitration is in its early stages and its ultimate outcome cannot be determined at this time.
On September 23, 1999, Torchmark Corporation, the Company's largest common stockholder, filed a lawsuit in the Circuit Court of Jefferson County, Alabama against the Company asserting breach of contract, conversion and breach of duty in connection with the Company's preparation and filing of a registration statement covering its shares in accordance with certain registration rights claimed by Torchmark. This claim seeks an injunction requiring a registration statement to be filed, as well as compensatory and punitive damages. This litigation is in its early stages, and management is unable to assess the damages that may be awarded, if any. However, management does not believe that such damages, if any, would materially and adversely affect the Company's financial position or result of operation.
Under insurance guaranty fund laws, in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. The Company does not believe such assessments will be materially different from amounts already provided for in the financial statements.
investment portfolio consisted of securities of the U.S. government or U.S. government backed securities (13.1%); mortgage backed securities GNMA collateral (17.4%); investment grade corporate bonds (31.4%); cash and short- term investments (29.5%); securities of state and municipal governments (7.5%); securities of foreign governments (0.7%); and corporate common stocks (0.4%). Corporate equity and debt investments are made in a wide range of industries. All of Vesta's investments at year-end 1999 were rated investment grade.
Income tax expense (benefit) attributable to income from operations consists of:
Deferred tax assets are to be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company has determined that the benefits of its deferred tax assets are realizable and accordingly, no valuation allowance has been recorded at December 31, 1999 and 1998. Net operating loss carryforwards expire in 2019.
Long-term debt and deferrable capital securities at December 31, 1999 and 1998 consists of the following (in thousands):
The credit agreement related to the 1998 line of credit contains certain covenants that require, among other things, the Company to maintain a certain consolidated net worth, maintain a certain amount of earnings before interest and taxes available for the payment of interest and dividend expense, cause each insurance subsidiary to maintain a certain total adjusted statutory capital, 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.
The Company's former banks agreed to amend the covenants and waive any event of default arising from non-compliance with the covenants as of December 31, 1998. The interest rate on the Amended Facility was the prime rate plus 1%, provided that from and after September 30, 1999 the rate 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 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 payments 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 exerciseable in the event the Company does not make $25 million of permanent principal prepayments on the facility by March 15, 2000. Based on its ability and intent to make the required principal payments, the Company assigned no value to the warrants. On September 30, 1999, the Company repaid the Amended Credit Facility and cancelled the warrants.
The estimated fair value and carrying amounts of the Company's long term debt are as follows (in thousands):
During 1995, the Financial Accounting Standards Board issued Financial Accounting Statement No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). The Statement defines a fair value based method of accounting for an employee stock option. It also allows an entity to continue using the intrinsic value based accounting method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The Company has continued to use this method to account for its stock options. However, SFAS 123 requires entities electing to remain with the intrinsic method of accounting to provide pro forma disclosures of net income and earnings per share as if the fair value based method of accounting had been applied as well as other disclosures about the Company's stock-based employee compensation plans. Information about the Company's stock option plans and the related required disclosures follow.
Prior to completion of the Company's initial public offering, the Company's stockholders approved the Vesta Insurance Group, Inc. Long Term Incentive Plan ("Plan"), which provided for grants to the Company's executive officers of restricted stock, stock options, stock appreciation rights, and deferred stock awards, and in certain instances grants of options to directors. The Company's stockholders approved certain amendments to the Plan effective August 27, 1999 and May 16, 1995, including an amendment to increase the shares of the Company's common stock available for awards under the Plan to 2,221,998 shares and an amendment to delete the provision for the grant of options to non- employee directors. The Company's stockholders also approved the Vesta Insurance Group, Inc. Non-Employee Director Stock Plan ("Director Plan") effective May 16, 1995, which provides for grants to the Company's non- employee directors of stock options and restricted stock.
Of the 860,636 outstanding options at December 31, 1999, 585,636 were exercisable. Of the remaining 275,000 shares, 50% will vest in 2003 and 50% in 2004. Exercise prices for options outstanding as of December 31, 1999 ranged from $4.44 to $59.19.
At December 31, 1999, the Company had issued 249,307 shares of restricted stock. 74,307 shares have been issued to officers of the Company in exchange for promissory notes. The common stock is being held by the Company for security for the repayment of the notes. The balance of the notes at December 31, 1999 and 1998, respectively, was $1.8 million and $2.1 million. The promissory notes are shown as deductions from stockholders' equity.
As discussed in Note S, the Company discontinued its commercial operations effective in the fourth quarter of 1999. Quarters prior to such effective rates have been reclassified in accordance with Accounting Principal Board Opinion No. 30 (APB 30) for presentation of discontinued operations.
On March 24, 1999 the Company sold its reinsurance assumed business with the exception of the homeowner's reinsurance business that is currently being converted to primary operations. The Company received $15 million in exchange for its commitment to (a) enter into a 100% quota share treaty, effective January 1, 1999 for all business written on or after that date; b) use its best efforts to novate to the purchaser or renew on the purchaser's paper, all assumed treaties except those currently being converted to primary business and; (c) facilitate the hiring by the purchaser of several of the Company's reinsurance employees. The Company is exiting the reinsurance assumed business with this transaction and continued conversion or commutation and termination of the other assumed reinsurance business.
In connection with the above acquisition, the Company agreed to compensate the Seller with an initial ceding commission of $18 million, $9 million of which represented value of business acquired and quarterly commissions through conversion. A portion of these quarterly commissions represents additional payments for the renewal rights to the business. Such amounts, representing initial and additional purchase price, have been capitalized as value of business acquired, included in goodwill and other intangibles, herein and are amortized over the estimated retention of such business. The Company changed its estimate of such retention in the third quarter of 1999, resulting in a $3.4 million net income improvement for the year ended December 31, 1999 as compared to results which would have been reported under previous estimates.
In 1999, the Company elected to exit all commercial lines programs by not accepting new commercial policy applications and non renewing existing in- force policies at their renewal dates. In November of 1999 the Company received final regulatory approval to non renew its commercial lines policies from all of the states in which the Company wrote commercial lines. Such approval represented the measurement date for treatment of the commercial segment as a discontinued operation under APB 30. Therefore, the commercial operations have been segregated from continuing operations herein for all periods presented. The Company will continue to earn premium and incur losses on policies which were in-force through November 1999. Operating results of commercial lines were as follows:
On March 3, 2000, the Company established a revolving credit facility which consists of a $7.5 million unsecured line which bears interest at prime plus .23% and an additional $7.5 million line, secured by a pledge of the management contract between our wholly owned management company, J. Gordon Gaines, Inc. and our operating subsidiaries.