The Company leases approximately 111,099 square feet for its home office at 3760 River Run Drive, Birmingham, Alabama under a long-term operating lease from Torchmark Development Corporation, a wholly owned subsidiary of Torchmark Corporation. The Company considers the office facilities to be suitable and adequate for its current level of operations.
The following information should be read in conjunction with the Company's Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K.
corrections. In addition, the Company has revised its statutory accounting for its assumed reinsurance business to reflect only accident/calendar year information. Effective with its year end 1997 statutory filings, the adjustments reversed, in the form of a one-time charge, the cumulative effect of the Company's prior practice of making estimates for reinsurance assumed on a combined underwriting and accident year basis, the accounting practice consistently applied over prior years. On a GAAP basis, the correction was accounted for by restating prior financial statements. (1) Statutory data have been derived from the financial statements of the Company prepared in accordance with SAP and filed with insurance regulatory authorities. (2) Restated for 3-for-2 stock split paid on January 22, 1996. (3) Effective as of December 31, 1997, the Company adopted FASB 128. The prior periods have been restated. See Note R of Notes to Consolidated Financial Statements. (4) 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 FAS 113. The Company erroneously recorded the initial gain on this contract in 1997 and must adjust its previously issued financial statements to appropriately defer and recognize such gain. See Note B for further discussion.
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 claims losses and underwriting expenses, including agents' commissions and operating expenses.
Significant factors influencing results of operations include the supply and demand for property and casualty insurance and reinsurance, as well as the number and magnitude of catastrophic losses such as hurricanes, windstorms, fires and severely cold weather. Premium rate levels are affected by the availability of insurance coverage which is influenced by levels of surplus in the industry and other factors. Increases in surplus have generally been accompanied by increased price competition among property and casualty insurers. Pricing in this business has weakened due to increased reinsurance market capacity.
The Company seeks to manage its risk exposure by adjusting the mix and volume of business written in response to changes in price, maintaining extensive reinsurance and retrocessional programs and applying the Company's knowledge of primary insurance markets to its reinsurance business.
On December 31, 1996 the Company terminated the 75% pro rata reinsurance contract on its homeowners and dwelling lines of business (excluding HIG) produced through independent agents and also on its homeowners and dwelling lines of business in the financial services business. The cancellation enabled the Company to increase its net writings in the personal lines of business.
Gross premiums written for commercial lines increased $38.5 million, or 44.8%, to $124.4 for the year ended December 31, 1998, from $85.9 million for the year ended December 31, 1997. The increase in gross premiums written is primarily attributable to the $37.5 million increase in premiums related to a full year of Shelby premiums in 1998 versus six months of Shelby premiums in 1997. Net premiums written increased $35.5 million, or 106.0% to $69.0 million for the year ended December 31, 1998, from $33.5 million for the year ended December 31, 1997. Net premiums earned increased $25.5 million, or 59.4%, to $68.4 million for the year ended December 31, 1998, from $42.9 million 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.
Net Investment Income. Net investment income decreased by $.9 million, or 2.5%, to $35.1 million for the year ended December 31, 1998, from $36.0 million for the year ended December 31, 1997. The weighted average yield on invested assets (excluding realized and unrealized gains) was 6.0% for the year ended December 31, 1998, compared with 5.8% for the year ended December 31, 1997.
Loss on asset impairment. During the fourth quarter of 1998, management evaluated goodwill impairment pursuant to the Company's existing policies. The evaluation indicated an impairment of goodwill acquired as part of the Shelby acquisition. The events that led to this conclusion include the Company's inability to integrate the Shelby acquisition as planned and the resulting high level of expenses, and the recording of significant operating losses in 1998. As a result of these evaluations, the unamortized goodwill attributable to the Shelby acquisition was reduced by $74.5 million. See Note C of the Notes of the Consolidated Financial Statements.
the second half of 1996 by $98.0 million. In 1997, the reinsurance facility had the effect of reducing net written premiums by $155.1 million, including reducing Shelby net written premiums by $37.5 million.
Gross premiums written for reinsurance increased by $37.9 million, or 7.6%, to $535.4 million for the year ended December 31, 1997, from $497.5 million for the year ended December 31, 1996. In 1997, the Company significantly increased its reinsurance writings of homeowners lines through several large contracts including the CIGNA 100% Quota Share Reinsurance Treaty. The increased reinsurance writings of homeowners lines was partially offset by a decrease in reinsurance writings of private passenger automobile lines from 1997 to 1996. The acquisition of Vesta County Mutual resulted in the shift of $47 million of private passenger automobile writings which had been recorded on the reinsurance line to primary insurance. Additionally, the reinsurance market experienced increased market capacity accompanied by increased price- competition in the private passenger automobile line of business. As a result of these factors, the Company elected to terminate certain accounts. Net premiums written for reinsurance decreased $21.7 million, or 5.8%, to $351.8 million for the year ended December 31, 1997, from $373.5 million for the year ended December 31, 1996. Net premiums earned for reinsurance decreased $7.1 million, or 2.1% to $335.4 million for the year ended December 31, 1997, from $342.5 million for the year ended December 31, 1996. The decreases in net premiums written and net premiums earned are attributable to the pro-rata reinsurance facility being in place for 12 months in 1997 versus six months in 1996.
Net premiums written for personal lines increased by $71.4 million, or 102.3%, to $141.2 million for the year ended December 31, 1997, from $69.8 million for the year ended December 31, 1996. Net premiums earned for personal lines increased $76.2 million, or 120.6% to $139.4 million for the year ended December 31, 1997, from $63.2 million for the year ended December 31, 1996.
Loss and LAE for personal lines increased by $69.6 million, or 271.9% to $95.2 million for the year ended December 31, 1997, from $25.6 million for the year ended December 31, 1996. Included in the increase in loss and loss adjustment expenses was $56.8 million in losses incurred by Shelby. The loss and LAE ratio for personal lines for the year ended December 31, 1997 was 68.3% as compared to 40.5% at December 31, 1996. The increase in the loss ratio was primarily due to a shift in writing more automobile lines because of the acquisition of Shelby and the increased writings from Vesta County Mutual. Automobile lines generally incur higher loss ratios than homeowners lines.
Gross premiums written for commercial lines increased by $41.3 million, or 92.7%, to $85.9 million for the year ended December 31, 1997, from $44.6 million for the year ended December 31, 1996. The increase in gross premiums written for commercial lines is primarily attributable to the acquisition of Shelby.
Loss and LAE for commercial lines increased by $2.8 million, or 13.2% to $24.0 million for the year ended December 31, 1997, from $21.1 million for the year ended December 31, 1996. The loss and LAE ratio for primary insurance for the year ended December 31, 1997 was 55.9% as compared to 62.8% at December 31, 1996.
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 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. See "Business--Regulation."
During 1998, the Company paid approximately $2.8 million in dividends on its common stock. However, 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 December 31, 1998, the Company's investment portfolio consisted of cash and short-term investments (24.6%), U.S. Government securities (11.9%), mortgage-backed securities (14.0%), corporate bonds (25.5%), foreign government securities (0.6%), municipal bonds (20.1%) and equity securities (3.3%). According to Moody's, 95.4% of the Company's portfolio is rated A or better. The Company expects current cash flow to be sufficient to meet operating needs, although invested assets have been categorized as 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. See "Business--Investments."
On November 1, 1996, the Company instituted a stock repurchase program under which the Company may purchase up to two million shares of its common stock in the open market at prevailing prices or in privately negotiated transactions, depending on market conditions, stock price and other factors. In 1996, the Company purchased a total of 375,000 shares of its common stock under this program for an aggregate purchase price of $10.2 million (average cost of $27.31 per share). In 1997, the Company purchased a total of 370,900 shares of its common stock for an aggregate purchase price of $21.1 million (average cost of $57.06 per share). Purchases to date have been funded from available working capital and the repurchased shares are being held in treasury to be used for ongoing stock issuances such as issuances under the Company's incentive compensation and stock option programs.
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. These securities were sold in a private placement transaction to qualified institutional buyers and were not registered under Securities Act of 1933 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.
The financial position, results of operations, and cash flows of property and casualty insurers have historically been subject to significant fluctuations due to competition, insurance ratings, and other factors. Certain known trends and uncertainties which may affect future results of the Company are discussed more fully below.
Insurance Ratings: A.M. Best, which rates insurance companies based on factors of concern to policy holders, recently lowered its rating on the Company's insurance subsidiaries to "B++" from "A-". The Company has determined that the downgrade will have a material impact on the commercial and reinsurance lines. See "A.M. Best Rating" for further discussion.
Litigation: See "Item 3. Legal Proceedings" and "Note J to the Consolidated Financial Statements" 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.
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.
The following table sets forth the estimated market values of the Company's fixed maturity investments and equity investments resulting from a hypothetical immediate 100 bases point increase in interest rates and a 10% decline in market prices for equity exposures, respectively from levels prevailing at December 31, 1998.
The decrease in fair values based on an increase in interest rates was determined by estimating the present value of future cash flows using various models, primarily duration modeling.
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 becoming Y2K compliant and would provide project management leadership and a team of programming resources to perform the actual migration.
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. Additioinal 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 of 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.
As of December 31, 1998, the Company had spent approximately $5.5 million to bring its systems to Y2K compliance. The Company estimates it will incur an additional $2.0 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.
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 failure to correct a material Y2K problem could result in an interruption in, or a 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, results of operations and liquidity.
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, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 14(a)(2) present fairly, in all material aspects, the information set forth therein at December 31, 1998 and the year then ended 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. We conducted our audit of these statements in accordance with generally accepted auditing standards 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 and estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
The Board of Directors and Stockholders Vesta Insurance Group, Inc. Birmingham, Alabama:
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vesta Insurance Group, Inc. and subsidiaries at December 31, 1997, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As discussed in Note B, the Company has restated its financial statements as of and for the year ended December 31, 1997.
Birmingham, Alabama March 27, 1998, except as to the statements of comprehensive income and Note B and Note O which are as of April 19, 1999
VESTA INSURANCE GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Amounts in thousands)
VESTA INSURANCE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (Dollar amounts in thousands)
VESTA INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands)
The availability and cost of reinsurance and retrocessional coverage may vary significantly over time and are subject to prevailing market conditions. Pricing on both assumed and ceded reinsurance weakened slightly in 1997 and 1998 due to increased availability of reinsurance market capacity.
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 and deferred policy acquisition costs.
Income Per Share: The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per share," effective for the year ended 1997. This standard requires the dual presentation of basic and diluted earnings per share ("EPS") on the face of the income statement and a reconciliation of basic EPS to diluted EPS. As required by SFAS 128, prior- period EPS data has been restated for comparability. 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: 1998-18,548,612, 1997-18,600,000, 1996-18,860,000. 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: 1998-18,548,612, 1997- 19,053,000, 1996 19,157,000.
New Accounting Standards: In 1998, the Company implemented SFAS No. 130, "Reporting Comprehensive Income," SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits." These financial statements have been prepared with the expanded disclosures required by these standards.
The deferred gain, which is included in the accompanying balance sheet, associated with this contract at December 31, 1997 and 1998 is $16.9 million and $9.8 million, respectively.
As a result of this measurement, the unamortized goodwill attributable to the Shelby Acquisition was reduced by $74.5 million.
Note D--Statutory Accounting and Regulation Insurance subsidiaries of Vesta are required to file statutory financial statements with state insurance regulatory authorities. Accounting principles used to prepare these statutory financial statements differ from GAAP. The most significant differences between statutory accounting principles and GAAP are as follows: (a) acquisition costs of obtaining new business are deferred and amortized over the policy period rather than charged to operations as incurred; (b) loss and loss adjustment expense are reduced for the benefits of salvage and subrogation; (c) deferred income taxes are provided for temporary differences between financial and taxable earnings; (d) certain items are reported as assets (property and equipment, agents' balances, prepaid expenses) rather than being charged directly to surplus as non admitted items; (e) statutory accounting disallows reserve credits for reinsurance in certain circumstances; (f) bonds are recorded at their market values instead of amortized costs. The tables set forth below reflect the Company's revision of its accounting for its assumed reinsurance business to reflect only accident/calendar year information. Effective with its year end 1997 statutory filings, the adjustments reversed, in the form of a one-time charge, the cumulative effect of the Company's prior practice of making estimates for reinsurance assumed on a combined underwriting and accident year basis, the accounting practice consistently applied over prior years. On a GAAP basis, the revision was accounted for by retroactively restating prior financial statements.
- -------- (1) Vesta Fire has revised its statutory and GAAP accounting for its assumed reinsurance business to reflect only accident/calendar year information in 1997. On a GAAP basis, the correction was accounted for by restating prior financial statements. On a statutory basis, the correction was made on a cumulative basis to the 1997 statutory filings. (2) In June 1998, the Company completed an internal investigation which resulted in a reduction of net income of approximately $13.6 million relating to the fourth quarter of 1997 and the first quarter of 1998. For GAAP purposes, the amounts relating to 1997 were corrected in 1997, while for statutory purposes, the amounts related to the fourth quarter of 1997 were recorded in the 1998 statutory reports as the 1997 statutory reports had been filed prior to such discovery.
The excess, if any, of stockholders' equity of the insurance subsidiaries on a GAAP basis over that as reported on a statutory basis is not available for distribution to its stockholders without regulatory approval.
A summary of fixed maturities and equity securities by amortized cost and estimated fair value at December 31, 1997 and 1998 is as follows:
A schedule of fixed maturities held for investment by contractual maturity at December 31, 1998 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 sales, maturities and calls of fixed maturities were $44 million in 1996, $284 million in 1997 and $156 million in 1998. Gross gains realized on those sales were $23 thousand in 1996, $3,386 thousand in 1997 and $178 thousand in 1998. Gross losses on those sales were $162 thousand in 1996, $329 thousand in 1997 and $19 thousand in 1998.
Depreciation expense on property and equipment used in the business was $1.4 million, $2.9 million and $4.2 million each of the years 1996, 1997, 1998.
The table below presents a reconciliation of beginning and ending loss and LAE reserves for the last three years:
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.
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.
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 therefrom has been made in the accompanying consolidated financial statements.
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.
Leases: The Company leases office space for its home office and HIG under operating lease arrangements. These leases contain various renewal options and escalation clauses. Rental expense for operating leases was $1.1 million, $1.2 million, and $1.8 million, for the years ending December 31, 1996, 1997, and 1998, respectively. Future minimum rental commitments required under these leases are approximately $1.5 million per year.
The following table summarizes Vesta's non-cash investing and financing activities and amounts recorded for interest and income taxes paid.
The effect on premiums earned and losses and loss adjustment expenses incurred of reinsurance ceded transactions are as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities included in other liabilities at December 31, 1997 and 1998 are presented below:
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 is able to demonstrate that the benefits of its deferred tax assets are realizable and accordingly, no valuation allowance has been recorded at December 31, 1998 and 1997.
Vesta has a defined contribution retirement and savings plan and a supplemental executive retirement plan. These plans are fully funded at year- end 1998. Vesta's total cost for benefits under these plans was $.3 million for 1996, $.7 million for 1997 and $.1 million for 1998.
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 valued 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.
Of the 564,048 outstanding options at December 31, 1998, 125,389 were exercisable with the remaining having varying vesting periods. Exercise prices for options outstanding as of December 31, 1998 ranged from $9.56 to $59.19. Unexercised options with exercise prices of less than $25.00 for 375,623 shares had a weighted average contractual life of 6.9 years and a weighted average exercise price of $18.13 while unexercised options with exercise prices greater than $25.00 for 188,425 shares had a weighted average contractual life of 9.2 years and a weighted average exercise price of $38.42.
In 1993, the Company entered into restricted stock agreements under which Vesta granted 153,300 shares of common stock at $10.26 per share to officers of the Company in exchange for promissory notes. In 1994, an additional 60,000 shares of Common Stock at $18.92 per share were issued to an officer of the Company under a restricted stock agreement in exchange for a promissory note. The common stock is being held by the Company as security for repayment of the notes. A portion of the shares will be released to the officers annually as they repay the promissory notes. The Company intends to pay cash bonuses each year in amounts sufficient to reduce the notes by the amount of the purchase price for the shares which are earned in that year. During 1996 the Company acquired 19,564 shares of its common stock with respect to previously granted awards of restricted stock in exchange for release of indebtedness of $169 thousand. The balance of the notes at December 31, 1996 was $3,207 thousand. During 1997 and 1998 the Company did not acquire any shares of its common stock with respect to previously granted awards of restricted stock. The balance of the notes at December 31, 1997 and 1998 was $3,891 thousand and $2,045 thousand, respectively. The promissory notes and the unearned compensation are shown as deductions from stockholders equity.
In 1995, the Company entered into restricted stock agreements under which the Company granted 23,333 shares of restricted common stock to certain officers of the Company. The Company entered into restricted stock agreements under which the Company granted 20,915 and 30,000 shares of restricted common stock to certain employees of the Company and 9,632 and 5,399 shares of restricted common stock to certain directors of the Company in 1997 and 1998, respectively. The common stock with respect to all awards of restricted stock is being held by the Company until the restrictions lapse.
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 FAS 113. The Company erroneously recorded a gain on this contract in the fourth quarter of 1997 and must adjust its previously issued financial statements to appropriately defer and recognize such gain. The first three quarters of 1998 and the fourth quarter of 1997 have been restated to reflect the recognition of the deferred gain in 1998 (See Note B). The third and fourth quarter of 1997 have also been restated to reflect adjustments for salvage and subrogation related to the Shelby loss reserves.
Revenues, losses and expenses for the 1998 third quarter have been restated to reflect changes in presentation. Amounts are restated to present adjustments recorded in the Company's reinsurance assumed business on gross basis rather than on a net basis as previously presented. Net income and earnings per share for the quarters and year to date periods ending September 30, 1998 were not affected by this change.
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.