We lease approximately 111,099 square feet for our home office at 3760 River Run Drive, Birmingham, Alabama under a long-term operating lease from SG/SPV Property I, LLC, formerly Torchmark Development Corporation, which, until September 25, 1999 was a wholly owned subsidiary of Torchmark Corporation. We consider the office facilities to be suitable and adequate for our current level of operations.
We own an office building with approximately 175,000 square feet located at 175 Mansfield Avenue, Shelby, Ohio for our Shelby operations. This property is currently listed and is being marketed for sale.
Balance Sheet Data (at end of period) Total Investments and Cash................... $483,997 $ 634,668 $ 656,816 $427,276 $422,516 Total Assets............ 915,809 1,347,702 1,636,859 871,385 735,758 Reserves For Losses and LAE.................... 354,709 504,911 596,797 173,275 168,502 Long Term Debt.......... 141,876 98,302 98,602 98,279 98,163 Total Liabilities....... 674,519 1,089,675 1,239,523 599,466 488,499 Deferrable Capital Securities............. 41,225 100,000 100,000 -- -- Stockholders' Equity.... 200,065 158,027 297,336 271,919 247,259
Our revenues from operations are derived primarily from net premiums earned on risks written or reinsured by our insurance subsidiaries, investment income and investment gains or losses. Our expenses consist primarily of payments for claims and underwriting expenses, including agents' commissions and operating expenses.
Loss and LAE for Reinsurance decreased by $128.4 million, or 73.1% to $47.3 million for the year ended December 31, 1999, from $175.7 for the year ended December 31, 1998. The dollar amount of loss and loss adjustment expenses incurred decreased during 1999 due to the decline in net premiums earned, and improvement in the loss and LAE ratio. The loss and LAE ratio for Reinsurance for the year ended December 31, 1999 was 49.3% as compared to 90.5% for the year ended December 31, 1998. The decrease in the loss ratio was primarily attributable to the decrease in ceded reinsurance costs in 1999 versus 1998, a decrease in catastrophe losses, positive development from the run out of the assumed reinsurance line and commutation gains. In addition, the 1999 results consisted primarily of the 100% quota share reinsurance treaty with CIGNA. The treaty reinsures primarily a homeowners line for CIGNA which has historically experienced a loss ratio in the fifties. As the covered business is renewed it will be transferred to Vesta Fire as the issuing carrier. This treaty was not included in the sale of the Reinsurance book of business. In 1999, this treaty accounted for $77.8 million in earned premiums.
Loss and LAE for Commercial Lines decreased $20.3 million, or 37.1%, from $54.7 million for the year ended December 31, 1998 to $34.4 million for the year ended December 31, 1999. The loss and LAE ratio for Commercial Lines for the year ended December 31, 1999, was 65.9% as compared to 80.0% for the year ended December 31, 1998. The decrease in loss ratio was primarily attributable to decreased catastrophe losses for the year ended December 31, 1999. Policy acquisition expenses decreased $4.2 million as a result of the decreased earned premium. Operating expenses decreased $.8 million from $16.1 million for the year ended December 31, 1998 to $15.3 million for the year ended December 31, 1999. The decrease was largely attributable to reduced expenses from workforce reductions and other reductions consistent with discontinuing the business, partially offset by severances and other costs. In 1998, $9 million of the loss on asset impairment was attributed to the commercial lines segment.
For the reasons discussed above, as well as the $15 million gain from the sale of reinsurance renewal rights to Hart Re, net loss from discontinued operations improved by $13.9 million, to a loss of $2.2 million for the year ended December 31, 1999 from a loss of $16.1 million for the year ended December 31, 1998.
Loss and LAE for Personal lines increased by $69.7 million, or 73.2%, to $164.9 million for the year ended December 31, 1998, from $95.2 million for the year ended December 31, 1997. The increase in loss and loss adjustment expenses was primarily attributable to a full year of losses for Shelby included in 1998 versus only six months of losses for Shelby in 1997. The loss and LAE ratio for Personal lines for the year ended December 31, 1998 was 66.7% as compared to 68.3% at December 31, 1997.
Gross premiums written for Reinsurance decreased by $247.8 million, or 46.3%, to $287.6 million for the year ended December 31, 1998, from $535.4 million for the year ended December 31, 1997. The main contributors to the reduction of Reinsurance gross premiums written were the continuation of increased competition in the market place coupled with the Company's unwillingness to follow the market price, the modification of one large treaty and the cancellation of another large treaty. The acquisition of Vesta County Mutual resulted in the further shift of $27 million of private passenger automobile writings which had been recorded on the Reinsurance line in 1997 to Personal lines in 1998. Net premiums written for Reinsurance decreased $194.1 million, or 55.2%, to $157.7 million for the year ended December 31, 1998, from $351.8 million for the year ended December 31, 1997. Net premiums earned for Reinsurance decreased $141.1 million, or 42.1% to $194.3 million for the year ended December 31, 1998, from $335.4 million for the year ended December 31, 1997.
Loss and LAE for Reinsurance decreased by $3.8 million, or 2.1% to $175.7 million for the year ended December 31, 1998, from $179.5 for the year ended December 31, 1997. The dollar amount of loss and loss adjustment expenses incurred decreased during 1998 due to the decline in net premiums earned. The loss and LAE ratio for Reinsurance for the year ended December 31, 1998 was 90.5% as compared to 53.5% for the year ended December 31, 1997. The increase in the loss ratio was primarily attributable to the decreases in earned premiums due to pricing pressures and market competition, higher ceded Reinsurance costs in 1998 versus 1997 and an increase of $18.7 million in catastrophe losses.
During the fourth quarter of 1998, management evaluated goodwill pursuant to our existing policies. The evaluation indicated an impairment of goodwill acquired as part of the Shelby acquisition. The events that led to this conclusion include our 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, of which $9.0 million is attributable to the discontinued Commercial Lines. See Note C of the Notes of the Consolidated Financial Statements.
Federal income taxes decreased by $69.8 million to a benefit of $48.5 million for the year ended December 31, 1998, from an expense of $21.3 million for the year ended December 31, 1997. The Company's effective tax rate for 1998 was 28.9% versus 35.7% in 1997. The Company's effective tax rate is lower than the federal statutory tax rate primarily due to investment income from tax exempt securities. The decrease in the effective tax rate for 1998 is primarily due to the Company's purchase of tax exempt securities.
For the reasons discussed above, income/ (loss) from discontinued operations decreased by $19.6 million, to a loss of $16.1 million for the year ended December 31, 1998 from income of $3.5 million for the year ended December 31, 1997.
For the reasons discussed above, net income decreased by $178.1 million, to a loss of $141.2 million for the year ended December 31, 1998, from $36.9 million for the year ended December 31, 1997.
Vesta is a holding company whose principal asset is its investment in the capital stock of the companies constituting the Vesta Group, a group of wholly owned property and casualty insurance companies including Vesta Fire. The insurance subsidiaries comprising the Vesta Group are individually supervised by various state insurance regulators. Vesta Fire is our principal operating subsidiary and reinsures substantially all business from our other operating subsidiaries.
In addition to dividends from its subsidiaries we determined to seek additional equity capital and other alternative sources of funds during 1999.
On September 10, 1999, we sold our authority and right to control and manage the affairs of Vesta County Mutual Insurance Company for $11.2 million. We recognized a gain of $4.8 million, which is included in other income, during the third quarter of 1999. In 1999, Vesta County Mutual had $44.5 million of direct written premium, of which we assumed $29.6 million. Also in 1999, we received $173,000 in interest income from a $2.5 million surplus debenture issued by Vesta County Mutual in exchange for our contribution of capital in a like amount. This debenture was repaid by Vesta County Mutual in connection with the sale.
During 1998, we failed to maintain certain financial covenants contained in our former revolving credit agreement with a group of commercial lenders led by First Union National Bank. In exchange for a waiver of remedies by these banks, we agreed on April 13, 1999 to amend our credit agreement with them in several respects, including shortening the maturity of approximately $70 million in loans thereunder. In connection with this amendment, we also issued warrants to them, which would have
become accessible for up to 6.6% of our common stock if we had been unable to prepay minimum levels of principal and interest on an accelerated schedule. On September 30, 1999, we repaid all amounts owing under this former credit facility (approximately $56 million), cancelled the credit agreement related thereto and cancelled all of the warrants which had been issued to those banks. This $56 million payment was funded primarily from three sources: (i) the $11.2 million in proceeds received from the transaction involving Vesta County Mutual, (ii) the $25 million in proceeds received from the sale of the Preferred Stock and (iii) the $20 million borrowed under the credit facilities established with The Banc on September 30, 1999.
On December 30, 1999, we repaid $15 million of the principal amount outstanding under The Banc credit facilities and cancelled the related credit agreements. In connection with the repayment of this debt, we restructured our commercial credit facility to consist of the following lines of credit, each of which was provided by The Bank:
. an additional $10 million line, secured by a pledge of the management contract between our wholly owned management company, J. Gordon Gaines, Inc., and our operating insurance subsidiaries.
On March 3, 2000 we established a revolving credit facility with First Commercial Bank, Birmingham, Alabama ("First Commercial") which consists of the following lines of credit:
. a $7.5 million unsecured line which bears interest at First Commercial's prime rate + 1/4%;
In 1995, we issued $100 million principal amount of our 8.75% Senior Debentures due 2025. As of December 31, 1999, all $100 million of these senior debentures remained outstanding.
In 1997, our single purpose finance subsidiary, Vesta Capital Trust I, issued $100 million principal amount of its 8.525% Deferrable Interest Capital Securities. We have unconditionally guaranteed Vesta Capital Trust's obligation to make semi-annual distributions on these capital securities, and we have issued a debenture in a like amount to Vesta Capital Trust which requires us to make interest payments in the same amounts and at the same time as the distributions which are payable on these capital securities. The terms of the capital securities and the underlying debenture permit us to defer interest payments on the debentures, and, therefore, distributions on the capital securities, for up to
On December 30, 1999, the Company issued approximately $44 million of its 12.50% Senior Notes due 2005, in exchange for approximately $59 million of its then outstanding 8.525% Deferrable Capital Securities. The resulting after-tax gain of $9.5 million was recorded directly to retained earnings. As of December 31, 1999, approximately $44.1 million of the 12.50% Senior Notes remained outstanding. The 12.5% Senior Notes have one million warrants attached that become exercisable in the event that the notes are still outstanding on December 31, 2004. Based on the probability of exercise, Vesta's stock price at the date of issuance and other factors, the value of the warrants is immaterial to the financial statements.
Annual distribution obligations for the Company's long term debt and preferred stock outstanding at December 31, 1999 are as follows:
"company action level" for Vesta Fire's risk based capital at any time. The Company's ability to comply with these covenants and financial tests may be affected by events beyond the Company's control, including economic, financial and industry conditions. Failure to comply with covenants may result in a default under the Company's credit agreements and/or indentures, and if any such default were not remedied within the applicable grace period, if any, the lenders under such agreements would be entitled to declare the amounts outstanding thereunder due and payable.
The principal sources of funds for our insurance subsidiaries are premiums, investment income and proceeds from the sale or maturity of invested assets. Such funds are used principally for the payment of claims, operating expenses, commissions and the purchase of investments. On a consolidated basis, net cash (used in) operations for the year ended December 31, 1999 and 1998, was $(103.3) million and $(47.1) million, respectively. The $103.3 net cash used in operations is primarily attributable to the declines in loss reserves and unearned premium reserves as a result of the Company's exit from the reinsurance assumed and commercial lines business.
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.
Because catastrophe loss events are by their nature unpredictable, historical results of operations may not be indicative of expected results of future operations. The Company markets its primary personal insurance products throughout the United States. While the Company seeks to reduce its exposure to catastrophic events through the purchase of reinsurance, the occurrence of one or more major catastrophes in any given period could have a material adverse impact on the Company's results of operations and financial condition and could result in substantial outflows of cash as losses are paid.
Reliance on Performance of Reinsurers: We evaluate the credit quality of the reinsurers and retrocessionares to which it cedes business. No assurance can be given regarding the future ability of any of our reinsurers to meet their obligations. See, "Risk Factors" on page 10.
Inflation: We do not believe our results over the last three fiscal years have been materially affected by inflation due in part to the predominantly short-tail nature of our business. The potential adverse impacts of inflation include: (i) a decline in the market value of our fixed maturity investment portfolio, (ii) an increase in the ultimate cost of settling claims which remain unresolved for a significant period of time, and (iii) an increase in our operating expenses. Historically, the effect of inflation on our reserves has not been material.
We do not believe we experienced any material operational problems as a result of the date change to the Year 2000. However, the Y2K issue is also a concern from an underwriting standpoint regarding the extent of liability for coverage under various general liability, property and directors and officers liability and product policies. We believe that minimal coverage could exist under some current liability and product policies. This exposure should be minimal as Commercial Lines business has historically excluded any manufacturing risks which produce computer and computer dependent products.
We have audited the consolidated balance sheet (not presented herein) of Vesta Insurance Group, Inc. and subsidiaries as of December 31, 1997 and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flow for the year then ended. In connection with our audit of the consolidated financial statements, we also have audited the 1997 financial statement schedules as listed in the index appearing at Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of Vesta's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
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 the year then ended, 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.
Nature of Operations: The Company is a holding company for a group of property and casualty insurance companies (the "Vesta Group") that offer primary insurance on personal risks. The lead insurer in the Vesta Group is Vesta Fire. The Company focuses primarily on private passenger auto and property coverages. In 1999, the Company discontinued its commercial line of business. See note R and S. The Company also exited its reinsurance assumed line of business with the exception of a large block of business being converted from assumed to direct. (see Note R)
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 1998 and 1999 due to increased availability of reinsurance market capacity.
Recognition of Premium Revenue: Earned premiums on primary business are generally recognized as revenue on a pro rata basis over the policy term. Earned premiums on assumed reinsurance is recognized as revenue over the contract period as reported by the cedant.
Goodwill: The company amortizes goodwill on a straight-line basis over a period of 15 years.
Long lived assets: The Company evaluates long-lived assets and certain identifiable intangibles held and used by an entity for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This evaluation is based on undiscounted future projected cash flows of the asset or asset group. If an impairment exists, the amount of such impairment is calculated based on the estimated fair value of the assets. Fair value is generally determined by discounting future projected cash flows of the asset or asset group under review.
In accordance with Accounting Principles Board Opinion (APB) No. 17, "Intangible Assets," the recoverability of goodwill not identified with assets subject to an impairment loss is reviewed for impairment, on an acquisition by acquisition basis, whenever events or changes in circumstances indicate that it may not be recoverable. If such an event occurred, the Company would prepare projections of future discounted cash flows for the applicable acquisition. The projections are for the remaining term of the goodwill using a discount rate and terminal value that would be customary for evaluating insurance company transactions. The Company believes this discounted cash flow approach approximates fair market value.
In December 1999, the staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes the SEC staff's views in applying generally accepted accounting principles to the recognition of revenues. The Company has evaluated the impact of the reporting requirements of SAB No. 101 and has determined that there will be no material impact on its consolidated results of operations, financial position or cash flows.
During the fourth quarter of 1998, management evaluated goodwill recoverability 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 this measurement, the unamortized goodwill attributable to the Shelby Acquisition was reduced by $74.5 million, of which $65.5 million was attributable to continuing operations and $9 million to discontinued operations.
Risk-Based Capital Requirements. The NAIC adopted risk-based capital requirements that require insurance companies to calculate and report information under a risk-based formula which attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potential weakly capitalized companies. Under the formula, a company determines its "risk-based capital" ("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). Risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" ("ACL") of RBC. Based on calculations made by the Company, the Company exceeds RBC requirements.
Depreciation expense on property and equipment used in the business was $4.3 million, $4.2 million, and $2.9 million each of the years 1999, 1998,
Deferred policy acquisition costs for the years ended December 31, 1999, 1998 and 1997 are summarized as follows:
Vesta leases office space from SG/SPU Property I, LLC, formerly Torchmark Development Corporation, which, until September 25, 1999 was a wholly owned subsidiary of Torchmark Corporation. Rent expense of $1.7 million, $1.2 million and $.7 million was charged to operations for the years ended December 31, 1999, 1998 and 1997, respectively, related to this lease agreement.
Waddell & Reed Asset Management Company, ("WRAMCO"), provides investment advice and services to the Company and its subsidiaries in connection with the management of their respective portfolios pursuant to an Investment Services Agreement. The Company paid $.6 million, $.6 million and $.4 million in fees to WRAMCO pursuant to the Investment Services Agreement in 1999, 1998 and 1997, respectively. In 1999, the Company cancelled the Investment Services Agreement with WRAMCO.
Subsequent to the filing of its quarterly report on Form 10-Q for the period ended March 31, 1998 with the Securities and Exchange Commission, the Company became aware of certain accounting irregularities consisting of inappropriate reductions of reserves and overstatements of premium income in the Company's reinsurance business that had been recorded in the fourth quarter of 1997 and the first quarter of 1998. The Company promptly commenced an internal investigation to determine the exact scope and amount of such reductions and overstatements. This investigation concluded that inappropriate amounts had, in fact, been recorded and the Company determined it should restate its previously issued 1997 financial statements and first quarter 1998 Form 10-Q. Additionally, during its internal investigation the Company re- evaluated the accounting methodology being utilized to recognize earned premium income in its reinsurance business. The Company had historically reported certain assumed reinsurance premiums as earned in the year in which the related reinsurance contracts were entered even though the terms of those contracts frequently bridged two years. The Company determined that reinsurance premiums should be recognized as earned over the contract period and corrected the error in its accounting methodology by restating previously issued financial statements. The Company issued press releases, which were filed with the Securities and Exchange Commission, on June 1, 1998 and June 29, 1998 announcing its intention to restate its historical financial statements.
The Company restated its previously issued financial statements for 1995, 1996 and 1997 and its first quarter 1998 Form 10-Q for the above items by issuance of a current report on Form 8-K dated August 19, 1998. These restatements resulted in a cumulative decrease to stockholder's equity of $75.2 million through March 31, 1998.
Commencing in June 1998, Vesta and several of its current and former officers and directors were named in several purported class action lawsuits in the United States District Court for the Northern District of Alabama and in one purported class action lawsuit in the Circuit Court of Jefferson County, Alabama. Several of Vesta's officers and directors also have been named in a derivative action lawsuit in the Circuit Court of Jefferson County, Alabama, in which Vesta is a nominal defendant.
The class action lawsuit filed in the Circuit Court of Jefferson County, Alabama has been dismissed and the derivative case has been placed on the administrative docket. The class actions filed in the United States District Court for the Northern District of Alabama have been consolidated into a single action in that district. The class representatives in that action have filed (a) a consolidated amended complaint alleging that the defendants violated the federal securities laws and (b) a motion for class certification, which was granted in 1999. The consolidated amended complaint also added as defendants Torchmark Corporation and the Company's predecessor auditors, KPMG LLP. The consolidated amended complaint alleges various violations of the federal securities law and seeks unspecified but potentially significant damages.
The Company has notified its directors and officers liability insurance companies of these lawsuits and the consolidated amended complaint. The litigation is still in the preliminary stages and there has been no discovery conducted in the securities case. The Company intends to vigorously defend this litigation and intends to explore all available rights and remedies it may have under the circumstances. In related litigation, in September, 1998, Cincinnati Insurance Company ("Cincinnati"), one of the Company's directors and officers liability insurance carriers, filed a lawsuit in the United States District Court for the Northern District of Alabama seeking to avoid coverage under its directors and officers liability and other policies. The Company filed a motion to dismiss Cincinnati's complaint on
jurisdictional grounds in federal court (which was granted), and filed a lawsuit against Cincinnati in the Circuit Court of Jefferson County, Alabama seeking damages arising out of Cincinnati's actions. Cincinnati has filed an answer and counterclaim in that case again seeking to avoid coverage.
As discussed above, the Company corrected its accounting for assumed reinsurance business through restatement of its previously issued financial statements. Similar corrections were made on a statutory accounting basis through recording cumulative adjustments in Vesta Fire's 1997 statutory financial statements. The impact of this correction has been reflected in amounts ceded under the Company's 20 percent whole account quota share treaty which was terminated on June 30, 1998 on a run-off basis. The Company believes such treatment is appropriate under the terms of this treaty and has calculated the quarterly reinsurance billings presented to the three treaty participants accordingly. The aggregate amount included herein as recoverable from such reinsurers totaled $54.4 million at December 31, 1999. The Company has collected approximately $48.5 million from significant reinsurers via the conversion of collateral on hand.
A dispute has arisen with F&G Re (on behalf of USF&G) under two aggregate stop loss reinsurance treaties whereby F&G Re assumed certain risk from the Company. During 1999 F&G Re filed for arbitration under those two treaties.
On June 23, 1999, a subsidiary of Torchmark filed suit in the Circuit Court of Jefferson County, Alabama against two subsidiaries of the Company. The lawsuit claims that the Company's subsidiaries have failed to pay certain sums due under a marketing and administrative services agreement between the parties. The suit also seeks payment of certain commissions and administrative expenses. 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 results of operation.
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 $2.1 million, $1.8 million, and $1.2 million, for the years ending December 31, 1999, 1998, and 1997, respectively. Future minimum rental commitments required under these leases are approximately $1.5 million per year.
Concentrations of Credit Risk: Vesta maintains a highly-diversified investment portfolio with limited concentrations in any given region, industry, or economic characteristic. At December 31, 1999, the
The effect of reinsurance on premiums written and earned, including premiums for discontinued operations is 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, 1999 and 1998 are presented below:
Vesta has a defined contribution retirement and savings plan and a supplemental executive retirement plan. These plans are fully funded at year- end 1999. Vesta's total cost for benefits under these plans was $.1 million for 1999, $.1 million for 1998 and $.7 million for 1997.
During 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires companies to report financial and descriptive information about their reportable operating segments. The Company writes personal and commercial insurance products throughout the United States and reinsurance for companies located throughout the United States. All revenues are generated from external customers and the Company does not have a reliance on any major customer.
The Company has reclassed prior year's segment data to reflect the discontinuance of Commercial Lines. The reclasses reflect changes to the Company's allocation of investment income and operating expenses to present the Personal and Reinsurance segments on a continuing operations basis.
The 12.5% senior notes have one million warrants attached that become exercisable in the event that the notes are still outstanding on December 31, 2004. Based on the probability of exercise, Vesta's stock price at the date of issuance and other factors, the value of the warrants is immaterial to the financial statements.
The Company's short-term debt outstanding at December 31, 1999 and 1998 as follows (in thousands):
As of December 31, 1999, the Company's credit facilities consisted of a $5 million unsecured line of credit and an additional $10 million line of credit, secured by a pledge of the management contract between our wholly owned management company, J. Gordon Gaines, Inc., and our operating insurance subsidiaries and carried an interest rate of the bank's prime rate.
In 1997, our single purpose finance subsidiary, Vesta Capital Trust I, issued $100 million principal amount of its 8.525% Deferrable Interest Capital Securities. We have unconditionally guaranteed Vesta Capital Trust's obligation to make semi-annual distributions on these capital securities, and we have issued a debenture in a like amount to Vesta Capital Trust which requires us to make interest payments in the same amounts and at the same times as the distributions which are payable on these capital securities. The terms of the capital securities and the underlying debenture permit us to defer interest payments on the debentures, and, therefore, distributions on the capital securities, for up to 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. On December 30, 1999, the Company exchanged $44.1 million of 12.5% senior notes, due 2006 for $58.8 million of the Deferrable Capital Securities. The resulting after- tax gain of $9.5 million was recorded directly to retained earnings in accordance with EITF 86-32 "Early Extinguishment of a Subsidiary's Mandatorily Redeemable Preferred Stock". As of December 31, 1999, approximately $41 million of these capital securities remained outstanding and carried a semi-annual distribution obligation of approximately $1.8 million.
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 consolidated 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 "company action level" for Vesta Fire's risk based capital at any time. The Company's liability to comply with these covenants and financial tests may be affected by events beyond the Company's control, including economic, financial and industry conditions. Failure to comply with covenants may result in a default under the Company's credit agreements and/or indentures, and if any such default were not remedied within the applicable grace period, if any, the lenders under such agreements would be entitled to declare the amounts outstanding thereunder due and payable.
Pro forma information regarding net income and earnings per share is required by FAS 123, and has been determined as if the Company 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 1999, 1998 and 1997, respectively; risk-free interest rates of 6.22%, 5.16% and 5.75%; dividend yields of 1.67%, 0.44% and 0.27%; volatility factor of the expected market price of the Company's common stock of 67.02, 44.7, and 38.75; and a weighted-average expected life of the options of ten years for all years.
The following table shows expiration dates and the weighted average exercise price for all outstanding options at December 31, 1999.
The restrictions on the remaining 175,000 shares expire in 2003 and 2004.
The Company acquired a block of personal lines of business from CIGNA on December 31, 1997 via a 100% quota share reinsurance contract and entered into an agreement whereby CIGNA would use its best efforts to renew the business on Company paper as expeditiously as possible. The Company continues to convert this business to its paper as state rate approvals are obtained and renewal dates are reached. The results of this business are reported in the Reinsurance Segment until renewals are made onto Company paper, at which time such policies become reported in the Personal Lines Segment.
Subsequent to December 31, 1999, the Company repaid the outstanding $5 million on the revolving line of credit and cancelled the related credit agreement effective February 29, 2000.