We lease approximately 115,000 square feet for our home office at 3760 River Run Drive, Birmingham, Alabama under a long-term operating lease. For our life and health insurance businesses, we lease approximately 25,000 square feet for our life insurance operations in Phoenix, Arizona, and approximately 13,000 square feet in Dallas, Texas under long-term operating leases.
The following information should be read in conjunction with Vesta's Consolidated Financial Statements and related notes reported elsewhere in this Form 10-K.
Vesta writes insurance on selected personal lines risks only. Our standard property-casualty writings are balanced between risks of property damage (faster determination of ultimate loss but is highly unpredictable) and casualty exposure (more predictable but takes longer to determine the ultimate loss). We also write life and annuity business, and accident and health insurance business. Additionally, we are actively involved in the writing of insurance on our polices for the benefit of non-affiliated reinsurance companies, commonly referred to as servicing carrier or fronting, which generates fee-for-service income.
Policy Liabilities: Vesta has recorded liabilities for life and accident and health reserves of $695.2 million at December 31, 2001. The reserves have been computed based upon mortality, morbidity, persistency and interest rate assumptions applicable to these coverages, including provisions for adverse deviation. These assumptions consider past experience and industry standards and may be revised if it is determined that future experience will differ substantially from that previously assumed.
Collectibility of reinsurance recoverables: Vesta has recorded amounts recoverable from reinsurers on paid losses of $76.7 million at December 31, 2001. These recoverables are based on management's interpretation of reinsurance ceded contracts and the financial viability of the reinsurer. If the amounts recoverable under the reinsurance contracts are determined to be materially less than the amounts recorded, we may incur a material, adverse impact on our financial condition and results of operations. For further discussion of reinsurance recoverables and other amounts subject to estimation due to arbitrations with our reinsurers, see Note F to the Consolidated Financial Statements.
Deferred acquisition costs represent the costs of acquiring new business, principally commissions, certain underwriting and agency expenses, and the cost of issuing policies. These costs are generally amortized over the life of the insurance contract or at a constant rate based upon the present value of estimated gross profits. Management periodically reviews these costs to determine their recoverability.
Deferred tax assets are recorded for the future tax consequences of events that have been recognized in the financial statements or tax returns, based upon enacted tax laws and rates. The deferred tax asset recorded at December 31, 2001 of $38.6 million primarily consists of net operating loss carryforwards. Deferred tax assets are recognized subject to management's judgment that realization is more likely than not. The recoverability of the recorded deferred tax asset is contingent upon the generation of enough future taxable income to provide use of the net operating loss carryforward.
Net premiums written for standard property-casualty lines increased by $58.5 million, or 28.5%, to $264.0 million for the year ended December 31, 2001, from $205.5 million for the year ended December 31, 2000. Net premiums earned for standard property-casualty lines increased $33.3 million, or 15.6% to $246.1 million for the year ended December 31, 2001, from $212.8 million for the year ended December 31, 2000. The increase in net premiums written and net premiums earned is primarily attributable to the acquisition of Florida Select Insurance Holdings, Inc. on April 1, 2001.
Loss and loss adjustment expenses ("LAE") for standard property-casualty lines increased by $36.8 million, or 29.5%, to $161.6 million for the year ended December 31, 2001, from $124.8 million for the year ended December 31, 2000. The loss and LAE ratio for property-casualty lines for the year ended December 31, 2001 was 64.7% as compared to 58.6% at December 31, 2000. The increase in loss and LAE incurred is primarily attributable to the increase in earned premium. The increase in the loss and LAE ratio is primarily attributable to deterioration in our Homeowners book, uninsured motorist coverage in Pennsylvania and a $1.4 million net loss on Tropical Storm Gabrielle.
Policy acquisition expenses increased by $2.4 million, or 4.6% to $54.8 million for the year ended December 31, 2001, from $52.4 million for the year ended December 31, 2000 primarily due to an increase in earned premium, partially offset by a decrease in contingent commissions owed on profitable business. Operating expenses increased by $5.8 million or 21.8% to $32.4 million primarily due to increased costs incurred by Florida Select after our acquisition.
Net premiums written for specialty lines increased by $9.6 million, to $11.8 million for the year ended December 31, 2001, from $2.2 million for the year ended December 31, 2000. Net premiums earned for specialty lines increased $9.1 million to $10.2 million for the year ended December 31, 2001, from $1.1 million for the year ended December 31, 2000. The increase in net premiums written and net premiums earned is primarily attributable a full year's worth of activity in this segment versus four months of activity in 2000 and an increase in retained risk in certain programs.
Loss and loss adjustment expenses ("LAE") for specialty lines increased by $7.3 million to $8.0 million for the year ended December 31, 2001, from $.7 million for the year ended December 31, 2000. The loss and LAE ratio for specialty lines for the year ended December 31, 2001 was 77.4% as compared to 60.2% at December 31, 2000. The increase in loss and LAE incurred is primarily attributable to the increase in earned premium. The increase in the loss and LAE ratio is primarily attributable to increased losses from our California program.
Policy acquisition expenses increased by $2.1 million consistent with the increase in earned premium. For the year ended December 31, 2001, we earned approximately $4.2 million of fronting fees compared to $1.0 million for the year ended December 31, 2000 primarily attributable to a full year's worth of activity in this segment versus four months of activity in 2000.
The principal operating subsidiary of our non standard auto agency segment is Instant Auto. Its principal revenue stream is agents' fees and commissions. In the 4th quarter of 2001, Instant Auto completed the acquisition of A-Affordable Insurance Agency and Spacecoast Agency in Florida. In the 4th quarter, A-Affordable added $2.3 million of fees and commissions and Spacecoast recognized $2.4 million of fees and commissions. These acquisitions helped Instant Auto increase their fees and commissions for the year to $5.9 million and helped the non standard auto agency segment improve is pre-tax income to approximately breakeven in the 4th quarter from an approximate $1.0 million quarterly pre-tax loss in prior quarters. We expect continued improvement in revenue and profitability in 2002 as we integrate and consolidate these two acquisitions and the additional acquisitions that we have completed in the 1st quarter of 2002.
We discontinued our reinsurance assumed business and our commercial lines business in 2000 and 1999, respectively. Each was discontinued by non-renewal, however we remain obligated to settle claims on coverages provided prior to such non-renewal. We estimated the reserves required to fulfill these obligations at the dates of discontinuance and we continue to monitor these estimates with respect to ultimate settlement. As a result of an unexpected increase in the severity and volume of reported claims associated with both our commercial and assumed reinsurance lines and an increase in payments on claim reserves during 2001, we increased our expected losses from discontinued operations by approximately $19.5 million, net of tax. The increase in our expected losses with respect to our commercial business related to a variety of underlying coverages including general liability. These types of claims may take many years to fully develop and we must continue to monitor trends in their ultmate developments. Similarly, we experienced negative development in some of our assumed reinsurance contracts, principally related to certain homeowner coverages. These types of claims should fully develop over a comparatively shorter period of time. While we believe that the recorded reserves for discontinued operations at December 31, 2001 are adequate, further adjustments to our estimates could be necessary as we continue to run off the remaining outstanding claims.
Net investment income increased by $18.0 million, or 39.2%, to $63.9 million for the year ended December 31, 2001, from $45.9 million for the year ended December 31, 2000. The weighted average yield on invested assets (excluding realized and unrealized gains) was 6.25% for the year ended December 31, 2001, compared with 6.7% for the year ended December 31, 2000. The increase in investment income is primarily attributable to an increase in average invested assets from the American Founders acquisition and a decrease in investment yield resulting from a overall decrease in interest rates.
There were a number of additional items that materially affected our results for 2001. In October, we settled our securities class action litigation for $61.0 million in cash plus expenses. In conjunction with this, the Company recorded a $25.0 million pre-tax charge. This charge is included in operating expenses in the Corporate and other segment.
Loss and loss adjustment expenses ("LAE") for standard property-casualty lines decreased by $40.2 million, or 24.4%, to $124.8 million for the year ended December 31, 2000, from $165.0 million for the year ended December 31, 1999. The loss and LAE ratio for property-casualty lines for the year ended December 31, 2000 was 58.6% as compared to 66.5% at December 31, 1999. The decrease in loss and LAE incurred is primarily attributable to the decline in earned premium. The decrease in the loss and LAE ratio is primarily attributable to a decrease in catastrophe losses in the current versus the prior year and to the recognition of increased estimated salvage and subrogation from prior years.
Net premiums written for specialty lines were $2.2 million for the year ended December 31, 2000. Net premiums earned for specialty lines were $1.1million for the year ended December 31, 2000. For the year ended December 31, 2000, we earned approximately $1.0 million of fronting fees.
Vesta is a holding company whose principal asset is its investment in the capital stock of the companies constituting the Vesta Insurance Group, a group of wholly owned insurance companies including Vesta Fire Insurance Corporation and a majority ownership in a life insurance holding company which includes American Founders Life Insurance Company and a majority ownership in Instant Insurance Holdings, Inc. The insurance subsidiaries comprising the Vesta Group are individually supervised by various state insurance regulators, but given our organizational structure, Vesta Fire is our only operating subsidiary that can pay dividends directly to our holding company. Vesta Fire is an Illinois domestic insurance company.
We rely primarily on fees earned under our management agreement with our insurance company subsidiaries to meet our cash requirements (including debt service) and to pay dividends to our stockholders. This management agreement, which provided approximately $25 million to our holding company in 2001, is subject to certain regulatory standards which generally require its terms and fees to be fair and reasonable. The Illinois Department of Insurance may review this agreement from time to time to insure the reasonableness of its terms and fees, and it is possible that such terms and fees could be modified to reduce the amounts available to our holding company. Assuming the management agreement is not modified in a material respect, we believe that this management agreement will provide us with funds sufficient to meet our anticipated needs (including debt service) for at least the next twelve months.
. a $15 million unsecured line which bears interest at First Commercial's prime rate +1/4%;
Each of these credit facilities mature on April 30, 2003. These credit agreements contain covenants which require us to maintain minimum (i) statutory consolidated net income, (ii) GAAP consolidated net income, (iii) statutory surplus and (iv) risk based capital. For the year ending December 31, 2001, our GAAP consolidated net income and statutory surplus did not meet the minimum requirements as set forth in our credit agreements. First Commercial has agreed that any such non-compliance will not be deemed an event of default under the credit agreement.
The following table sets forth the principal maturities of all contractual obligations at December 31, 2001:
As part of the Federal Home Loan Bank program, as more fully described in Note M, we have pledged securities with a market value of $176.8 million to secure our obligation of $168.6 million. We intend to renew all Federal Home Loan Bank advances maturing in the current year, however in the unlikely event we elect not to renew all maturing advances, we could liquidate the pledged investments to satisfy the obligation.
As part of its ongoing reinsurance recoverable arbitrations, we have obtained letters of credit for the benefit of certain parties. Our principal operating subsidiary, Vesta Fire is contingently liable under the terms of these letters of credit. For our reinsurance arbitrations, we have obtained letters of credit totaling $33.7 million for which we are contingently liable.
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. As is typical in the insurance industry, we collect cash in the form of premiums and invest that cash until claims are paid. Cash collected from premiums and cash paid for claims is included in cash flow from operations, while the cash impact from our investing activities is included in cash flow from investing activities. In periods such as 2001 and 2000, where we are exiting certain lines of business such as commercial lines and reinsurance assumed lines we are funding the payout of commercial and reinsurance assumed claims through the liquidation of invested assets, consistent with the historical insurance business model. However, this generates cash outflows from operations that can be misleading.
On a consolidated basis, net cash used in operations for the year ended December 31, 2001 and 2000, was $11.1 million and $59.0 million, respectively. Cash flow from operations was negative for the current period primarily due to the continued payout of claims from our discontinued operations, the payout of standard-property casualty claims incurred in prior periods, and the timing of payment of certain payables and other operational items. Net cash (used in) provided by investing activities was $(45.0) million and $128.6 million for the year ended December 31, 2001 and 2000, respectively as we used cash to purchase Florida Select in April, 2001, and funded the discontinuance of the reinsurance assumed and commercial lines of business in 2000 through the liquidation of our investment portfolio. Net cash provided by (used in) financing activities was $66.3 million and $(73.9) million for the year ending December 31, 2001 and 2000, respectively as we engaged in a number of stock transactions in the year ended December 31, 2001 including the issuance of 8.625 million shares of stock in a follow-on offering for approximately $64.0 million, net of underwriting discount and expenses and repurchased outstanding debt in the year ending December 31, 2000.
In June of 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.
Vesta will adopt the provisions of SFAS No. 142 effective January 1, 2002. Vesta is currently in the process of preparing for its adoption of SFAS No. 142 and is making the determinations as to what its reporting units are and what amounts of goodwill, intangible assets, other assets, and liabilities should be allocated to those reporting units. SFAS No. 142 requires that goodwill be tested annually for impairment and the initial goodwill impairment test is required to be completed within six months of adoption. Vesta has not completed its initial goodwill impairment test and has net yet determined what effect the impairment tests will have on its financial position or results of operations. Vesta expects that the elimination of goodwill amortization will positively impact pretax net income by approximately $2.6 million in fiscal year 2002.
Nature of Operations: Vesta Insurance Group, Inc. and subsidiaries is a holding company for a group of insurance companies that offers financial services through the production, distribution, and administration of property-casualty and life and health insurance products. The lead insurers in the Vesta Group are Vesta Fire Insurance Corporation and American Founders Life Insurance Company. In 1999 and 2000, we discontinued commercial line of business and our reinsurance assumed line of business, respectively. See Note Q.
Principles of Consolidation: The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include the accounts of Vesta Insurance Group, Inc. and its operating subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
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. Mortgage loans, policy loans, and collateral loans are stated at the aggregate unpaid principal balances, less any unamortized discount and less allowance for possible losses, if required.
Determination of Fair Values of Financial Instruments: Fair values for cash, short-term investments, short-term debt, receivables and payables approximate their carrying value. Fair values for investment securities and long-term debt are based on quoted market prices where available. Otherwise, fair values are based on quoted market prices of comparable instruments.
Estimated December 31, Useful Lives -------------------- 2001 2000 Lives -------- -------- ------------ Building and real estate $ 5,570 $ 5,065 3-9 yrs Data processing equipment 24,616 18,341 3-15 yrs Furniture and office equipment 7,721 7,893 1-5 yrs Other 3,622 1,639 1-5 yrs -------- -------- 41,529 32,938 Accumulated depreciation (23,161) (18,928) -------- -------- $ 18,368 $ 14,010 ======== ========
Depreciation expense on property and equipment used in the business was $3.9 million, $3.3 million, and $4.3 million for the years ended December 31, 2001, 2000, and 1999, respectively.
2001 2000 -------- ------- Goodwill and other intangible assets $115,373 $20,516 Accumulated amortization (6,113) (2,719) -------- ------- $109,260 $17,797 ======== =======
Vesta will adopt SFAS No. 142 effective January 1, 2002. Upon initial application of SFAS No. 142, Vesta does not anticipate impairment losses for goodwill resulting from a transitional impairment test. However, Vesta has not yet fully determined the impact that the adoption of other elements of SFAS No. 142, including the possible future impairment charges on goodwill, may have on its financial position or results of operations. Vesta expects that the elimination of goodwill amortization will positively impact pretax net income by approximately $2.6 million in fiscal year 2002.
Effective April 1, 2001, we acquired Florida Select Insurance Holdings Inc., the parent company of Florida Select Insurance Company for cash of approximately $66.4 million. Florida Select is the 8th largest residential homeowners insurer in the State of Florida with approximately $137.7 million of assets and $60.0 million of annual gross written premium. The transaction has been accounted for as a purchase. Summarized below is an allocation of assets and liabilities acquired and the consolidated results of operations for the years ended December 31, 2001 and 2000 on an unaudited pro forma basis as if the acquisition had occurred as of the beginning of each period presented.
Assets acquired: Invested assets $ 56,707 Cash 24,895 Other assets 14,109 Intangible assets 7,756 Goodwill 34,215 ------- Total assets $137,682
Liabilities acquired: Loss and LAE reserves $ 22,019 Unearned premiums 36,582 Other liabilities 12,668 ------- Total liabilities $ 71,269
Assets acquired: Cash $ 3,211 Other assets 1,746 Goodwill and other intangibles 11,874 ------- Total assets $16,831
On June 30, 2000, we completed the acquisition of a 71% controlling interest in American Founders Financial Corporation for $25 million. American Founders is a life insurance holding company with approximately $1.8 billion (face value) of life products in force and approximately $339 million of annuity deposits as of December 31, 2000. American Founders is currently rated B+ by A.M. Best and operates in 40 states and the District of Columbia. The transaction has been accounted for as a purchase. Summarized below is an allocation of assets and liabilities acquired (in thousands):
The following is a summary of selected statutory financial information for our primary insurance subsidiaries at December 31, 2001 and 2000 (in thousands):
2001 2000 -------- -------- Statutory Capital and Surplus: Vesta Fire Insurance Corporation $235,935 $275,270 American Founders Life $ 35,030 $ 32,995
Restrictions on Dividends to Stockholder and Transactions between Affiliates: Transactions between Vesta and its insurance subsidiaries, including the payment of dividends and management fees 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 out of earned surplus 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 October 29, 2001, the Illinois Insurance Department published a Company Bulletin that indicates that the Department interprets these dividend limitations to prohibit the payment of dividends if the insurer has negative or zero "unassigned funds" at the end of the prior year, as reported on its statutorily required annual statement. Our lead insurance subsidiary, Vesta Fire, reported negative "unassigned funds" on its annual statement for 2001. Accordingly, we may not be able to declare and pay a dividend from our lead insurance company subsidiary for the foreseeable future without prior approval.
Proceeds from the sale of equity securities were $3.3 million, $.5 million, and $22 million in 2001, 2000, and 1999, respectively. Gross gains (losses) realized on those sales were $.4 million, $(.6) million and $8.2 million in 2001, 2000 and 1999, respectively. Proceeds from sales, maturities and calls of fixed maturities were $319.5 million in 2001, $157.7 million in 2000 and $294 million in 1999. Gross gains realized on those sales were $3 million in 2001, $1.4 million in 2000 and $1.7 million in 1999. Gross losses on those sales were $.5 million in 2001, $1.8 million in 2000 and $2.0 million in 1999.
Vesta determined to participate in the funding of the settlement and to take the related one-time charge against earnings as a result of the Cincinnati Insurance Company's attempted rescission of their $25 million directors and officers liability policy and denial of coverage. Vesta has sued Cincinnati in Alabama state court alleging that its actions were taken in bad faith and is vigorously pursuing that claim. The Cincinnati case is scheduled for trial in August 2002.
We lease office space for our home office and subsidiary offices under operating lease arrangements. Rental expense for operating leases was $6.2 million, $3.0 million, and $2.1 million for the years ending December 31, 2001, 2000 and 1999 respectively. Future minimum rental commitments required under these leases are approximately $3.2 million per year.
The effect on premiums earned and losses and loss adjustment expenses of all assumed reinsurance transactions are as follows:
The amount of reserves for unpaid losses and loss adjustment expenses, policy benefits and unearned premiums that Vesta would remain liable for should reinsuring companies be unable to meet their obligations are as follows:
2001 2000 ------- ------- (in thousands) Deferred tax assets: Unearned and advance premiums $10,312 $ 6,160 Discounted unpaid losses 9,146 6,443 Net operating loss/AMT credit carryforward 30,213 15,468 Policy liabilities 5,514 4,204 Goodwill 8,804 9,653 Other 10,448 11,107 ------- ------- Total deferred tax assets 74,437 53,035
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. Vesta has determined that the benefits of its deferred tax assets are realizable and accordingly, no valuation allowance has been recorded at December 31, 2001 and 2000. Net operating loss carryforwards expire in periods through 2021.
On January 26, 2001, pursuant to the original terms, the holders of our Series A Convertible Preferred Stock, converted their preferred stock into 5.9 million shares of common stock. We subsequently purchased these shares for approximately $47.6 million.
In 2001, we redeemed $10.0 million face amount of Deferrable Capital Securities in exchange for approximately 965 thousand shares of common stock. We also redeemed preferred stock of a subsidiary with a stated value of $9.0 million and a carrying value of $8.4 million for approximately $5.2 million. Additionally, we were not required to pay the contingent amount recorded in 2000 as discussed below. The resulting after-tax gain from these transactions of $7.1 million was recorded directly to equity in accordance with EITF 86-32 "Early Extinguishment of a Subsidiary's Mandatorily Redeemable Preferred Stock." Also, we redeemed $7.0 million face amount of our Senior Debentures in exchange for approximately 568 thousand shares of common stock. The resulting after-tax gain of $.9 million ($0.03 per diluted share) was recorded on the statement of operations as an extraordinary gain on the extinguishments of debt.
Unearned stock consists of shares of common stock issued by Vesta that remain subject to certain future restrictions, and therefore are shown as a reduction to stockholders' equity. Unearned stock compensation is composed of the following at December 31, 2001 and 2000, (in thousands):
2001 2000 ------- ------- Unamortized restricted stock awards $14,537 $1,804 Receivable from issuance of restricted stock 278 438 Agent's trust 4,692 4,725 ------- ------ $19,507 $6,967 ======= ======
On June 30, 2000, we entered the life and annuity business through an investment in American Founders Financial Corporation, a holding company for two life insurance companies domiciled in Texas and we entered the health insurance business through the acquisition of Aegis Financial Corporation in December 2000. American Founders and Aegis have approximately $2.5 billion (face value) of life and annuity products in force and approximately $22.5 million of health insurance premiums in force at December 31, 2001. American Founders markets traditional life products, universal life products, fixed-rate annuities, pension contracts and related products through independent agents throughout the majority of the United States. Aegis Financial markets health insurance products through captive agents throughout the United States.
Long-term debt and Deferrable Capital Securities at December 31, 2001 and 2000 consists of the following (in thousands):
On March 3, 2000, we established a revolving credit facility with First Commercial Bank, Birmingham, Alabama ("First Commercial"). In May, 2001 we increased the amounts available and increased the term of the credit facility to the following:
. an additional $15 million line which bears interest at First Commercial's prime rate, secured by a pledge of the revenues received under management contract between our wholly owned management company, J. Gordon Gaines, Inc., and our operating insurance subsidiaries.
Each of these credit facilities mature on April 30, 2003. These credit agreements contain covenants which require us to maintain minimum (i) statutory consolidated net income, (ii) GAAP consolidated net income, (iii) statutory surplus and (iv) risk based capital. For the period ending December 31, 2001, our GAAP consolidated net income and statutory surplus did not meet the minimum requirements as set forth in our credit agreements. First Commercial has agreed that any such non-compliance will not be deemed an event of default under the credit agreement.
In 1997, our single purpose finance subsidiary, Vesta Capital Trust I, issued $100 million principal amount of its 8.525% Deferrable 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. These securities and the related distributions are treated in a manner similar to minority interest in the financial statements. 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. In December, 1999, we 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." In December, 2000, we exchanged 1.2 million shares of common stock for $8 million face amount of Deferrable Capital Securities. The resulting after-tax gain of $1.3 million was recorded directly to retained earnings in accordance with EITF 86-32. In 2001, we exchanged 965 thousand shares of common stock for $10 million face amount of Deferrable Capital Securities. The resulting after tax gain of $1.9 million was recorded directly to retained earning in accordance with EITF 86-32. The after tax gains from these transactions have been included in the respective computations of income available to common shareholders and related earnings per share computations in accordance with EITF Topic No. D-42, "The Effect on the Calculation of Earnings per Share for the Redemption or Induced Conversion of Preferred Stock.".
As of December 31, 2001, approximately $23.3 million of these capital securities remained outstanding and carried a semi-annual distribution obligation of approximately $ 1.0 million.
We are required to maintain a collateral deposit with FHLB. At December 31, 2001 and 2000 respectively, investments having a market value of approximately $176.8 million and $153.9 million at December 31, 2001 and 2000, respectively, were pledged to the FHLB. Interest expense was approximately $8.6 million and $9.6 million for the years ended December 31, 2001 and 200l, respectively.
Vesta's actual and pro forma information follows (in thousands, except for earnings per share information):
2003 91,416 $ 16.60 91,416 2004 19,500 15.05 19,500 2005 92,061 22.09 92,061 2006 9,000 35.38 9,000 2007 15,000 31.00 15,000 2008 15,000 59.19 15,000 2009 358,500 4.51 138,500 2010 130,000 4.89 40,000 2011 137,500 6.16 40,000
At December 31, 2001, Vesta has issued 2,005,818 shares of restricted stock. 74,307 shares have been issued to officers of Vesta in exchange for promissory notes. The common stock is being held by Vesta as security for the repayment of the notes. The balance of the unamortized restricted stock and unpaid note receivable at December 31, 2001 and 2000, was $14.8 million and $2.2 million, respectively, and are shown as reductions to stockholders' equity. The restrictions on the remaining 1.9 million shares expire in 2002 - 2011.
. Borrowings - Fair values for the advances from FHLB were calculated using interest rates in effect as of each year end with the other terms of the advances unchanged. Carrying values of short term debt approximate fair value as effective rates approximate current rates. Fair values of long term debt and deferrable capital securities, were determined based on recent transactions involving the applicable securities.
As a result of an unexpected increase in the severity and volume of reported claims associated with both our discontinued commercial and assumed reinsurance lines and an increase in payments on claim reserves during 2001, we increased our expected losses from discontinued operations by approximately $19.5 million, net of tax. The increase in our expected losses with respect to our commercial business related to a variety of underlying coverages including general liability. These types of claims may take many years to fully develop and we must continue to monitor trends in their ultimate development. Similarly, we experienced negative development in some of our assumed reinsurance contracts, principally related to certain homeowner coverages. These types of claims should fully develop over a comparatively shorter period of time. While we believe that the recorded reserves for discontinued operations at December 31, 2001 are adequate, further adjustments to our estimates could be necessary as we continue to run off the remaining outstanding claims. Operating results of reinsurance assumed and commercial lines were as follows (in thousands):
Assets and liabilities of the commercial lines and reinsurance assumed segments are primarily comprised of the following at December 31 (in thousands):