Our retail stores predominately sell non-standard personal automobile insurance policies issued by our insurance companies and administered by our underwriting agencies. Approximately 83% of our retail stores’ commission and fee revenue is paid by us for sales of our non-standard personal automobile insurance policies and is therefore eliminated in the consolidated financial statements. The remaining 17% of our retail stores’ commission and fee revenue is generated through sales of non-standard personal automobile policies issued by unaffiliated insurance companies as well as through sales of certain other complementary insurance products and ancillary non-insurance products and services.
• Derivatives Implementation Group Issue No. B36 “Bifurcation of Embedded Credit Derivatives”;
paid losses, deferred policy acquisition costs and deferred income taxes. Changes in the assumptions, judgments or estimates we have made with respect to each of these assets would directly impact our financial results and financial condition.
Deferred income taxes are provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations, as well as net operating loss, tax credit and other carryforwards. SFAS 109, “Accounting for Income Taxes”, requires that deferred tax assets be reduced by a valuation allowance if, based on available evidence, it is more likely than not that all of the recorded deferred tax assets will not be realized in future periods. This assessment requires significant judgment, and an evaluation of both objective and subjective positive and negative factors.
For the year ended December 31, 2002, policy acquisition expenses increased by $17.4 million (up 31.8%) to $72.2 million from $54.8 million for the same period of the prior year. In 2002, policy acquisition expenses related to our activities in Texas increased to $22.4 million from $.6 million in 2001. Operating expenses increased by $7.5 million, or 23.1%, to $39.9 million from $32.4 million, primarily as a result of our growth in Texas.
Our subsidiary operations also involve ongoing reinsurance recoverable disputes that could result in an obligation to repay certain amounts to reinsurers from whom we have collected funds. In connection with these disputes, our principal operating subsidiary, Vesta Fire, has obtained letters of credit for the benefit of reinsurers for which it is contingently liable. At December 31, 2003, Vesta Fire was contingently liable for $38.5 million under the terms of letters of credit obtained in connection with these reinsurance disputes.
As discussed in Note A to the Financial Statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment of Long-Lived Assets.” In addition, as discussed in Note A to the Financial Statements, effective July 1, 2003, the Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” Further, as discussed in Note A to the Financial Statements, effective October 1, 2003, the Company adopted Derivatives Implementation Group Issue No. B-36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments.”
In the fourth quarter of 2002, we wrote off $9.1 million of goodwill associated with our discontinued health insurance ($7.9 million) and consulting ($1.2 million) business lines. (See Note R for further discussion of discontinued operations).
The changes in the carrying amount of goodwill and other intangible assets for the years ended December 31, 2003 and 2002 are as follows (in thousands):
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 unassigned surplus in any year which, together with other dividends or distributions made within the preceding 12 months, such dividends 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” in its annual statement for 2003. 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.
As part of a modified coinsurance agreement with Employers Reinsurance Corporation, our life insurance subsidiary is holding $161.3 million of invested assets for the benefit of Employers Re. Additionally, we have pledged investments having a market value of $178.8 million to the Federal Home Loan Bank.
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 the 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. 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, resulting in a pre-tax gain of $1.4 million.
non-compliance with its consolidated GAAP net income, interest coverage ratio, consolidated debt to capital ratio, and GAAP net worth covenants. First Commercial has waived compliance with these covenants, which effectively waives these covenants through December 31, 2004.
At December 31, 2003, Vesta has issued 766,807 shares of restricted stock. In addition, Vesta issued 74,307 shares 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, 2003 and 2002, was $6.1 million and $7.1 million, respectively, and are shown as reductions to stockholders’ equity. The restrictions on these shares expire in 2004 - 2011.