Alabama-based Vesta Insurance Group Inc. reported results for its fourth quarter and full year ended Dec. 31, 2003 that included a $118.8 million charge – $28.9 million cash and $89.9 million non-cash – to write-off recoverables associated with a reinsurance arbitration ruling, and to establish a full valuation allowance for its entire net deferred tax asset in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.”
The company also announced that its Board of Directors has deferred consideration of cash dividends on its common stock until the company’s upcoming capital initiatives have been completed.
In addition, Vesta announced that it has entered into a definitive agreement to sell American Founders Financial Corporation for approximately $63.5 million dollars. The transaction is subject to regulatory approval and is expected to close in the second quarter. The closing of the sale of American Founders will result in an estimated GAAP gain of $5 million and a statutory gain of approximately $19.5 million.
On a statutory basis, the impact of writing down the reinsurance recoverables associated with the arbitration rulings is approximately $55.8 million. Including the impact of the potential sale of American Founders, statutory capital is estimated to be approximately $165 million at March 31, 2004, which is approximately 7 percent below the statutory capital level as of Sept. 30, 2003.
“While we are obviously disappointed with the write down of these recoverables, the negative exposure to these matters is now behind us and we can focus on the growing profitability of our continuing operations which produced excellent results in the fourth quarter and the second half of 2003 and in the first two months of 2004,” said Norman Gayle, III, president and CEO.
“The Board of Directors determined that deferring the payment of a cash dividend on our common stock is prudent, and we expect our current annual dividend rate of $0.10 per share per year to resume after our capital initiatives are completed.
“Our insurance company strength is sound and we believe our financial position will improve dramatically with the sale of American Founders and the planned initial public offering of our non-standard auto insurance subsidiary, Affirmative Insurance Holdings, Inc. We expect to file a registration statement on Form S-1 in the next few days.”
As disclosed on March 2, 2004, an arbitration panel ruled against Vesta in a 6-year reinsurance dispute with NRMA Insurance, Ltd. concerning the 1997 20 percent whole account quota share contract.
As a result of the ruling, Vesta incurred a previously announced $33.5 million pre-tax charge to fourth quarter earnings associated with the NRMA ruling. Vesta considered the NRMA ruling in the evaluation of the recoverability of other amounts due from the other participants on the same reinsurance treaty as well as another, unrelated treaty. Although there are reportedly distinct facts and circumstances underlying and affecting Vesta’s disputes with those other participants, for financial reporting purposes, the company concluded that those amounts may not ultimately be collected.
Accordingly, Vesta recorded an additional pre-tax charge of $32.4 million in the fourth quarter of 2003, $30.1 million of which was related to other balances recoverable from other participants in the 20 percent whole account quota share contract. The total after-tax charge related to the reinsurance recoverables write-down in the fourth quarter is $43.4 million. The recording of this charge does not impact Vesta’s intention to actively arbitrate with the other participants on the 20 percent whole account quota share contract. Additionally, the company has filed a motion to vacate the NRMA arbitration award in U.S. District Court on the grounds of the evident partiality of the umpire.
In connection with the filing of the annual report on Form 10-K for 2003, Vesta updated its SFAS No. 109 income tax analysis, to evaluate the recoverability of its deferred tax asset. In making this evaluation, the company considered all available positive and negative evidence, including our past results, the existence of significant cumulative losses in recent years, and its estimate of future taxable income.
While Vesta does anticipate being profitable in future periods, the combination of significant cumulative losses in recent years and uncertainty with respect to its ability to achieve sufficient taxable income to fully realize the year-end deferred tax asset balances within a reasonable timeframe, warrants the recording of a valuation allowance under SFAS No. 109. Accordingly, Vesta incurred a $75.4 million dollar charge to earnings to reflect this valuation allowance.
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