ITEM 2. PROPERTIES
The Company leases approximately 45,091 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 and anticipated level of operations.
HIG leases approximately 24,755 square feet for its operations at 1001 Bishop Street Pacific Tower, Honolulu, Hawaii under a long-term operating lease. The Company considers the office facilities to be suitable and adequate for HIG's current and anticipated level of operations.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company, through its subsidiaries, is routinely a party to 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 to be material.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTER
(a) Market Information
Since November 11, 1993, the Common Stock has been traded on the New York Stock Exchange under the symbol "VTA". Prior to November 11, 1993, there was no established public trading market for the Common Stock. The stock began trading on November 11, 1993, at $16.67 per share. The amounts in the table below have been adjusted for the 3-for-2 stock split paid on January 22, 1996.
Quarterly high and low market prices of the Company's common stock in 1995 were as follows:
Quarterly high and low market prices of the Company's common stock in 1996 were as follows:
(b) Number of Holders of Common Stock
There were 110 shareholders of record on January 15, 1997 including shareholder accounts held in nominee form.
(c) Dividend History and Restrictions
The Company's Board of Directors has established a policy of declaring regular quarterly cash dividends on the Company's common stock. The declaration and payment of dividends will be at the discretion of the Company's Board of Directors and will depend upon many factors, including the Company's financial condition and earnings, the capital requirements of the Company's operating subsidiaries, legal requirements and regulatory constraints. Accordingly, there is no requirement or assurance that dividends will be declared or paid.
The dividends paid by the Company on its common stock for the past two years were as follows (in thousands):
Alabama, Hawaii and Texas impose restrictions on the payment of dividends to the Company by the Company's insurance subsidiaries in excess of certain amounts without prior regulatory approval. The Company does not currently expect that regulatory constraints or other restrictions will affect its ability to declare and pay the quarterly dividends contemplated by the Company's dividend policy described above.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
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.
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AND PERCENTAGE DATA)
- -------- (1) During the first quarter of 1993, Vesta adopted FASB Statement Number 109, which resulted in a one-time addition to after-tax earnings of $2,321,000. Vesta also adopted FASB Statement No. 106 which resulted in a one-time after tax charge to earnings of $382,000. The implementation of these standards is not expected to have a material impact on future earnings. (2) Effective as of January 1, 1993, the Company adopted FASB Statement Number 113. The prior periods have not been restated. See Note J of Notes to Consolidated Financial Statements. (3) Statutory data have been derived from the financial statements of the Company prepared in accordance with SAP and filed with insurance regulatory authorities. (4) The statutory industry data are taken from the A. M. Best Company, Aggregates and Averages, 1996 Edition. (5) 1996 estimate by A. M. Best, Reviews and Previews, January 1997 Edition. (6) Restated for 3-for-2 stock split paid on January 22, 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company writes treaty reinsurance and primary insurance on selected personal and commercial lines risks. In both its reinsurance and primary insurance operations, the Company focuses principally on property coverages, for which ultimate losses generally can be more promptly determined than on casualty risks. The Company's revenues from operations are derived primarily from net premiums earned on risks written and 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 slightly due to increased availability of 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, balancing the geographic distribution of its risks, maintaining extensive reinsurance and retrocessional programs and applying the Company's knowledge of primary insurance markets to its reinsurance business. Management believes that this strategy accounts, in part, for combined ratios that are lower than the property and casualty industry average.
The Company has historically followed a practice of maintaining low retentions in its primary and reinsurance business to reduce the variability of its earnings. As a result of this practice and the Company's focus on short-tail property coverages, the Company's loss reserve levels historically have remained relatively stable from year to year despite changes in premium volume. The Company is continuing to cede portions of insurance risks while using its capital base to gradually increase, on a selective basis, its retention of certain property risks.
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 principally in the southeastern United States and Hawaii, an area known for hurricane risk. 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 result in substantial outflows of cash as losses are paid. In addition, the increased underwritings of catastrophe related reinsurance, and potential residual market assessments may also lead to increased variability in the Company's loss ratio.
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 enables the Company to increase its net writings in the personal lines of business.
In July of 1996, Vesta Fire entered into a pro-rata reinsurance facility covering substantially all primary and assumed business in order to provide capital flexibility to take advantage of growth opportunities in the future. This reinsurance facility had the effect of reducing net premiums written in the second half of 1996 by $98.0 million.
COMPARISON OF THE FISCAL YEAR 1996 TO THE FISCAL YEAR 1995
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross premiums written increased by $182.8 million, or 31.2%, to $769.6 million for the year ended December 31, 1996, from $586.8 million for the year ended December 31, 1995, as gross premiums written on reinsurance risks increased by $192.7 million and gross premiums written on primary insurance risks decreased by $9.9 million. Net premiums written increased by $81.4 million, or 17.7%, to $540.6 million for the year ended December 31, 1996, from $459.2 million for the year ended December 31, 1995.
Gross premiums written for reinsurance increased by $192.7 million, or 45.6%, to $615.4 million for the year ended December 31, 1996, from $422.7 million for the year ended December 31, 1995. This growth was largely attributable to an increase in gross premiums written on pro rata business. The growth in pro-rata reinsurance gross premiums written was largely due to growth in existing accounts as well as the addition of new accounts in the 1996 period as compared to the 1995 period. Net premiums written for reinsurance increased $87.8 million, or 24.5%, to $446.1 million for the year ended December 31, 1996, from $358.3 million for the year ended December 31, 1995.
Gross premiums written for primary insurance decreased by $9.9 million, or 6.0%, to $154.2 million for the year ended December 31, 1996, from $164.1 million for the year ended December 31, 1995, due to a $13.9 million decrease in commercial lines premiums and a $4.0 million increase in personal lines premiums. Gross premiums written for commercial products decreased 23.6%, to $44.6 million for the year ended December 31, 1996, compared to $58.4 million for the year ended December 31, 1995, due primarily to the Company's re- underwriting of its book of business in an effort to increase profitability in commercial lines. Gross premiums on personal lines rose 3.8% from $105.6 million for the year ended December 31, 1995 to $109.6 million for the year ended December 31, 1996. The increase was primarily attributable to the acquisition of HIG in June of 1995.
Net premiums written for primary insurance decreased by $6.3 million, or 6.2%, to $94.6 million for the year ended December 31, 1996, from $100.9 million for the year ended December 31, 1995. The decrease in net premiums written was largely attributable to a pro-rata reinsurance facility entered into by Vesta Fire Insurance Corporation ("Vesta Fire") to provide capital flexibility to take advantage of growth opportunities.
Net premiums earned increased by $130.1 million, or 34.1%, to $511.9 million for the year ended December 31, 1996, from $381.8 million for the year ended December 31, 1995. The increase in net premiums earned is primarily attributable to the increase in net written premiums for the year ended December 31, 1996.
Net Investment Income. Net investment income increased by $5.1 million, or 28.3%, to $23.1 million for the year ended December 31, 1996, from $18.0 million for the year ended December 31, 1995. The weighted average yield on invested assets (excluding realized and unrealized gains) was 5.6 % for the year ended December 31, 1996, compared with 5.8% for the year ended December 31, 1995. The increase in net investment income is primarily attributable to an increase in average invested assets relating to the receipt of proceeds from the sale by the Company of $100 million of its 8.75% Senior Debentures due 2025 and operating cash flow.
Losses and Loss Adjustment Expenses Incurred. Losses and loss adjustment expenses ("LAE") increased by $76.0 million, or 34.7%, to $295.0 million for the year ended December 31, 1996, from $219.0 million for the year ended December 31, 1995. The dollar amount of loss and loss adjustment expenses incurred increased during 1996 due to the growth in premiums earned. The loss and LAE ratio for the year ended December 31, 1996 was 57.6% as compared to 57.4% for the year ended December 31, 1995.
Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses increased by $42.8 million, or 38.3%, to $154.6 million for the year ended December 31, 1996, from $111.8 million for the year ended December 31, 1995. The underwriting expense ratio for the year ended December 31, 1996, was 30.2%, as compared to 29.3% for the year ended December 31, 1995. The increase in the underwriting expenses was primarily due to the growth in premiums written.
Federal Income Taxes. Federal income taxes increased by $3.9 million, or 18.5%, to $25.0 million for the year ended December 31, 1996. The effective rate on pre-tax income increased only slightly from 33.1% to 33.2 % for the year ended December 31, 1996.
Net Income. For the reasons discussed above, net income increased by $7.5 million, or 17.6%, to $50.2 million for the year ended December 31, 1996, from $42.7 million for the year ended December 31, 1995.
COMPARISON OF FISCAL YEAR 1995 TO FISCAL YEAR 1994
Gross Premiums Written; Net Premiums Written; Net Premiums Earned. Gross premiums written increased by $231.9 million, or 65.4%, to $586.8 million for the year ended December 31, 1995, from $354.8 million for the year ended December 31, 1994, as gross premiums written on reinsurance risks increased by $180.7 million and gross premiums written on primary insurance risks increased by $51.2 million. Net premiums written increased by $199.5 million, or 76.8%, to $459.2 million for the year ended December 31, 1995, from $259.7 million for the year ended December 31, 1994.
Gross premiums written for reinsurance increased by $180.7 million, or 74.7%, to $422.7 million for the year ended December 31, 1995, from $242.0 million for the year ended December 31, 1994. This growth was attributable to an increase in gross premiums written on pro rata business. The growth in pro- rata reinsurance gross premiums written was due to growth in existing accounts as well as the addition of new accounts in the 1995 period as compared to the 1994 period. Net premiums written for reinsurance increased $165.2 million, or 85.6%, to $358.3 million for the year ended December 31, 1995, from $193.1 million for the year ended December 31, 1994.
Gross premiums written for primary insurance increased by $51.4 million, or 45.6%, to $164.1 million for the year ended December 31, 1995, from $112.7 million for the year ended December 31, 1994, due to a $9.4 million increase in commercial lines premiums and a $41.9 million increase in personal lines premiums. Gross premiums written for commercial products increased 19.2%, to $58.4 million for the year ended December 31, 1995, compared to $49.0 million for the year ended December 31, 1994, due primarily to increased sales of property casualty products to a certain class of accounts and an increase in transportation business. Gross premiums on personal lines rose 65.9%, from $63.7 million for the year ended December 31, 1994 to $105.6 million for the year ended December 31, 1995. The increase was primarily attributable to the acquisition of HIG in June of 1995.
Net premiums written for primary insurance increased by $34.3 million, or 51.5%, to $100.9 million for the year ended December 31, 1995, from $66.6 million for the year ended December 31, 1994.
Net premiums earned increased by $121.8 million, or 46.9%, to $381.8 million for the year ended December 31, 1995, from $260.0 million for the year ended December 31, 1994. The increase in net premiums earned is primarily attributable to the increase in net written premiums for the year ended December 31, 1995.
Net Investment Income. Net investment income increased by $5.0 million, or 38.3%, to $18.0 million for the year ended December 31, 1995, from $13.0 million for the year ended December 31, 1994. The weighted average yield on invested assets (excluding realized and unrealized gains) was 5.8% for the year ended December 31, 1995, compared with 5.3% for the year ended December 31,
1994. The increase in net investment income is primarily attributable to an increase in average invested assets relating to the receipt of proceeds from the sale by the Company of $100 million of its 8.75% Senior Debentures due 2025, operating cash flow, and the increase in yield on invested assets.
Losses and Loss Adjustment Expenses Incurred. Losses and loss adjustment expenses ("LAE") increased by $78.8 million, or 56.2%, to $219.0 million for the year ended December 31, 1995, from $140.2 million for the year ended December 31, 1994. The loss and LAE ratio for the year ended December 31, 1995 was 57.4% as compared to 53.9% for the year ended December 31, 1994. This increased loss and LAE ratio for 1995 period was due principally to an increased frequency of losses and the effect of a greater percentage of pro- rata business in the mix of reinsurance written by the Company. Pro-rata business tends to carry lower, but more stable margins than excess reinsurance.
Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses increased by $23.5 million, or 26.6%, to $111.8 million for the year ended December 31, 1995, from $88.3 million for the year ended December 31, 1994. The underwriting expense ratio for the year ended December 31, 1995 was 29.3%, as compared to 34.0% for the year ended December 31, 1994. The decrease in the underwriting expense ratio resulted principally from the stability of fixed operating expenses relative to increases in net premiums earned and, to a lesser extent, from a decline in contingent commissions paid to agents and ceding reinsurers.
Federal Income Taxes. Federal income taxes increased by $8.3 million, or 64.8%, to $21.1 million for the year ended December 31, 1995. The effective rate on pre-tax income increased from 30.5% to 33.1% for the year ended December 31, 1995. This increase was due primarily to a smaller portion of income from tax free municipal bonds in the 1995 period versus the 1994 period.
Net Income. For the reasons discussed above, net income increased by $13.5 million, or 46.1%, to $42.7 million for the year ended December 31, 1995, from $29.2 million for the year ended December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company 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 several insurance company subsidiaries comprising Vesta Group are individually supervised by state insurance regulators. Vesta Fire is the principal operating subsidiary of the Company.
As a holding company with no other business operations, the Company relies primarily upon dividend payments from Vesta Fire to meet its cash requirements (including its debt service) and to pay dividends to its stockholders. Transactions between Vesta Fire and the Company, including the payment of dividends by Vesta Fire, are subject to certain limitations under the insurance laws of Alabama. Specifically, Alabama and Texas law permits the payment of dividends 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. Hawaii law limits dividends to the lesser of 10% of statutory surplus as of the end of the preceding year or the net income for the preceding year without prior approval. Based upon restrictions presently in effect, the maximum amount available for payment of dividends to the Company by its insurance subsidiaries in 1997 without prior approval of regulatory authorities is approximately $50.7 million.
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. There can be no assurance as to the ability of the Company's insurance subsidiaries to continue to pay dividends at current levels. However, 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 1996, the Company paid approximately $2.8 million in dividends on its common stock, and it is expected that the Company will pay approximately $2.8 million in 1997. 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, and semi-annual interest payments of $4.3 million on its $100 million of 8.525% Junior Subordinated Deferrable Interest Debentures issued to Vesta Capital Trust I in connection with its sale of $100 million of 8.525% Capital Securities.
In order to provide further liquidity, the Company replaced its $40 million line of credit with a new $100 million line of credit. The line of credit is with a group of domestic banks pursuant to a Credit Agreement dated September 24, 1996 (the "Credit Agreement"). The Credit Agreement relating to this line of credit contains certain covenants that require, among other things, the Company to maintain a certain consolidated net worth, maintain a certain amount of investment income available for the payment of interest expense, cause each insurance subsidiary to maintain a certain total adjusted capital and which limit the amount of indebtedness the Company can have. The Company is in compliance with these covenants.
The principal sources of funds for the Company's 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 provided from (used in) operations for the year ended December 31, 1996 and 1995, was $13.8 million and $19.9 million, respectively. Net cash provided from operations in 1996 and 1995 was due principally to the large increase in premiums written. Cash flow during 1996 was adversely affected by the settlement of the unearned premium portfolio transfer on the Company's pro rata reinsuance facility.
As of December 31, 1996, the Company's investment portfolio consisted of cash and short-term investments (25.8%), U.S. Government securities (8.8%), mortgage-backed securities (1.8%), corporate bonds (24.3%), foreign government securities (0.5%), municipal bonds (36.9%) and equity securities (1.9%). According to Moody's, 97.6% 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. As of December 31, 1996, the Company had 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). 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 under Rule 144A and were not registered under the Securities Act of 1933. 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 will be used for general corporate purposes.
INFLATION
The Company does not believe its results have been materially affected by inflation due in part to the predominantly short-tail nature of its business. The potential adverse impacts of inflation include: (i) a decline in the market value of the Company's 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 the Company's operating expenses. Historically, the effect of inflation on the Company's reserves has not been material.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statement contained in this report which is not a historical fact, or which might otherwise be considered an opinion or projection concerning the Company or its business, whether express or implied, is meant as and should be considered a forward-looking statement as that term is defined in the Private Securities Litigation Reform Act of 1996. Forward-looking statements are based on assumptions and opinions concerning a variety of known and unknown risks, including but not necessarily limited to changes in market conditions, natural disasters and other catastrophic events, increased competition, changes in availability and cost of reinsurance, changes in governmental regulations, and general economic conditions, as well as other risks more completely described in the Company's filings with the Securities and Exchange Commission, including its most recent Annual Report of Form 10-K. If any of these assumptions or opinions prove incorrect, any forward-looking statements made on the basis of such assumptions or opinions may also prove materially incorrect in one or more respects.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Vesta Insurance Group, Inc. Birmingham, Alabama:
We have audited the consolidated financial statements of Vesta Insurance Group, Inc. and subsidiaries as listed in Item 8 and the supporting schedules as listed in 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.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial statement schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
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, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, 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.
KPMG PEAT MARWICK LLP
Birmingham, Alabama January 30, 1997, except for Note Q which is as of January 31, 1997.
VESTA INSURANCE GROUP, INC. CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
See accompanying Notes to Consolidated Financial Statements.
VESTA INSURANCE GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
See accompanying Notes to Consolidated Financial Statements.
VESTA INSURANCE GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
- -------- (1) See Note O.
See accompanying Notes to Consolidated Financial Statements
VESTA INSURANCE GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOW (DOLLAR AMOUNTS IN THOUSANDS)
- -------- (1) Vesta acquired The Hawaiian Insurance & Guaranty Company, Limited on June 19, 1995.
See accompanying Notes to Consolidated Financial Statements.
VESTA INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Financial Statement Presentation: Vesta Insurance Group, Inc. (Vesta) was incorporated by Torchmark Corporation on July 9, 1993 and capitalized on July 16, 1993 with a $50 million contribution from Torchmark and the contribution from Torchmark of all of the outstanding common stock of J. Gordon Gaines, Inc., Liberty National Reinsurance Company, Ltd, and Vesta Fire Insurance Corporation and its wholly-owned subsidiaries. On November 18, 1993, the Company completed an initial public offering of common stock which resulted in proceeds to the Company of approximately $51 million. At year-end 1996, Torchmark held approximately 27% of the outstanding common stock of the Company with the balance publicly traded.
Nature of Operations: The Company is a holding company for a group of property and casualty insurance companies (the "Vesta Group") that offer treaty reinsurance and primary insurance on personal and commercial risks. The lead insurer in the Vesta Group is Vesta Fire Insurance Corporation ("Vesta Fire"). In both its reinsurance and primary insurance operations, the Company focuses primarily on property coverages. Gross premiums written by the Company in 1996 totalled $769.6 million. Gross premiums written in the reinsurance line were $615.4 million in 1996, substantially all of which were on personal (including automobile) risks and commercial property risks. Also, property (including auto physical damage) risks accounted for approximately 89% of the Company's gross premiums written in all lines in 1996.
The availability and cost of reinsurance and retrocessional coverage may vary significantly over time and are subject to prevailing market conditions. Pricing in this business has weakened slightly 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 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.
Investments: Investment securities are classified in three categories at date of purchase and accounted for as follows: (i) Debt securities which are purchased with the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost; (ii) Debt and equity securities which are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings; and (iii) Debt and equity securities which are not classified as either held- to-maturity or trading 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.
Short-term investments are carried at cost and include investments in certificates of deposit and other interest-bearing time deposits with original maturities of one year or less. If an investment becomes permanently impaired, such impairment is treated as a realized loss and the investment is adjusted to net realizable value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Gains and losses realized on the disposition of investments are recognized as revenues and are determined on a specific identification basis. Unrealized gains and losses on equity securities and fixed maturities available for sale, net of deferred income taxes, are reflected directly in stockholders' equity.
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.
Cash: Cash consists of balances on hand and on deposit in banks and financial institutions.
Recognition of Premium Revenue: Earned premiums are generally recognized as revenue on a pro rata basis over the policy term.
Losses and Loss Adjustment Expenses: The liability for losses and loss adjustment expenses includes an amount determined from loss reports and individual cases. It also includes an amount for losses incurred but not reported which is based on past experience. Such liabilities are necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed, and any adjustments are reflected in earnings currently. These reserves are established on an undiscounted basis and are reduced for estimates of salvage and subrogation.
Deferred Acquisition Costs: Commissions and other costs of acquiring insurance that vary with and are primarily related to the production of new and renewal business are deferred and amortized over the terms of the policies or reinsurance treaties to which they relate. Anticipated investment income is considered in determining recoverability of deferred acquisition costs on certain lines.
Reinsurance: Reinsurance enables an insurance company, by assuming or ceding reinsurance, to diversify its risk and limit its financial exposure to risk and catastrophic events. However, reinsurance does not ordinarily relieve the primary insurer from its obligations to the insured. In the ordinary course of business, Vesta assumes business from other insurance organizations and also reinsures certain risks with other insurance organizations. The Company accrues premiums not yet reported based on historical experience.
Income Taxes: Vesta accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Property and Equipment: Property and equipment is reported at cost less allowances for depreciation. Depreciation is recorded primarily on the straight line method over the estimated useful lives of these assets which range from 2 to 5 years for equipment. Ordinary maintenance and repairs are charged to income as incurred.
Goodwill: The company amortizes goodwill straight-line over a period of 15 years.
Reclassification: Certain amounts in the financial statements presented have been reclassified from amounts previously reported in order to be comparable between years. These reclassifications have no effect on previously reported stockholders' equity or net income during the period involved.
Stock Split: On January 22, 1996 Vesta distributed one share for every two shares owned by shareholders of record as of January 5, 1996 in the form of a stock dividend. All prior year share and per share data has been restated to give effect for the dividend.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS) NOTE A--SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Per Share: Net income per share is calculated by dividing net income by the weighted average number of common share and common equivalent shares outstanding. The weighted average number of common shares and common equivalent shares outstanding for each period was 18,810,752, 18,841,756 and 18,860,427 for 1994, 1995 and 1996, respectively.
NOTE B--STATUTORY ACCOUNTING
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. Consolidated net income and stockholders' equity on a statutory basis for the insurance subsidiaries were as follows:
The excess, if any, of stockholders' equity of the insurance subsidiaries on a GAAP basis over that determined on a statutory basis is not available for distribution to its stockholders without regulatory approval.
A reconciliation of Vesta's insurance subsidiaries' statutory net income to Vesta's consolidated GAAP net income is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE B--STATUTORY ACCOUNTING (CONTINUED)
A reconciliation of Vesta's insurance subsidiaries' statutory stockholders' equity to Vesta's consolidated GAAP stockholders' equity is as follows:
NOTE C--INVESTMENT OPERATIONS
Investment income is summarized as follows:
An analysis of gains (losses) from investments is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE C--INVESTMENT OPERATIONS (CONTINUED)
A summary of fixed maturities and equity securities by amortized cost and estimated fair value at December 31, 1995 and 1996 is as follows:
A schedule of fixed maturities held for investment by contractual maturity at December 31, 1996 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 of fixed maturities were $14 million in 1994, $8 million in 1995 and $40 million in 1996. Gross gains realized on those sales were $0 in 1994, $273 thousand in 1995, and $23 thousand in 1996. Gross losses on those sales were $695 thousand in 1994, $351 thousand in 1995, and $161 thousand in 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE D--PROPERTY AND EQUIPMENT
A summary of property and equipment used in the business is as follows:
Depreciation expense on property and equipment used in the business was $706 thousand, $1,037 thousand, and $1,415 thousand in each of the years 1994, 1995, 1996.
NOTE E--DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs for the years ended December 31, 1994 1995 and 1996 are summarized as follows:
Commissions comprise the majority of the additions to deferred policy acquisition costs in each year.
NOTE F--RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The table below presents a reconciliation of beginning and ending loss and loss adjustment expense reserves for the last three years:
NOTE G--RELATED PARTY TRANSACTIONS
Vesta leases office space from Torchmark Development Corporation, a wholly owned subsidiary of Torchmark. Rent expense of $439 thousand, $494 thousand and $566 thousand was charged to operations for the years ended December 31, 1994, 1995 and 1996, respectively, related to this lease agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE G--RELATED PARTY TRANSACTIONS (CONTINUED)
Waddell & Reed Asset Management Company, a wholly owned subsidiary of Torchmark ("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 $127 thousand, $222 thousand and $409 thousand in fees to WRAMCO pursuant to the Investment Services Agreement in 1994, 1995 and 1996, respectively.
On September 13, 1993, Vesta Fire Insurance Corporation, a wholly owned subsidiary of the Company ("Vesta Fire"), and Liberty National Life Insurance Company ("Liberty National"), a wholly owned subsidiary of Torchmark, entered into a Marketing and Administrative Services Agreement, pursuant to which Vesta Fire marketed certain of its industrial fire insurance products through agents of Liberty National. Under this agreement, Liberty National pays to Vesta Fire an amount equal to all premiums collected by Liberty National after deducting all expenses incurred by Liberty National which are directly attributable to the industrial fire insurance products and after deducting a fee for administrative services. Such fee for 1994, 1995 and 1996 was $2,849 thousand, $2,305 thousand and $1,702 thousand, respectively. This agreement was terminated effective April 30, 1995, and these products are no longer marketed through Liberty National agents. However, Liberty National continues to service the existing business.
NOTE H--COMMITMENTS AND CONTINGENCIES
Litigation: The Company, through its subsidiaries, is routinely a party to 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 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 $439 thousand, $706 thousand, and $1,014 thousand, for the years ending December 31, 1994, 1995, and 1996, respectively. Future minimum rental commitments required under these leases are approximately $1.0 million per year.
Restrictions on Dividends: Vesta relies on dividends from its subsidiaries to meet its cash requirements and to pay dividends to its stockholders. The payment of dividends by Vesta's insurance subsidiaries are subject to certain limitations imposed by the insurance laws of the States of Alabama, Hawaii and Texas. The restrictions are generally based on certain levels of surplus, investment income and operating income, as determined under statutory accounting practices. Alabama, Texas and most other states that regulate Vesta's operations permit dividends in any year which together with other dividends or distributions made within the preceding 12 months, do not exceed the greater of (i) 10% of statutory surplus as of the end of the preceding year or (ii) the net income for the preceding year, with larger dividends payable only upon prior regulatory approval. Hawaii law limits dividends to the lesser of (i) and (ii) without prior approval. Certain other extraordinary transactions between an insurance company and its affiliates, including sales, loans or investments which in any twelve-month period aggregate at least 3% of its admitted assets or 25% of its statutory capital and surplus, also are subject to prior approval by the Department of Insurance. Based upon restrictions presently in effect, the maximum amount available for payment of dividends to the Company by its insurance subsidiaries in 1997 without prior approval of regulatory authorities is approximately $50.7 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE H--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 risk-based capital levels for each of the Company's insurance subsidiaries did not trigger regulatory attention.
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, 1996, the investment portfolio consisted of securities of the U.S. government or U.S. government backed securities (9%); mortgage backed securities, GNMA collateral (2%); investment grade corporate bonds (24%); cash and short-term investments (26%); securities of state and municipal governments (36%); securities of foreign governments (1%); and corporate common stocks (2%). Corporate equity and debt investments are made in a wide range of industries. All of Vesta's investments at year-end 1996 were rated investment-grade.
At December 31, 1996, the Company has unsecured reinsurance recoverables from two reinsurers that are in excess of 2% of statutory surplus, the largest of which is $15 million.
NOTE I--SUPPLEMENTAL DISCLOSURES FOR CASH FLOW STATEMENT
The following table summarizes Vesta's non-cash transactions, which are not reflected on the Statement of Cash Flow, as required by GAAP:
The following table summarizes certain amounts paid during the period as required by GAAP:
NOTE J--REINSURANCE
Vesta engages in reinsurance ceded transactions as part of its overall underwriting and risk management strategy. Vesta's reinsurance ceded programs include coverages which limit the amount of individual claims to a fixed amount or percentage and which limit the amount of claims related to catastrophes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE J--REINSURANCE (CONTINUED)
The effect on premiums earned and losses and loss adjustment expenses incurred of all reinsurance ceded transactions are as follows:
The amounts deducted from reserves for unpaid losses and loss adjustment expenses and unearned premiums that Vesta would remain liable for should reinsuring companies be unable to meet their obligations are as follows:
Vesta engages in assumed reinsurance transactions as part of its overall business strategy. The effect on premiums earned and losses and loss adjustment expenses of all assumed reinsurance transactions, including involuntary pools, are as follows:
The effect of reinsurance on premiums written and earned is as follows:
NOTE K--INCOME TAXES
Income tax expense for the years ended December, 1994, 1995 and 1996 was allocated as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE K--INCOME TAXES (CONTINUED)
Income tax expense attributable to income from operations consists of:
Vesta's effective income tax rate differed from the statutory income tax rate 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, 1995 and 1996 are presented below:
A valuation allowance for deferred tax assets, as of December 31, 1995 and 1996, was not necessary.
NOTE L--RETIREMENT PLANS
Vesta has a defined contribution retirement and savings plan and a supplemental executive retirement plan. These plans are fully funded at year- end 1996. Vesta's total cost for benefits under these plans since the Offering date was $250,391 for 1994, $319,337 for 1995 and $348,125 for 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE M--SEGMENT INFORMATION
NOTE N--DEBT
On July 19, 1995, the Company issued $100 million of its 8.75% Senior Debentures due July 15, 2025. The Debentures are not subject to redemption or any sinking fund prior to maturity. The Debentures are unsecured and rank on parity with all of its other unsecured and unsurbordinated indebtedness. The Debentures contain covenants that limit the ability of the Company or its subsidiaries to issue, sell or otherwise dispose of shares of voting common stock of any Restricted Subsidiary and limit the ability of the Company or its subsidiaries to pledge the shares of capital stock of any subsidiary. The Debentures also place certain limitations on the Company's ability to consolidate or merge with or sell its assets substantially as an entirety. The Company used the proceeds from the sale to repay the $28,000,000 loan from United Investors Management Company,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE N--DEBT (CONTINUED)
a subsidiary of Torchmark and to increase the capital and surplus of its principal insurance subsidiary, Vesta Fire Insurance Corporation.
Vesta has a $100 million line of credit. The line of credit is with a group of domestic banks pursuant to a Credit Agreement dated September 24, 1996 (the "Credit Agreement"). The interest charge is either (i) the London Interbank Rate plus 0.25% or (ii) the higher of the prime rate and the Federal Funds rate plus 0.5%, at the Company's discretion. At December 31, 1996 the London Interbank three month rate was 5.5625% and the Federal Funds rate was 5.25%.There was a balance of $22 million under this line of credit at December 31, 1996. The line of credit contains covenants which (1) restricts the Company from incurring consolidated indebtedness greater than 42.5% of the sum of the Company's consolidated indebtedness and consolidated net worth, (2) requires the Company to maintain consolidated net worth to be equal to or greater than $250,000,000 plus 50% of the aggregate of consolidated net income for each fiscal quarter ending after September 30, 1996 up to and including the fiscal quarter then ending minus the aggregate amount of all dividends paid with respect to the Company's equity securities at any time after September 30, 1996, (3) requires the Company to maintain a ratio of consolidated income before interest and taxes to consolidated interest expense of 3.0 to 1.0, and (4) requires the Company to maintain total adjusted capital (within the meaning of Risk-Based Capital for Insurers Model Act ("Model Act")) of Vesta Fire to be equal to or greater than 150% of the applicable "Company Action Level RBC" (within the meaning of the model act).
NOTE O--STOCK OPTIONS
During 1995, the Financial Accounting Standards Board issued Financial Accounting Statement No. 123, Accounting for Stock-Based Compensation ("FAS 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, FAS 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.
Prior to completion of the Company's initial public offering, the Company's stockholders approved the Vesta Insurance Group, Inc. Long Term Incentive Plan ("Plan"), which provided for grants to the Company's executive officers of restricted stock, stock options, stock appreciation rights, and deferred stock awards, and in certain instances grants of options to directors. The Company's stockholders approved certain amendments to the Plan effective May 16, 1995, including an amendment to increase the shares of the Company's common stock available for awards under the Plan from 1,091,400 shares to 2,221,998 shares and an amendment to delete the provision for the grant of options to non- employee directors. The Company's stockholders also approved the Vesta Insurance Group, Inc. Non-Employee Director Stock Plan ("Director Plan") effective May 16, 1995, which provides for grants to the Company's non- employee directors of stock options and restricted stock.
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 1995 and 1996, respectively; risk-free interest rates of 6.33 percent and 6.37 percent; dividend yields of 0.37 percent for both years; volatility factor of the expected market price of the Company's common stock of 0.34 for both years; and a weighted-average expected life of the options of ten years for both years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE O--STOCK OPTIONS (CONTINUED)
The Company's actual and pro forma information follows (in thousands except for earnings per share information):
The following summary sets forth activity under the Plan for the years ended December 31:
Of the 1,022,872 outstanding options at December 31, 1996, 549,087 were exercisable with the remaining having varying vesting periods. Exercise prices for options outstanding as of December 31, 1996 ranged from $15.00 to $35.375. Unexercised options with exercise prices of less than $25.00 for 810,358 shares had a weighted average contractual life of 7.8 years and a weighted average exercise price of $17.86 while unexercised options with exercise prices greater than $25.00 for 212,514 shares had a weighted average contractual life of 9.6 years and a weighted average exercise price of $30.01.
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 1995 the company acquired 31,192 shares of its common stock with respect to previously granted awards of restricted stock in exchange for release of indebtedness of $320,036. The balance of the notes at December 31, 1995 was $1,962,150. 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 $168,951. The balance of the notes at December 31, 1996 was $1,580,269. The promissory notes and the unearned compensation are shown as deductions from stockholders equity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS)
NOTE O--STOCK OPTIONS (CONTINUED)
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. In 1996, the Company entered into restricted stock agreements under which the Company granted 23,144 shares of restricted common stock to certain officers of the Company and 5,664 shares of restricted common stock to certain directors of the Company. The common stock with respect to all awards of restricted stock is being held by the Company until the restrictions lapse.
NOTE P--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of quarterly financial data, in thousands except per share data:
NOTE Q--SUBSEQUENT EVENT
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 under Rule 144A and were not registered under the Securities Act of 1933. 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 will be used for general corporate purposes.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No disagreements with accountants on any matter of accounting principles or practices or financial statement disclosure have been reported on a Form 8-K within the twenty-four months prior to the date of the most recent financial statements.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information required by this item is incorporated by reference from the sections entitled "Election of Directors," "Profiles of Directors and Nominees," "Executive Officers" and "Compensation and Other Transactions with Executive Officers and Directors" in the Proxy Statement for the Annual Meeting of Stockholders to be held May 20, 1997 (the "Proxy Statement"), which is to be filed with the Securities and Exchange Commission.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the section entitled "Compensation and Other Transactions with Executive Officers and Directors" in the Proxy Statement.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a)Security ownership of certain beneficial owners:
Information required by this item is incorporated by reference from the section entitled "Principal Stockholders" in the Proxy Statement.
(b)Security ownership of management:
Information required by this item is incorporated by reference from the section entitled "Stock Ownership" in the Proxy Statement.
(c)Changes in control:
The Company knows of no arrangements, including any pledges by any person of its securities, the operation of which may at a subsequent date result in a change of control.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the section entitled "Compensation Committee Interlocks and Insider Participation; Other Transactions" in the Proxy Statement.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Index of documents filed as a part of this report:
EXHIBITS INDEX
- -------- *These are the Company's compensatory plans.
Exhibit 11. Statement re computation of per share earnings
VESTA INSURANCE GROUP, INC. COMPUTATION OF EARNINGS PER SHARE
- -------- Adjusted for stock split.
Exhibit 21. Subsidiaries of the Registrant
The following table lists subsidiaries of the registrant which meet the definition of "significant subsidiary" according to Regulation S-X:
All other exhibits required by Regulation S-K are listed as to location in the Exhibits Index on pages 47 through 49 of this report. Exhibits not referred to have been omitted as inapplicable or not required.
VESTA INSURANCE GROUP, INC. (PARENT COMPANY) SCHEDULE II--CONDENSED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA)
VESTA INSURANCE GROUP, INC. (PARENT COMPANY) SCHEDULE II--CONDENSED STATEMENTS OF OPERATIONS (DOLLAR AMOUNTS IN THOUSANDS)
VESTA INSURANCE GROUP, INC. (PARENT COMPANY) SCHEDULE II--CONDENSED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS)
VESTA INSURANCE GROUP, INC. SCHEDULE III--SUPPLEMENTAL INSURANCE INFORMATION (CONSOLIDATED) AS OF DECEMBER 31, 1995 AND 1996 (DOLLAR AMOUNTS IN THOUSANDS)
VESTA INSURANCE GROUP, INC. SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION--(continued) (CONSOLIDATED) FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (DOLLAR AMOUNTS IN THOUSANDS)
VESTA INSURANCE GROUP, INC. SCHEDULE IV--REINSURANCE (CONSOLIDATED) FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (DOLLAR AMOUNTS IN THOUSANDS)
VESTA INSURANCE GROUP, INC. SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED) FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 (DOLLAR AMOUNTS IN THOUSANDS)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VESTA INSURANCE GROUP, INC.
/s/ Robert Y. Huffman By___________________________________ Robert Y. Huffman Its President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, as amended, this report has been signed by the following persons in the capacities and on the dates indicated.