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BIRMINGHAM, Ala. -- Vesta Insurance Group Inc. will restate its financial results for the last five years, reducing earnings by a total of $72.4 million to correct accounting problems that triggered a massive sell-off of its stock last month.
Vesta announced last week that it will take a $13.6 million aftertax hit to earnings for the fourth quarter of 1997 and first quarter of 1998 after finding that it had overestimated premium income and improperly reduced reserves.
Of the $13.6 million, about $6.1 million represents a reinstatement of reserves that Vesta had earlier taken down, while most of the remaining $7.5 million relates to an overstatement of premium income, the company said.
At the same time, Vesta said it is revising its method of accounting for assumed reinsurance business, including actuarial assumptions it used to estimate premium income and losses.
As a result, the insurance group will report:
* A cumulative $49 million aftertax hit to earnings for the years 1993 through 1997.
Of this, $29 million relates to Vesta's accelerated recognition of premium income. Earnings related to this income should reappear in the company's results for 1998 and future periods, Vesta said.
The other $20 million reduction relates to revised actuarial assumptions used in calculating reinsurance premium and loss reserves, the company said.
* An additional $9.8 million aftertax hit to first-quarter 1998 earnings to reflect the accounting changes.
On June 1, Vesta, a property/casualty insurance and reinsurance group, announced that it had discovered possible "accounting irregularities" that it estimated would cause a $15.3 million cut in reported earnings for the last quarter of 1997 and first quarter of this year (BI, June 8).
Vesta, which did not describe the irregularities, also reported that Robert Y. Huffman, its president and chief executive officer, had resigned. Two other Vesta officers, including its senior vp-administration, also resigned.
The news cut Vesta's stock price in half from $52.69 a share on May 29 to $26 per share by the end of the following week, a reduction in market capitalization from $972.5 million to $481 million. The price drop also triggered a barrage of proposed shareholder class-action lawsuits charging the company with filing false financial statements.
Vesta had earlier sparred with the Alabama Insurance Department over its statutory reinsurance accounting methods and was forced to take a one-time $68 million charge against 1997 earnings. The charge reversed the cumulative impact for prior years of Vesta's method of recording premium income.
Previously, Vesta had recorded premiums for assumed reinsurance business as earned in the year the business was written even when the treaties overlapped two calendar years, the company said.
While it agreed with Alabama regulators to stop this practice in its statutory reports, Vesta maintained in its Securities and Exchange Commission filings that the change did not affect its reporting under generally accepted accounting principles.
After reviewing the matter with its auditor, KPMG Peat Marwick, though, Vesta concluded that it should use the same method for its statutory and GAAP reports. The result was the announced reduction in earnings of $9.8 million for the first quarter and $49 million for the previous years.
The earnings hits "do not affect the financial strength of Vesta," said Norman W. Gayle III, who took over as acting CEO after Mr. Huffman's departure. "Vesta continues to have stockholders' equity in excess of $300 million and is in compliance with all of its financial covenants in its loan agreements. Our financial position and our franchise remain strong."
Alabama Deputy Insurance Commissioner David Parsons said a regular examination of Vesta is expected to be finished by September.
Standard & Poor's Corp. has downgraded Vesta's financial strength rating to A- from A+, citing an "expected decline in operating performance and financial flexibility."
Duff & Phelps Credit Rating Co. also downgraded Vesta's claims paying ability rating to A from A+, while the insurer's A rating from A.M. Best Co. remains under review.
Vesta also announced last week that it has hired James E. Tait as acting chief financial officer. Mr. Tait is a former managing partner of Coopers & Lybrand L.L.P. and is president of Tait Advisory Services L.L.C.
Vesta's operating units include Vesta Fire Insurance Co., Shelby Casualty Insurance Co. and Vesta County Mutual Insurance Co.