Vesta opens options for firm's future
RUSSELL HUBBARD
News staff writer
05/23/99
Birmingham News
Vesta Insurance Group executives say they have put "no restraint or limit" on the investment bankers hired to explore strategic alternatives.
"We are still interested in a transaction that will make sense for our shareholders, that will increase value for them," said Vesta CEO Norman Gayle.
That value plummeted last year, after June accounting controversies slashed share prices from $52.69 to $5.56 at Thursday's close. Those problems cost the company its CEO, Robert Huffman, and motivated shareholder lawsuits alleging fraud and mismanagement. In recent months, Vesta has sold or disconti nued many insurance lines that earned hefty profits in the past.
While investment bankers Wasserstein Perella seek a buyer or merger partner, Gayle said Vesta will go forward as a seller of personal policies, such as those for cars and houses. That puts the company in direct competition with giant, low cost competitors such as GEICO and Allstate that sell policies inexpensively via telephone and the Internet.
Vesta earned its reputation - and healthy profits - during the early 1990s as a reinsurance company. It sold insurance to other insurers seeking protection against catastrophic losses. It also did a thriving trade in certain polices sold to business owners.
But the accounting problems, which wiped out $49 million in profits from previous years and destroyed investor confidence, led to damaging downgrades by insurance ratings agencies. That sealed the fate of the reinsurance and commercial businesses. Only personal insurance remained, a market that doesn't require the high ratings customers demand for reinsurance and commercial policies.
That larger, more efficient companies compete fiercely on price for personal insurance customers "is not lost" on Vesta, Gayle said. "Our strategy is to compete in the areas where they do not," he said. He said the company's national network of insurance agents in small towns, where many people prefer face-to face contact with insurance salespeople, represents a strong opportunity to fill a neglected niche.
"It is a reasonable strategy," said Don Thorpe, an analyst with Duff & Phelps, a credit rating agency in Chicago. "They could not continue in reinsurance and commercial insurance with their ratings downgrades."
Shedding the reinsurance and commercial lines also reduces Vesta's capital needs, Thorpe said, as the costs associated with running those operations disappears. "They can't access capital as cheaply as in the past," Thorpe said. "They will be limited in their financial flexibility."
Gayle, who moved from vice president to CEO after the June account ing crisis, believes the company will earn a profit during 1999 between $15 million and $20 million. The company earned first quarter profits of $8.8 million, as opposed to $2.1 million in restated profits the year before. For fiscal 1998, Vesta lost $141 million.
The $15 million Vesta collected for the sale of its reinsurance business earlier this year counted toward the first quarter profit, which rankles some investors who doubt the company's ability to earn a profit from operations alone.
"At this point the stock is a loser," said John Linnartz, a Houston investor who traveled to Birmingham to question management. "The only way they can support earnings at this point is by selling assets."
Despite the company's difficulties, which included three consecutive quarters of net losses until this year's first quarter, shareholders overwhelmingly supported management's proposals at the company's annual meeting last week. Both Gayle and Chief Financial Officer James Tait were up for re-election to the board of directors, and both carried 98 percent of the shareholder votes tendered.
"We don't want to tout this too much, but it appears to reaffirm that management has done a better job than many people might say," Gayle said after the meeting. "If there was an opportunity for an embedded message, this was it." |
