Vesta Group Downgraded; Co. May Divest Some P/C Units

April 1, 2003

A.M. Best Co. said it downgraded the financial strength rating to “B” (Fair) from “B+” (Very Good) of the property/casualty affiliates of Birmingham, Ala.-based Vesta Insurance Group. Additionally, A.M. Best has assigned a “b-” rating to the existing senior debt issued by Vesta Insurance Group Inc. and “ccc” on its deferrable capital securities. The rating outlooks are stable.

In response to the ratings actions, Vesta announced that it is evaluating a possible divestiture of a portion of its property-casualty business to maximize shareholder value and strengthen its statutory capital position.

“We are disappointed with A.M. Best’s decision, and we do not believe that the rating fully reflects our continued improvement in operating trends, and the profitability of our continuing operations,” said Norman W. Gayle, III, president and CEO. “However, management is committed to improving our surplus leverage ratios, capital position and maximizing shareholder value.”

The downgrade reflects deterioration in the group’s risk-adjusted capitalization, volatile operating performance trends and uncertainty associated with the success of management’s capital enhancement initiatives.

Recent results have been negative due to unanticipated severity in the private passenger automobile line, adverse development in reserves on discontinued lines of business and continuing poor homeowner’s results in the insurance portfolio acquired from Shelby Insurance in 1997.

A.M. Best added that results continue to be impacted by Vesta’s above average expense structure. This lackluster operating performance coupled with an unfavorable arbitration decision in 2002 contributed to double digit declines in surplus in each of the last two years. When combined with significant premium growth, Vesta’s premium leverage has increased considerably resulting in capitalization that no longer supports a Secure rating.

Among other things, Vesta has entered into a 50 percent quota share agreement on its Texas property business to help stabilize its capitalization.

Members of the group that have been lowered to B (Fair) financial strength ratings include: Vesta Fire Insurance Corporation; Affirmative Insurance Company; Florida Select Insurance Company; Hawaiian Insurance & Guar Co Ltd.; Insura Property & Casualty Ins Co Inc.; Shelby Casualty Insurance Company; Shelby Insurance Company; Texas Select Lloyds Insurance Company; and Vesta Insurance Corporation.

Vesta has engaged a financial advisor, Cochran, Caronia & Co., to evaluate alternatives for the Company’s property and casualty businesses. As previously announced, Vesta has also engaged William Blair & Co. to pursue capital raising alternatives, including a possible divestiture, for Vesta’s primary life insurance subsidiary, American Founders.

According to the company, since 2000 Vesta’s statutory capital and surplus has declined due to lower than expected arbitration awards and changes in estimates of disputed reinsurance recoverables, reserve strengthening in discontinued operations, and significant premium growth.

Topics Property Property Casualty AM Best Casualty

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