Vesta Affirmed

Fitch Ratings affirmed “BBB-” insurer financial strength ratings of Vesta Insurance Group’s insurance subsidiaries. A “BBB-” rating was assigned to Florida Select Insurance Company (Florida Select), and Vesta’s “BB-” senior debt rating and the “B+” capital securities rating of Vesta Capital Trust I were affirmed. The outlook is negative.

The action considers Vesta’s continued progress in recovering from a series of negative events in 1998 and 1999. Fitch believes that Vesta’s strategy is reasonable and views positively management’s dexterity in adapting to ever-changing competitive conditions. Vesta significantly expanded its homeowners’ insurance operation in 2001 with the acquisition of Florida Select, and expanded its non-standard auto insurance operation with investment in Instant Auto Insurance Holdings Inc. (Instant Auto). Additionally, Vesta continued to profitably grow its specialty insurance business.

A number of developments offset these positives. In 2001 Vesta experienced significant adverse loss reserve development in its discontinued reinsurance and commercial insurance businesses. This reserve development added $30 million to losses. Increased loss severity in bodily injury, uninsured motorist and under-insured motorist coverages raised Vesta’s loss ratios in its standard auto business in 2001. Vesta also incurred a $25 million charge in 2001 to settle a securities class action lawsuit. Positively, the securities settlement caps VTA’s liability in the suit and is partially mitigated by an outstanding claim Vesta has made against its primary director’ and officers’ (D&O) insurer. Vesta expects its claim will be adjudicated in 2002 and any damages received will be recognized as a gain when settled.

The ratings assume Vesta has now adequately reserved for losses in discontinued commercial and reinsurance segments. Fitch expects Vesta to expand its homeowners’ insurance business in select target markets where it appears to have a competitive advantage and believes management will continue to operate its standard auto business with profitability as its primary goal. Vesta is expected to continue to resolve its reinsurance collection issues and other disputes through the arbitration process.

Topics Florida Auto