Vesta Declares Cash Dividend, Receives Negative Outlook from Fitch

Alabama-based Vesta Insurance Group, a holding company for various insurance and financial service firms, announced its board of directors has declared a quarterly cash dividend of $0.025 per share for the period ending June 30, 2002.

The dividend is payable Aug. 30 to shareholders of record as of Aug. 16.

Concurrently, Fitch Ratings affirmed “BBB-” insurer financial strength ratings of the company’s insurance subsidiaries. Fitch assigned a “BBB-” rating to Florida Select Insurance Company (Florida Select), and also affirmed VTA’s “BB-” senior debt rating and the “B+” capital securities rating of Vesta Capital Trust I. At the same time, Fitch changed its Rating Outlook to Negative from Positive.

The rating action considers VTA’s continued progress in recovering from a series of negative events in 1998 and 1999. Fitch continues to believe that VTA’s strategy is reasonable for the group’s situation and positively views its management’s dexterity in adapting to ever-changing competitive conditions. VTA significantly expanded its homeowners’ insurance operation in 2001 with the acquisition of Florida Select. VTA also expanded its non-standard auto insurance operation with the company’s investment in Instant Auto Insurance Holdings, Inc. (Instant Auto). Additionally, VTA continued to profitably grow the specialty insurance business it began in 2000. VTA financed the Florida Select acquisition through a secondary stock offering and continued to repurchase its senior debt and trust preferred securities. Both of these actions contributed to a reduction in financial leverage.

However, VTA’s progress was hampered by a number of developments that offset these positives and resulted in the change in Rating Outlook. In 2001 VTA experienced significant adverse loss reserve development in its discontinued reinsurance and commercial insurance businesses. This reserve development added $30 million to losses. Additionally, increased loss severity in bodily injury, uninsured motorist and under-insured motorist coverages raised VTA’s loss ratios in its standard auto business in 2001. Further, Vesta Insurance Group 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 VTA has made against its primary director’ and officers’ (D&O) insurer. VTA expects its claim will be adjudicated in 2002 and any damages received will be recognized as a gain when settled.

On July 18, 2002, VTA announced that an arbitration panel had rendered a decision in VTA’s reinsurance recoverable dispute with F&G Re, Inc. (F&G Re). The panel awarded VTA half of the $30 million recoverable sought plus $1.4 million of interest. As a result, Vesta Insurance Group recognized a $13.6 million pretax loss. Also, VTA announced that it had incurred $6.2 million in catastrophe losses and would report a net loss from operations for the second quarter of 2002.

The ratings assume VTA has now adequately reserved for losses in its discontinued commercial and reinsurance segments. Fitch expects VTA will expand its homeowners’ insurance business in select target markets where it appears to have a competitive advantage.

Additionally, Fitch believes management will continue to operate its standard auto business with profitability as its primary goal, taking the pricing, underwriting and agency actions necessary to achieve this goal.

Fitch expects VTA will continue to resolve its reinsurance collection issues through the arbitration process and anticipates similar results in some disputes to those obtained in the F&G Re dispute. A material recovery in the claim against its D&O carrier would be viewed positively.

Topics Florida Trends Auto Reinsurance