A.M. Best Co. has placed the financial strength rating of B (Fair) of the property/casualty affiliates of Alabama-based Vesta Insurance Group Inc. (Vesta) under review with negative implications.
A.M. Best has also assigned an issuer credit rating of “b” to Vesta, placing the rating under review with negative implications. Concurrently, A.M. Best has placed the senior debt ratings of “b” on $100 million 8.75% senior unsecured debentures, due 2025, and “ccc+” on $100 million 8.525% deferrable capital securities, due 2027, of Vesta under review with negative implications.
These rating actions reflect Vesta’s significant deterioration in capital and its ongoing uncertainty regarding management’s capital enhancement initiatives. The reduction in capital was driven primarily by a $60.6 million loss stemming from the four Florida hurricanes and a recent jury verdict received on a previously disclosed litigation case, Muhl v. Vesta. The charge for this case is initially estimated to be in the range of $10 to $15 million and will result in a loss from discontinued operations in the third quarter. Accordingly, Vesta’s risk-adjusted capitalization has fallen below its current rating level.
In addition, Vesta recently announced that it has terminated the agreement to sell its life insurance operations to an unaffiliated investor group. Vesta terminated the agreement on Nov. 5, 2004, following the buyers’ failure to close after the transaction received regulatory approval on Oct. 11, 2004.
Consequently, the financial strength rating of B (Fair) of American Founders Life Insurance Company (American Founders Life) (Texas) remains under review with negative implications. Vesta is currently evaluating its alternatives related to American Founders Life, including retaining and growing the business or pursuing a divestiture.
The ratings will remain under review pending A.M. Best’s meeting with management as well as completion of Vesta’s capital enhancement initiatives. While the holding company has access to additional funds for the insurance operations, execution risk remains. In the absence of improved risk-adjusted capitalization, the ratings will likely be downgraded.
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