Fitch Affirms, Removes Vesta Off Rating Watch Negative

Fitch Ratings has removed all ratings of Alabama-based Vesta Insurance Group (VTA) and its subsidiaries from Rating Watch Negative. Fitch affirmed VTA’s ‘B-‘ long-term issuer and debt ratings with a Stable Outlook. Fitch also affirmed the ‘CCC’ capital securities rating of Vesta Capital Trust I. The ratings cover approximately $56 million of public senior debt and $20 million of deferrable capital securities.

Fitch also affirmed the ‘BB’ insurer financial strength ratings of Florida Select Insurance Co., Hawaiian Ins. & Guaranty Co., Shelby Casualty Insurance Co., The Shelby Insurance Co., Vesta Fire Insurance Corporation, Vesta Insurance Corporation, and Texas Select Lloyds Insurance Company with a Stable Outlook.

The ratings were placed on Rating Watch on March 5, 2004 following VTA’s announcement of an adverse ruling in a reinsurance arbitration dispute. VTA also indicated that it was reviewing the implication of the ruling on other reinsurance recoverables, as well as the recoverability of its deferred tax asset.

Vesta subsequently announced that it has written off the reinsurance recoverables related to the arbitration ruling and had established a valuation allowance for its deferred tax asset, resulting in a combined fourth quarter 2003 GAAP charge of $118.8 million.

Monday’s rating action follows Vesta’s successful completion of an initial public offering of its Affirmative Insurance Holdings (AFFM) subsidiary. Vesta sold 3.75 million shares of AFFM for net proceeds of approximately $48.8 million. The underwriters have a 30-day option to purchase an additional 563,000 shares from VTA, which would generate additional proceeds of $7.3 million. Assuming full exercise of the underwriters’ option, VTA will own 43% of AFFM.

The affirmations of VTA’s ratings reflect its successful completion of the offering, which enabled it to replenish capital lost as a result of the arbitration and deferred tax write-downs.

Additionally, the transaction transfers approximately $180 million of annual premium to AFFM, which should enable VTA to reduce its gross leverage. The affirmations also assume VTA will successfully complete the sale of its American Founders life insurance subsidiary for $63.5 million. A definitive agreement has been reached in that transaction, which currently awaits state regulatory approval of the sale.

The ratings also recognize that, subsequent to the sale of AFFM, VTA is a smaller and less diversified insurance organization. Additionally, the business retained by VTA contains considerable natural catastrophe risk. Fitch also notes that the proceeds from the sale of American Founders are in the form of cash and a $38.5 million note. Therefore, the sale exposes VTA to some credit risk.

Fitch ratings affected:

— Florida Select Insurance Co.

— Hawaiian Ins. & Guaranty Co.

— Shelby Casualty Insurance Co.

— The Shelby Insurance Co.

— Vesta Fire Insurance Corporation

— Vesta Insurance Corporation

— Texas Select Lloyds Insurance Co.

— Insurer Financial Strength/Affirm/’BB’/Stable

Vesta Insurance Group, Inc.:

— Long-term issuer affirmed at ‘B-‘; Stable Outlook;

— Senior debentures due 2025; affirmed at ‘B-‘; Stable Outlook.

Vesta Capital Trust I:

— Deferrable capital securities due 2027; affirmed at ‘CCC’.