None of the following is good, so buyer beware:
Ongoing woes may force sale of Vesta subsidiaries
By Tiffany Ray
Birmingham Business Journal
Updated: 8:00 p.m. ET July 16, 2006
Vesta Insurance Group Inc.'s largest subsidiary and at least six others could be on the block as regulators in three states labor to protect policyholders from the company's ongoing financial ills.
Earlier this month, the company announced that its largest subsidiary, Vesta Fire Insurance Corp., along with Vesta Insurance Corp., Shelby Insurance Co., Shelby Casualty Insurance Corp., Texas Select Lloyds Insurance Co. and Select Insurance Services Inc., had been placed into court-ordered rehabilitation in Texas.
In addition, the Florida Department of Insurance placed Vesta's Sarasota subsidiary, Florida Select Insurance Co., into rehabilitation under that state's Department of Financial Services. And in Hawaii, the state's insurance commissioner has taken control of Hawaiian Insurance & Guaranty Co. Ltd., another Vesta subsidiary.
News of the rehabilitations is the latest in a string of blows that have brought share prices for the Birmingham-based insurer to just over a penny as of Wednesday, July 12.
Plagued by accounting errors and hit with losses from the spate of recent hurricanes in Florida, Texas and other states, Vesta has lagged in filing financial statements with the U.S. Securities and Exchange Commission. The company has yet to file financial statements for 2005 or the current year and has worked to restate results for previous years.
Statements filed in May for 2004 reported a net loss of $136.7 million for the year, compared with a net loss of $119.8 million in 2003. Per diluted share, the loss was $3.85 in 2004, compared with a loss of $3.43 in 2003. Total revenue declined in 2004 to $472 million, down from $616.4 million in 2003.
In 2004, hurricanes Ivan and Jeanne resulted in a combined net loss of about $66.5 million, the company reported. The company noted in the filing that it was hit with a subsequent net loss of $30.6 million from 2005 hurricanes.
Late last year, the company announced it would be delisted from the New York Stock Exchange. In January, Vesta shares began trading on the Pink Sheets Electronic Quotation Service under the ticker symbol VTAI.PK.
News of the rehabilitation orders led to quick revisions by ratings agencies. A.M. Best Co. revised its financial strength rating for the subsidiaries to "E", indicating that they are under regulatory supervision, from C++, or marginal. The issuer credit ratings - that is, ratings on any corporate debt the company might issue - were lowered to "d" from "b" for Vesta's insurance affiliates and to "d" from "cc" for the parent company.
Moody's Investors Service lowered Vesta's senior debt rating to a C from B3.
Vesta indicated in its announcement of the rehabilitation orders that the move constitutes a default on its $70 million long-term debt securities. With that and other factors, Moody's says in a statement, the holding company's ability to meet its debt obligations "appears to be severely strained."
The limited information available on its financial situation creates a lot of uncertainty about the company, says Pano Karambelas, vice president and senior analyst in Moody's Financial Institutions Group. Without financial filings, it's difficult to determine how much cash flow the company is generating and whether it is sufficient to service its debts.
Additionally, Karambelas says news of the rehabilitation may hamper the company's ongoing business prospects.
Peter Brink, a senior financial analyst with Weiss Ratings Inc. in New York, agrees. "They might say they're open for business, but who's going to go there?" he says.
Brink says the rehabilitation orders triggered a downgrade to an "F" rating for Vesta's insurance subsidiaries.
David W. Lacefield, who was named CEO of the ailing company in February, could not be reached for comment.
Under the terms of rehabilitation, policies and coverage remain in place, and subsidiaries continue to process and pay claims. But control of operations has shifted from Vesta's corporate leaders to regulators in each state.
"For all intents and purposes, we are running the company," says Jim Hurley, a spokesman for the Texas Department of Insurance.
Hurley says Texas' decision to take control of Vesta's six subsidiaries there was based on an accumulation of factors, but the department decided to make the move after efforts by Vesta to recapitalize operations there fell through.
"At the end of the day, you've got to make a gut call for when you pull the trigger," he says.
Although Hurley says a number of alternatives are available in dealing with the companies, a news release from the department says Texas regulators are "currently in active negotiations with a potential buyer that will recapitalize a number of the Vesta companies."
Hurley declined to elaborate.
Regulators in Honolulu say the Hawaii company's financial condition was "adversely affected" by the experiences of Vesta Insurance Group and its Vesta Fire Insurance and other subsidiaries. A news release from the Hawaii Department of Commerce and Consumer Affairs says the commissioner, along with regulators in other states, is "currently considering a number of options, including proposals from companies that will provide additional capital to" Vesta Fire Insurance and Hawaiian Insurance & Guaranty.
Nina Banister, a spokeswoman for Florida Department of Financial Services in Tallahassee, says Florida Select was unable to secure the reinsurance it needed to bolster reserves after its existing reinsurance expired June 30, and that triggered the decision by the state's Insurance Department to place the company in rehabilitation.
© 2006 Birmingham Business Journal
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