A.M. Best Downgrades Vesta Insurance Units To B -Fair- From B++ -Very Good-.

OLDWICK, N.J.--(BUSINESS WIRE)--May 3, 1999--

A.M. Best Co. today downgraded the insurance entities of the Vesta Insurance Group, Inc., Birmingham, Ala., from B++ (Very Good) to B (Fair) and removed the rating from under review.

The downgrade reflects the group parent's highly leveraged financial condition, weak holding company liquidity and precipitous 53% drop in its capital base, following significant earnings charges during 1998. Accordingly, A.M. Best believes that, while the insurance group has an ability to meet its current obligations, its financial strength is vulnerable to adverse changes in underwriting and economic conditions.

Vesta recently announced a $100 million fourth-quarter charge, $75 million of which was related to the write-off of goodwill associated with its 1997 Shelby acquisition, which represents the majority of Vesta's ongoing business volume. Over the next year, A.M. Best believes Vesta faces considerable financial challenges and uncertainty in its ability to service its amended bank line, which matures in July 2000, particularly in light of the group's diminished long-term earnings prospects following the sale of its reinsurance operation. Vesta's outstanding bank line is currently $55 million.

A.M. Best expects that Vesta management will likely resort to asset sales, as evidenced by its recent sale of its reinsurance renewal rights for $15 million, as well as attracting additional capital and/or refinancing its large debt obligations. In addition, Vesta's operating leverage at the subsidiary level is high. While premium leverage will fall off from the sale of its reinsurance business, A.M. Best also is concerned about Vesta's large reinsurance recoverable balances, equating to roughly 100% of surplus, given its heavy concentration with a handful of reinsurers. Finally, Vesta is in the midst of a targeted 1998 insurance examination that was prompted at management's request. This review has not, as yet, yielded any further accounting adjustments, but some uncertainty remains.

Vesta's recent earnings volatility, which included a net loss of approximately $140 million 1998, stemmed from sizable one-time accounting adjustments, reserve strengthening, heavy catastrophe losses and higher-than-expected integration costs. The group's financial leverage is very high, with debt and debt-like instruments now comprising two-thirds of its capital base. This higher financial leverage, coupled with the group's weak stock currency--which is trading 90% below its prior year market value--has considerably diminished its financial flexibility. In addition, Vesta has suspended its common and preferred dividends, as required by its amended bank facility agreement.

While some near-term improvement in the group's earnings is expected, uncertainty remains, given Vesta's shift to a regional personal lines operation following the sale of its reinsurance book and the discontinuation of most of its commercial lines business. Vesta's dramatic business mix shift, which was driven largely by the acquisition of Shelby, has required substantial infrastructure and system modifications causing a significant increase in the group's expense ratio. While some cost redundancies will be removed with the final integration of these operations, Vesta will remain challenged by intensifying personal lines competition.

On the positive side, A.M. Best is encouraged by the group's strong business persistency, loyal agency relations and improved profitability projected for 1999. These factors will enable the group to service its near-term obligations and should stabilize its surplus levels in accordance with its amended bank facility agreement. Vesta also successfully negotiated the waiver of defaulted loan covenants, and improved its interim liquidity through its amended bank agreement. Finally, the group is actively engaged in reviewing its long-term capital structure to improve flexibility. A.M. Best will closely monitor the group's financial strength and management's progress and adjust Vesta's rating accordingly.

A.M. Best Co., established in 1899, is America's oldest and most widely recognized insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.