Vesta said earlier this month that it has lost an Australian arbitration case involving a quota-share reinsurance dispute with NRMA Insurance, and that as a result it will take a $33.5 million charge for its 2003 fourth quarter.

Commenting on the arbitration dispute, which dates back to July 1997, Chief Executive Norman Gayle said he vehemently disagrees with the panel's final ruling, "and we are evaluating all remaining legal options to fight this decision."

The insurer also announced this week that it has signed a definitive agreement to sell a life-insurance unit, American Founders Financial Corp., to an undisclosed buyer for $63.5 million and that it will suspend cash dividends on its common stock until its upcoming capital-raising initiatives are completed.

A.M. Best said that the reduction in capital at Vesta was caused mostly by charges stemming from the unfavorable arbitration decision, along with the write-down of a deferred tax asset. As a result, the ratings firm noted, Vesta's statutory surplus for P-C operating companies declined dramatically. In addition, the company has been suffering a considerable loss in stockholders equity, Best said.

Vesta announced previously that it will sell part of its nonstandard agency and underwriting business through an initial public offering. But Best cautioned that while such an IPO may help bring in more capital, some considerable execution risks still remain regarding the success of these initiatives. The ratings agency warned that unless it sees capital improvement, its ratings for Vesta will likely be downgraded.