8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report

July 17, 2006

(Date of earliest event reported)

VESTA INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	001-12338	63-1097283
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

3760 River Run Drive Birmingham, Alabama	35243
(Address of principal executive offices)	(Zip Code)

(205) 970-7000

(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 7.01 Regulation FD Disclosure

Vesta Insurance Group, Inc. (“Vesta”) did not pay the interest due on July 15, 2006 (payable July 17, 2006) relating to its 8-3/4% Senior Debentures due 2025 (the “2025 Debentures”) and its 8.525% Junior Subordinated Deferrable Interest Debentures due 2027 (the “2027 Debentures”). If the failure to pay interest on the 2025 Debentures and the 2027 Debentures continues for a period of 30 days, such failure will result in an Event of Default under the Indenture, dated as of July 19, 1995, between Vesta and SouthTrust Bank of Alabama, National Association, as trustee, and the Supplemental Indenture thereto, also dated as of July 19, 1995, relating to the 2025 Debentures and the Indenture, dated as of January 31, 1997, between Vesta and First Union National Bank of North Carolina, as trustee, relating to the 2027 Debentures.

On July 18, 2006, the Texas Department of Insurance (“TDI”) notified Vesta that it has filed an Application for Order of Liquidation and Request for Expedited Hearing (the “Application”) with the District Court of Travis County, Texas. A hearing is set before the Special Master on July 24, 2006. A copy of the Application and Notice of Hearing is attached hereto as Exhibit 99.1. TDI also notified Vesta that notices will be issued to agents and policyholders directing agents to cease writing new and renewal insurance business and informing policyholders that all policies will be cancelled effective August 23, 2006. A release posted by TDI on its website regarding the notices to be sent to agents and policyholders is attached hereto as Exhibit 99.2.

Item 9.01 Financial Statements and Exhibits

(d) Exhibits.

99.1	Application for Order of Liquidation and Request for Expedited Hearing and Notice of Hearing.
99.2	Release, dated July 18, 2006, posted by the Texas Department of Insurance.

The information in this Current Report on Form 8-K, including the exhibits hereto, shall not be deemed “filed” for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

Dated as of July 19, 2006.

VESTA INSURANCE GROUP, INC.
By:	/s/ Donald W. Thornton
Its:	Senior Vice President— General Counsel and Secretary

EX-99.1

Exhibit 99.1

Cause No. D-I-GN-06-002366

THE TEXAS DEPARTMENT OF INSURANCE	§ §	IN THE DISTRICT COURT OF
Plaintiff	§
v.	§ § §
VESTA FIRE INSURANCE CORPORATION, VESTA INSURANCE CORPORATION, SHELBY CASUALTY INSURANCE COMPANY, THE SHELBY INSURANCE COMPANY, TEXAS SELECT LLOYDS INSURANCE COMPANY AND SELECT INSURANCE SERVICES, INC.	§ § § § § § §	TRAVIS COUNTY, TEXAS
Defendants	§	126th JUDICIAL DISTRICT

APPLICATION FOR ORDER OF LIQUIDATION

AND REQUEST FOR EXPEDITED HEARING

TO THE HONORABLE JUDGE OF SAID COURT:

NOW COMES the Commissioner of Insurance for the State of Texas, in his capacity as Rehabilitator of Vesta Fire Insurance Corporation, Vesta Insurance Corporation, Shelby Casualty Insurance Company, The Shelby Insurance Company, Texas Select Lloyds Insurance Company and Select Insurance Services, Inc. (the “Rehabilitator”), and files this Application for Order of Liquidation and Request for Expedited Hearing, and would respectfully show the Court the following:

I. AUTHORITY

1.1 The Rehabilitator is authorized to file this application under TEX. INS. CODE §21A.104(a).

1.2 This hearing on this matter has been referred to the Special Master appointed herein in accordance with the Order of Reference to Master entered on June 28, 2006.

II. BACKGROUND

2.1 Vesta Insurance Group (“VIG”) is a holding company, and the owner of Vesta Fire Insurance Corporation (“Vesta Fire”). Vesta Fire wholly owns or controls six insurance subsidiaries domiciled in three states. Texas Select Lloyds Insurance Company (“Texas Select”), Vesta Insurance Corporation (“Vesta Insurance”), Shelby Casualty Company (“Shelby Casualty”) and The Shelby Insurance Company (“Shelby Insurance”) are domiciled in Texas (collectively, the “Texas Subsidiaries”). The other insurance subsidiaries are Hawaiian Insurance & Guaranty Co., Ltd. (“HIG”), which is domiciled in Hawaii, and Florida Select Insurance Company (“Florida Select”), which is domiciled in Florida. Select Insurance Services, Inc. (“SIS”) is the attorney in fact for Texas Select.

2.2 Prior to receivership, A.M. Best downgraded the rating of VIG’s insurance subsidiaries to C++ (Vulnerable). As independent agents typically do not do business with insurers rated lower than B, and most lenders for residential property require insurance from a carrier that is at least B rated, VIG’s insurance subsidiaries experienced significant declines in applications and renewals after the downgrade in the rating. Further, an audit of VIG found that it had experienced accounting irregularities, including understating liabilities and overstating surplus, and a number of material weaknesses concerning internal controls, causing funds to be commingled and improperly allocated among affiliates.

2.3 In its 2004 10 K Statement filed with the Security and Exchange Commission on May 25, 2006, VIG acknowledged that its insurance subsidiaries’ business could be expected to deteriorate if VIG was unable to improve its financial condition, or if it was unable to enter into a transaction to recapitalize the companies. As VIG determined that the financial condition of its insurance subsidiaries would continue to weaken without an infusion of additional capital, it

sought to sell the subsidiaries. VIG entertained offers to purchase Texas Select, Vesta Insurance, Shelby Insurance, HIG, and Florida Select, but was unable to negotiate an agreement. VIG informed the Texas Department of Insurance that it could not agree to a sale without first obtaining approval of its shareholders and bondholders. VIG anticipated that this would substantially delay any sale, and that approval was not a certainty. Given the declining fortunes of the insurance subsidiaries, this was not a realistic option.

2.4 On June 26, 2006, this Court entered its Agreed Order Appointing Rehabilitator and Permanent Injunction (the “Rehabilitation Order”), placing Defendants into rehabilitation and appointing the Commissioner of Insurance as Rehabilitator of Defendants under TEX. INS. CODE §21A.101 et seq. Among the grounds for the proceeding was that the Texas insurers were in hazardous financial condition under TEX. INS. CODE art. 1.32 and 28 TEX. ADMIN. CODE § 8.3. HIG and Florida Select were subsequently placed in to rehabilitation in Hawaii and Florida, respectively.

2.5 The Rehabilitator made a diligent effort to sell some of the Texas Subsidiaries. The Rehabilitator entered into a letter of intent with a potential buyer to acquire control of Texas Select, Vesta Insurance and Shelby Insurance. The proposed sale would have provided for continued coverage for approximately 181,000 policyholders, and ensured the necessary capitalization for these companies to remain in business. Unfortunately, the proposed sale could not be effectuated because critical conditions of the sale could not be met. It was necessary for Vesta Fire to commute the reinsurance agreements with Texas Select, Vesta Insurance and Shelby Insurance, and such subsidiaries were required to obtain external reinsurance. The companies did not have sufficient liquid assets to fulfill these prerequisites.

III. RELIEF REQUESTED

3.1 Pursuant to TEX. INS. CODE §21A.104(a), if the Rehabilitator believes that further attempts to rehabilitate an insurer would be futile, or would substantially increase the risk of loss to creditors, policyholders, or the public, the Rehabilitator may move for an order of liquidation.

3.2 Vesta Fire, Texas Select, Vesta Insurance, Shelby Casualty and Shelby Insurance cannot continue as ongoing insurers. The companies lack sufficient liquid assets to obtain external reinsurance, leaving them exposed to catastrophic risk. Further, A.M. Best has downgraded the companies to an E-rating, making it virtually impossible to write new insurance. Finally, a number of states are suspending the companies’ licenses to do business. In accordance with the authority granted in the Rehabilitation Order under TEX. INS. CODE §21A.102(b), the Rehabilitator is proceeding to cancel all insurance policies issued by Vesta Fire, Texas Select, Vesta Insurance, Shelby Casualty and Shelby Insurance effective August 23, 2006.

3.3 The Rehabilitator has also determined that a run-off of all of the companies’ liabilities cannot be achieved due the lack of liquid assets. Because the Texas insurers were jointly administered and financially interdependent to a high degree, it is necessary to administer them in a single proceeding. As these companies will not be able to pay all policy claims as they become due, continuing rehabilitation efforts would substantially increase the risk of loss to policyholders and claimants. A liquidation order is required so that claims may be paid by state guaranty associations.

V. NOTICE

5.1 TEX. INS. CODE § 21A.007(d) provides that the Rehabilitator shall provide notice of an application to all persons on the service list, and any other parties as determined by the Rehabilitator. The Rehabilitator has determined that notice should be provided to VIG, the

insurance regulators where the insurance subsidiaries did business, and the property and casualty insurance guaranty associations that may become liable for claims upon the entry of a liquidation order. Notice of this application will be provided by electronic mail, where possible, as permitted by TEX. INS. CODE § 21A.007(d) and the Rehabilitation Order. Pursuant to TEX. INS. CODE § 21A.007(d). inclusion on the service list does not confer standing on any party.

VI. REQUEST FOR EXPEDITED HEARING

6.1 Pursuant to TEX. INS. CODE § 21A.007(e), the Rehabilitation Order permits the Rehabilitator to provide notice of any application in the time periods prescribed in Rule 21(a) of the Texas Rules of Civil Procedure if he determines that an expedited hearing is necessary. The Order of Reference to Master provides that notice of an application regarding a matter referred to the Master shall be provided at least 14 calendar days before the hearing date, unless an expedited hearing is requested. Due to the imminent risk to policyholders, the Rehabilitator requests that the Special Master consider this application on an expedited basis at 11:30 p.m. on July 24, 2006.

WHEREFORE, PREMISES CONSIDERED, the Rehabilitator prays that the Court grant the Application, and grant such other and further relief to which the Rehabilitator may be entitled.

Respectfully submitted,

/s/ James Kennedy

James Kennedy

State Bar No. 11294550

Attorney for the Rehabilitator

P.O. Box 149104

MC 110-1A

Austin, Texas 78714-9104

Phone: (512) 305-8164

Fax:     (512) 475-1843

NOTICE OF HEARING

Pursuant to the terms of the Order of Reference to Master entered by the District Court in this cause, the Application for Order of Liquidation is hereby set for oral hearing before the Special Master, Tom Collins, at 11:30 a.m. on July 24, 2006, at 333 Guadalupe, Hearing Room 101, Austin, Texas. In accordance with the Order of Reference and the procedures established by the Master under Rule 171 of the Texas Rules of Civil Procedure, any interested party objecting to the Application must observe the following rules:

1. Any objection must be filed with the Travis County District Clerk three days prior to the hearing date.

2. A copy of any objection shall be served on:

(a) The Special Master’s Docket Clerk, Ms. Jean Sustaita, Texas Department of Insurance, 333 Guadalupe, Hobby Tower III, Room 550, Austin, Texas (by hand delivery); or, MC 305-1D, P.O. Box 149104, Austin, Texas 78714-9104 (by mail).

(b) Counsel for any parties that have filed an appearance in this cause.

3. The written objection must specifically list all reasons for the objection with supporting references to and discussion of statutory and case authorities. Reasons not stated in writing will not be considered orally.

4. Failure to file timely a written objection before the Special Master constitutes a waiver of the right to object to the Special Master’s recommendation to the District Court.

/s/ James Kennedy

James Kennedy

Attorney for the Rehabilitator

EX-99.2

Exhibit 99.2

July 18, 2006

Vesta Fire and Subsidiaries to Cancel Policies;

Action includes Texas Select Homeowners Policies

AUSTIN – At the direction of its Rehabilitator, Vesta Fire Insurance Company (Vesta Fire) and its Texas subsidiary insurance companies have begun issuing notices to agents to cease writing new and renewal insurance business, including homeowners policies for Texas Select Lloyds customers. Absent a last minute solution, all policies with the companies will be cancelled on August 23. The Rehabilitator has also started the process to have Vesta Fire and its Texas subsidiary insurers, including Texas Select, placed into liquidation.

Vesta Fire is a Texas-domiciled insurer and the parent company of four other Texas-domiciled insurers: Texas Select Lloyds Insurance Company, Vesta Insurance Corporation, Shelby Casualty Company, and the Shelby Insurance Company. Texas Select is the only insurers with active Texas policyholders.

This action follows an agreed order of rehabilitation for the Texas-domiciled companies obtained by the Texas Department of Insurance on June 28. Texas Insurance Commissioner Mike Geeslin, acting as Rehabilitator, immediately appointed a Special Deputy Receiver (SDR). The SDR assumed control of Vesta Fire and its Texas subsidiaries and subsequently made a recommendation that the companies were unable to meet their current obligations. Prior to that determination, the Rehabilitator had been in active negotiations with a potential buyer for certain Vesta insurers, including Texas Select. However, the parties were unable to complete the transaction.

In taking this action, Geeslin noted that it was in the long-term best interests of policyholders.

“My primary goal in this action is to ensure policyholders have insurance that is able to pay their claims should a loss occur,” Geeslin said. “We simply could not allow policyholders and ultimately Texas taxpayers to be at risk given the financial condition of these companies.”

Geeslin noted that concerns with Vesta Fire and its subsidiaries extend group-wide and were not limited to Texas Select and its underlying insurance contracts. Vesta’s problems include a series of losses from hurricanes that drove a long-term need for additional capital. Ultimately, Vesta’s capital raising initiatives were not successful. Similar to the Texas actions, regulators in Hawaii have taken control of another Vesta subsidiary, Hawaiian Insurance & Guaranty Co. Ltd., and Florida regulators have taken control of another affiliate, Florida Select Insurance Company.

Until earlier this year, Texas Select Lloyds was the only Vesta insurer domiciled in Texas. In May, four other Vesta insurers re-domesticated to Texas, including Vesta Fire. Vesta Fire is the parent company of the other Vesta insurers and served as a financial backstop for the subsidiary insurers, including Texas Select. These actions were coordinated by the Texas Department of Insurance in order to consolidate regulatory authority.

Affected policyholders should contact their insurance agents as soon as possible to begin securing new insurance coverage. TDI is also assisting Texas policyholders to obtain new insurance immediately. Policyholders located in other states may request similar assistance from their respective states’ insurance departments. Consumer Assistance specialists may be reached at the Texas Department’s toll-free number – 1-800-252-3439. TDI’s websites, www.tdi.state.tx.us and www.helpinsure.com, have been updated with information to assist consumers during this transition. Other TDI resources on the internet include homeowners price comparison and company and agent “look up” pages to verify that insurance companies, agencies and agents are licensed.

For more information contact: PIO@tdi.state.tx.us

Last updated: 07/18/2006