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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 1-8007
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FREMONT GENERAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 95-2815260
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2020 SANTA MONICA BOULEVARD,
SANTA MONICA, CALIFORNIA 90404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 315-5500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
LIQUID YIELD OPTION(TM) NOTES DUE 2013 (ZERO COUPON-SUBORDINATED)
FREMONT GENERAL FINANCING I -- 9% TRUST ORIGINATED PREFERRED SECURITIES(SM)
(TITLE OF EACH CLASS)
NEW YORK STOCK EXCHANGE
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 22, 1996:
COMMON STOCK, $1.00 PAR VALUE -- $395,582,000
The number of shares outstanding of each of the issuer's classes of common
stock as of March 22, 1996:
COMMON STOCK, $1.00 PAR VALUE -- 25,393,000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the 1996 annual meeting of stockholders
are incorporated by reference into Part III of this report.
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ITEM 1. BUSINESS
GENERAL
Fremont General Corporation is a nationwide insurance and financial
services holding company, operating select businesses in niche markets. The
primary operating strategy of Fremont General is to build upon its core business
units through acquisition opportunities and new business development. Fremont
General's secondary strategy is to achieve income balance and geographic
diversity among its business units in order to limit the exposure of Fremont
General and its subsidiaries ("Fremont General" or "the Company") to industry,
market and regional concentrations.
The Company is one of the largest mono-line workers' compensation insurers
in the United States, with major market positions in California and Illinois,
and a presence in Arizona, Indiana, Michigan and Wisconsin. For the year ended
December 31, 1995, the Company's workers' compensation insurance premiums were
evenly divided between the western and the mid-western regions. For the year
ended December 31, 1995 and 1994, the Company had workers' compensation
insurance premiums earned of $575 million and $401 million, respectively. See
"Insurance Operations." The Company recently expanded its workers' compensation
insurance operations through the acquisition on February 22, 1995 of Casualty
Insurance Company ("Casualty") and its wholly-owned subsidiary Workers'
Compensation and Indemnity Company ("WCIC"). Casualty is the largest underwriter
of workers' compensation insurance in Illinois with additional operations,
directly or indirectly, in Indiana, Michigan and Wisconsin. Fremont General
believes that this acquisition provides the Company with a national platform
upon which to build its workers' compensation insurance business, while
providing greater geographic diversification. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note B of Notes to Consolidated Financial Statements. A.M. Best rates the
Company's workers' compensation insurance subsidiaries on a consolidated basis
as "A-" (Excellent). An "A-" rating is A.M. Best's fourth highest rating
category out of fifteen rating categories ranging from "A++" (Superior) to "F"
(In Liquidation).
The Company also has growing financial services operations engaged
primarily in commercial and residential real estate lending in California and
commercial finance lending, principally to small and middle market companies
nationwide. The Company's financial services loan portfolio has grown from $536
million at December 31, 1991 to $1.5 billion at December 31, 1995. By engaging
in several selected businesses which are geographically diverse the Company
believes it can achieve greater stability in its operating results. Over the
five years ended December 31, 1995, the Company's income before taxes grew at a
compound annual rate of approximately 21% to $100 million in 1995. The Company's
book value increased from $175 million at December 31, 1990 to $498 million at
December 31, 1995. The Company's assets were $4.5 billion at December 31, 1995.
See "Financial Services Operations."
Management believes that ownership of the Company's Common Stock by
employees has been an important element in the Company's success by enabling the
Company to attract and retain the best available personnel for positions of
substantial responsibility and to provide additional incentive and motivation to
such individuals to promote the success of the Company. As of December 31, 1995,
officers and directors of the Company, their families and the Company's ESOP
beneficially owned approximately 30% of the Company's outstanding Common Stock.
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this section and
elsewhere in this
Form 10-K.
Fremont General, a Nevada corporation, was incorporated in 1972.
INSURANCE OPERATIONS
Workers' Compensation Insurance
Fremont Compensation Insurance Company and its subsidiaries ("Fremont
Compensation") underwrites workers' compensation insurance principally in
California and Illinois, with a smaller presence in Arizona, Indiana, Michigan,
and Wisconsin. With the acquisition of Casualty in 1995, Fremont Compensation is
one of the largest mono-line workers' compensation insurers in the United
States. In 1995, Fremont
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Compensation's workers' compensation insurance premiums were evenly divided
between the western and mid-western regions. The Company believes this
geographic diversity mitigates potential fluctuations in earnings from cyclical
downturns in various regional economies. A.M. Best rates the Company's workers'
compensation insurance subsidiaries on a consolidated basis as "A-" (Excellent).
In 1995, income before taxes from workers' compensation insurance operations was
$85 million.
Workers' compensation is a statutory system which requires every employer
to either purchase insurance or self-insure in order to provide its employees
with medical care and other specified benefits for work-related injuries or
illnesses. Compensation is payable regardless of who was at fault. Most
employers provide for this potential liability by purchasing workers'
compensation insurance from insurance carriers. There are four types of benefits
payable under workers' compensation policies: medical benefits, vocational
rehabilitation benefits, disability benefits and death benefits. The amounts of
disability and death benefits payable for claims are established by statute,
vocational rehabilitation benefits are provided with certain limitations in some
jurisdictions, including California, and no dollar limitation is set forth for
medical benefits. See "Regulation -- Insurance Regulation."
Premiums. Workers' compensation insurance premiums are based upon the
policyholder's payroll and may be significantly affected by changes in general
economic conditions which impact employment and wage levels, as well as by
government regulation. Insurance premiums are also subject to supervision and
regulation by the state insurance authority in each state. In July 1993, the
California legislature enacted legislation to reform the workers' compensation
system and to, among other things, adopt an open rating system through the
repeal of the minimum rate law effective January 1, 1995. Illinois has been
operating under an open rating system since 1982. In an open rating system,
workers' compensation insurers are provided with advisory rates by job
classification and each insurance company determines its own rates based in part
upon its particular operating and loss costs. Although insurance companies are
not required to adopt such advisory rates, companies in Illinois generally
follow such rates. However, insurance companies in California have, since the
adoption of an open rating system, generally set their premium rates below such
advisory rates. Before January 1, 1995, California operated under a minimum rate
law, whereby premium rates established by the California Department of Insurance
were the minimum rates which could be charged by an insurance carrier. See
"Regulation -- Insurance Regulation." The repeal of the minimum rate law has
resulted in lower premiums and lower profitability on the Company's California
workers' compensation insurance policies due to increased price competition. The
Company expects that the premiums earned in California will continue to
decrease, principally due to price competition. In addition, the Company
anticipates price competition to continue in Illinois, where an additional
overall decrease in advisory rates of 13.6% was effective January 1, 1996. See
"Competition."
Underwriting and Loss Control. Prior to insuring a workers' compensation
account, the Company's underwriting department reviews the employer's prior loss
experience, safety record, credit history, operations, geographic location and
employment classifications. The Company generally avoids industries and
businesses involving hazardous conditions or high exposure to multiple injuries
resulting from a single occurrence. The Company targets accounts that appear to
have a strong work ethic among employees, long-term employees, and a genuine
interest in the adoption of and adherence to loss control standards.
The loss control department participates in the initial underwriting
process and provides continuing services while the policy is in force. In the
initial underwriting phase, a Company loss control consultant will generally
survey the employer's operations, review the employer's prior loss patterns and
assess the extent to which such losses may be prevented. The loss control
consultant will also meet with the employer's management to assess the extent to
which management is committed to safety in the workplace. After the policy is
issued, the loss control department provides continuing assistance to the
employer in developing and maintaining safety programs and procedures, reviews
periodic loss reports, attempts to identify weaknesses in the employer's loss
control procedures and assists the employer in correcting these weaknesses.
Policyholders' Dividends. In 1995, the Company's workers' compensation
insurance policies, both in California and those underwritten by Casualty, were
predominately written as non-participating, which does not include provisions
for the insurer to declare and pay dividends to a policyholder after the
expiration of the
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policy. In 1994 and prior, the Company's policies were predominately written as
participating, thereby obligating the Company to consider the payment of
dividends to a policyholder, based upon the policyholder's loss experience, the
Company's overall loss experience and competitive conditions. This shift in
policy type is due primarily to the increased competition in the California
market which has resulted from the repeal of the minimum rate law, effective
January 1, 1995. See "Premiums" and "Regulation -- Insurance Regulation." The
Company anticipates that this shift to non-participating policies will continue
and be a characteristic element of the competitive environment.
Claims Administration. The Company's policy is to settle valid claims
promptly and to work closely with policyholders to return injured workers to the
job quickly, while avoiding litigation if possible. Claims personnel communicate
frequently with policyholders, injured employees and medical providers. The
Company's policy is to control the number of cases assigned to its claims
personnel, to identify and investigate questionable claims and to produce early
and cost-effective case settlements of valid claims. As part of its "zero
tolerance" program, the Company refuses to settle any claim that it believes to
be fraudulent. In most claims litigated administratively, the Company utilizes
its own non-lawyer hearing representatives and has found this practice to be
significantly less expensive than using legal counsel.
The Company provides rehabilitation programs for insured employees and
medical cost containment programs. The Company monitors medical care bills to
determine if they are reasonable, audits hospital bills, reviews hospital
utilization and becomes involved in the selection of treatment facilities.
Competition. The insurance industry is characterized by competition on the
basis of price and service. Prior to January 1, 1995, minimum premium rates were
prescribed for workers' compensation insurance in California by the Department
of Insurance, and competition for underwriting such insurance in California had
been based principally upon an insurance carrier's financial strength and
history of paying policyholders' dividends. Secondary considerations included
loss control and claims administration, the ability to respond promptly to
agents and brokers, and commission schedules for agents and brokers. The repeal
of the California minimum rate law effective January 1, 1995 has resulted in
increased price competition which is adversely affecting the Company's results
of operations for its workers' compensation insurance business in California.
See "Regulation -- Insurance Regulation." The Company recently expanded its
workers' compensation operation through the acquisition on February 22, 1995 of
Casualty, which underwrites workers' compensation insurance in several
mid-western states, primarily in Illinois. Although Casualty is the largest
underwriter of workers' compensation insurance in the Illinois market, based on
the competitive nature of the insurance industry and the inherent risks
associated with the Company entering into a new geographic market, there can be
no assurance that Casualty will continue to maintain its market share in the
future. In addition, advisory premium rates established by the National Council
on Compensation Insurance, which workers' compensation insurance companies in
Illinois generally tend to follow, decreased in 1995. An additional average
overall decrease in such advisory rates of 13.6% went into effect on January 1,
1996. As a result, the Company anticipates price competition to continue in
Illinois. Furthermore, state regulatory changes could affect competition in the
states where the Company transacts insurance business. Although the Company is
one of the largest writers of workers' compensation insurance in California and
Illinois, certain of the Company's competitors are larger and have greater
resources than the Company.
Marketing. The Company markets its workers' compensation insurance
products through more than 1,200 non-exclusive independent insurance agents and
brokers, many of whom have been associated with the Company for more than 15
years. During 1995, the ten largest agents accounted for approximately 9% of the
Company's workers' compensation insurance premiums written, and no single agent
or broker accounted for more than 2% of premiums written.
Medical Malpractice Insurance
The Company's medical malpractice insurance operation underwrites primarily
standard professional liability insurance on a "claims made" basis in
California. Coverage is provided for claims reported to the Company during the
policy period arising from incidents that occurred at any time that the insured
was covered by the policy. Fremont Indemnity Company, within which the medical
malpractice insurance is
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written, is currently rated "B++" (Very Good) by A.M. Best. The Company offers
coverage for individual medical doctors, anesthesiologists, podiatrists, as well
as medical groups, community clinics, laboratories and miscellaneous medical
clinics. The Company markets its policies exclusively through approximately 300
non-exclusive independent insurance agents and brokers. Revenues from this
subsidiary were not significant in 1995, 1994 and 1993.
Reinsurance Ceded
Reinsurance is ceded primarily to reduce the liability on individual risks
and to protect against catastrophic losses. The Company follows the industry
practice of reinsuring a portion of its risks. For this coverage, the Company
pays the reinsurer a portion of the premiums received on all policies.
The Company maintains excess of loss reinsurance treaties with various
reinsurers for each of its insurance lines. Under the current workers'
compensation reinsurance treaties, various reinsurers assume liability on that
portion of the loss that exceeds $1 million per occurrence, up to a maximum of
$199 million per occurrence. Further, in conjunction with the acquisition of
Casualty, certain treaties were established between the Company and The
Continental Insurance Company ("Continental") whereby certain liabilities of
Casualty, which were not part of the business acquired, were ceded to
Continental. For medical malpractice insurance, excess of loss reinsurance
treaties cover claims and losses above $1 million, up to a maximum of $5
million. Although reinsurance makes the assuming reinsurer liable to the insurer
to the extent of the reinsurance ceded, it does not legally discharge an insurer
from its primary liability for the full amount of the policy liability. All of
the foregoing reinsurance is with non-affiliated reinsurers. The Company
believes that the terms of its reinsurance contracts are consistent with
industry practice and, based on its review of the reinsurers' financial
statements and reputations in the reinsurance marketplace, that its reinsurers
are financially sound. The Company encounters disputes from time to time with
its reinsurers, which, if not settled, are typically resolved in arbitration.
The Company's treaties are generally for annual terms. The Company has
maintained reinsurance treaties with many of these same reinsurers for a number
of years and believes that suitable alternative reinsurance treaties are readily
obtainable at the present time. In general, the reinsurance agreements are of
the treaty variety and cover all underwritten risks of types specified in the
treaties. As of December 1995, The Continental Insurance Company and General
Reinsurance Corporation were the only reinsurers that accounted for more than
10% of total amounts recoverable from all reinsurers on paid and unpaid losses.
Operating Data
Set forth below is certain information pertaining to the Company's workers'
compensation insurance business as determined in accordance with GAAP for the
years indicated. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of certain of this
information.
1995 1994 1993 1992 1991
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(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Workers' Compensation
Net premiums earned............... $574,952 $401,455 $426,793 $378,468 $371,981
Net investment income and
other(1)....................... 87,304 52,747 56,733 67,458 62,370
Underwriting profit (loss)........ (2,295) 9,452 (6,958) (25,659) (21,132)
Net income before taxes........... 85,009 62,199 49,775 41,799 41,238
Loss Ratio..................... 75.9% 62.1% 70.4% 82.2% 70.9%
Expense ratio.................. 24.5% 23.1% 20.6% 21.8% 25.0%
Policyholders' dividend
ratio........................ 0.0% 12.4% 10.6% 2.8% 9.8%
-------- -------- -------- -------- --------
Total combined ratio...... 100.4% 97.6% 101.6% 106.8% 105.7%
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(1) Includes net realized investment gains and interest expense.
Statutory Combined Ratio. The following table reflects the combined ratios
of the Company's insurance subsidiaries determined in accordance with statutory
accounting practices, together with the property and
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casualty industry-wide combined ratios after policyholders' dividends, as
compiled by A.M. Best for the years indicated.
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
------------- ----- ----- ----- -----
Workers' compensation:
Company.................................... 100.1% 98.5% 98.8% 110.4% 104.8%
Industry(1)................................ not available 101.4% 109.1% 121.5% 122.6%
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(1) Nationwide statutory combined ratio information for the workers'
compensation insurance industry for 1991 through 1994 is from A.M. Best's
Aggregates & Averages, Property-Casualty (1992 through 1995 editions).
Premium-to-Surplus Ratio. Regulatory authorities regard the
premium-to-surplus ratio as an important indicator of operating leverage, since
the lower the ratio, the greater the insurer's ability to withstand abnormal
loss experience. Guidelines established by the National Association of Insurance
Commissioners ("NAIC") provide that a property and casualty insurer's
premium-to-surplus ratio is satisfactory if it is below 3 to 1.
The following table sets forth the Company's consolidated ratio of net
property and casualty premiums written during the period to policyholders'
surplus on a statutory basis at the end of the period, for the periods
indicated:
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
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(THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Net premiums written during the
year.............................. $683,711(1) $425,631 $454,867 $414,218 $404,701
Policyholders' surplus at end of
year.............................. 299,408 235,294 221,857 162,714 158,512
Ratio............................... 2.3x 1.8x 2.1x 2.5x 2.6x
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(1) Includes net written premium for Casualty and WCIC for the period January 1,
1995 through February 21, 1995, which was prior to the Company's acquisition
of Casualty on February 22, 1995.
Loss and Loss Adjustment Expense Reserves
In many cases, significant periods of time, ranging up to several years or
more, may elapse between the occurrence of an insured loss, the reporting of the
loss to the insurer, and the insurer's payment of that loss. To recognize
liabilities for future unpaid losses, insurers establish reserves, which are
balance sheet liabilities, representing estimates of future amounts needed to
pay claims with respect to insured events that have occurred. Reserves are also
established for loss adjustment expense reserves ("LAE") representing the
estimated expenses of settling claims, including legal and other fees, and
general expenses of administering the claims adjustment process.
Reserves for losses and LAE are based not only on historical experience but
also on management's judgment of the effects of matters such as future economic
and social forces likely to impact the insurer's experience with the type of
risk involved, circumstances surrounding individual claims, and trends that may
affect the probable number and nature of claims arising from losses not yet
reported. Consequently, loss reserves are inherently subject to a number of
highly variable circumstances.
Reserves for losses and LAE are revalued periodically using a variety of
actuarial and statistical techniques for producing current estimates of expected
claim costs. Claim frequency and severity and other economic and social factors
are considered in the reevaluation process. A provision for inflation in the
calculation of estimated future claim costs is implicit since reliance is placed
on both actual historical data, which reflect past inflation, and on other
factors which are judged to be appropriate modifiers of past experience.
Adjustments to liabilities are reflected in operating results for the periods to
which they are made.
Reconciliation of Loss and Loss Adjustment Expense Reserves. The following
table shows in accordance with GAAP the reconciliation of the estimated
liability for losses and LAE for the Company's property
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and casualty insurance subsidiaries (excluding discontinued operations) and the
effect on income for each of the three years indicated.
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
YEAR ENDED DECEMBER 31,
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1995 1994 1993
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(THOUSANDS OF DOLLARS)
Reserves for losses and LAE, net of reinsurance
recoverable, at beginning of year.................... $ 610,510 $ 644,190 $ 633,394
Incurred losses and LAE:
Provision for insured events of the current year, net
of reinsurance.................................... 459,951 290,833 323,279
Increase (decrease) in provision for insured events
of prior years, net of reinsurance................ 1,382 (17,234)(1) (4,126)
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Total incurred losses and LAE................ 461,333 273,599 319,153
Payments:
Losses and LAE, net of reinsurance, attributable to
insured events of:
Current year...................................... (132,358) (70,505) (67,805)
Prior years....................................... (358,423) (236,774) (240,552)
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Total payments............................... (490,781) (307,279) (308,357)
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Subtotal..................................... 581,062 610,510 644,190
Liability for losses and LAE for Casualty Insurance
Company acquired during the current year............. 604,644 -- --
---------- --------- ---------
Reserves for losses and LAE, net of reinsurance
recoverable, at end of year.......................... 1,185,706 610,510 644,190
Reinsurance recoverable for losses and LAE, at end of
year................................................. 269,986 136,151 138,737
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Reserves for losses and LAE, gross of reinsurance
recoverable, at end of year.......................... $1,455,692 $ 746,661 $ 782,927
========== ========= =========
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(1) See "Analysis of Loss and Loss Adjustment Expense Development" below for
discussion of the decrease in reserve estimates during 1994.
Analysis of Loss and Loss Adjustment Expense Development. The following
table shows the cumulative amount paid against the previously recorded liability
at the end of each succeeding year and the cumulative development of the
estimated liability for the ten years ending December 31, 1995. Conditions and
trends that have affected the development of these reserves and payments in the
past will not necessarily recur in the future. Accordingly, it would not be
appropriate to use this cumulative history to project future performance.
The re-estimated liability portion of the following table shows the year by
year development of the previously estimated liability at the end of each
succeeding year. The re-estimated liabilities are increased or decreased as more
information becomes known about the frequency and severity of claims for
individual years. The increases or decreases are reflected in the current year's
operating earnings. Each column shows the reserve held at the indicated calendar
year-end and cumulative data on re-estimated liabilities for the year and all
prior years making up those calendar year end liabilities. The effect on income
of the charge (credit) during the current period (i.e., the difference between
the estimated liability at December 31 and the liability estimated one year
later) is shown in the table above for each of three most recent years as
"Increase (decrease) in provision for insured events of prior years."
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CHANGES IN HISTORICAL RESERVES FOR LOSS AND LAE FOR THE LAST TEN YEARS
GAAP BASIS AS OF DECEMBER 31, 1995
YEAR ENDED DECEMBER 31,
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1985 1986 1987 1988 1989 1990 1991
-------- -------- -------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Reserves for Loss and LAE, net of reinsurance
recoverable.................................... $382,066 $384,923 $390,799 $406,823 $647,559 $652,284 $627,103
Net reserve re-estimated as of:
One year later.................................. 409,681 413,549 402,902 396,091 636,039 624,953 668,107
Two years later................................. 406,550 410,654 389,973 377,080 607,253 647,959 660,729
Three years later............................... 390,847 403,767 374,330 356,961 607,492 638,879 651,482
Four years later................................ 392,108 394,868 361,209 350,736 599,052 627,194 654,403
Five years later................................ 385,919 384,891 358,645 375,550 593,527 631,165
Six years later................................. 385,247 385,732 369,320 373,514 596,808
Seven years later............................... 382,482 391,036 371,863 375,364
Eight years later............................... 385,334 394,790 372,920
Nine years later................................ 388,250 396,359
Ten years later................................. 388,744
Net cumulative redundancy (deficiency)........... (6,678) (11,436) 17,879 31,459 50,751 21,119 (27,300)
Cumulative amount of reserve paid, net of reserve
recoveries, through:
One year later.................................. 134,969 136,523 128,565 125,563 226,101 245,777 257,591
Two years later................................. 226,952 228,926 213,323 211,529 374,876 403,105 419,638
Three years later............................... 282,748 286,155 266,605 263,229 461,366 495,707 521,729
Four years later................................ 317,928 320,729 298,956 291,817 514,890 550,404 583,013
Five years later................................ 339,771 342,673 316,483 320,511 547,535 585,094
Six years later................................. 352,179 354,069 333,461 339,998 567,871
Seven years later............................... 359,469 365,410 346,547 351,805
Eight years later............................... 367,029 375,384 353,517
Nine years later................................ 373,853 380,437
Ten years later................................. 377,177
Net reserve -- December 31.......................
Reinsurance recoverable..........................
Gross reserve -- December 31.....................
Net re-estimated reserve.........................
Re-estimated reinsurance recoverable.............
Gross re-estimated reserve.......................
Gross cumulative redundancy (deficiency).........
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995
-------- -------- -------- ----------
Reserves for Loss and LAE, net of reinsurance
recoverable.................................... $633,394 $644,190 $610,510 $1,185,709
Net reserve re-estimated as of:
One year later.................................. 629,268 626,956 611,892 --
Two years later................................. 615,747 633,333
Three years later............................... 621,348
Four years later................................
Five years later................................
Six years later.................................
Seven years later...............................
Eight years later...............................
Nine years later................................
Ten years later.................................
Net cumulative redundancy (deficiency)........... 12,046 10,857 (1,382) --
Cumulative amount of reserve paid, net of reserve
recoveries, through:
One year later.................................. 240,552 236,774 241,667(1) --
Two years later................................. 402,048 392,237
Three years later............................... 499,924
Four years later................................
Five years later................................
Six years later.................................
Seven years later...............................
Eight years later...............................
Nine years later................................
Ten years later.................................
Net reserve -- December 31....................... $610,510 $1,185,709
Reinsurance recoverable.......................... 136,151 269,983
-------- ----------
Gross reserve -- December 31..................... $746,661 $1,455,692
========= ===========
Net re-estimated reserve......................... $611,892
Re-estimated reinsurance recoverable............. 135,931
--------
Gross re-estimated reserve....................... $747,823
=========
Gross cumulative redundancy (deficiency)......... $ (1,162)
=========
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(1) Excludes $116,756,000 in loss and LAE payments on 1994 and prior years
related to reserves acquired from Casualty.
The Company is required to maintain reserves to cover its estimated
ultimate liability for losses and LAE with respect to reported and unreported
claims incurred as of the end of each accounting period. These reserves do not
represent an exact calculation of liabilities, but rather are estimates
involving actuarial projections at a given time of what the Company expects the
ultimate settlement and administration of claims will cost based on facts and
circumstances then known, predictions of future events, estimates of future
trends in claims' frequency and severity and judicial theories of liability as
well as other factors. The Company regularly reviews its reserving techniques,
overall reserve position and its reinsurance. In light of present facts and
current legal interpretations, management believes that adequate provision has
been made for loss reserves. In making this determination, management has
considered its claims experience to date, loss development history for prior
accident years, estimates of future trends of claims frequency and severity, and
various external factors such as judicial theories of liability. However,
establishment of appropriate reserves is an inherently uncertain process, and
there can be no certainty that currently established reserves will prove
adequate in light of subsequent actual experience. Subsequent actual experience
has resulted and could result
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in loss reserves being too high or too low. Future loss development could
require reserves for prior periods to be increased, which would adversely impact
earnings in future periods.
In 1995, there was relatively insignificant development on 1994 and prior
accident years of $1.4 million. In 1994, the Company decreased its losses and
LAE reserves for 1993 and prior accident years by $17.2 million. This reserve
decrease was partially offset by an increase in the liability for dividends to
policyholders. Further, this reduction in reserves represents the recognition of
a continued decrease in the frequency and severity of reported claims on 1994
and prior accident years. For the 1993 calendar year, losses and LAE development
on 1992 and prior accident years was a relatively modest $4.1 million decrease
in loss and LAE reserves. The Company is not able to determine with certainty
the specific cause or causes of increases and decreases in claims experience
that led to these changes in reserves but has reached its own conclusion based
on a review of its internal data base and a subjective evaluation of external
factors. The following discussion is a summary of the principal considerations
that the Company evaluated in determining workers' compensation insurance
reserve adjustments during 1994 and 1993.
The Company believes that a number of factors including the economic
recession in California (including unemployment rates) in the early 1990's,
primarily 1990 and 1991, led to increases in the occurrence and magnitude of
post-employment stress claims submitted to the Company, including many
fraudulent claims. These conditions mirrored those of the California workers'
compensation industry in general as private workers' compensation insurers in
California, including the Company, substantially increased loss reserves in
calendar year 1992 for the 1990 and 1991 accident years. The effect of fraud on
the industry during 1990 and 1991 is further supported by the impact of actions
taken by the California legislature in 1992 to limit workers' compensation
fraud. In connection with this legislation, the Company instituted its "zero
tolerance" program and began to aggressively investigate and prosecute those
attempting to defraud policyholders through filing and encouraging fraudulent
workers' compensation insurance claims. Thus, while unemployment continued to
remain high in California during 1992 the number of claims and loss ratios for
the industry on the 1992 accident year declined. The Company believes the
decline in claim frequency and severity, which continued into 1994, is due
primarily to the anti-fraud legislation enacted in California and the anti-fraud
campaigns thereafter undertaken by the Company and other members of the workers'
compensation insurance industry. In 1993, the Company only partially recognized
this decline in claim frequency and severity, due in part to a lack of
sufficient information to confirm the continued trend in claim frequency and
severity decreases. The significant reserve decrease in 1994 for losses and LAE
on 1993 and prior accident years of $17.2 million represents the Company's
additional recognition of these claim frequency and severity decreases, and
reflects the results of the Company's review of statistical evidence that
emerged in 1994 which further confirmed the claim frequency and severity
decreases related to the 1993 and prior accident years.
INVESTMENT PORTFOLIO
The Company manages its investments internally. The following portfolio
information reflects the Company's continuing operations. See "Discontinued
Operations."
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10
The following table reflects the amortized cost and fair value of fixed
maturity investments and non-redeemable preferred equity securities by major
category, as well as the amortized cost and fair value of cash and short-term
investments on the dates indicated.
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- --------- --------
(THOUSANDS OF DOLLARS)
Available for sale:
United States Treasury securities and
obligations of other US government
agencies and corporations............. $ 136,626 $ 149,250 $ 53,045 $ 45,152
Redeemable preferred stock............... 15,887 15,764 4,249 3,491
Mortgage-backed securities............... 340,682 337,133 189,551 130,675
Corporate securities
Banks................................. 123,144 125,836 24,744 20,125
Financial............................. 117,013 120,242 10,000 8,225
Transportation........................ 16,888 17,241 -- --
Utilities............................. 13,427 13,820 -- --
Industrial............................ 491,767 517,264 30,112 27,774
---------- ---------- -------- --------
Total............................ 1,255,434 1,296,550 311,701 235,442
Non-redeemable preferred stock........... 285,337 277,451 213,935 189,632
---------- ---------- -------- --------
Total............................ $1,540,771 $1,574,001 $ 525,636 $425,074
========== ========== ======== ========
Held to maturity:
United States Treasury securities and
obligations of other US government
agencies and corporations............. $ -- $ -- $ 53,695 $ 51,407
Mortgage-backed securities............... -- -- 152,721 147,696
---------- ---------- -------- --------
Total............................ $ -- $ -- $ 206,416 $199,103
========== ========== ======== ========
Short-term investments..................... $ 362,163 $ 362,163 $ 255,751 $255,751
Cash....................................... 39,559 39,559 31,058 31,058
As of December 31, 1995, substantially all of the fixed maturity
investments in the portfolio were rated investment grade. Using Standard and
Poor's, Moody's and Fitch's rating services, 59% were rated "A" or higher, 40%
were rated BBB and 1% were rated BB. As of December 31, 1995, these investment
securities had an approximate fair value of $1.3 billion, which was higher than
amortized cost by approximately $41 million. The Company does not currently plan
or intend to invest in securities rated below investment grade.
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The following table reflects the average cash and investment assets of the
Company and its subsidiaries for the periods indicated.
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- --------
(THOUSANDS OF DOLLARS, EXCEPT
PERCENTS)
Average cash and investment assets
Cash.................................................. $ 24,657 $ 29,693 $ 33,700
Investment assets..................................... 1,591,972 1,060,001 925,794
----------- ----------- --------
Total......................................... $1,616,629 $1,089,694 $959,494
=========== =========== ========
Percent earned on (excluding realized gains and losses):
Cash and investment assets............................ 7.38% 6.99% 7.83%
Investment assets only................................ 7.49% 7.19% 8.11%
Percent earned on (including realized gains and losses):
Cash and investment assets............................ 7.38% 6.97% 8.05%
Investment assets only................................ 7.49% 7.16% 8.34%
The Company's general investment philosophy is to hold fixed income
securities for long term investment. As a result of changing accounting and
industry practice and management's evaluation of the investment portfolio, the
Company has segregated its portfolio into investments held to maturity and those
that would be available for sale in response to changing market conditions,
liquidity requirements, interest rate movements and other investment factors. At
December 31, 1995 and 1994, Company held securities having an amortized cost of
$1.5 billion and $526 million, respectively, as available for sale. See "Item 7.
Management's Discussion and Analysis" and Notes A and C of Notes to Consolidated
Financial Statements.
The following table sets forth maturities in the fixed maturity and
short-term investment portfolios at December 31, 1995:
AMORTIZED
COST PERCENTAGE
---------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
One year or less..................................... $ 389,521 24%
Over 1 year through 5 years.......................... 245,447 15
Over 5 years through 10 years........................ 495,154 31
Over 10 years........................................ 146,793 9
Mortgage-backed securities........................... 340,682 21
----------- ---
Totals..................................... $1,617,597 100%
=========== ===
Using Standard and Poor's, Moody's and Fitch's rating services, the
following table sets forth the quality mix of the Company's fixed maturity
investment portfolio at December 31, 1995:
PERCENTAGE
-----------
AAA (Including US government obligations)....................... 31%
AA.............................................................. 2
A............................................................... 26
BBB............................................................. 40
BB.............................................................. 1
---
Total................................................. 100%
===
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FINANCIAL SERVICES OPERATIONS
Real Estate Lending
In 1990, the Company acquired Investors Bancor, a holding company for
Fremont Investment & Loan (formerly Investors Thrift), a California thrift and
loan from Tomar Financial Corporation for approximately $6.7 million. Fremont
Investment & Loan ("Fremont I & L") serves more than 23,000 customers through
its 12 branches, and its deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). See "Regulation -- Thrift and Loan Regulation." Fremont I
& L's operations are primarily engaged in commercial and residential real estate
lending. Income before taxes from the real estate lending operation has
increased significantly from $2.5 million in 1991 to $10.6 million in 1995.
Assets of the real estate lending operation have grown from $278 million at the
end of 1991 to $1.05 billion at the end of 1995, due to increased loan
originations and to the purchase of loan portfolios from other financial
institutions. Fremont I & L funds its lending activities through its deposits
and capital. Deposits consists of full-paid investment certificates (which are
similar to certificates of deposit) and installment investment certificates
(which are similar to passbook accounts and money market accounts). Deposits
totaled $926 million at December 31, 1995.
The ability of the Company to continue to originate loans, and of borrowers
to repay outstanding loans, may be impaired by adverse changes in local or
regional economic conditions which affect such areas or by adverse changes in
the real estate market in those areas. Such events could also significantly
impair the value of the underlying collateral. If the Company's collateral were
to prove inadequate, the Company's results of operations could be adversely
affected. In addition, the financial services industry is characterized by
competition on the basis of price and service.
Loan Origination. Fremont I & L originates loans through independent loan
brokers and through its own loan agents. In 1994, Fremont I & L purchased an
aggregate of $366 million in primarily California commercial real estate loan
portfolios from financial institutions. Acquisition costs of purchased loan
portfolios are significantly lower than if loans were originated by the Company.
In 1995, no portfolios of commercial real estate loans were purchased, primarily
due to increased competition which resulted in inadequate yields or unacceptable
risk profiles for the portfolios considered. The Company originates and
purchases loans primarily for its own portfolio rather than for resale to third
parties. The Company performs an internal evaluation of the underlying
collateral at the time each loan is purchased and applies strict underwriting
guidelines that include conservative loan-to-value ratios.
Fremont I & L has primarily focused on the origination of commercial real
estate loans secured by first trust deeds on income-producing properties in
California. The real estate securing these loans include a wide variety of
property types, such as small office buildings, small shopping centers,
owner-user office/warehouses and retail properties. Fremont I & L does not
originate commercial real estate construction and development loans. The
majority of the commercial real estate loans originated are adjustable rate
loans and generally range between $1 to $5 million. As of December 31, 1995, the
average loan size was $1,030,000 and the approximate average loan-to-value ratio
was 66%, using the most current available appraised values and current balances
outstanding. The total amount of commercial real estate loans outstanding at
December 31, 1995 was $731 million or 81% of the loan portfolio. Loans secured
by commercial real estate are generally considered to entail a higher level of
risk than loans secured by residential real estate. Although the properties
securing the Company's commercial real estate loans generally have good
operating histories, there is no assurance that such properties will continue to
generate sufficient funds to allow their owners to make full and timely mortgage
loan payments. At December 31, 1995, Fremont I & L had forty-seven non-accrual
commercial real estate loans totaling approximately $21.5 million and commercial
real estate owned of approximately $4.4 million.
Fremont I & L also originates loans secured by single-family residences. At
December 31, 1995, single family residential real estate secured loans,
represented $166 million, or 18%, of Fremont I & L's loan portfolio.
Substantially all of these loans are secured by first trust deeds. These loans
have principal amounts primarily below $300,000, have maturities of nine to
thirty years and are approved in accordance with lending policies approved by
Fremont I & L's Board of Directors which includes standards covering, among
other things, collateral value, loan to value and debt ratio. At December 31,
1995, the average single-family loan amount was $118,000, and the approximate
average loan-to-value ratio was 74%, using appraised values at the time of loan
origination and current balances outstanding.
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13
The portfolio of Fremont I & L's loans receivable as of the dates indicated
are summarized in the following table by type of primary collateral.
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
Commercial real estate loans................................... $730,599 $687,198 $302,202
Residential real estate loans.................................. 165,888 103,532 64,608
Contract loans................................................. 547 32,990 52,214
Installment loans.............................................. 1,783 3,191 5,638
Finance leases................................................. -- 114 794
-------- -------- --------
Loans receivable before deferred fees and costs................ 898,817 827,025 425,456
Purchase discount and deferred fees and costs.................. (9,865) (19,498) (24)
-------- -------- --------
Total loans receivable, purchase discount and deferred
fees and costs.......................................... 888,952 807,527 425,432
Less allowance for possible loan losses........................ (17,498) (14,391) (11,880)
-------- -------- --------
Loans receivable, net..................................... $871,454 $793,136 $413,552
======== ======== ========
Funding Sources. Fremont I & L obtains funds from depositors by offering
full-paid investment certificates and installment investment certificates
insured by the FDIC to the legal maximum through its 12 branches in California.
Fremont I & L has typically offered higher interest rates to its depositors than
do most full service financial institutions. At the same time, it has minimized
the cost of maintaining these accounts by not offering transaction accounts or
services such as checking, safe deposit boxes, money orders, ATM access and
other traditional retail services. Fremont I & L generally effects deposit
withdrawals by issuing checks rather than disbursing cash, which minimizes
operating costs associated with handling and storing cash. Additional financing
became available from the Federal Home Loan Bank of San Francisco effective
January 1995. This financing is available at varying rates and terms. As of
December 31, 1995, $170 million was available under the facility and no
borrowings were outstanding.
The table below summarizes Fremont I & L's investment certificates as of
December 31, 1995 which are stated in amounts of $100,000 or more, by maturity
and by type.
INVESTMENT CERTIFICATES $100,000 OR MORE, MATURING
------------------------------------------------------
3 MONTHS OVER 3 THROUGH OVER 6 THROUGH OVER
OR LESS 6 MONTHS 12 MONTHS 12 MONTHS TOTAL
-------- -------------- -------------- --------- -------
(THOUSANDS OF DOLLARS)
Retail.................................. $2,285 $2,500 $3,845 $ 6,624 $15,254
IRA's................................... 227 201 316 436 1,180
Wholesale............................... 311 300 2,967 5,359 8,937
Brokered................................ 5,550 2,494 1,451 46,027 55,522
------ ------ ------ ------- -------
Total.............................. $8,373 $5,495 $8,579 $58,446 $80,893
====== ====== ====== ======= =======
Commercial Finance
The Company's commercial finance subsidiary, Fremont Financial Corporation
("Fremont Financial"), provides working capital loans, primarily secured by
accounts receivable and inventory, to small and middle market companies on a
nationwide basis. Fremont Financial's total loan portfolio has grown from $189
million at December 31, 1991 to $569 million at December 31, 1995. This growth
has been achieved through development of Fremont Financial's customer base
through loan originations and through participation in syndicated loan
transactions. In 1995, income before taxes from commercial finance was $22.8
million. The lending market has become increasingly competitive for small to
middle market commercial borrowers. As a result, Fremont Financial has
experienced decreasing yields on its commercial finance loans. In addition,
adverse economic developments can negatively affect the Company's business and
results of operations in a number of ways. Such developments can reduce the
demand for loans, impair the ability of borrowers to pay loans and impair the
value of the underlying collateral. Commercial finance loans made by Fremont
Financial
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are primarily on a revolving short-term basis (generally two or three years) and
secured by assets which primarily include accounts receivable, inventory,
machinery and equipment and, to a lesser extent, real estate and other types of
collateral. In addition, Fremont Financial also makes term loans secured
primarily by equipment and real estate. The term loans originated in conjunction
with revolving loans are cross-collateralized (i.e., the same collateral is used
to support both the term loans and all the related revolving loans) and
coterminous with the related revolving loan made to the same borrower. The term
to maturity for the term loans is generally five to seven years; however,
certain term loans are "balloon loans" that amortize over a longer period and
therefore do not amortize fully before their respective maturities. Commercial
loans also include secured loans originated and serviced by other asset-based
lenders and participated in by Fremont Financial. As of December 31, 1995, the
average outstanding commercial loan balance was $2.7 million. Loans outstanding
to a single borrower generally range in size from $500,000 to $15,000,000.
The major avenue of growth for Fremont Financial remains the establishment
of new lending relationships. The Company has a national presence with regional
offices in Santa Monica, Chicago, New York and Atlanta, as well as eight other
marketing offices across the country. To provide a stable source of funds to
facilitate the continued expansion of its asset-based lending business, the
Company, in 1993, established the Fremont Small Business Loan Master Trust
("Fremont Trust") for the purpose of securitizing the greater part of its
commercial finance loan portfolio. The Fremont Trust is a master trust that can
issue multiple series of asset-backed certificates which represent undivided
interests in the Fremont Trust's assets (primarily commercial finance loans) and
Fremont Financial will continue to service the loans thereunder. The proceeds
from the sale of the initial series of asset-backed certificates ("Series A")
under this program in April 1993 were $200 million bearing interest at the rate
of LIBOR plus 0.47%. In November 1993, an additional $100 million of these
certificates ("Series B") were sold bearing interest at the rate of LIBOR plus
0.5%. The securities issued in this program have a scheduled maturity of three
and four years, but could mature earlier depending on fluctuations in
outstanding balances of loans in the portfolio and other factors. During April
1995, the Company issued $30 million in subordinated variable rate asset-backed
certificates, which mature in 2000, via a private placement. As of December 31,
1995, up to $500 million in additional publicly offered asset-backed
certificates may be issued pursuant to a shelf registration statement to fund
future growth in the commercial finance loan portfolio. In February 1996, $135
million in asset-backed certificates ("Series C") were issued which mature in
2000. The proceeds were used, in conjunction with existing cash, to retire the
$200 million in Series A certificates. The Series B certificates are scheduled
to mature in 1997. In December 1995, a commercial paper facility was established
as part of the asset securitization program. This facility provides for the
issuance of up to $150 million in commercial paper, dependent upon the level of
assets within the asset securitization program. This facility, which expires in
December 1998, had no amounts outstanding under it as of December 31, 1995. The
commercial finance operation also has an unsecured revolving line of credit with
a syndicated bank group that presently permits borrowings of up to $300 million,
of which $185 million was outstanding as of December 31, 1995. This credit line
is primarily used to finance assets which are not included in the Company's
asset securitization program. This credit line expires August 1998.
The Company's customer base consists primarily of small to middle market
manufacturers and distributors which generally require financing for working
capital and debt restructuring. At December 31, 1995, the Company had
approximately 195 loans outstanding in 34 states and the District of Columbia.
Approximately 32% of total loans outstanding were made to companies based in
California, and no other state accounted for more than 10% of total loans
outstanding.
Asset-based revolving loans permit a company to borrow from the lender at
any time during the term of the loan agreement, up to the lesser of a maximum
amount set forth in the loan agreement or a percentage of the value of the
collateral which primarily secures such loans. Under an asset-based lending
agreement, the borrower retains the credit and collection risk with respect to
the collateral in which the lender takes a security interest. Cash collections
are received as often as daily by or on behalf of the borrower after the loan is
initially made. These collections are paid to the lender to reduce the loan
balance.
While consideration is given to the net worth and profitability of a
client, asset-based loans are generally extended to borrowers who do not have
bank sources of credit readily available and are based on the estimated
liquidation value of the collateral pledged to secure the loan. The largest
percentage of realized losses has resulted from fraud or collateral
misrepresentations by the borrower. Fremont Financial seeks to protect itself
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15
against this risk through a comprehensive system of collateral monitoring and
control. Fremont Financial's auditors perform auditing procedures of a
borrower's books and records and physically inspects the collateral prior to
approval and funding, as well as approximately every 90 days during the term of
the loan. General economic conditions beyond the Company's control can and do
impact the ability of borrowers to repay loans and also the value of the assets
collateralizing such loans.
Over the past four years, the majority of Fremont Financial's loans that
have been liquidated have been fully repaid, as Fremont Financial attempts to
work closely with the borrower through the liquidation to ensure repayment of
the loan. Fremont Financial seeks to maintain conservative collateral valuations
and perfection of security interests.
Fremont Financial primarily competes with commercial finance companies and
banks, most of whom are larger and have greater financial resources than Fremont
Financial. The principal competitive factors are the rates and terms upon which
financing is provided and customer service. The lending market has become
increasingly competitive for small to middle market commercial borrowers. As a
result, Fremont Financial has experienced decreasing yields on its commercial
finance loans.
Premium Financing and Life Insurance
The Company finances property and casualty insurance premiums through its
subsidiary, Fremont Premium Finance Corporation. This premium finance loan
portfolio is collateralized by the unearned premiums of the underlying insurance
policies. Revenues and operating income from this subsidiary were not
significant in 1995, 1994 or 1993.
Prior to January 1, 1996, the Company offered life insurance products,
including annuities, credit life and disability insurance and term life
insurance for consumers, through its subsidiary, Fremont Life Insurance Company.
On December 31, 1995 and on January 1, 1996, the Company entered into
reinsurance and assumption agreements with a reinsurer whereby assets and
liabilities related to certain life insurance and annuity policies were ceded to
the reinsurer. These reinsurance agreements are part of several other agreements
which collectively act to significantly reduce the Company's life insurance
operations. The effect on operations from these agreements is not expected to be
material, and revenues and operating income from this subsidiary were not
significant in 1995, 1994 or 1993.
DISCONTINUED OPERATIONS
The Company's discontinued operations consist primarily of assumed treaty
and facultative reinsurance business that was discontinued between 1986 and
1991. In 1990, the Company established a management group to actively manage the
liquidation of this business. The liabilities associated with this business are
long term in duration and therefore, the Company continues to be subject to
claims being reported. Claims under these reinsurance treaties include
professional liability, product liability and general liability which include
environmental claims.
The Company supports these discontinued operations with $191 million in
cash and investment grade fixed income securities, reinsurance recoverables of
$54 million and other assets totaling $18 million. The Company estimates that
the dedicated assets supporting these operations and all future cash inflows
will be adequate to fund future obligations. However, should those assets
ultimately prove to be insufficient, the Company believes that its property and
casualty subsidiaries would be able to provide whatever additional funds might
be needed to complete the liquidation without having a material adverse effect
on the Company's consolidated financial position or results of operations. See
Note M of Notes to Consolidated Financial Statements. The discontinued
operations have investment portfolios which resemble the portfolios in the
ongoing operations with regard to asset allocation, quality, performance and
maturities.
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REGULATION
Insurance Regulation
The Company's workers' compensation insurance operations are concentrated
in California and Illinois, with additional writings in Arizona, Indiana,
Michigan and Wisconsin. Insurance companies are subject to supervision and
regulation by the state insurance authority in each state in which they transact
business. Such supervision and regulation relate to numerous aspects of an
insurance company's business and financial condition. The primary purpose of
such supervision and regulation is the protection of policyholders rather than
investors or shareholders of an insurer. The extent of such regulation varies,
but generally derives from state statutes that delegate regulatory, supervisory
and administrative authority to state insurance departments. Accordingly, the
authority of the state insurance departments includes the establishment of
standards of solvency which must be met and maintained by insurers, the
licensing to do business of insurers and agents, the nature of and limitations
on investments by insurers, premium rates for certain property and casualty
insurance, and life and disability insurance, the provisions which insurers must
make for current losses and future liabilities and the approval of policy forms.
Additionally, most states require issuers to participate in assigned risk plans
which provide insurance coverage to individuals or entities who are unable to
obtain coverage from existing insurers in those states. The net profit or loss
incurred in the administration of these plans is allocated back to participant
insurers based on the insurers' relative market share (i.e. insurance premiums)
in each state. State insurance departments also conduct periodic examinations of
the affairs of insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance companies. The
Company's multistate insurance operations require, and will continue to require,
significant resources of the Company in order to continue to comply with the
regulations of each state in which it transacts business.
Workers' Compensation Regulation. Illinois began operating under an open
rating system in 1982 and California began operating under such a system
effective January 1, 1995. In an open rating system, workers' compensation
companies are provided with advisory rates by job classification and each
insurance company determines its own rates based in part upon its particular
operating and loss costs. Although insurance companies are not required to adopt
such advisory rates, companies in Illinois generally follow such rates. However,
insurance companies in California have, since the adoption of an open rating
system, generally set their premium rates below such advisory rates. Before
January 1, 1995, California operated under a minimum rate law, whereby premium
rates established by the California Department of Insurance were the minimum
rates which could be charged by an insurance carrier.
In July 1993, California enacted legislation to reform the workers'
compensation insurance system and to, among other things, (i) reduce workers'
compensation manual premium rates by 7% effective July 16, 1993 and (ii) adopt
an open rating system through the repeal of the minimum rate law effective
January 1, 1995. In addition to the July 1993 legislation, in December 1993, the
California Insurance Commissioner reduced workers' compensation manual premium
rates on new and renewal business an additional 12.7% effective January 1, 1994.
In September 1994, California workers' compensation manual premium rates were
further reduced by 16% effective October 1, 1994 on all business incepting on or
after January 1, 1994.
The repeal of the minimum rate law on January 1, 1995 has resulted in lower
premiums and lower profitability in the Company's California workers'
compensation insurance business due to increased price competition. The Company
believes that its acquisition of Casualty, with policies written primarily
outside of California, has lessened the impact of the repeal of the minimum rate
law by providing geographic diversity, which mitigates the impact of economic
and regulatory changes within a regional marketplace.
Prior to January 1, 1995, the Company's policies were predominately written
as participating, thereby obligating the Company to consider the payment of
dividends to policyholders. The ability of the Company's subsidiaries to pay
policyholder dividends on workers' compensation insurance policies was subject
to California regulations which stated in part that dividends under a workers'
compensation policy could only be paid from surplus accumulated on workers'
compensation policies issued in California. Beginning in 1995, the payment of
policyholder dividends in respect of workers' compensation policies written in
California is not limited. However, in 1995 the Company's workers' compensation
insurance policies, both in California and Illinois, were predominately written
as non-participating, which does not include provisions for dividend
consideration. This shift in policy type
15
17
is due primarily to the increased competition in the California market which has
resulted from the repeal of the minimum rate law, effective January 1, 1995. The
Company anticipates that this shift to non-participating policies will continue
and be a characteristic element of the competitive environment. In addition, the
Company's subsidiaries are required, with respect to their workers' compensation
line of business, to maintain on deposit investments meeting specified standards
that have an aggregate market value equal to the Company's loss reserves.
Insurance Guaranty Association Laws. Under insolvency or guaranty fund
laws in most states in which the Company's insurance subsidiaries operate,
insurers doing business in those states can be assessed, up to the prescribed
limits, for losses incurred by policyholders as a result of the insolvency of
other insurance companies. The amount and timing of such assessments are beyond
the control of the Company and generally have not had an adverse impact on the
Company's earnings in years in which such assessments have been made. Premiums
written under workers' compensation policies are subject to assessment only with
respect to covered losses incurred by the insolvent insurer under workers'
compensation policies. The Company believes it does not face any material
exposure to guaranty fund assessments.
Holding Company Regulation. The Company is subject to the California
Insurance Holding Company System Regulatory Act (the "Holding Company Act").
This act, and similar laws in other states, require the Company to periodically
file information with the California Department of Insurance and other state
regulatory authorities, including information relating to its capital structure,
ownership, financial condition and general business operations. Certain
transactions between an insurance company and its affiliates, including sales,
loans or investments which in any twelve month period aggregate at least 5% of
its admitted assets or 25% of its statutory capital and surplus, also are
subject to prior approval by the Department of Insurance.
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
that controls a California insurance company, such as Fremont General. The
Liquid Yield Option(TM) Notes ("LYONs") constitute a security convertible into
the voting Common Stock of the Company, and the shares of Common Stock into
which a holder's LYONs are convertible and any other securities convertible into
Common Stock must be aggregated with any other shares of Common Stock of the
holder for purposes of determining the percentage ownership. A person seeking to
acquire "control," directly or indirectly, of the Company must generally file
with the Insurance Commissioner an application for change of control containing
certain information required by statute and published regulations and provide a
copy of the application to the Company. The Holding Company Act also effectively
restricts the Company from consummating certain reorganizations or mergers
without prior regulatory approval.
The Holding Company Act also limits the ability of the Company's insurance
subsidiaries to pay dividends to the Company. The act permits a property and
casualty insurance company to pay dividends in any year which, together with
other dividends or other distributions made within the preceding twelve months,
do not exceed the greater of 10% of its statutory surplus or 100% of its net
income as of the end of the preceding year, subject to a limit equal to prior
year end unassigned funds less unrealized capital gains contained within
unassigned funds. Larger dividends are payable only upon prior regulatory
approval. Applicable regulations further require that an insurer's statutory
surplus following a dividend or other distribution be reasonable in relation to
its outstanding liabilities and adequate to its financial needs. Based upon
restrictions presently in effect, the maximum amount available for payment of
dividends by the Company's direct property and casualty subsidiaries during 1996
without prior regulatory approval is approximately $30 million. In addition,
insurance regulations require that the Department of Insurance be given fifteen
days advance notice of any dividend payment.
Other Regulations. The NAIC has adopted a formula to calculate risk based
capital ("RBC") of property and casualty insurance companies for inclusion in
annual statements. The purpose of the RBC model is to help state regulatory
authorities monitor the capital adequacy of property and casualty insurance
companies by measuring several major areas of risk facing property and casualty
insurers including underwriting, credit and investment risks. Companies having
less statutory surplus than the RBC model calculates will be required to
adequately address these risk factors and will be subject to varying degrees of
16
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regulatory intervention, depending on the level of capital inadequacy. As of
December 31, 1995 the Company's insurance subsidiaries engaged in continuing
operations exceed all RBC levels requiring any regulatory intervention.
Thrift and Loan Regulation
Fremont I & L is subject to supervision and regulation by the Department of
Corporations of the State of California (the "DOC") and, as an insured
institution, by the FDIC. Neither Investors Bancor nor Fremont I & L is
regulated or supervised by the Office of Thrift Supervision, which regulates
savings and loan institutions. Fremont General is generally not directly
regulated or supervised by the DOC, the FDIC, the Federal Reserve Board or any
other bank regulatory authority, except with respect to guidelines concerning
its relationship with Investors Bancor and Fremont I & L. Such guidelines
include (i) general regulatory and enforcement authority of the DOC and the FDIC
over transactions and dealings between Fremont General and Fremont I & L, (ii)
specific limitations regarding ownership of the capital stock of the parent
company of any thrift and loan company, and (iii) specific limitations regarding
the payment of dividends from Fremont I & L as discussed below. Fremont I & L is
examined on a regular basis by both agencies.
Federal and state regulations prescribe certain minimum capital
requirements and, while Fremont I & L is currently in compliance with such
requirements, the Company could in the future be required to make additional
investments in Fremont I & L in order to maintain compliance with such
requirements. Federal and state regulatory authorities have the power to
prohibit or limit the payment of dividends by Fremont I & L. Future changes in
government regulation and policy could adversely affect the thrift and loan
industry, including Fremont I & L.
The FDIC conducted an examination of Fremont I & L as of August 31, 1994.
The examination resulted in the FDIC requiring Fremont I & L to enter into a
Memorandum of Understanding in January 1995 ("the MOU"). The MOU requires, among
other things, that Fremont I & L: (a) maintain management acceptable to the
FDIC, (b) maintain a ratio of Tier 1 capital as a percentage of average
quarterly assets of at least 8.5%, (c) maintain an adequate reserve for loan
losses, (d) reduce its dependence on volatile liabilities, (e) not pay cash
dividends without the prior written consent of the FDIC, and (f) effect
revisions and enhancements to certain policies and procedures, including
lending, collection, reserve for loan losses, asset/liability management and
affiliate transaction policies and procedures.
The FDIC conducted another examination as of March 31, 1995, in conjunction
with a DOC examination as of the same date. The FDIC's and DOC's reports issued
as a result of this examination indicated that Fremont I & L's compliance with
the MOU was satisfactory. The Company does not believe that the restrictions on
Fremont I & L's ability to pay dividends imposed by the MOU or by federal or
state law will adversely affect the ability of Fremont General to meet its
obligations. However, no assurances can be given as to when, or if, the MOU will
be terminated.
California Law. The thrift and loan business conducted by Fremont I & L is
governed by the California Industrial Loan Law and the rules and regulations of
the Commissioner which, among other things, regulate the collateral requirements
and maximum maturities of the various types of loans that are permitted to be
made by California-chartered industrial loan companies, i.e., thrift and loan
companies or investment and loans.
Subject to restrictions imposed by applicable California law, Fremont I & L
is permitted to make secured and unsecured consumer and non-consumer loans. The
maximum term for repayment of loans made by thrift and loan companies range up
to forty years and thirty days depending upon collateral and priority of secured
position, except that loans with repayment terms in excess of thirty years and
thirty days may not in the aggregate exceed 5% of total outstanding loans and
obligations of the thrift. Consumer loans secured by real property with terms in
excess of three years must be repayable in substantially equal periodic payments
unless such loans are covered under the Garn-St. Germain Depository Institutions
Act of 1982 (primarily single-family residential loans). Non-consumer loans may
be repayable in unequal periodic payments during their respective terms.
California law limits lending activities outside of California by thrift and
loan companies to no more than 30% of total assets.
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California law contains extensive requirements for the diversification of
the loan portfolios of thrift and loan companies. A thrift and loan with
outstanding investment certificates may not, among other things, place more than
5% of its loans or other obligations in loans or obligations which are secured
only partially, but not primarily, by real property; may not make any one loan
secured primarily by improved real property which exceeds 20% of its paid-up and
unimpaired capital stock and surplus not available for dividends; may not lend
an amount in excess of 5% of its paid-up and unimpaired capital stock and
surplus not available for dividends upon the security of the stock of any one
corporation; may not make loans to, or hold the obligations of, any one person
as primary obligor in an aggregate principal amount exceeding 20% of its paid-up
and unimpaired capital stock and surplus not available for dividends; and may
have no more than 70% of its total assets in loans which have remaining terms to
maturity in excess of seven years and are secured solely or primarily by real
property. At December 31, 1995, Fremont I & L was in compliance with all of
these requirements.
A thrift and loan generally may not make any loans to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the DOC. Further, a thrift and loan may not make any loan to, or
hold an obligation of, any of its shareholders or any shareholder of its holding
company or affiliates, except that this prohibition does not apply to persons
who own less than 10% of the stock of a holding company or affiliate which is
listed on a national securities exchange, such as Fremont General. Any person
who wishes to acquire (i) 10% or more of the voting securities of a California
thrift and loan company, or (ii) 10% or more of the voting securities of a
holding company of a California thrift and loan company, such as the Company,
must obtain the prior approval of the DOC. The LYONs are not voting securities
of the Company, but the shares of Common Stock into which such LYONs are
convertible constitute voting securities of the Company. Fremont I & L must also
obtain prior written approval from the DOC before it may open or relocate any
branch or loan production office or close a branch office.
The Industrial Loan Law prohibits an industrial loan company from having
deposits at any time in an aggregate sum in excess of 20 times the aggregate
amount of its paid-up unimpaired capital and such of its unimpaired surplus as
is declared by its by-laws not to be available for cash dividends. Fremont I & L
currently has an authorized ratio of deposits to such capital of 17 to 1.
Federal Law. Fremont I & L's deposits are insured by the FDIC to the full
extent permitted by law. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and generally supervises
the operations of institutions to which it provides deposit insurance. Fremont I
& L is subject to the rules and regulations of the FDIC to the same extent as
other financial institutions which are insured by that entity. The approval of
the FDIC is required prior to any merger, consolidation or change in control or
the establishment or relocation of any branch office of Fremont I & L. This
supervision and regulation is intended primarily for the protection of the
insured deposit funds. Prior written notice to the FDIC is required to close a
branch office.
Fremont I & L is subject to federal risk-based capital adequacy guidelines
which provide a measure of capital adequacy and are intended to reflect the
degree of risk associated with both on- and off-balance sheet items, including
residential real estate loans sold with recourse, legally binding loan
commitments and standby letters of credit. A financial institution's risk-based
capital ratio is calculated by dividing its qualifying capital by its
risk-weighted assets. Financial institutions are generally expected to meet a
minimum ratio of qualifying total capital to risk-weighted assets of 8%, of
which at least 4% of qualifying total capital must be in the form of core
capital ("Tier 1") -- common stock, noncumulative perpetual preferred stock,
minority interests in equity capital accounts of consolidated subsidiaries and
allowed mortgage servicing rights, less all intangible assets other than allowed
mortgage servicing rights and eligible purchased credit card relationships.
Supplementary capital ("Tier 2") consists of the allowance for loan and lease
losses up to 1.25% of risk-weighted assets, cumulative perpetual preferred
stock, long-term preferred stock (original maturity of at least 20 years),
perpetual preferred stock, hybrid capital instruments, term subordinated debt
and intermediate term preferred stock (original average maturity of five years
or more). The maximum amount of Tier 2 capital which may be recognized for
risk-based capital purposes is limited to 100% of Tier 1 capital (after any
deductions for disallowed intangibles). The aggregate amount of term
subordinated debt and intermediate term preferred stock that may be treated as
Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations
and restrictions also apply. At December 31, 1994, the Tier 2 capital of Fremont
I & L consisted of
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approximately $10.6 million of allowance for possible loan losses. As of
December 31, 1995, Fremont I & L's allowance for possible loan losses for Tier 2
capital increased to $11.9 million. See "Financial Services -- Real Estate
Lending." The following table presents Fremont I & L's risk-based capital
position at the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
PERCENT OF PERCENT OF
RISK-WEIGHTED RISK-WEIGHTED
AMOUNT ASSETS AMOUNT ASSETS
--------- ------------- --------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 capital.......................... $ 89,374 9.46% $ 80,385 9.57%
Minimum requirement..................... 37,782 4.00 33,590 4.00
-------- ----- -------- -----
Excess........................ $ 51,592 5.46% $ 46,795 5.57%
======== ===== ======== =====
Total capital........................... $ 101,248 10.72% $ 90,937 10.83%
Minimum requirement..................... 75,564 8.00 67,179 8.00
-------- ----- -------- -----
Excess........................ $ 25,684 2.72% $ 23,758 2.83%
======== ===== ======== =====
Risk-weighted assets.................... $ 944,553 $ 839,743
======== ========
The FDIC has adopted a 3% minimum leverage ratio which is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions continue to maintain a minimum level of core capital. A minimum
leverage ratio of 3% is required for institutions which have been determined to
be the highest of five categories used by regulators to rate financial
institutions. All other institutions (including Fremont I & L) will likely be
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum. It is improbable, however, that an institution with a 3% core
capital-to-total assets ratio would be rated in the highest category since a
strong capital position is so closely tied to the rating system. Therefore, the
"minimum" leverage ratio is, for all practical purposes, significantly above 3%.
The following table presents Fremont I & L's leverage ratio (the ratio of Tier 1
capital to the quarterly average of total assets) at the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
PERCENT OF PERCENT OF
AVERAGE TOTAL AVERAGE TOTAL
AMOUNT ASSETS AMOUNT ASSETS
--------- ------------- --------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 capital............................ $ 89,374 9.02% $ 80,385 9.79%
Minimum requirement....................... 29,735 3.00 24,643 3.00
-------- ---- -------- ----
Excess.......................... 59,639 6.02% $ 55,742 6.79%
======== ==== ======== ====
Average total assets for the quarter ended
December 31,............................ $ 991,163 $ 821,434
======== ========
The FDIC has designated Fremont I & L as a "well-capitalized" institution
under the regulations promulgated under the Federal Deposit Insurance
Corporation Improvement Act of 1991. A "well-capitalized" institution has a
total risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital
ratio of at least 6.0%, has a leverage ratio of at least 5.0% and is not subject
to any written agreement, order, capital directive or prompt corrective action
directive issued by the FDIC under Section 8 or Section 38 of the Federal
Deposit Insurance Act to meet and maintain a specific capital level for any
capital measure. The total risk-based capital ratio is the ratio of qualifying
total capital to risk-weighted assets and the Tier 1 risk-based capital ratio is
the ratio of Tier 1 capital to risk-weighted assets. In August 1994, an
additional $23 million was contributed to the capital of Fremont I & L to
support the growth in the loan portfolio during 1994.
As a "well-capitalized" institution, Fremont I & L's annual FDIC insurance
premiums were 23 cents per $100 of eligible domestic deposits in 1994. In 1995,
this annual insurance premium rate was increased to 26 cents for the period
January 1, 1995 through June 30, 1995, and then significantly decreased to 7
cents for the period July 1, 1995 through December 31, 1995. This rate has been
further decreased to 3 cents effective for the period January 1, 1996 through
June 30, 1996. The insurance premium payable is subject to semi-
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annual adjustment. The FDIC, by the first day of the month preceding each
semi-annual period, is required to notify each insured institution of its
assessment risk-classification upon which the insurance premium assessment for
the following period will be based. The FDIC has the authority to assess to all
insured institutions collectively, additional premiums to cover losses and
expenses associated with insuring deposits maintained at financial institutions
and for other purposes it deems necessary.
Limitations on Dividends. Under California law, a thrift is not permitted
to declare dividends on its capital stock unless it has at least $750,000 of
unimpaired capital plus additional capital of $50,000 for each branch office
maintained. In addition, no distribution of dividends is permitted unless: (i)
such distribution would not exceed a thrift's retained earnings; (ii) any
payment would result in violation of the approved maximum capital to thrift
investment certificate ratio; or (iii) in the alternative, after giving effect
to the distribution, the sum of a thrift and loan's qualified assets would be
not less than 125% of certain of its liabilities, or with certain exceptions,
current assets would be not less than current liabilities. In addition, a thrift
and loan is prohibited from paying dividends from that portion of capital which
its board of directors has declared restricted for dividend payment purposes. In
policy statements, the FDIC has advised insured institutions that the payment of
cash dividends in excess of current earnings from operations is inappropriate
and may be cause for supervisory action. Under the Financial Institutions
Supervisory Act and the Financial Institutions Reform, Recovery and Enforcement
Act of 1989, federal regulators also have authority to prohibit financial
institutions from engaging in business practices which are considered to be
unsafe or unsound. It is possible that, depending upon the financial condition
of Fremont I & L and other factors, such regulators could assert that the
payment of dividends in some circumstances might constitute unsafe or unsound
practices and could prohibit payment of dividends even though technically
permissible.
Fremont I & L is also subject to federal consumer protection laws,
including the Truth In Savings Act, the Truth in Lending Act, the Community
Reinvestment Act and the Real Estate Settlement Procedures Act.
Commercial Finance
Fremont Financial is licensed under the California Finance Lenders Law by
the California Department of Corporations as a commercial finance lender and a
personal property broker and holds certain other licenses.
Intercompany Transactions
The payment of stockholders' dividends and the advancement of loans to the
Company by its subsidiaries are and may continue to be subject to certain
statutory and regulatory restrictions.
EMPLOYEES
At December 31, 1995, the Company had 1,826 employees, none of whom is
represented by a collective bargaining agreement. The Company believes its
relations with employees are good.
ITEM 2. PROPERTIES
Substantially all facilities used by the Company are leased.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries and affiliates are parties to various
legal proceeding, which in some instances include claims for punitive damages,
all of which are considered routine and incidental to their business. The
Company believes that ultimate resolution or settlement of such matters will not
have a material adverse effect on its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
("NYSE") under the trading symbol "FMT." The following table sets forth the high
and low sales prices of the Company's Common Stock adjusted retroactively for a
three for two stock split effective January 8, 1996 and a ten percent stock
dividend distributed June 15, 1995 as reported as composite transactions on the
NYSE and the adjusted cash dividends declared on the Company's Common Stock
during each quarter presented.
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
1995
1st Quarter...................................... 14 5/32 11 3/4 $0.12
2nd Quarter...................................... 17 13/32 17 7/16 0.13
3rd Quarter...................................... 19 5/32 16 0.13
4th Quarter...................................... 24 27/32 17 21/32 0.13
-----
Total.......................................... $0.51
=====
1994
1st Quarter...................................... 15 1/16 13 1/32 $0.11
2nd Quarter...................................... 14 15/16 13 1/32 0.11
3rd Quarter...................................... 15 3/4 13 7/8 0.11
4th Quarter...................................... 15 13 11/32 0.12
-----
Total.......................................... $0.45
=====
On December 31, 1995, the closing sale price of the Company's Common Stock
on the NYSE was $24.50 per share. There were 1,320 stockholders of record as of
December 31, 1995.
The Company has paid cash dividends in every quarter since its initial
public offering in 1977. While the Company intends to continue to pay dividends,
the decision to do so is made quarterly by the Board of Directors and is
dependent on the earnings of the Company, management's assessment of future
capital needs, and other factors. As a holding company, Fremont General's
ability to pay dividends to its stockholders is partially dependent on dividends
from its subsidiaries. The ability of several of these subsidiaries to
distribute dividends is subject to certain statutory and regulatory restrictions
and various agreements, principally loan agreements, of the subsidiaries that
restrict the ability of the respective subsidiaries to pay cash dividends or
advance loans and other payments to the Company and is contingent upon the
earnings of those subsidiaries. See Note J to Consolidated Financial Statements
and "Business -- Regulation."
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995(1) 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS AND PER SHARE DATA)
INCOME STATEMENT DATA:
Property and casualty premiums
earned.......................... $ 606,917 $ 433,584 $ 455,765 $ 411,956 $ 413,156
Net investment income.............. 119,523 76,821 77,198 70,820 73,796
Loan interest income............... 162,992 113,382 87,244 73,310 60,685
Realized investment gains
(losses)........................ 1 (315) 2,165 16,208 5,290
Other revenue...................... 34,381 29,676 29,033 26,399 28,247
---------- ---------- ---------- ---------- ----------
Total revenues..................... $ 923,814 $ 653,148 $ 651,405 $ 598,693 $ 581,174
========= ========= ========= ========= =========
Property and casualty income....... $ 83,092 $ 61,265 $ 52,092 $ 45,187 $ 37,946
Financial services income.......... 35,737 28,014 21,456 14,878 9,340
Other interest and corporate
expense......................... (18,502) (7,708) (9,200) (11,484) (6,277)
---------- ---------- ---------- ---------- ----------
Income before taxes, discontinued
operations and cumulative effect
of accounting change............ 100,327 81,571 64,348 48,581 41,009
Income tax expense................. (32,305) (25,759) (21,638) (13,381) (8,878)
Discontinued operations............ -- -- -- -- (964)
Cumulative effect of accounting
change for income taxes......... -- -- -- 43,509 --
---------- ---------- ---------- ---------- ----------
Net income......................... $ 68,022 $ 55,812 $ 42,710 $ 78,709 $ 31,167
========= ========= ========= ========= =========
GAAP RATIOS FOR PROPERTY AND CASUALTY
SUBSIDIARIES:
Loss ratio......................... 76.0% 63.1% 70.0% 80.4% 72.7%
Expense ratio...................... 24.5% 23.4% 21.3% 22.5% 24.5%
Policyholder dividends ratio....... 0.0% 11.5% 9.9% 2.5% 8.8%
---------- ---------- ---------- ---------- ----------
Combined ratio..................... 100.5% 98.0% 101.2% 105.4% 106.0%
========= ========= ========= ========= =========
PER SHARE DATA (2):
Cash dividends declared............ $ 0.51 $ 0.45 $ 0.44 $ 0.39 $ 0.35
Stockholders' equity:
Including FASB 115 for 1994 and
1995 (3)...................... 19.62 13.82 N/A N/A N/A
Excluding FASB 115 for 1994 and
1995 (3)...................... 18.76 16.40 14.55 13.39 9.79
Income before discontinued
operations and cumulative effect
of accounting change:
Primary......................... 2.61 2.16 1.85 1.73 1.57
Fully diluted................... 2.17 1.82 1.65 1.53 1.43
Net income:
Primary......................... 2.61 2.16 1.85 3.84 1.52
Fully diluted................... 2.17 1.82 1.65 3.29 1.39
WEIGHTED AVERAGE SHARES USED TO
CALCULATE PER SHARE DATA (2):
Primary............................ 26,079 25,823 23,039 20,498 20,491
Fully diluted...................... 33,343 33,034 28,243 24,734 24,481
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DECEMBER 31,
--------------------------------------------------------------
1995(1) 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
BALANCE SHEET DATA:
Total assets....................... $4,477,399 $3,134,390 $2,669,290 $2,070,533 $1,952,169
Fixed income and other
investments..................... 1,937,890 888,918 1,055,289 782,542 772,947
Loans receivable................... 1,499,043 1,440,774 846,443 689,443 519,874
Claims and policy liabilities...... 1,971,719 1,012,704 1,007,054 812,081 838,459
Short-term debt.................... 72,191 176,325 78,087 208,013 147,450
Long-term debt..................... 693,276 468,390 451,581 100,572 101,303
Stockholders' equity:
Including FASB 115 for 1994 and
1995(3)....................... 498,090 351,013 N/A N/A N/A
Excluding FASB 115 for 1994 and
1995(3)....................... 476,491 416,378 369,369 271,710 198,724
- ---------------
(1) The Company acquired Casualty Insurance Company on February 22, 1995.
(2) Adjusted for a three-for-two split of the Common Stock distributed on
February 7, 1996 to stockholders of record at close of business on January
8, 1996; a ten percent stock dividend distributed June 1995; and a
three-for-two split of the Common Stock effected June 1993.
(3) Effective January 1994, FASB 115 changed the accounting treatment afforded
the Company's investment portfolio wherein unrealized gains and losses on
securities designated by the Company as available for sale are included, net
of deferred taxes, as a component of stockholders' equity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Fremont General Corporation, a nationwide property and casualty insurance
and financial services holding company, operates through its wholly-owned
subsidiaries in select businesses in niche markets. The three core operating
lines of business are workers' compensation insurance, real estate lending and
commercial finance lending. Additionally, on a smaller scale, the Company is
involved in underwriting various other insurance products. The primary operating
strategy of the Company is to build upon its core business units through
acquisition opportunities and new business development. The Company's secondary
strategy is to achieve income balance and geographic diversity among its
business units in order to limit the exposure of the Company to industry, market
and regional concentrations.
The Company began its workers' compensation insurance operations in 1959
and continues to derive the majority of its revenues from this business. The
Company's workers' compensation insurance business has grown through internal
expansion, as well as through the acquisition of other workers' compensation
insurance companies. In 1989, the Company restructured its workers' compensation
insurance operations under a single management group. By consolidating duplicate
offices and functions, this management group has increased efficiency and
achieved substantial cost savings.
More recently, on February 22, 1995, the Company completed the acquisition
of all outstanding stock of Casualty Insurance Company ("Casualty") and its
wholly-owned subsidiary Workers' Compensation and Indemnity Company ("WCIC")
from the Buckeye Union Insurance Company ("Buckeye"). Casualty underwrites
workers' compensation insurance primarily in Illinois and several other
mid-western states, as well as a modest amount through WCIC in California.
Casualty currently is the largest underwriter of workers' compensation insurance
in Illinois and has provided the Company with a significant presence in the mid-
western region. The Casualty acquisition has provided geographic diversity
within the Company's workers' compensation insurance business segment and the
Company's 1995 revenues from workers' compensation insurance premiums were
evenly divided between the west and mid-west regions. The Company believes this
geographic diversity mitigates potential fluctuations in earnings from cyclical
downturns in various regional economies.
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The Company's balance sheet at December 31, 1995 has been significantly
impacted by the acquisition of Casualty. The purchase price was $250 million,
comprised of $225 million in cash and $25 million in a note payable to Buckeye.
In addition, $6.5 million of costs were incurred in connection with the
acquisition bringing the total cost to $256.5 million. The acquisition was
treated as a purchase for accounting purposes and approximately ten months of
Casualty's operating results are included in the Company's results of operations
for the year ended December 31, 1995. At the acquisition date, the assets
acquired and liabilities assumed, net of the purchase price and purchase
accounting adjustments, are summarized in the following table:
(THOUSANDS OF DOLLARS)
Assets acquired:
Fixed maturity investments -- at fair value............. $ 15,646
Short-term investments.................................. 472,166
Premiums receivable and agents' balances................ 67,117
Reinsurance recoverable on paid and unpaid losses....... 185,145
Deferred policy acquisition costs....................... 12,656
Deferred income taxes................................... 59,830
Costs in excess of net assets acquired.................. 45,036
Other assets, including cash, accrued investment income,
state deferred taxes and trade name.................. 37,719
--------
Total assets acquired........................... $895,315
========
Liabilities assumed:
Losses and loss adjustment expenses..................... $787,663
Unearned premiums....................................... 83,323
Dividends to policyholders.............................. 17,660
Other liabilities....................................... 6,669
--------
Total liabilities assumed....................... $895,315
========
Since the date of acquisition, the