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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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, 1999
COMMISSION FILE NUMBER 1-8007
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 February 29, 2000:
COMMON STOCK, $1.00 PAR VALUE -- $329,095,000
The number of shares outstanding of each of the issuer's classes of common
stock as of February 29, 2000:
COMMON STOCK, $1.00 PAR VALUE -- 70,032,000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the 2000 annual meeting of stockholders
are incorporated by reference into Part III of this report.
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FREMONT GENERAL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 26
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 27
Item 6. Selected Financial Data..................................... 28
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 29
Item 7(a). Quantitative and Qualitative Disclosures About Market
Risk........................................................ 50
Item 8. Financial Statements and Supplementary Data (Index to
Consolidated Financial Statements and Financial Statement
Schedules on Page 56)....................................... 50
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 50
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 51
Item 11. Executive Compensation...................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 51
Item 13. Certain Relationships and Related Transactions.............. 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 52
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ITEM 1. BUSINESS
The following business section contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those projected in these forward looking statements as a result
of certain risks and uncertainties, including those factors set forth in this
"Item 1. Business" section and elsewhere in this Form 10-K including, but not
limited to, "Competition," "Reinsurance Ceded," "Loss and Loss Adjustment
Expense Reserves," "Analysis of Loss and Loss Adjustment Expense Development,"
"Investment Portfolio," "Competition," "Discontinued Operations," "Regulation,"
"Risk Factors," and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
GENERAL
Fremont General Corporation is an insurance and financial services holding
company operating select businesses nationally in niche markets. The reported
assets of Fremont General Corporation and its subsidiaries ("Fremont" or "the
Company") as of December 31, 1999 were $8.0 billion. The Company incurred a loss
before taxes from continuing operations of $66.3 million in the year ended
December 31, 1999, resulting entirely from losses recognized within the
Company's property and casualty insurance segment. (See "Property and Casualty
Insurance Operation.") Additionally, Fremont recorded a net loss from
discontinued operations of $25 million which resulted primarily from a
deterioration in the Company's estimated reserves for asbestos and environmental
claims. (See "Discontinued Operations.")
Fremont's business strategy includes achieving income balance and
geographic diversity among its business units in order to limit its exposure to
market and regional concentrations. The Company's business strategy also
includes growing its business through new business development and acquisitions.
The Company's stock is traded on the New York Stock Exchange under the symbol
"FMT".
The Company's businesses are managed within two reportable segments:
property and casualty insurance and financial services. Revenues from these
segments are derived from two basic financial products; policies of insurance
(property and casualty insurance), and loans (financial services). They are
managed separately and use different pricing, distribution, and operating
methods. Fremont evaluates the performance of its reportable segments based on
income before taxes using accounting policies which are the same as those
described in the summary of significant accounting policies. (See Note A of
Notes to Consolidated Financial Statements.) Additionally, there are certain
corporate revenues and expenses, comprised primarily of investment income,
interest expense and certain general and administrative expenses, that Fremont
does not allocate to its segments.
Substantially all of Fremont's property and casualty insurance operation is
represented by the underwriting of workers' compensation insurance policies,
which are distributed primarily through non-exclusive independent insurance
agents and brokers nationwide. The Company's property and casualty insurance
segment posted income (loss) before taxes of $(116.2) million, $169.2 million
and $144.7 million for the years ended December 31, 1999, 1998 and 1997,
respectively, on revenues of $984.6 million, $729.7 million and $738.1 million
for the same respective periods. Fremont's financial services operation consists
of operating units that conduct collateralized lending activities on a national
basis. Lending activities included: commercial and residential real estate
lending; commercial working capital lines of credit ("commercial finance"); the
Company's interest in large syndicated commercial loans originated and serviced
by other financial institutions ("syndicated loans"); and insurance premium
financing. In December 1999, the Company discontinued its commercial finance
lending activities through the sale on December 20, 1999 of Fremont Financial
Corporation, a commercial finance subsidiary, to FINOVA Capital Corporation, a
subsidiary of The FINOVA Group, Inc. for approximately $708 million in cash
including the refinancing and assumption of existing debt. (See "Financial
Services Operation.") The financial services business is developed through
independent loan brokers, the Company's own marketing representatives and
referrals from various financial intermediaries and financial institutions.
Fremont's financial services operation earned $79.9 million, $55.5 million and
$42.3 million in income before taxes for the years ended December 31, 1999, 1998
and 1997,
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respectively, on revenues of $411.6 million, $297.5 million and $232.3 million
for the same respective periods. (See Note O of Notes to Consolidated Financial
Statements.)
Fremont's workers' compensation insurance business currently has premium
volume concentrated in California, Illinois, and to a lesser degree, Alaska,
Arizona, Colorado, Indiana, Michigan, New Jersey, Texas and Wisconsin. For the
year ended December 31, 1999, these states collectively accounted for over 80%
of the Company's premium. At December 31, 1999, the Company had premiums inforce
in forty-five states and the District of Columbia. The Company ranked as the
seventh largest writer in direct premiums of workers' compensation insurance in
the United States for the year ended December 31, 1998, according to A.M. Best.
Additionally, for the year ended December 31, 1998, Fremont was ranked by A.M.
Best in the top five writers of direct workers' compensation insurance premiums
in Alaska, Arizona, California, Idaho, Illinois and Montana. For the years ended
December 31, 1999, 1998, and 1997, the Company had workers' compensation
insurance premiums earned of $831 million, $551 million, and $571 million,
respectively. Over the last five years, the Company has focused on creating a
broad national platform upon which to build its businesses, while providing
geographic diversity to mitigate potential fluctuations in earnings from
cyclical downturns in various regional economies. (See "Property and Casualty
Insurance Operation" and "Risk Factors.") A.M. Best rates the Company's workers'
compensation insurance subsidiaries on a pool basis as "B++" (Very Good). This
rating represents a change of one notch from "A-", announced by A.M. Best on
March 1, 2000, and resulted from both company specific issues, as well as to
their general concerns relating to workers' compensation market conditions in
California. (See "Competition.") The "B++" rating remains in A.M. Best's
"Secure" range, which indicates that A.M. Best has evaluated the Company as
having a good ability to meet its ongoing obligations to policyholders. A "B++"
rating is A.M. Best's fifth highest rating category out of fifteen rating
categories ranging from "A++" (Superior) to "F" (In Liquidation).
Fremont's financial services operation originates loans and purchases
interests in syndicated bank loans on a national basis through its
California-chartered thrift and loan subsidiary, Fremont Investment & Loan. The
Company, to a lesser degree, purchases pools of loans from time to time that
meet its new loan origination underwriting guidelines. Fremont's lending is done
primarily on a senior and secured basis and it seeks to minimize its credit
exposure through conservative loan underwriting and appropriate loan to
collateral valuations and cash flow coverages. The Company continues to focus on
loan origination by broadening its existing distribution channels and creating
new distribution channels. The outstanding loan portfolio of Fremont's financial
services operation has grown from $1.4 billion at December 31, 1995 to $3.1
billion at December 31, 1999. In addition, the Company had residential real
estate loans of approximately $1.3 billion under three securitizations at
December 31, 1999 which are not included in the Company's balance sheet. (See
"Financial Services Operation -- Residential Real Estate Lending.")
After the sale of the Company's commercial finance subsidiary in December
1999, Fremont's remaining lending activities include commercial and residential
real estate lending, syndicated loans and insurance premium financing.
Commercial real estate loans are originated and purchased primarily for the
Company's own portfolio and are secured mainly by first mortgages on
income-producing properties. Residential real estate loans are originated and
purchased for the Company's own portfolio, for securitization and for resale to
other financial institutions. The residential real estate loans are generally
secured by first deeds of trust on single-family residences. Syndicated loans
represent Fremont's interest in large syndicated commercial loans which are
originated and serviced by other financial institutions. These loans are senior
obligations of the borrowers and are secured by substantially all of the assets
of the borrower. Insurance premium financing represents the financing of
property and casualty insurance premiums for small businesses and is secured by
the unearned premiums of the underlying insurance policies. (See "Financial
Services Operation.")
By engaging in geographically diverse businesses nationwide, the Company
believes it has provided opportunities for growth in its revenues. Since the
year ended December 31, 1995 to the year ended December 31, 1999, the Company's
revenues grew at a compound annual rate of approximately 11% to $1.4 billion for
1999. The Company's book value increased to $731 million at December 31, 1999
from $498 million at December 31, 1995.
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Management believes that ownership of Fremont'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, 1999,
officers and directors of the Company, their families and the Company's benefit
plans beneficially owned approximately 37% of the Company's outstanding common
stock.
Fremont General Corporation, a Nevada corporation, was incorporated in
1972. Its corporate office is located at 2020 Santa Monica Boulevard, Suite 600,
Santa Monica, California 90404 and its phone number is (310) 315-5500.
PROPERTY AND CASUALTY INSURANCE OPERATION
Fremont Compensation Insurance Group, Inc., through its subsidiaries
("Fremont Comp"), underwrites workers' compensation insurance, and had premiums
inforce in forty-five states and the District of Columbia as of December 31,
1999. Over the last five years, the Company's focus on creating a broad national
platform through acquisitions and new business development has resulted in
Fremont Comp becoming one of the largest workers' compensation insurers in the
United States. Fremont Comp continues to underwrite a significant amount of its
premiums in California and Illinois. Using Fremont Comp's estimated annual
premiums on policies in effect at December 31, 1999, 1998 and 1997 (referred to
as "inforce premium"), the percentage of Fremont Comp's inforce premium in
California and Illinois totaled 60%, 65%, and 61%, respectively. Fremont Comp
also has significant premium volume in Alaska, Arizona, Colorado, Indiana,
Michigan, New Jersey, Texas and Wisconsin. These states collectively accounted
for 23%, 23% and 27% of Fremont Comp's inforce premium at December 31, 1999,
1998 and 1997, respectively. A.M. Best rates the Company's workers' compensation
insurance subsidiaries on a pool basis as "B++" (Very Good).
Workers' compensation insurance is a government-mandated ("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
which party 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 the nature of their business and may be affected
significantly 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. Most of the states in which Fremont Comp does business, including
California and Illinois, operate under an open rating system. Generally, in an
open rating system, workers' compensation insurers are provided with advisory
premium rates (expected losses and expenses) or loss costs (expected losses
only) which vary by job classification. Each insurance company sets its base
rates to reflect its particular loss experience and operating costs. These rates
are then modified to reflect individual risk characteristics and other expenses
in determining a final premium rate. (See "Regulation -- Insurance
Regulation -- Workers' Compensation Regulation.")
Underwriting and Loss Control. Prior to insuring a workers' compensation
policy, Fremont Comp's underwriting department reviews the employer's prior loss
experience, safety record, credit history, operations and employment
classifications. Fremont Comp generally avoids industries and businesses
involving hazardous conditions or high exposure to multiple injuries resulting
from a single occurrence. Fremont Comp 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. Fremont Comp's
primary market is small to medium sized employers. The average policy size,
using inforce premium at December 31, 1999, was $13,642 with approximately
76,000 policies issued.
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Fremont Comp's loss control department participates in the initial
underwriting process and also provides ongoing services to policyholders based
on individual needs and potential risk exposure. In the initial underwriting
phase, the underwriter will review both the loss experience and description of
operations and, where there is a concern about the potential hazards or claim
trends, a loss control consultant may be requested to pre-screen the account
prior to policy issuance. This pre-screening process may involve meeting with
the employer's management to assess the extent to which management is committed
to safety in the workplace, surveying the employer's operations, reviewing past
loss patterns and evaluating the safety program.
After the policy is issued, the loss control department provides service
calls to the insured based on both regulatory requirements and specific needs to
assist the employer in developing and maintaining safety programs and
procedures, reviews periodic loss reports, identifies weaknesses in the
employer's loss prevention programs and assists in correcting these weaknesses.
In some states, loss control must target those employers who have high loss
ratios and/or experience modifications, and provide specific services to assist
in accident prevention. Accident and claim records maintained by Fremont Comp
are also reviewed by the loss control department and service calls may be
initiated when adverse claim trends develop. Any insured who requests loss
control service is provided this service free of charge. Accident prevention
services include physical surveys for hazard recognition, safety program
evaluation, loss trend analysis and employee training.
Policyholders' Dividends. Since 1995, Fremont Comp's workers' compensation
insurance policies have generally been written as non-participating and,
therefore, do not include provisions for the insurer to declare and pay
dividends to a policyholder after the expiration of the policy. (See
"Regulation -- Workers' Compensation Regulation.")
Claims Administration. Fremont Comp's policy is to settle valid claims
promptly and to work closely with policyholders to return injured workers to
their jobs quickly, while avoiding litigation if possible. Claims personnel
communicate frequently with policyholders, injured employees and medical
providers. Fremont Comp'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, Fremont Comp refuses to settle any claim that it
believes to be fraudulent without a comprehensive investigation.
Fremont Comp's litigation management is an integral part of its claim cost
control process. Fremont Comp utilizes in-house lawyers and hearing
representatives, where statutes permit, who understand the complex
administrative system and handle all aspects of the litigation process. Outside
counsel are also used when the unique aspects of a claim warrant it.
Fremont Comp provides early return-to-work programs for injured workers and
aggressively pursues the containment of medical costs. Utilizing Fremont Comp's
team-based medical management, claims examiners and registered nurses work with
the health care provider to return the injured worker to good health and back to
work. Fremont Comp's claims personnel utilize a network of directly-contracted
preferred providers, who have unique experience in industrial medicine, to
control costs. Fremont Comp also provides medical bill review to evaluate
compliance to state fee schedules and medical peer review panels to obtain
detailed evaluation of treatment protocols designed to return injured workers to
their jobs as quickly as possible.
Competition. The insurance industry is characterized by competition on the
basis of price and service. Service considerations include 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 has adversely affected the Company's results of operations for
its workers' compensation insurance business in California. In Illinois, price
competition has also impacted the Company's results of operations. The advisory
premium rates in Illinois, which are established by the National Council on
Compensation Insurance and which workers' compensation insurance companies in
Illinois tend to follow, increased 1.2% effective January 1, 2000 as opposed to
decreases of 0.2% and 7.9% effective January 1, 1999 and 1998, respectively.
(See "Regulation -- Insurance Regulation.") Beginning in the second half of
1999, however, Fremont Comp observed a lessening of price competition in its
primary regions of California and Illinois. More recently, in January 2000,
Fremont
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Comp experienced weighted average renewal premium rate increases of 26% and 14%
in California and Illinois, respectively, and Fremont Comp's total inforce
premiums for all regions combined remained in excess of $1 billion at January
31, 2000. It is uncertain however, whether the observed lessening in the
competitive environment and Fremont Comp's ability to increase premium rates
will continue. Over the past several years, Fremont Comp has also observed a
reduction in the number of competitors resulting from the consolidation of
companies into other entities, companies who are forced to terminate
underwriting activities through regulatory actions by state insurance
authorities, as well as from companies electing to reduce or discontinue the
writing of workers' compensation insurance in certain jurisdictions. (See "Risk
Factors.")
Fremont Comp expanded its workers' compensation operation through the
acquisition on August 1, 1997 of Industrial Indemnity Holdings, Inc.
("Industrial"), which underwrites workers' compensation insurance in most
western states. Although the acquisition of Industrial, and the acquisition of
Illinois-based Casualty Insurance Company ("Casualty") on February 22, 1995,
have provided Fremont Comp with major market positions in several states outside
of California, based on the competitive nature of the insurance industry and the
inherent risks associated with Fremont Comp entering into a new geographic
market, there can be no assurance that Fremont Comp will continue to maintain
its market share in the future.
Marketing. Fremont Comp primarily markets its workers' compensation
insurance policies through more than 2,800 non-exclusive independent insurance
agents and brokers, many of whom have been associated with Fremont Comp for more
than 15 years. At December 31, 1999, the ten largest agents accounted for
approximately 18.5% of Fremont Comp's workers' compensation insurance premiums.
The largest producer accounted for 3.9%.
As part of its September 1, 1998 acquisition of UNICARE Specialty Services,
Inc. ("Unicare") from Wellpoint Health Networks, Inc. ("Wellpoint"), Fremont
Comp formed a strategic joint marketing partnership with Wellpoint. Under this
program, a Fremont Comp workers' compensation insurance policy is integrated
with Wellpoint's non-occupational benefit programs, such as group medical and
non-occupational disability coverage ("the integrated product"). This integrated
product is marketed through approximately 1,800 agents, who are part of
Wellpoint's life and health product distribution system.
Fremont Comp also markets group insurance programs, which allow trade
associations and small businesses within an industry to pool their workers'
compensation insurance premium dollars and maximize their purchasing power.
These group insurance programs include customized safety programs that address
issues specific to an industry or association.
Reinsurance Ceded. Reinsurance is ceded primarily to reduce the liability
on individual risks and to protect against catastrophic losses. Fremont Comp
follows the industry practice of reinsuring a portion of its risks. For this
coverage, Fremont Comp pays the reinsurer a portion of the premiums received on
all covered policies.
Fremont Comp maintains excess of loss reinsurance treaties with various
reinsurers. Under the workers' compensation reinsurance treaties in effect as of
and for the year ended December 31, 1999, various reinsurers assumed liability
for up to a maximum of $399,950,000 of loss and certain allocated loss
adjustment expenses in excess of $50,000 per loss occurrence. Effective January
1, 2000, these reinsurance limits were reduced. Currently, Fremont Comp's excess
of loss reinsurance for new and renewal workers' compensation insurance policies
with effective dates of January 1, 2000 or after assumes liability for up to a
maximum of $399,000,000 of loss and certain allocated loss adjustment expenses
in excess of $1,000,000 per loss occurrence. (See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Property and Casualty Insurance Operation -- Premiums.") 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 understanding of the reinsurers' financial condition and
reputations in the reinsurance marketplace, that its reinsurers are financially
sound. Fremont Comp encounters disputes from time to time with its reinsurers,
which, if not settled, are typically resolved in arbitration.
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Most of Fremont Comp's treaties are for annual terms. However, for the
specific treaties which became effective January 1, 1998 and under which the
reinsurers assume liability for loss and certain allocated loss adjustment
expense that exceeds $50,000 per occurrence, up to a maximum of $950,000, the
terms were for a period of two years, and expired December 31, 1999.
In general, the reinsurance agreements are of the treaty variety and cover
all underwritten risks of types specified in the treaties. As of December 31,
1999, Gerling Global Reinsurance Corporation of America, Reliance Insurance
Company, Great Southern Insurance Company and United States Fire Insurance
Company were the only reinsurers that accounted for more than 10% of the
Company's total reinsurance recoverables on paid and unpaid losses.
On February 28, 2000, Fremont Comp reached an agreement with one of its
reinsurers, Reliance Insurance Company ("Reliance"), to settle all obligations
between Fremont Comp and Reliance under a contract of reinsurance which was in
effect for the period January 1, 1998 through December 31, 1999. The reinsurance
treaty afforded Fremont Comp coverage for loss and certain loss adjustment
expense that exceeded $100,000 per occurrence, up to a maximum of $150,000.
Under the terms of the settlement agreement, Fremont Comp will receive in excess
of $100 million in cash and will no longer have any involvement with the
Reliance workers' compensation reinsurance programs brokered for Reliance by
Unicover Managers, Inc. In recognition of this settlement, Fremont recorded a
charge to its operating results in the quarter ended December 31, 1999 of
approximately $48.8 million after taxes, consisting primarily of the adjustment
necessary to bring the estimated unpaid reinsurance recoverables under the
reinsurance contract to a present value basis at December 31, 1999. The Company
anticipates this charge to be mitigated through future investment income earned
on the cash to be received under the agreement. The cash payment is expected to
be made to Fremont Comp on or shortly after the effective date of the agreement,
which is anticipated by the end of the first quarter of 2000.
The Company evaluated the adequacy of the expected cash settlement under
the Reliance settlement agreement through an independent actuarial analysis of
the expected losses and allocated loss adjustment expenses to be paid under the
Reliance reinsurance contract after December 31, 1999. A range of expected loss
payments was estimated and then discounted to a present value basis using
investment yields considered appropriate. Based on these indications, the cash
settlement is within the range of present values. The Company believes that the
cash settlement coupled with the estimated future investment income earned from
these proceeds, will approximate the future loss and allocated loss adjustment
expense payments that would have been reinsured and paid by Reliance under the
reinsurance contract. Based on the results of this evaluation, the Company
believes the net effect of this transaction will be economically neutral.
Medical Malpractice Insurance. Fremont's medical malpractice insurance
operation underwrote primarily standard professional liability insurance on a
"claims made" basis, through non-exclusive independent brokers mainly in
California. On January 1, 1998, the Company entered into reinsurance and
assumption agreements with a reinsurer whereby substantially all of the assets
and liabilities related to the medical malpractice policies were ceded to the
reinsurer. These reinsurance agreements are part of several other agreements
which collectively resulted in the sale of Fremont's medical malpractice
operation effective January 1, 1998. The effect on operations from these
agreements was not material, and revenue and operating income from medical
malpractice operations were not significant in 1997.
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Operating Data. Set forth below is certain information pertaining to
Fremont's property and casualty insurance business as determined in accordance
with generally accepted accounting principles ("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.)
YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Net premiums earned................ $ 831,005 $552,078 $601,183 $486,860 $606,917
Net investment income and
other(1)......................... 122,140 148,040 102,645 92,254 85,912
Underwriting profit (loss)......... (238,318) 21,195 42,022 25,339 (2,820)
Income (loss) before taxes......... (116,178) 169,235 144,667 117,593 83,092
Loss ratio....................... 92.7% 60.8% 64.7% 68.9% 76.0%
Expense ratio.................... 31.6% 34.5% 27.5% 25.9% 24.5%
Policyholders' dividend ratio.... 4.4% 0.9% 0.8% -- --
--------- -------- -------- -------- --------
Total combined ratio..... 128.7% 96.2% 93.0% 94.8% 100.5%
========= ======== ======== ======== ========
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(1) Includes net realized investment gains (losses), other revenues and interest
expense.
Statutory Combined Ratio. The following table reflects the combined ratios
of Fremont's workers' compensation insurance business determined in accordance
with statutory accounting practices, together with the workers' compensation
industry-wide combined ratios after policyholders' dividends, as compiled by
A.M. Best, for the years indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------------- ----- ----- ---- -----
Workers' Compensation:
Company................................. 120.0% 113.4%(2) 96.6%(3) 97.9% 100.1%(4)
Industry(1)............................. not available 107.6% 100.7% 99.7% 97.0%
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(1) Nationwide statutory combined ratio information for the workers'
compensation insurance industry for 1995 through 1998 is from A.M. Best's
Aggregates & Averages, Property-Casualty (1996 through 1999 editions).
(2) Includes the statutory results for Unicare for the period January 1, 1998
through August 31, 1998, which was prior to the Company's acquisition of
Unicare on September 1, 1998. The significant increase in the statutory
combined ratio in 1998 as compared to 1997 is due primarily to significant
increases in the liability for losses and LAE for Unicare, which occurred
prior to its acquisition by the Company.
(3) Includes the statutory results for Industrial for the period January 1, 1997
through July 31, 1997, which was prior to the Company's acquisition of
Industrial on August 1, 1997.
(4) Includes the statutory results for Casualty for the period January 1, 1995
through February 21, 1995, which was prior to the Company's acquisition of
Casualty on February 22, 1995.
Premium-to-Surplus Ratio. Regulatory authorities regard the
premium-to-surplus ratio as an important indicator of operating leverage. A
lower ratio indicates a greater ability on the part of an insurer 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.
7
10
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, including a proforma result for the 1999 year had the previously
discussed Reliance reinsurance settlement been recognized on a statutory basis:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
PROFORMA
1999(1) 1999 1998(2) 1997(3) 1996 1995(4)
-------- -------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Net premiums written during the year.............. $896,833 $896,833 $644,218 $820,532 $473,123 $683,711
Policyholders' surplus at end of year............. 508,000 562,879 646,828 548,280 399,893 299,408
Ratio............................................. 1.8x 1.6x 1.0x 1.5x 1.2x 2.3x
- ---------------
(1) Since the Reliance reinsurance settlement was not executed until February
28, 2000, the effect of this settlement was not recognized in the Company's
statutory results for the year ended December 31, 1999. The proforma
premium-to-surplus ratio represents the estimated ratio had the Reliance
reinsurance settlement been recognized in the statutory results for the year
ended December 31, 1999.
(2) Includes net written premium for Unicare for the period January 1, 1998
through August 31, 1998, which was prior to the Company's acquisition of
Unicare on September 1, 1998.
(3) Includes net written premium for Industrial for the period January 1, 1997
through July 31, 1997, which was prior to the Company's acquisition of
Industrial on August 1, 1997.
(4) Includes net written premium for Casualty 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. Associated with the liabilities for
future unpaid losses and LAE are estimates of reinsurance recoverables related
to these future unpaid losses and LAE, which are reported on the balance sheet
as assets.
Reserves for losses and LAE ("loss reserves") 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.
Loss reserves and reinsurance recoverables on unpaid losses are revalued
periodically using a variety of actuarial and statistical techniques for
producing current estimates of expected claim costs and reinsurance recoveries.
Claim frequency and severity and other economic and social factors are
considered in the re-evaluation process. A provision for inflation in the
calculation of estimated future claim costs and reinsurance recoverables 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 loss reserves and reinsurance
recoverables are reflected in operating results for the periods to which they
are made.
8
11
Reconciliation of Loss and Loss Adjustment Expense Reserves. The following
table shows the GAAP reconciliation of the estimated liability for loss and LAE
for Fremont's property and casualty insurance subsidiaries (excluding
discontinued operations) and the effect on income for each of the three years
indicated.
RECONCILIATION OF RESERVES FOR LOSS AND LAE
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Reserves for loss and LAE, net of reinsurance recoverable,
at beginning of year...................................... $1,597,116 $1,809,395 $1,010,886
Incurred loss and LAE:
Provision for insured events of the current year, net of
reinsurance............................................ 677,756 348,897 441,524
Increase (decrease) in provision for insured events of
prior years, net of reinsurance........................ 92,767 (13,447) (52,323)
---------- ---------- ----------
Total incurred loss and LAE....................... 770,523 335,450 389,201
Payments:
Loss and LAE, net of reinsurance, attributable to insured
events of:
Current year......................................... (296,039) (245,177) (253,323)
Prior years.......................................... (576,320) (590,197) (386,469)
---------- ---------- ----------
Total payments.................................... (872,359) (835,374) (639,792)
---------- ---------- ----------
Subtotal.......................................... 1,495,280 1,309,471 760,295
Liability for loss and LAE for companies acquired during the
year...................................................... -- 287,645 1,049,100
---------- ---------- ----------
Reserves for loss and LAE, net of reinsurance recoverable,
at end of year............................................ 1,495,280 1,597,116 1,809,395
Reinsurance recoverable for loss and LAE, at end of year.... 939,477 701,002 353,928
---------- ---------- ----------
Reserves for loss and LAE, gross of reinsurance recoverable,
at end of year............................................ $2,434,757 $2,298,118 $2,163,323
========== ========== ==========
9
12
Analysis of Loss and Loss Adjustment Expense Development. The following
table shows the cumulative amount paid, net of reinsurance recoveries, against
the previously recorded liability, net of reinsurance recoverables, at the end
of each succeeding year and the cumulative development of the estimated net
liability for the ten years ending December 31, 1999. Conditions and trends that
have affected the development of these net reserves and net payments in the past
will not necessarily recur in the future. Accordingly, management does not
believe that it is appropriate to use this cumulative history to project future
performance.
The re-estimated net liability portion of the following table shows the
year-by-year development of the previously estimated net liability at the end of
each succeeding year. The re-estimated net 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 net reserve held at the
indicated calendar year-end and cumulative data on re-estimated net liabilities
for the year and all prior years making up those calendar year-end net
liabilities. The effect on income of the charge (credit) during the current
period (i.e., the difference between the estimated net liability at December 31
and the net liability estimated one year later) is shown in the previous table
above for each of the three most recent years as "Increase (decrease) in
provision for insured events of prior years, net of reinsurance".
CHANGES IN HISTORICAL RESERVES FOR LOSS AND LAE FOR THE LAST TEN YEARS
GAAP BASIS AS OF DECEMBER 31, 1999
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- ---------- ----------
(THOUSANDS OF DOLLARS)
Reserves for Loss and LAE, net of
reinsurance recoverable......... $647,559 $652,284 $627,103 $633,394 $644,190 $610,510 $1,185,706 $1,010,886
Net reserve re-estimated as of:
One year later.................. 636,039 624,953 668,107 629,268 626,956 611,892 1,186,456 958,563
Two years later................. 607,253 647,959 660,729 615,747 633,333 632,397 1,116,673 955,644
Three years later............... 607,492 638,879 651,482 621,348 641,166 644,485 1,116,103 978,872
Four years later................ 599,052 627,194 654,403 626,174 659,968 641,581 1,096,712
Five years later................ 593,527 631,165 659,050 685,517 656,549 698,045
Six years later................. 596,808 634,628 717,517 681,811 698,918
Seven years later............... 600,646 675,661 714,447 720,800
Eight years later............... 630,176 672,560 747,198
Nine years later................ 627,227 694,387
Ten years later................. 646,381
Net cumulative redundancy
(deficiency).................... 1,178 (42,103) (120,095) (87,406) (54,728) (87,535) 88,994 32,014
Cumulative amount of reserve
paid, net of reserve recoveries,
through:
One year later.................. 226,101 245,777 257,951 240,552 236,774 241,667 401,980 386,469
Two years later................. 374,876 403,105 419,638 402,048 392,237 397,640 662,943 607,273
Three years later............... 461,366 495,707 521,729 499,924 484,474 495,825 812,174 714,248
Four years later................ 514,890 550,404 583,013 558,935 545,574 548,109 883,106
Five years later................ 547,535 585,094 623,022 600,071 580,503 577,367
Six years later................. 567,871 608,802 652,990 624,813 599,414
Seven years later............... 583,580 629,321 670,625 637,967
Eight years later............... 597,623 641,031 680,387
Nine years later................ 605,926 646,969
Ten years later................. 609,778
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,
------------------------------------
1997 1998 1999
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Reserves for Loss and LAE, net of
reinsurance recoverable......... $1,809,395 $1,597,116 $1,495,280
Net reserve re-estimated as of:
One year later.................. 1,795,948 1,689,883
Two years later................. 1,745,340
Three years later...............
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).................... 64,055 (92,767)
Cumulative amount of reserve
paid, net of reserve recoveries,
through:
One year later.................. 590,197 576,320
Two years later................. 895,834
Three years later...............
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,...... $1,809,395 $1,597,116 $1,495,280
Reinsurance recoverable.......... 353,928 701,002 939,477
---------- ---------- ----------
Gross reserve -- December 31,.... $2,163,323 $2,298,118 $2,434,757
========== ========== ==========
Net re-estimated reserve......... $1,745,340 $1,689,883
Re-estimated reinsurance
recoverable..................... 508,358 727,899
---------- ----------
Gross re-estimated reserve....... $2,253,698 $2,417,782
========== ==========
Gross cumulative redundancy
(deficiency).................... $ (90,375) $ (119,664)
========== ==========
10
13
The Company regularly reviews its reserving techniques, overall reserve
position and its reinsurance estimates. In light of present facts and current
legal interpretations, management believes that adequate provision has been made
for loss reserves and for reinsurance recoverables. 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. (See "Risk Factors.")
In 1999, the Company increased its net loss and LAE reserves for 1998 and
prior accident years by $92.8 million. The increase resulted primarily from the
combined effect of a lower than expected level of reinsurance recoveries than
had been actuarially predicted, coupled with the effect on the 1998 accident
year of the Company's recognition of the settlement agreement with Reliance
under a reinsurance treaty that expired December 31, 1999. (See "Reinsurance
Ceded.") While the prior years' development during calendar year 1999 was
comprised primarily of adjustments to reinsurance recoverables on unpaid losses,
the Company has observed for its primary regions relative stability in its
workers' compensation gross loss and allocated loss adjustment expense ratios
derived from the actuarial indications of reserves for loss and allocated loss
adjustment expense, gross of reinsurance recoverables.
With regard to the lower than expected reinsurance recoveries, in the third
and fourth quarters of 1999, the Company lowered its estimate of reinsurance
recoverables on unpaid losses for the 1998 accident year by approximately $49
million. This re-estimation was in recognition of a lower than actuarially
predicted level of incurred loss ceded under certain reinsurance contracts that
were in effect from January 1, 1998 through December 31, 1999. These reinsurance
contracts reduced Fremont Comp's net loss exposure from a historical retention
of $1 million per occurrence to $50,000 per occurrence. Prior to entering into
these reinsurance agreements the Company had estimated its expected gross
incurred loss and LAE. Estimates of net incurred loss and LAE were then
established utilizing actuarial indications based upon historical experience and
other factors considered appropriate to forecast incurred losses to be ceded
under these reinsurance agreements. During the third quarter of 1999 and
pursuant to its regular review of net incurred loss and LAE estimates, the
Company observed a deterioration in these net loss and LAE estimates as compared
to the actuarial predictions. To assist the Company in its determination of net
loss and LAE reserve estimates, the Company retained outside actuarial
consultants who performed an independent actuarial analysis of the Company's net
loss and LAE reserves as of June 30, 1999. These actuarial indications were
reaffirmed at September 30, 1999 and further re-evaluated by the independent
outside actuaries at December 31, 1999, which resulted in the Company's
recognition of the deterioration in reinsurance recoverables in the third and
fourth quarters of 1999. Based on the Company's review of these actuarial
indications and consequent recognition of the deterioration in estimated
reinsurance recoverables on the 1998 accident year, the Company believes its
estimates of reinsurance recoverables on unpaid losses are an adequate provision
for loss recoveries under reinsurance agreements. (See "Reinsurance Ceded.")
Also contributing to the increase in 1999 to the Company's net loss and LAE
reserves for the 1998 and prior accident years is $26 million in lower
reinsurance recoverables on the 1998 accident year pursuant to a settlement
agreement entered into February 28, 2000 between the Company and Reliance under
a reinsurance contract that was in effect from January 1, 1998 through December
31, 1999. Under the settlement agreement, Fremont Comp is to receive in excess
of $100 million in cash and will no longer have any involvement with Reliance
under the reinsurance contract. The Company evaluated the adequacy of the
expected cash settlement under the agreement through an independent actuarial
analysis of the expected loss and allocated loss adjustment expenses to be paid
under the Reliance reinsurance contract after December 31, 1999. A range of
expected loss payments was estimated and then discounted to a present value
basis using investment yields considered appropriate. Based on these
indications, the cash settlement is within the range of present values. The $26
million decrease in reinsurance recoverables represents primarily the adjustment
necessary to bring the estimated reinsurance recoverables relating to the 1998
accident year under the reinsurance contract with Reliance to a present value
basis at December 31, 1999. (See "Reinsurance Ceded.")
In 1998, Fremont decreased its net loss and LAE reserves for 1997 and prior
accident years by $13.4 million. This decrease resulted primarily from the
combined effect of a decrease to 1997 and prior
11
14
accident year loss and LAE reserves under certain assigned risk plans that
Fremont Comp is required to participate in, and an increase in the discount
established for certain accident and health permanent disability and death
reserves. (See "Regulation -- Insurance Regulation" and Note A of Notes to
Consolidated Financial Statements.)
In 1997, Fremont decreased its net loss and LAE reserves for 1996 and prior
accident years by $52.3 million. This reserve decrease related primarily to loss
and LAE reserves on workers' compensation policies written in Fremont Comp's
midwest region and represents the recognition of a decrease in the frequency of
reported claims on the 1996 and 1995 accident years. Additionally, the Company's
management believes that its implementation of more effective claims handling
procedures in the midwest region contributed to the reduction in LAE reserves on
the 1996 and prior accident years during calendar year 1997.
Fremont Comp acquired Casualty on February 22, 1995. This acquisition
provided Fremont Comp a significant presence in several midwestern states,
primarily Illinois. By the end of 1995, the Company observed a significant
reduction in the frequency of reported claims on the 1995 accident year as
compared to Casualty's historical experience prior to 1995. Also during 1995,
Fremont Comp had been active in assimilating the operations of Casualty into its
existing operating environment, which included, among other things, implementing
more effective claims handling procedures. Therefore, the Company could not
determine with certainty whether or not the observed lower frequency in reported
claims was a one-time event occurring as a result of these changes in claims
handling procedures. In 1997, Fremont observed the continued trend in lower
reported claim experience on the 1996 and 1995 accident years, which also had
been confirmed in the industry through an evaluation of industry data.
Appropriate reserve adjustments were, therefore, made by the Company in 1997 in
recognition of this confirmed trend in lower loss experience on the 1996 and
1995 accident years for the midwest region. Fremont 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 and a subjective evaluation of
external factors. The previous discussion is a summary of the principal
considerations that the Company evaluated in determining workers' compensation
insurance reserves adjustments in 1997.
INVESTMENT PORTFOLIO
Fremont manages its investments internally. The following investment
portfolio information reflects the Company's continuing property and casualty
insurance and financial services operations.
12
15
The following table reflects the amortized cost and fair value of fixed
maturity investments and non-redeemable preferred equity securities by major
category, all of which are held as available for sale, as well as the amortized
cost and fair value of cash and short-term investments on the dates indicated.
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- -----------------------
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............... $ 64,601 $ 64,467 $ 87,615 $ 89,328
Obligations of states and political
subdivisions............................ 139,559 132,138 240,067 247,222
Redeemable preferred stock................. 80,127 73,800 38,035 38,306
Mortgage-backed securities................. 344,649 326,993 355,747 369,246
Corporate securities
Banks................................... 136,401 125,996 79,398 83,993
Financial............................... 179,600 166,623 195,937 198,624
Transportation.......................... -- -- 27,211 30,149
Industrial.............................. 513,784 501,212 573,575 589,904
---------- ---------- ---------- ----------
Total.............................. 1,458,721 1,391,229 1,597,585 1,646,772
Non-redeemable preferred stock............. 407,903 369,103 489,714 500,376
---------- ---------- ---------- ----------
Total.............................. $1,866,624 $1,760,332 $2,087,299 $2,147,148
========== ========== ========== ==========
Short-term investments....................... $ 410,457 $ 410,457 $ 222,719 $ 222,719
Cash......................................... 65,102 65,102 79,875 79,875
As of December 31, 1999, substantially all of the investments in the
portfolio were rated investment grade by Standard and Poor's, Moody's, Duff and
Phelps and Fitch's rating services. Of these investments, 79% were rated A or
higher, 20% were rated BBB and 1% were rated BB. As of December 31, 1999, these
investment securities had an approximate fair value of $1.8 billion, which was
lower than amortized cost by approximately $106 million. Fremont does not
currently plan or intend to invest in securities rated below investment grade.
In 1999, portions of the corporate securities financial sector were reclassified
to the banks sector.
The following table reflects average amortized cost of investment assets of
the Company for the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Average investment assets.............................. $2,260,957 $2,345,464 $1,970,602
========== ========== ==========
Investment yield earned on investment assets:
Excluding realized gains and losses.................. 7.52% 8.25% 7.68%
Including realized gains and losses.................. 7.37% 8.23% 7.58%
Fremont has designated its entire portfolio as investments that would be
available for sale in response to changing market conditions, liquidity
requirements, interest rate movements and other investment factors. At December
31, 1999 and 1998, the Company held securities having an amortized cost of
$1.867 billion and $2.087 billion, respectively, as available for sale. (See
Notes A and C of Notes to Consolidated Financial Statements.)
13
16
The following table sets forth maturities in the fixed maturity investment
portfolio at December 31, 1999:
AMORTIZED
COST PERCENTAGE
---------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
One year or less............................................ $ 57,793 4%
Over 1 year through 5 years................................. 126,604 9
Over 5 years through 10 years............................... 138,990 9
Over 10 years............................................... 790,685 54
Mortgage-backed securities.................................. 344,649 24
---------- ---
Totals............................................ $1,458,721 100%
========== ===
FINANCIAL SERVICES OPERATION
The operations of the financial services segment are consolidated within
Fremont General Credit Corporation, which is engaged in collateralized lending
to businesses and individuals nationwide through its California-chartered thrift
and loan subsidiary, Fremont Investment & Loan ("the thrift"). The Company's
financial services loan portfolio as of the dates indicated is summarized in the
following table by loan type.
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Commercial real estate loans........................... $2,332,880 $1,561,145 $1,046,441
Residential real estate loans.......................... 388,297 549,400 380,126
Syndicated loans....................................... 331,705 360,150 146,790
Premium finance loans.................................. 64,596 58,319 54,257
Commercial finance loans............................... -- 485,508 400,475
---------- ---------- ----------
Loans receivable before allowance for possible loan
losses............................................... 3,117,478 3,014,522 2,028,089
Less allowance for possible loan losses................ (56,494) (56,346) (44,402)
---------- ---------- ----------
Loans receivable, net................................ $3,060,984 $2,958,176 $1,983,687
========== ========== ==========
Commercial Real Estate Lending
The commercial real estate lending operation of Fremont currently consists
of more than 600 loans. The Company originates commercial real estate loans
nationwide primarily through independent loan brokers and through its own
marketing representatives. The origination of commercial real estate loans are
generally held for the Company's own portfolio. There were $217 million in
commercial real estate loans sold to other financial institutions in 1999,
representing approximately 14% of origination volume in 1999, and no loans were
sold in 1998 or 1997. Commercial real estate loan origination volume grew 61% to
$1.54 billion in 1999 from $959 million in 1998. The commercial real estate loan
portfolio grew to $2.33 billion or 74.8% of the Company's financial services
loan portfolio at December 31, 1999 from $1.56 billion or 49.4% of the financial
services loan portfolio at December 31, 1998.
The commercial real estate loan originations are primarily secured by first
mortgages on income-producing properties in California and, to a lesser degree,
Illinois, Texas and many other states. The real estate securing these loans
include a wide variety of property types including office, retail, industrial,
multi-family and mixed-use properties. Loans include short-term bridge
facilities for the rehabilitation and lease-up of existing properties, as well
as five to ten year permanent loans and single tenant loans. The majority of the
commercial real estate loans originated are adjustable rate loans and generally
range in loan size between $1 million and $15 million. As of December 31, 1999,
the average loan size was $3.5 million and the average loan-to-value ratio was
65.3%, using the most current available appraised values and current balances
outstanding. At December 31, 1999, the Company had 8 non-performing commercial
real estate loans totaling approximately $14.4 million and no commercial real
estate owned.
14
17
Residential Real Estate Lending
The Company's residential real estate lending operation is currently
comprised of more than 6,000 loans. Fremont originates residential real estate
loans nationwide through independent loan brokers, through its own marketing
representatives and through bulk purchase. The real estate securing these loans
are single family residences located in California, and to a lesser degree
Illinois, Florida, Washington, New Jersey, and many other states. The Company's
origination volume increased 89% to $1.72 billion in 1999 from $906 million in
1998. Contributing to the significant growth in 1999 was the expansion of new
business in Illinois and Florida, as well as the acquisition of a
California-based wholesale loan production unit in November 1998. The
residential real estate loan portfolio, excluding loans held for sale, was $388
million or 12.5% of the Company's financial services loan portfolio at December
31, 1999, down from $549 million or 29.3% of the financial services loan
portfolio at December 31, 1998.
Substantially all of the Company's residential real estate loans are
secured by first deeds of trust. These loans generally have principal amounts
below $350,000, have maturities generally of thirty years and are underwritten
in accordance with lending policies approved by the thrift's Board of Directors,
which include standards covering, among other things, collateral value, loan to
value and customer debt ratio. These loans generally are "hybrid" loans which
have a fixed rate of interest for an initial period after origination, typically
two to three years, after which the interest rate will be adjusted to a rate
equal to the sum of six month LIBOR and a margin as set forth in the mortgage
note. This interest rate will then be adjusted at each six-month interval
thereafter, subject to various lifetime and periodic rate caps and floors. These
loans have been originated using underwriting standards that are less stringent
than the Federal National Mortgage Association's guidelines and are commonly
known as "subprime" loans. To mitigate the higher potential for credit losses
that accompanies these types of borrowers, Fremont attempts to maintain
underwriting standards that require conservative loan to collateral valuations.
(See "Risk Factors.") At December 31, 1999, the average single-family loan
amount was $101,000, and the average loan-to-value ratio was 77.5%, using
appraised values at the time of loan origination and current balances
outstanding. At December 31, 1999, Fremont had 167 non-performing residential
real estate loans totaling approximately $15.5 million and residential real
estate owned of approximately $3.7 million.
In years prior to 1999, the Company originated residential real estate
loans for its own portfolio and for whole loan sale to other financial
institutions. In the second half of 1998, Fremont observed that prices for the
residential real estate loans began to decrease due to market disruptions and
oversupply. The Company, rather than sell the loans at prices lower than what it
believed was the economic benefit to be derived, began a program to retain these
benefits by either retaining the loans in its portfolio or securitizing them.
During 1999, Fremont sold $1.75 billion in residential real estate loans,
comprised of $1.4 billion in loans sold in three securitizations and $343.5
million in whole loan sales to other financial institutions. In 1998 and 1997,
residential real estate loan sales of $746.5 million and $162.8 million,
respectively, were represented entirely by whole loan sales. The Company's
residential real estate loan disposition strategy will continue to include
securitization in addition to whole loan sales and retaining loans in its
portfolio, depending on market conditions, profitability and cash flows.
In the Company's securitizations, the Company sells residential real estate
loans to a special purpose entity, which is established for the limited purpose
of purchasing the loans and issuing interest bearing securities that represent
interests in the loans. The securitization is treated as a sale and the loans
sold are removed from the Company's balance sheet. The securities issued to
third party investors are collateralized by the underlying pool of residential
real estate loans. The investors and the special purpose entity have no recourse
to the Company for failure of the residential loan borrowers to pay when due.
The Company retains a residual interest, which represents the right to receive
certain future cash flows which are generally equal to the value of the
principal and interest to be collected on the loans in excess of: (i) the
principal and interest to be paid on the securities; and (ii) various
contractual net servicing fees and other expenses. Most of the Company's
residual interests, however, are generally restricted until investors and other
expenses have been paid or otherwise are subordinate to investor's interests.
Upon completion of the securitization, the Company records its residual
interests as an asset on the balance sheet. Gains or losses on a securitization
are based on the estimated fair value of the proceeds from the sale, net of
related transaction costs and the allocated
15
18
carrying value of the loans sold. Fair value is determined by computing the net
present value of the estimated cash flows retained, using the dates that such
cash flows are expected to be released to the Company (the cash-out method), at
a discount rate considered commensurate with the risks associated with the cash
flows. The amounts and timing of the cash flows are estimated after considering
various economic factors and other factors, including prepayment speeds and
delinquency, default and loss rates. The outstanding balance of the Company's
residual interests at December 31, 1999 was $63 million. Since the value of the
residual interests is subject to substantial credit, prepayment, and interest
rate risks on the loans sold, the Company has recognized no gain on the residual
interests it has retained. This reduces the amounts of gain recognized in the
current period; however, income may be recognized in future periods if the
Company's original assumptions develop favorably. (See "Risk Factors.")
In a whole loan sale for cash, the Company generally enters into an
agreement to sell the loans for cash, without recourse, on a servicing released
basis. After the sale, the Company retains no interest in the underlying loans.
Syndicated Loans
Fremont has interests in large syndicated commercial loans which are
originated and serviced by other financial institutions. These loans are senior
obligations of the borrowers and are secured by substantially all of the assets
of the borrower and, if applicable, its subsidiaries. The syndicated loans are
variable rate loans and are originated on both a revolving and fixed-term basis.
The term loans are generally issued with terms not in excess of seven years. The
Company funds these loans using thrift deposits. The syndicated loan portfolio
was $332 million at December 31, 1999, or 10.6% of the financial services loan
portfolio, as compared to $360 million or 11.9% of the financial services loan
portfolio at December 31, 1998. These loans are originated through development
of the Company's relationships with various financial institutions. As of
December 31, 1999, the average outstanding syndicated loan balance was $7.2
million. Loan commitments to a single borrower generally range in size from $5
million to $10 million.
Insurance Premium Financing
The Company finances property and casualty insurance premiums for small
businesses. Fremont funds this activity in the thrift, mainly through deposits.
This premium finance loan portfolio is collateralized by the unearned premiums
of the underlying insurance policies. At December 31, 1999, insurance premium
finance loans represented $64.6 million or 2.1% of Fremont's financial services
loan portfolio. (See "Regulation -- Thrift and Loan Regulation -- California
Law.")
Funding Sources
Fremont's real estate lending activities are financed mainly through
deposit accounts offered by the Company's thrift (80,000 accounts at December
31, 1999), which are insured by the Federal Deposit Insurance Corporation
("FDIC"). (See "Regulation -- Thrift and Loan Regulation.") Fremont offers
certificates of deposit and installment investment certificates (which are
similar to passbook accounts and money market accounts) insured by the FDIC to
the legal maximum through its 19 branches in California. The Company has
typically offered higher interest rates to its depositors than do most full
service financial institutions. At the same time, the Company has minimized the
cost of maintaining its accounts by not offering traditional checking, safe
deposit boxes, money orders, ATM access and other traditional retail services,
which have higher maintenance costs. Fremont generally effects deposit
withdrawals by issuing checks rather than disbursing cash, which minimizes
operating costs associated with handling and storing cash. Deposits totaled $3.4
billion at December 31, 1999. Fremont's syndicated loans and insurance premium
finance loans are also funded by the thrift. Additional financing is available
to the thrift from the Federal Home Loan Bank of San Francisco ("FHLB"). The
financing by the FHLB is available at varying rates and terms. As of December
31, 1999, $363.9 million was available from the FHLB and $10.0 million was
outstanding. In 1999, the thrift obtained a line of credit with the Federal
Reserve Bank of San Francisco, and at December 31, 1999 had a borrowing capacity
of $272.5 million, with no amounts outstanding.
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In October 1999, the thrift established a warehouse financing facility that
may be used to finance certain residential real estate loans held for sale
through securitization or whole loan sale. The facility permits secured
borrowings for up to $200 million with a variable interest rate of LIBOR plus
0.375%. As of December 31, 1999, there were no borrowings under this facility.
The table below summarizes the Company's certificates of deposit as of
December 31, 1999, which are stated in amounts of $100,000 or more, by maturity
and by type.
CERTIFICATES OF DEPOSIT $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................................. $79,169 $37,111 $64,054 $ 26,444 $206,778
IRA's.................................. 4,067 2,554 6,979 3,986 17,586
Wholesale.............................. 2,107 1,504 1,412 -- 5,023
Brokered............................... -- -- -- 231,649 231,649
------- ------- ------- -------- --------
Total........................ $85,343 $41,169 $72,445 $262,079 $461,036
======= ======= ======= ======== ========
Commercial Finance
In December 1999, the Company discontinued its commercial finance lending
activities through the sale on December 20, 1999 of Fremont Financial
Corporation, its commercial finance subsidiary, to FINOVA Capital Corporation, a
subsidiary of The FINOVA Group, Inc. for approximately $708 million in cash
including the refinancing and assumption of existing debt. Included in the
Company's results of operations for the year ended December 31, 1999 is the
recognition of a $10.3 million gain before taxes on the sale of this subsidiary.
(See Note B of Notes to Consolidated Financial Statements.) Prior to the sale,
this commercial finance subsidiary provided working capital loans, primarily
secured by accounts receivable, inventory, machinery and equipment to small and
middle market companies on a nationwide basis.
Competition
Fremont's financial services businesses compete in markets that are highly
competitive and are characterized by factors that vary based upon product and
geographic region. The markets in which the Company competes are typically
characterized by a large number of competitors who compete based primarily upon
price, terms and loan structure. Fremont primarily competes with banks,
mortgage, insurance and finance companies, many of which are larger and have
greater financial resources than Fremont. The competitive forces of these
markets could adversely affect the Company's net finance income, loan
origination volume or net credit losses.
LIFE INSURANCE
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 a subsidiary. Effective December 31, 1995 and
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 have collectively resulted
in the substantial reduction of the Company's life insurance operation. The
Company continues to remain primarily obligated for approximately $110 million
in statutory reserve value of annuities which, at December 31, 1999, have been
fully co-insured with Great Southern Insurance Company. Revenue and operating
results from this subsidiary were not significant in 1999, 1998 or 1997.
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DISCONTINUED OPERATIONS
Fremont'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 by the commutation of liabilities and as claims are
paid. 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 asbestos and environmental claims.
During the third quarter of 1999, the Company incurred an after tax charge
of $25 million in recognition of an increase in asbestos and environmental
claims reserves over previous estimates. This charge is represented by the
Company's contribution of $25 million to the discontinued operations to ensure
that sufficient funds are available to discharge estimated liabilities as they
become due.
The discontinued operations' assets at December 31, 1999 consisted of $178
million in cash and investment grade fixed income securities, reinsurance
recoverables of $50 million and other assets totaling $22 million. Fremont
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. (See Note N of
Notes to Consolidated Financial Statements.)
REGULATION
Insurance Regulation
Fremont's workers' compensation insurance operation now has premiums
inforce in forty-five states and the District of Columbia. 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 injured workers and 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
minimum solvency standards which must be met and maintained by insurers, the
licensing to do business of insurers and agents, restrictions on investments by
insurers, establishing premium rates for certain property and casualty insurance
and life and disability insurance, establishing the provisions which insurers
must make for current losses and future liabilities and the approval of policy
forms. Additionally, excluding California, most states require insurers 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. Fremont'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. A significant portion of Fremont's
workers' compensation insurance premiums is derived from policies issued in
California and Illinois. Illinois began operating under an open rating system in
1982 and California began operating under such a system effective January 1,
1995. Generally, in an open rating system, workers' compensation insurance
companies are provided with advisory premium rates (expected losses and
expenses) or loss costs (expected losses only) which vary by job classification.
Each insurance company sets its base rates to reflect its particular loss
experience and operating costs. These rates are then modified to reflect
individual risk characteristics and other expenses in determining a final
premium rate. Before January 1, 1995, California operated under a minimum rate
law, whereby
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premium rates established by the California Department of Insurance were the
minimum rates which could be charged by an insurance carrier. The repeal of the
minimum rate law on January 1, 1995 resulted in lower premiums and lower
profitability in the Company's California workers' compensation insurance
business due to increased price competition. (See "Risk Factors.")
Beginning in 1995, Fremont's policies have generally been written as
non-participating, which does not include provisions for policyholder dividend
consideration. Prior to January 1, 1995, the Company's policies, which were
written mainly in California, were primarily written as participating, which
obligated Fremont to consider policyholder dividend payments. This shift in
policy type was due primarily to the increased competition in the California
market which resulted from the repeal of the minimum rate law, effective January
1, 1995. The shift to non-participating policies has continued and is a
characteristic element of the competitive environment.
Fremont's insurance subsidiaries are required in certain states to maintain
on deposit investments meeting specified standards that have an aggregate market
value equal to the Company's workers' compensation 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 Fremont and generally have not had an adverse impact on Fremont's
earnings in years in which such assessments have been made. Premiums written
under workers' compensation policies are generally 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 California 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, a presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, that 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 Corporation.
The Liquid Yield Option(TM) Notes ("LYONs") issued by the Company 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
Fremont 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 Fremont from consummating certain
reorganizations or mergers without prior regulatory approval.
The Holding Company Act also limits the ability of Fremont'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 certain limitations.
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
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relation to its outstanding liabilities and adequate to its financial needs.
Based upon these restrictions, the maximum amount available for payment of
dividends by the Company's property and casualty insurance subsidiaries during
2000 without prior regulatory approval is approximately $56.3 million. In
addition, insurance regulations in California require that the Department of
Insurance be given ten days advance notice of any dividend payment.
Other Regulations. The NAIC adopted a formula to calculate risk based
capital ("RBC") of property and casualty insurance companies for inclusion in
annual statements filed with state insurance departments. 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 regulatory intervention, depending on the level of
capital inadequacy. As of December 31, 1999 the Company's insurance subsidiaries
engaged in continuing operations exceeded all RBC levels requiring any
regulatory intervention.
Thrift and Loan Regulation
Fremont's thrift is subject to supervision and regulation by the Department
of Financial Institutions of the State of California (the "DFI") and, as an
insured institution, by the FDIC. None of the Company's subsidiaries are
regulated or supervised by the Office of Thrift Supervision, which regulates
savings and loan institutions. Fremont General Corporation is generally not
directly regulated or supervised by the DFI, the FDIC, the Federal Reserve Board
or any other bank regulatory authority, except with respect to guidelines
concerning its relationship with the thrift subsidiary. Such guidelines include
(i) general regulatory and enforcement authority of the DFI and the FDIC over
transactions and dealings between Fremont General Corporation and the thrift,
(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 the thrift as discussed below. The thrift is
examined on a regular basis by both agencies. At December 31, 1999, the thrift
was in compliance with the regulatory requirements of these agencies.
Federal and state regulations prescribe certain minimum capital
requirements and the thrift is currently in compliance with such requirements.
Federal and state regulatory authorities also have the power to prohibit or
limit the payment of dividends by the thrift. Fremont does not believe that the
restrictions on the thrift's ability to pay dividends imposed by federal or
state law will adversely affect the ability of Fremont General Corporation to
meet its obligations. (See "Risk Factors.")
California Law. The thrift and loan business conducted by Fremont's thrift
is governed by the California Industrial Loan Law and the rules and regulations
of the Commissioner of the DFI 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., industrial banks, thrift and loan, investment and loan, or premium
financing companies.
Subject to restrictions imposed by applicable California law, the thrift 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 is forty
years 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 until December 31,
1999. California law limits lending activities outside of California by thrift
and loan companies to no more than 20% of total assets and upon application to
and consent by the Commissioner, 40% of total assets. Effective January 1, 2000,
these percentages changed to 25% and 50%, respectively. Loans for purchase or
refinance of single or multi-family residential property, which are saleable in
the secondary market,
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evidenced by a commitment to buy by a buyer in the secondary market and held for
90 days or less, are exempt from the out-of-state lending limits.
California law contains statutory 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, 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, which stock collateral may not be greater than 10% of the
stock of said 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, until December 31, 1999 and subject to certain exceptions,
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, which 70% limitation was repealed effective January 1, 2000.
Additionally, loans having a principal balance in excess of $10,000 and secured
primarily by real property are limited to a maximum loan to value of 90%, with
certain exceptions which include: (i) government insured or guaranteed loans,
(ii) loans made to facilitate sale of real property owned resulting from
foreclosure or deeds in lieu thereof, (iii) restructured loans, (iv) loans
saleable in the secondary market, or (v) loans held for less than 90 days.
Effective January 1, 1999, the California legislature clarified the law and
expressly authorized a thrift and loan company to issue credit cards and to
acquire or hold obligations resulting from the use of credit cards. It was also
in that legislation that the words "industrial bank" were authorized to be used
in the name of a thrift and loan company and the Industrial Loan Law to be
referred to as the Industrial Banking Law.
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 DFI. 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 Corporation.
Any person who wishes to acquire (i) 10% or more of the capital stock 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 Fremont
General Corporation, must obtain the prior written approval of the DFI. 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's thrift must also obtain prior written approval from the DFI
before it may open or relocate any branch or loan production office or close a
branch office.
The Industrial Banking 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 surplus not available for
dividends. The Company's thrift currently has an authorized ratio of deposits to
such capital of 17 to 1.
Federal Law. The thrift'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's
thrift 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 the thrift. 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. No approval, however, is required to open, relocate, or close a
loan production office.
The thrift 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
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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. As of
December 31, 1999, the thrift's allowance for possible loan losses for Tier 2
capital was $40.5 million. At December 31, 1998, the Tier 2 capital of the
thrift consisted of approximately $25.5 million of allowance for possible loan
losses. The following table presents the thrift's risk-based capital position at
the dates indicated:
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
PERCENT OF PERCENT OF
RISK-WEIGHTED RISK-WEIGHTED
AMOUNT ASSETS AMOUNT ASSETS
---------- ------------- ---------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 capital............................... $ 338,939 9.48% $ 186,520 9.17%
Minimum requirement.......................... 142,981 4.00 81,371 4.00
---------- ----- ---------- -----
Excess..................................... $ 195,958 5.48% $ 105,149 5.17%
========== ===== ========== =====
Total capital...................... $ 379,396 10.61% $ 212,048 10.42%
Minimum requirement.......................... 285,961 8.00 162,743 8.00
---------- ----- ---------- -----
Excess..................................... $ 93,435 2.61% $ 49,305 2.42%
========== ===== ========== =====
Risk-weighted assets......................... $3,574,514 $2,034,280
========== ==========
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 the Company's thrift) will
likely be required to maintain leverage ratios of at least 1% to 2% 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 the thrift's leverage ratio (the ratio of Tier 1
capital to the quarterly average total assets) at the dates indicated:
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
PERCENT OF PERCENT OF
AVERAGE TOTAL AVERAGE TOTAL
AMOUNT ASSETS AMOUNT ASSETS
---------- ------------- ---------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 capital................................. $ 338,939 8.97% $ 186,520 8.81%
Minimum requirement............................ 113,313 3.00 63,510 3.00
---------- ---- ---------- ----
Excess.................................... $ 225,626 5.97% $ 123,010 5.81%
========== ==== ========== ====
Average total assets for the quarter ended
December 31,................................. $3,777,101 $2,117,009
========== ==========
The FDIC has designated Fremont's thrift 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
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of at least 6%, has a leverage ratio of at least 5% 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.
As a "well-capitalized" institution, the thrift's annual FDIC insurance
premiums currently are 2.1 cents per $100 of eligible domestic deposits in 2000.
The insurance premium payable is subject to semi-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.
In November 1999, the FDIC announced proposed new regulations which are
designed primarily to increase the capital requirements for insured financial
institutions engaged in subprime lending. These proposed regulations address the
concentration of subprime risk in loan portfolios of insured financial
institutions, formalizes the definition of subprime lending which would be
subject to the proposed regulations and establishes higher levels of required
capital for insured financial institutions engaged in the type of subprime
lending as defined in the proposed regulations. It is unclear what changes, if
any, will be made to these proposed regulations by the FDIC before they are
finalized and implemented. While the Company's FDIC insured thrift originates
subprime residential real estate loans, it is unclear what impact, if any, these
proposed regulations, once finalized and implemented, will have on the Company's
financial position or operating results.
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 not 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 the Company's thrift 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's thrift 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.
Intercompany Transactions
The payment of stockholders' dividends and the repayment of loans to
Fremont General Corporation by its subsidiaries are and may continue to be
subject to certain statutory and regulatory restrictions.
Fremont General Corporation receives management fees from its property and
casualty insurance subsidiaries as reimbursement for certain administrative and
investment portfolio management services rendered by Fremont General
Corporation.
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EMPLOYEES
At December 31, 1999, the Company had 3,314 employees, none of whom is
represented by a collective bargaining agreement. Fremont believes its relations
with employees are good.
RISK FACTORS
Operating Results and Financial Condition May Vary
The Company's profitability can be affected significantly by many factors
including competition, the severity and frequency of claims, fluctuation in
interest rates and the rate of inflation, legislation and regulations, court
decisions, the judicial climate and general economic conditions and trends, all
of which are outside of the Company's control. In addition, Fremont's results
may be affected by its ability to assess and integrate successfully the
operations of acquired companies, as well as the Company's ability to contain
expenses and to implement appropriate technological changes. Any of these
factors could contribute to significant variation in the Company's results of
operations within the different aspects of its business, or businesses taken as
a whole, from quarter to quarter and from year to year.
With respect to Fremont's workers' compensation insurance business, changes
in economic conditions can lead to reduced premium levels due to lower payrolls
as well as increased claims due to the tendency of workers who are laid off to
submit workers' compensation insurance claims. Changes in market interest rates
can affect the amount of interest income that the Company earns on its
investment portfolio, as well as the amount of realized and unrealized gains or
losses on specific holdings within the Company's investment portfolio.
Legislative and regulatory changes can also cause the operating results of the
Company's workers' compensation insurance businesses to vary.
During periods when economic conditions are unfavorable, the Company's
financial services businesses may not be able to originate new loan products or
maintain the credit quality of its finance receivables, both in its portfolio
and for those loans that have been securitized, at previously attained levels.
This may result in increased levels of non-performing assets and net credit
losses. Changes in market interest rates, or in the relationships between
various interest rates could cause Fremont's interest margins to be reduced and
may result in significant changes in the prepayment patterns of the Company's
finance receivables. These risk factors could adversely affect the value of
Fremont's loans and their related collateral, as well as, the valuation of the
residual interests in the Company's securitized loans, both of which could
adversely affect Fremont's results of operations and financial condition.
Loss Reserves and Reserves for Credit Losses May Prove to Be Inadequate
Fremont's property and casualty insurance subsidiaries are required to
maintain reserves to cover the Company's 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 instead are estimates involving actuarial projections at a
given time of what the ultimate settlement and administration of claims will
cost, including estimates of reinsurance recoveries associated with the
estimated claims costs. These projections are 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 reinsurance. Establishment of appropriate gross loss and LAE
reserves and reinsurance recoverables is an inherently uncertain process and
there can be no certainty that currently established gross loss and LAE reserves
and reinsurance recoverables will prove to be adequate in light of subsequent
actual experience. Subsequent actual experience has resulted, and could result,
in net loss and LAE reserves being too high or too low. Fremont's future loss
and LAE development could require an increase in its gross loss and LAE reserves
or a decrease in its reinsurance recoverables from prior periods, which would
adversely affect the Company's earnings in future periods.
The Company's financial services businesses maintain reserves for credit
losses on its portfolio of finance receivables in amounts that the Company
believes are sufficient to provide adequate protection against
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27
potential losses. The finance receivables that Fremont primarily originates,
both for its portfolio and for securitization, are generally non-conventional
and non-investment grade loans. To mitigate for the somewhat higher potential
risk of the lending that the Company is primarily engaged in and for the impact
that adverse economic developments could have on the Company's finance
receivables, Fremont lends primarily on a senior and secured basis and employs a
proactive asset management approach. The Company also attempts to carefully
evaluate the underlying collateral that secures these loans and to maintain
underwriting standards that are designed to effect appropriate loan to
collateral valuations and cash flow coverages. Although the Company believes
that its consolidated level of reserves is sufficient to cover potential credit
losses, these reserves could prove to be inadequate due to unanticipated adverse
changes in economic conditions or discrete events that adversely affect specific
borrowers, industries or markets. Any of these changes could impair the
Company's ability to realize the expected value of the collateral securing
certain of its finance receivables or the timing of the realization thereof.
Competition May Adversely Affect the Company's Market Share and Operating
Results
Fremont's property and casualty insurance business competes in a market
characterized by competition on the basis of price and service. In addition,
state regulatory changes could affect competition in the states where the
Company transacts business. Although Fremont is one of the largest writers of
workers' compensation insurance in the nation, certain of the Company's
competitors are larger and have greater resources than Fremont. The Company
cannot be certain that it will continue to maintain its market share in the
future or that the Company will be able to obtain adequate pricing for its
insurance products.
The Company's financial services businesses compete in markets that are
highly competitive and are characterized by factors that vary based upon product
and geographic region. The markets in which Fremont competes are typically
characterized by a large number of competitors who compete based primarily upon
price, terms and loan structure. The Company primarily competes with banks and
mortgage and finance companies, many of which are larger and have greater
financial resources than Fremont. The competitive forces of these markets could
adversely affect the Company's net finance income, loan origination volume or
net credit losses.
Geographic Concentration of Business Could Adversely Affect the Company's
Operations
Fremont's workers' compensation insurance operations are concentrated in
California and Illinois, with 60% of the Company's premium inforce being located
in these two states. Because of this concentration, the Company's financial
position and results of operations have been and are expected to continue to be
influenced by general trends in the respective states' economies, and in
particular, the condition of the workers' compensation insurance market within
each state. The impact of unfavorable economic conditions, legislation and other
trends within these two states may result in greater uncertainty and volatility
in the Company's business operations and could adversely affect the results of
Fremont's operations and its financial condition more than if the Company's
premium had been originated with more geographic diversification.
While the Company attempts to diversify its loan origination by geographic
region, the Company's geographic concentration of commercial and residential
real estate loans remains in California. At December 31, 1999, approximately
half of Fremont's commercial and residential real estate loans, both in its
portfolio and those loans that have been securitized, were collateralized by
properties located in California. Adverse events in California, such as real
estate market declines or the occurrence of natural disasters upon property
located therein, may have a more significant adverse effect upon the Company's
operating results and financial condition than if a higher percentage of its
loans were collateralized by properties located outside California.
Regulatory Developments Could Adversely Affect the Company's Operations
The Company's workers' compensation insurance operations have premiums
inforce in forty-five states and the District of Columbia. 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 the numerous aspects of an insurance company's business and financial
condition. The primary purpose of such
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28
supervision and regulation is the protection of injured workers and
policyholders rather than investors or stockholders of an insurer. Fremont'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 Fremont transacts business.
Illinois began operating under an open rating system in 1982 and California
began operating under such a system effective January 1, 1995. Generally, in an
open rating system, workers' compensation insurance companies are provided with
advisory premium rates (expected losses and expenses) or loss costs (expected
losses only) which vary by job classification. Each insurance company sets its
base rates to reflect its particular loss experience and operating 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 that could be
charged by an insurance carrier. The repeal of the minimum rate law has resulted
in lower premiums and profitability on the Company's California workers'
compensation insurance policies due to increased price competition.
Fremont's financial services businesses include a FDIC insured thrift
subject to supervision and regulation by the California Department of Financial
Institutions and the FDIC. Federal and state regulations prescribe certain
minimum capital requirements and, while the Company's thrift is currently in
compliance with such requirements, in the future the Company could be required
to make additional contributions to its thrift in order to maintain compliance
with such requirements. Future changes in government regulation and policy could
adversely affect the thrift and loan industry, including Fremont's thrift. Such
changes in regulations and policies may place restrictions on or make changes to
the Company's lending business and increase the costs of compliance.
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 proceedings, which in some instances include claims for punitive damages,
most of which are considered routine and incidental to their business. Fremont
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
two-for-one stock split effected on December 10, 1998 as reported as composite
transactions on the NYSE and the cash dividends declared on the Company's common
stock during each quarter presented.
DIVIDENDS
HIGH LOW DECLARED
---- --- ---------
1999
1st Quarter...................................... $25 11/16 $17 9/16 $0.080
2nd Quarter...................................... 21 3/4 16 1/2 0.080
3rd Quarter...................................... 19 9/16 8 1/2 0.080
4th Quarter...................................... 9 1/2 4 11/16 0.080
------
Total.................................. $0.320
======
1998
1st Quarter...................................... $31 1/16 $24 5/32 $0.075
2nd Quarter...................................... 30 5/16 24 1/4 0.075
3rd Quarter...................................... 30 3/32 18 7/8 0.075
4th Quarter...................................... 25 11/16 18 0.080
------
Total.................................. $0.305
======
On December 31, 1999, the closing sale price of the Company's common stock
on the NYSE was $7 3/8 per share. There were 1,636 stockholders of record as of
December 31, 1999.
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
Corporation'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 regulation under California
law. (See Note K to Consolidated Financial Statements.)
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999(1) 1998(2) 1997(3) 1996 1995(4)
----------- ----------- --------- --------- ---------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS AND PER SHARE DATA)
INCOME STATEMENT DATA:
Property and casualty premiums earned..................... $ 831,005 $ 552,078 $601,183 $486,860 $606,917
Loan interest............................................. 366,408 240,749 199,195 168,018 168,891
Net investment income..................................... 169,559 192,815 149,729 123,531 119,523
Realized investment gains (losses)........................ (3,548) (605) (1,964) (1,658) 1
Other revenue............................................. 34,186 44,143 23,020 17,547 28,482
---------- ---------- -------- -------- --------
Total revenues..................................... $1,397,610 $1,029,180 $971,163 $794,298 $923,814
========== ========== ======== ======== ========
Property and casualty income (loss)....................... $ (116,178) $ 169,235 $144,667 $117,593 $ 83,092
Financial services income................................. 79,874 55,506 42,286 36,589 35,737
Other interest and corporate expense...................... (29,980) (28,029) (28,060) (25,873) (18,502)
---------- ---------- -------- -------- --------
Income (loss) before taxes................................ (66,284) 196,712 158,893 128,309 100,327
Income tax (expense) benefit.............................. 25,907 (63,748) (50,601) (41,021) (32,305)
---------- ---------- -------- -------- --------
Income (loss) from continuing operations.................. $ (40,377) $ 132,964 $108,292 $ 87,288 $ 68,022
========== ========== ======== ======== ========
GAAP RATIOS FOR PROPERTY AND CASUALTY SUBSIDIARIES:
Loss ratio................................................ 92.7% 60.8% 64.7% 68.9% 76.0%
Expense ratio............................................. 31.6% 34.5% 27.5% 25.9% 24.5%
Policyholder dividends ratio.............................. 4.4% 0.9% 0.8% -- --
---------- ---------- -------- -------- --------
Combined ratio............................................ 128.7% 96.2% 93.0% 94.8% 100.5%
========== ========== ======== ======== ========
PER SHARE DATA:
Cash dividends declared................................... $ 0.32 $ 0.305 $ 0.30 $ 0.30 $ 0.25
Stockholders' equity:
Including FASB 115(5)................................... 10.44 13.60 12.04 9.95 9.81
Excluding FASB 115(5)................................... 11.42 13.04 11.28 9.90 9.38
Income (loss) from continuing operations:
Basic................................................... (0.64) 2.09 1.90 1.77 1.34
Diluted(6).............................................. (0.64) 1.90 1.62 1.37 1.09
WEIGHTED AVERAGE SHARES USED TO CALCULATE PER SHARE DATA:
Basic..................................................... 63,650 63,529 57,059 49,315 50,782
Diluted(6)................................................ 63,650 70,082 68,585 67,206 66,626
DECEMBER 31,
--------------------------------------------------------------
1999(1) 1998(2) 1997(3) 1996 1995(4)
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
BALANCE SHEET DATA:
Total assets........................................... $8,015,235 $7,369,612 $6,090,627 $4,307,512 $4,477,399
Fixed income and other investments..................... 2,205,834 2,386,757 2,442,813 1,484,310 1,937,890
Loans receivable....................................... 3,060,984 2,958,176 1,983,687 1,688,040 1,499,043
Claims and policy liabilities.......................... 2,753,874 2,571,027 2,460,550 1,579,325 1,971,719
Short-term debt........................................ 10,000 165,702 26,290 16,896 72,191
Long-term debt......................................... 429,185 913,006 691,068 636,456 693,276
Trust Originated Preferred Securities (SM)(7).......... 100,000 100,000 100,000 100,000 --
Stockholders' equity:
Including FASB 115(5)................................ 731,101 950,912 832,815 559,117 498,090
Excluding FASB 115(5)................................ 800,191 912,010 779,906 556,488 476,491
- ---------------
(1) The Company sold Fremont Financial Corporation on December 20, 1999.
(2) The Company acquired UNICARE Specialty Services, Inc. on September 1, 1998.
(3) The Company acquired Industrial Indemnity Holdings, Inc. on August 1, 1997.
(4) The Company acquired Casualty Insurance Company on February 22, 1995.
(5) 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.
(6) For 1999, dilutive securities were excluded from diluted weighted average
shares because the effect would have been antidilutive.
(7) Company-obligated mandatorily redeemable preferred securities of subsidiary
Trust holding solely Company junior subordinated debentures.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD & A") contains forward looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. The Company's actual results could differ
materially from those projected in these forward looking statements as a result
of certain risks and uncertainties, including those factors set forth in this MD
& A section and elsewhere in this Form 10-K including, but not limited to "Item
1. Business -- Risk Factors."
GENERAL
Fremont General Corporation is an insurance and financial services holding
company operating select businesses nationally in niche markets. The reported
assets of Fremont General Corporation and its subsidiaries ("Fremont" or "the
Company") as of December 31, 1999 were $8.0 billion. The Company incurred a loss
before taxes from continuing operations of $66.3 million in the year ended
December 31, 1999, resulting entirely from losses recognized within the
Company's property and casualty insurance segment. (See "Property and Casualty
Insurance Operation -- Special Discussion Concerning Property and Casualty
Insurance Results.") Additionally, Fremont recorded a net loss from discontinued
operations of $25 million which resulted primarily from a deterioration in the
Company's estimated reserves for asbestos and environmental claims.
Fremont's business strategy includes achieving income balance and
geographic diversity among its business units in order to limit its exposure to
market and regional concentrations. The Company's business strategy also
includes growing its business through new business development and acquisitions.
The Company's stock is traded on the New York Stock Exchange under the symbol
"FMT".
The Company's businesses are managed within two reportable segments:
property and casualty insurance and financial services. Revenues from these
segments are derived from two basic financial products; policies of insurance
(property and casualty insurance), and loans (financial services). They are
managed separately and use different pricing, distribution, and operating
methods. Fremont evaluates the performance of its reportable segments based on
income before taxes using accounting policies which are the same as those
described in the summary of significant accounting policies. (See Note A of
Notes to Consolidated Financial Statements.) Additionally, there are certain
corporate revenues and expenses, comprised primarily of investment income,
interest expense and certain general and administrative expenses, that Fremont
does not allocate to its segments.
Substantially all of Fremont's property and casualty insurance operation is
represented by the underwriting of workers' compensation insurance policies. The
Company began its workers' compensation insurance operation in 1959 and
continues to derive the majority of its revenues from this business. Fremont's
workers' compensation insurance business has grown through internal expansion,
as well as through the acquisition of other workers' compensation insurance
companies and currently has premium volume concentrated in California, Illinois,
and to a lesser extent, Alaska, Arizona, Colorado, Indiana, Michigan, New
Jersey, Texas and Wisconsin. For the year ended December 31, 1999, these states
collectively accounted for over 80% of the Company's premium. At December 31,
1999 the Company had premiums inforce in forty-five states and the District of
Columbia.
Consistent with its business strategy, the Company's workers' compensation
insurance business has grown dramatically since 1994 through acquisitions. On
September 1, 1998, Fremont acquired UNICARE Specialty Services, Inc. ("Unicare")
from Wellpoint Health Networks, Inc. Unicare underwrites workers' compensation
insurance primarily in California, with a smaller presence in Georgia, Texas,
and Indiana. On August 1, 1997, the Company acquired Industrial Indemnity
Holdings, Inc. ("Industrial") from Talegen Holdings, Inc., a subsidiary of Xerox
Corporation. Industrial, which specializes in underwriting workers' compensation
insurance, has a strong presence in the western United States dating back over
seventy years. (See Note B of Notes to Consolidated Financial Statements.) On
February 22, 1995, the Company acquired Casualty Insurance Company ("Casualty"),
the largest underwriter of workers' compensation insurance in Illinois, with
additional operations in several other midwestern states. Over the last five
years, the Company has focused on
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creating a broad national platform upon which to build its business, while
providing geographic diversity to mitigate potential fluctuations in earnings
from cyclical downturns in various regional economies. (See "Results of
Operations -- Property and Casualty Insurance Operation.")
The operations of Fremont's financial services segment are consolidated
within Fremont General Credit Corporation, which is engaged in collateralized
lending to businesses and individuals nationwide through its
California-chartered thrift and loan subsidiary, Fremont Investment & Loan (the
"thrift"). After the sale of the Company's commercial finance subsidiary in
December 1999, Fremont's remaining lending activities include commercial and
residential real estate lending, interests in large syndicated commercial loans
("syndicated loans") and insurance premium financing. In December 1999, the
Company discontinued its commercial finance lending activities through the sale
on December 20, 1999 of Fremont Financial Corporation, its commercial finance
subsidiary, to FINOVA Capital Corporation, a subsidiary of The FINOVA Group,
Inc. for approximately $708 million in cash including the refinancing and
assumption of existing debt. Fremont's financial services business is developed
by the Company through independent loan brokers, through its own marketing
representatives and referrals from various financial intermediaries and
financial institutions. The Company's financial services loan portfolio was $3.1
billion at December 31, 1999. In addition, the Company had residential real
estate loans of approximately $1.3 billion under three securitizations at
December 31, 1999 which are not included in the Company's balance sheet. (See
"Financial Services Operation.")
The real estate lending operations of Fremont currently consist of more
than 6,000 residential real estate loans and 600 commercial real estate loans.
The real estate lending activities are financed mainly through deposit accounts
(approximately 80,000 accounts at December 31, 1999), which are insured by the
Federal Deposit Insurance Corporation ("FDIC"). (See "Item 1.
Business -- Regulation -- Thrift and Loan Regulation.") The thrift's deposits
are currently serviced through 19 branch offices in California. Fremont's
syndicated loans and insurance premium finance loans are also funded by the
thrift. Fremont originates real estate loans nationwide primarily through
independent loan brokers, through its own marketing representatives and through
bulk purchases. For commercial real estate loans, principal amounts primarily
range in loan size between $1 million and $15 million and are primarily secured
by first mortgages on income-producing properties in California and, to a lesser
degree, Illinois, Texas, and many other states. The real estate securing these
loans includes a wide variety of property types including office, retail,
industrial, multi-family and mixed-use properties. For residential real estate
loans, principal amounts are generally below $350,000 and are secured by single
family residences located in California, and to a lesser degree Illinois,
Florida, Washington, New Jersey, and many other states. The residential real
estate loans are originated using underwriting standards that are less stringent
than the Federal National Mortgage Association's guidelines and are commonly
known as "subprime" loans. To mitigate the higher potential for credit losses
that accompanies these types of borrowers, Fremont attempts to maintain
underwriting standards that require conservative loan to collateral valuations.
The Company's operating strategy is to grow its commercial and residential real
estate loan portfolios through the origination of new loans that meet its
underwriting guidelines. Over the three year period ended December 31, 1999, the
commercial real estate loan portfolio grew to $2.33 billion at the end of 1999
from $846 million at the end of 1996, and the residential real estate loan
portfolio grew to $388 million from $268 million for the same respective
period-end dates. The growth in these portfolios was due primarily to increased
loan originations and, to a lesser extent, the purchase of loan portfolios from
other financial institutions. (See "Item 1. Business -- Financial Services
Operation -- Real Estate Lending.")
Fremont has interests in large syndicated commercial loans which are
originated and serviced by other financial institutions. These syndicated loans
are senior obligations of the borrower and are secured by substantially all of
the assets of the borrower and, if applicable, its subsidiaries. The syndicated
loans are variable rate loans and are originated on both a revolving and
fixed-term basis. The term loans are generally issued with terms not in excess
of seven years. The Company funds these loans using thrift deposits. The
syndicated loan portfolio was $332 million at December 31, 1999, as compared to
$360 million at December 31, 1998. The Company establishes its lending
relationships through referrals from various financial institutions.
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33
Fremont provides insurance premium finance loans, primarily to small
businesses, which finance property and casualty insurance premiums. These loans
are collateralized by the unearned premiums of the underlying insurance
policies. At December 31, 1999, the insurance premium finance loan portfolio
totaled $65 million.
Prior to the December 1999 sale of the Company's commercial finance
subsidiary, Fremont provided commercial finance loans, primarily secured by
accounts receivable, inventory, and machinery and equipment, to small and middle
market companies on a nationwide basis.
By engaging in geographically diverse businesses nationwide, the Company
believes it has provided opportunities for growth in its revenues. Since the
year ended December 31, 1995 to the year ended December 31, 1999, the Company's
revenues grew at a compound annual rate of approximately 11% to $1.4 billion for
1999. The Company's book value increased to $731 million at December 31, 1999
from $498 million at December 31, 1995.
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 a subsidiary. As of January 1, 1996, the
Company had 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 were part of
several other agreements which have collectively resulted in the substantial
reduction of the Company's life insurance operation. The Company continues to
remain primarily obligated for approximately $110 million of account value of
annuities which, at December 31, 1999, have been fully co-insured with Great
Southern Insurance Company. Revenue and operating results from this subsidiary
were not significant in 1999, 1998 or 1997.
Fremont'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 by the commutation of liabilities and as claims are
paid. 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 asbestos and environmental claims.
During the third quarter of 1999, the Company incurred an after tax charge
for its discontinued operations of $25 million in recognition of an increase in
asbestos and environmental claims reserves over previous estimates. This charge
is represented by the Company's contribution of $25 million to the discontinued
operations to ensure that sufficient funds are available to discharge estimated
liabilities as they become due.
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34
RESULTS OF OPERATIONS
Fremont has achieved growth in revenues during the three years ended
December 31, 1999 through the development of its insurance and financial
services customer base, which includes small and medium-sized businesses and
individuals nationwide. Higher revenues and net income were also achieved
through the acquisitions of Unicare and Industrial. The following table presents
information for each of the three years in the period ended December 31, 1999
with respect to the Company's core business segments.
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- --------
(THOUSANDS OF DOLLARS)
Revenues:
Property and casualty................................. $ 984,573 $ 729,728 $738,072
Financial services.................................... 411,575 297,469 232,342
Unallocated corporate revenue......................... 1,462 1,983 749
---------- ---------- --------
Total......................................... $1,397,610 $1,029,180 $971,163
========== ========== ========
Income (Loss) Before Taxes:
Property and casualty................................. $ (116,178) $ 169,235 $144,667
Financial services.................................... 79,874 55,506 42,286
Unallocated corporate loss............................ (29,980) (28,029) (28,060)
---------- ---------- --------
Total......................................... $ (66,284) $ 196,712 $158,893
========== ========== ========
The Company generated revenues of approximately $1.40 billion for 1999, as
compared to revenues of $1.03 billion and $971 million for 1998 and 1997,
respectively. Higher revenues in 1999 as compared to 1998 resulted from higher
workers' compensation insurance premiums in the property and casualty insurance
segment and higher loan interest in the financial services segment. Higher
workers' compensation insurance premiums were achieved primarily from new
business development, and from the September 1, 1998 acquisition of Unicare.
(See "Property and Casualty Insurance Operation -- Premiums.") The increase in
loan interest revenue is consistent with the significant growth in the average
loan portfolio of the financial services operation to $3.9 billion in 1999 from
$2.4 billion in 1998. Higher revenues for 1998 as compared to 1997 resulted from
higher financial services revenues, offset partially by lower revenues in the
property and casualty segment. The lower property and casualty revenues were due
primarily to the net effects of higher workers' compensation insurance premiums
and investment income resulting from the acquisitions of Unicare on September 1,
1998 and Industrial on August 1, 1997, more than offset by additional ceded
reinsurance premiums which have the result of lowering premium revenues. These
additional ceded reinsurance premiums were due mainly to additional excess of
loss reinsurance purchased for Fremont's workers' compensation insurance
business which was in effect from January 1, 1998 through December 31, 1999.
(See "Item 1. Business -- Property and Casualty Insurance
Operation -- Reinsurance Ceded.") Higher revenues in the financial services
segment in 1998 as compared to 1997 were achieved primarily from increased loan
interest revenues which resulted from significant growth in the average
financial services loan portfolio and to higher gains on whole loan sales of
residential real estate loans. (See "Financial Services Operation.") Also
included in revenues were realized investment losses of $3.5 million, $0.6
million, and $2.0 million for 1999, 1998 and 1997, respectively.
Fremont posted a net loss from continuing operations of $40.4 million or
$0.64 diluted loss per share for 1999, as compared to net income from continuing
operations of $133.0 million or $1.90 diluted earnings per share and $108.3
million or $1.62 diluted earnings per share for 1998 and 1997, respectively.
Loss before taxes for 1999 was $66.3 million as compared to income before taxes
of $196.7 million and $158.9 million for 1998 and 1997, respectively.
Additionally, in 1999 Fremont recorded a net loss from discontinued operations
of $25 million or $0.39 diluted loss per share. (See "General.")
The property and casualty insurance operation posted a loss before taxes of
$116.2 million for 1999, as compared to income before taxes of $169.2 million
and $144.7 million for 1998 and 1997, respectively. The loss before taxes in
1999 was due primarily to the combined effect of a significant decrease in the
second half
32
35
of 1999 in the Company's estimates of reinsurance recoverables on unpaid losses,
and the recognition of a $75 million charge before taxes associated with a
settlement agreement executed on February 28, 2000 with Reliance Insurance
Company ("Reliance") under a workers' compensation reinsurance contract that was
in effect from January 1, 1998 through December 31, 1999. (See "Property and
Casualty Insurance Operation -- Special Discussion Concerning Property and
Casualty Insurance Results" and "Item 1. Business -- Property and Casualty
Insurance Operation -- Reinsurance Ceded.") The increase in income before taxes
of 17% in 1998 as compared to 1997 was due primarily to the inclusion of a full
year of Industrial's operating results and lower losses incurred resulting from
the additional reinsurance purchased by the Company which was effective from
January 1, 1998 through December 31, 1999. The combined ratio for 1999 was
128.7% as compared to 96.2% and 93.0% for 1998 and 1997, respectively.
Through January 1, 1998 the Company maintained a small medical malpractice
insurance operation within the property and casualty insurance segment. On
January 1, 1998, the Company entered into reinsurance and assumption agreements
with a reinsurer whereby substantially all of the assets and liabilities related
to the medical malpractice policies were ceded to the reinsurer. These
reinsurance agreements are part of several other agreements which collectively
result in the sale of the Company's medical malpractice operation effective
January 1, 1998. The effect on the Company's results of operations from these
agreements was not material. Revenues from the medical malpractice operation
were $32.6 million for 1997.
The financial services segment posted income before taxes of $79.9 million
for 1999, as compared to $55.5 million and $42.3 million for 1998 and 1997,
respectively. The 44% increase in 1999 is due primarily to the combined effect
of a significant growth in the average loan portfolio of the financial services
operation to $3.9 billion in 1999 from $2.4 billion in 1998, and the recognition
of a $10.3 million gain before taxes resulting from the December 20, 1999 sale
of the Company's commercial finance subsidiary. Partially offsetting these
increases in income before taxes were lower gains in 1999 on residential real
estate whole loan sales. Furthermore, the Company did not recognize any gains in
conjunction with three securitizations of residential real estate loans
completed in 1999. The 31% increase in income before taxes in 1998 as compared
to 1997 is due mainly to the general growth in the average financial services
loan portfolio to $2.4 billion in 1998 from $1.9 billion in 1997, as well as
gains in 1998 on residential real estate whole loan sales. (See "Financial
Services Operation.")
Unallocated corporate revenues consisted primarily of investment income,
while unallocated corporate expenses consisted primarily of interest expense and
general and administrative expense. The unallocated corporate loss before income
taxes was $30.0 million, $28.0 million and $28.1 million for 1999, 1998 and
1997, respectively. Higher interest expense, offset partially by lower general
and administrative expense, accounted for the modest increase in unallocated
corporate loss before tax in 1999. The unallocated corporate loss before tax was
flat in 1998 as compared to 1997 due primarily to the net effects of lower
interest expense, offset by higher general and administrative expenses.
Income tax (benefit) expense of $(25.9) million, $63.7 million and $50.6
million for 1999, 1998 and 1997, respectively, represents effective tax rates of
39%, 32% and 32%, respectively on (loss) income before taxes of $(66.3) million,
$196.7 million and $158.9 million for the corresponding periods. The Company's
effective tax rates on (loss) income before taxes for all years presented are
different than the enacted federal income tax rate of 35%, due primarily to tax
exempt investment income which either reduces the Company's taxable income or
increases a taxable loss. At December 31, 1999, the Company has a net loss
carryforward of $230.1 million for income tax purposes that expire in years 2015
through 2019. The majority of this net loss carryover was generated in 1999,
resulting mainly from the losses recognized in the Company's property and
casualty insurance segment. (See Note G of Notes to Consolidated Financial
Statements.)
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36
PROPERTY AND CASUALTY INSURANCE OPERATION
The following table represents information with respect to Fremont's
property and casualty insurance operation:
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- -------- --------
(THOUSANDS OF DOLLARS)
Revenues.................................................. $ 984,573 $729,728 $738,072
Expenses.................................................. 1,100,751 560,493 593,405
---------- -------- --------
Income (Loss) Before Taxes................................ $ (116,178) $169,235 $144,667
========== ======== ========
Revenues from the property and casualty insurance operation consist of
workers' compensation insurance premiums earned and net investment income.
Expenses consist primarily of loss and loss adjustment expenses, policy
acquisition costs and other operating costs and expenses.
Special Discussion Concerning Property and Casualty Insurance Results. In
1999, the Company's property and casualty insurance operation recorded a loss
before taxes from continuing operations of $116.2 million. This loss resulted
primarily from the combined adverse effect on incurred loss and loss adjustment
expense ("LAE") of a lower than expected level of reinsurance recoverables than
had been actuarially predicted, coupled with the Company's recognition of the
settlement agreement with Reliance under a reinsurance treaty that was in effect
from January 1, 1998 through December 31, 1999.
With regard to the lower than expected reinsurance recoverables, in the
third and fourth quarters of 1999, the Company lowered its estimate of
reinsurance recoverables on unpaid losses for the 1998 and 1999 accident years
by approximately $147 million. This decrease was in recognition of a lower than
actuarially predicted level of incurred losses ceded under certain reinsurance
contracts that were in effect from January 1, 1998 through December 31, 1999.
These reinsurance contracts reduced the Company's net loss exposure from a
historical retention of $1 million per occurrence to $50,000 per occurrence.
(See "Item 1. Business -- Property and Casualty Insurance
Operation -- Reinsurance Ceded.") Prior to entering into these reinsurance
agreements, the Company had estimated its expected gross incurred loss and LAE.
Estimates of incurred loss and LAE, net of reinsurance recoveries, were then
established utilizing actuarial indications based upon historical experience and
other factors considered appropriate to forecast incurred losses to be ceded
under these reinsurance agreements. During the third quarter of 1999 and
pursuant to its regular review of net incurred loss and LAE estimates, the
Company observed a deterioration in these net loss and LAE estimates as compared
to the actuarial predictions. To assist the Company in its determination of net
loss and LAE reserve estimates, the Company retained outside actuarial
consultants who performed an independent actuarial analysis of the Company's net
loss and LAE reserves as of June 30, 1999. These actuarial indications were
reaffirmed at September 30, 1999 and further re-evaluated by the independent
outside actuaries at December 31, 1999, which resulted in the Company's
recognition of the deterioration in reinsurance recoverables in the third and
fourth quarters of 1999. Based on the Company's review of these actuarial
indications and consequent recognition of the deterioration in estimated
reinsurance recoverables, the Company believes its estimates of reinsurance
recoverables on unpaid losses are an adequate provision for loss recoveries
under reinsurance agreements. (See "Variability of Operating Results.") While
the upward development in the Company's estimates of net loss and LAE reserves
during calendar year 1999 was comprised primarily of adjustments to reinsurance
recoverables on unpaid losses, the Company has observed for its primary regions
relative stability in its workers' compensation gross loss and allocated loss
adjustment expense ratios derived from the actuarial indications of reserves for
loss and allocated loss adjustment expense, gross of reinsurance recoverables.
Also contributing to the Company's loss before taxes in 1999 was the
recognition of $75 million in lower reinsurance recoverables on the 1998 and
1999 accident years pursuant to a settlement agreement entered into February 28,
2000 between the Company and Reliance under a reinsurance contract that was in
effect from January 1, 1998 through December 31, 1999. Under the settlement
agreement, the Company is to receive in excess of $100 million in cash and will
no longer have any involvement with the Reliance workers'
34
37
compensation reinsurance programs brokered for Reliance by Unicover Managers,
Inc. The Company evaluated the adequacy of the expected cash settlement under
the agreement through an independent actuarial analysis of the expected losses
and allocated loss adjustment expenses to be paid under the Reliance reinsurance
contract after December 31, 1999. A range of expected loss payments was
estimated and then discounted to a present value basis using investment yields
considered appropriate. Based on these indications, the cash settlement is
within the range of present values. The $75 million decrease in reinsurance
recoverables represents primarily the adjustment necessary to bring the
estimated reinsurance recoverables relating to the 1998 and 1999 accident years
under the reinsurance contract with Reliance to a present value basis at
December 31, 1999. (See "Item 1. Business -- Property and Casualty Insurance
Operation -- Reinsurance Ceded.")
Premiums. Premiums earned from the Company's property and casualty
insurance operation were $831.0 million for 1999, as compared to $552.1 million
and $601.2 million for 1998 and 1997, respectively. The increase of 51% in
premiums earned in 1999 as compared to 1998 is due primarily to new business
development and, to a lesser extent, the acquisition of Unicare. New business
development was significant in 1999 totaling approximately $448.8 million in
estimated annual direct premiums written, as compared to $221 million in
estimated annual direct premiums written for 1998. Using estimated annual
premiums on policies in effect at December 31, 1999 and 1998 (referred to as
"inforce premiums"), the Company's inforce premium has grown 41% to $1.034
billion at December 31, 1999 from $734.3 million at December 31, 1998. While the
growth in inforce premium is considered significant, the Company believes it has
remained conservative in its underwriting standards. This is evidenced by the
fact that the new business written in 1999 represents only 8% of the approximate
$5.4 billion in estimated annual premiums submitted to the Company for
underwriting consideration in 1999. This percentage compares to 7% for 1998 and
is in line with the Company's historical experience. The growth in inforce
premium has occurred across all of the Company's geographic regions nationally.
(See "Variability of Operating Results" and "Workers' Compensation Regulation.")
The lower insurance premiums in 1998 as compared to 1997 were due mainly to
the offsetting effects of higher workers' compensation insurance premiums
resulting from the acquisitions of Unicare and Industrial, more than offset by
additional ceded reinsurance premiums in 1998. These additional ceded
reinsurance premiums were due mainly to additional excess of loss reinsurance
purchased for the Company's workers' compensation insurance business, which was
in effect from January 1, 1998 through December 31, 1999. This additional
reinsurance reduced the point at which reinsurers assume liability from $1
million per loss occurrence to $50,000 per loss occurrence. With the expiration
of these reinsurance agreements, the Company's ceded premium expense in the
future is expected to be significantly lower than the ceded premium expense
levels recognized in 1999 and 1998. (See "Item 1. Business -- Property and
Casualty Insurance Operation -- Reinsurance Ceded" and Note F of the Notes to
Consolidated Financial Statements.)
Net Investment Income. Net investment income within the property and
casualty insurance operation was $157.7 million, $178.3 million and $138.9
million in 1999, 1998 and 1997, respectively. Higher invested assets associated
with the Unicare acquisition were more than offset by higher ceded reinsurance
costs and claim payments, resulting in lower investment income in 1999 as
compared to 1998. The higher investment income in 1998 as compared to 1997 was
due mainly to significantly higher average invested assets resulting from the
acquisitions of Unicare and Industrial. (See "Item 1. Business -- Investment
Portfolio.")
Loss and Loss Adjustment Expense. The property and casualty loss and LAE
incurred was $770.5 million, $335.5 million and $389.2 million in 1999, 1998 and
1997, respectively. In addition, the ratio of these losses and LAE to property
and casualty insurance premiums earned ("loss ratio") was 92.7%, 60.8% and 64.7%
in 1999, 1998 and 1997, respectively. The loss ratio increased significantly in
1999 as compared to 1998 due to the combined adverse effect on loss and LAE
incurred of a lower than expected level of reinsurance recoveries than had been
actuarially predicted, coupled with the effect of the Company's recognition of
the settlement agreement with Reliance under a reinsurance treaty that was in
effect from January 1, 1998 through December 31, 1999. (See "Special Discussion
Concerning Property and Casualty Insurance Results" and "Item 1.
Business -- Property and Casualty Insurance Operation -- Reinsurance Ceded.")
The decrease in the loss ratio in 1998 as compared to 1997 is due predominately
to the additional reinsurance purchased by
35
38
Fremont and which was in effect from January 1, 1998 through December 31, 1999,
offset partially by higher loss ratios in 1998 associated with Industrial.
Fremont's property and casualty insurance operation is required to maintain
reserves to cover the Company's ultimate liability for losses and LAE with
respect to reported and unreported claims incurred as of the end of each
accounting period. The Company regularly reviews its reserving techniques,
overall reserve position and reinsurance. In light of present facts and current
legal interpretations, management believes that adequate provisions have been
made for loss and LAE reserves, net of reinsurance recoverables. These reserves
do not represent an exact calculation of liabilities, but instead are estimates
involving actuarial projections at a given time of what the ultimate settlement
and administration of claims will cost, including estimates of reinsurance
recoveries associated with the estimated claims costs. These projections are
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 establishment of
appropriate gross loss and LAE reserves and reinsurance recoverables is an
inherently uncertain process and there can be no certainty that currently
established gross loss and LAE reserves and reinsurance recoverables will prove
to be adequate in light of subsequent actual experience. Subsequent actual
experience has resulted, and could result, in net loss and LAE reserves being
too high or too low. Fremont's future loss and LAE development could require an
increase in its gross loss and LAE reserves or a decrease in its reinsurance
recoverables from prior periods, which would adversely affect the Company's
earnings in future periods.
Policy Acquisition Costs and Other Operating Costs and Expenses. The ratio
of policy acquisition costs and other operating costs and expenses to premiums
earned is referred to as the expense ratio, which was 31.6%, 34.5% and 27.5% in
1999, 1998 and 1997, respectively. The lower expense ratio in 1999 as compared
to 1998 is due mainly to the significant increase in the premium base in 1999
resulting from increases in new business development, as well as to the
acquisition of Unicare. The increase in this ratio in 1998 as compared to 1997
is due mainly to a lower premium base in 1998 resulting from the additional
reinsurance purchased by Fremont that was effective from January 1, 1998 through
December 31, 1999. (See "Premiums.")
Dividends to Policyholders. The Company's policyholder dividends ratio was
4.4%, 0.9% and 0.8% in 1999, 1998 and 1997, respectively. The low ratios are due
primarily to the type of workers' compensation insurance policies written by the
Company. Fremont's workers' compensation insurance policies are generally
written as non-participating, which means that they do not include provisions
for dividend consideration. (See "Item 1. Business -- Regulation -- Workers'
Compensation Regulation.")
Variability of Operating Results. The Company's profitability can be
affected significantly by many factors including competition, the severity and
frequency of claims, fluctuation in interest rates and the rate of inflation,
legislation and regulations, court decisions, the judicial climate and general
economic conditions and trends, all of which are outside of the Company's
control. In addition, Fremont's results may be affected by its ability to assess
and integrate successfully the operations of acquired companies, as well as the
Company's ability to contain expenses and to implement appropriate technological
changes. Any of these factors could contribute to significant variation in the
Company's results of operations within the different aspects of its business, or
businesses taken as a whole, from quarter to quarter and from year to year.
Also, the establishment of appropriate loss and LAE reserves, net of reinsurance
recoverables, necessarily involves estimates, and reserve adjustments have
caused significant fluctuations in operating results from year to year.
With respect to Fremont's workers' compensation insurance business, changes
in economic conditions can lead to reduced premium levels due to lower payrolls
as well as increased claims due to the tendency of workers who are laid off to
submit workers' compensation insurance claims. Changes in market interest rates
can affect the amount of interest income that the Company earns on its
investment portfolio, as well as the amount of realized and unrealized gains or
losses on specific holdings within the Company's investment portfolio.
Legislative and regulatory changes can also cause the operating results of the
Company's workers' compensation insurance businesses to vary.
Fremont's workers' compensation insurance business competes in a market
characterized by competition on the basis of price and service. In addition,
state regulatory changes could affect competition in the states where the
Company transacts business. Although the Company is one of the largest writers
of workers'
36
39
compensation insurance in the nation, certain of its competitors are larger and
have greater resources than Fremont. The Company cannot be certain that it will
continue to maintain its market share in the future or that the Company will be
able to obtain adequate pricing for its insurance products. Over the past
several years, the Company has observed a reduction in the number of competitors
resulting from the consolidation of companies into other entities, companies who
are forced to terminate underwriting activities through regulatory actions by
state insurance authorities, as well as from companies electing to reduce or
discontinue the writing of workers' compensation insurance in certain
jurisdictions.
Fremont's workers' compensation insurance operations are concentrated in
California and Illinois, with 60% of the Company's premium inforce being located
in these two states. Because of this concentration, the Company's financial
position and results of operations have been and are expected to continue to be
influenced by general trends in the respective states' economies, and in
particular, the condition of the workers' compensation insurance market within
each state. The impact of unfavorable economic conditions, legislation and other
trends within these two states may result in greater uncertainty and volatility
in the Company's business operations and could adversely affect the results of
Fremont's operations and its financial condition more than if the Company's
premium had been originated with more geographic diversification.
Workers' Compensation Regulation. The Company's workers' compensation
insurance operation has premiums inforce in forty-five states and the District
of Columbia. 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 the numerous aspects of an insurance
company's business and financial condition. The primary purpose of such
supervision and regulation is the protection of injured workers and
policyholders rather than investors or stockholders of an insurer. Fremont'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 Fremont transacts business.
Illinois began operating under an open rating system in 1982 and California
began operating under such a system effective January 1, 1995. Generally, in an
open rating system, workers' compensation insurance companies are provided with
advisory premium rates (expected losses and expenses) or loss costs (expected
losses only) which vary by job classification. Each insurance company sets its
base rates to reflect its particular loss experience and operating costs.
Although insurance companies are not required to adopt such advisory premium
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
that could be charged by an insurance carrier. The repeal of the minimum rate
law has resulted in lower premiums and profitability on the Company's California
workers' compensation insurance policies due to increased price competition.
Beginning in the second half of 1999, however, Fremont observed a lessening of
price competition in its primary regions of California and Illinois. More
recently, in January 2000 Fremont experienced weighted average renewal premium
rate increases of 26% and 14% in California and Illinois, respectively, and
Fremont's total inforce premiums for all regions combined remained in excess of
$1 billion at January 31, 2000. It is uncertain however, whether the observed
lessening in the competitive environment and the Company's ability to increase
premium rates will continue.
FINANCIAL SERVICES OPERATION
The financial services operation of Fremont General Credit Corporation is
principally engaged in commercial and residential real estate lending,
syndicated loans and insurance premium financing. Revenues consist principally
of interest income and, to a lesser extent, gains on whole loan sales, fees and
other income. Prior to the December 20, 1999 sale of the Company's commercial
finance subsidiary, Fremont provided commercial finance loans, primarily secured
by accounts receivable, inventory, and machinery and equipment, to small and
middle market companies on a nationwide basis.
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40
The following table presents information with respect to Fremont's
financial services operation:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
Revenues................................................... $411,575 $297,469 $232,342
Expenses................................................... 331,701 241,963 190,056
-------- -------- --------
Income Before Taxes........................................ $ 79,874 $ 55,506 $ 42,286
======== ======== ========
Revenues increased 38% and 28% in 1999 and 1998, respectively, due
primarily to greater loan interest revenue attributable to growth in the average
financial services loan portfolio over the three year period ended December 31,
1999. The average financial services loan portfolio grew in 1999 to $3.9 billion
from $2.4 billion and $1.9 billion in 1998 and 1997, respectively. Also
contributing to the increase in revenues in 1999 is a gain before taxes of $10.3
million recognized by the Company from the December 20, 1999 sale of its
commercial finance subsidiary.
Partially offsetting the 1999 increase in interest revenues were lower
gains on the whole loan sales of residential real estate loans. Gains on whole
loan sales were approximately $5.0 million, $29.7 million and $8.2 million for
the years ended December 31, 1999, 1998 and 1997, respectively. Whole loan sales
are cash transactions made without recourse to the Company or its subsidiaries.
The lower whole loan sales resulted from an observed decrease in the price for
the Company's residential real estate loans beginning in the second half of
1998. This condition was a consequence of market disruptions and an oversupply
of loans available for sale which occurred during this same period. Rather than
sell its loans at cash prices lower than what it believed was the economic
benefit to be derived, the Company began a program to retain these benefits by
either retaining the loans in its portfolio or by securitizing them. During
1999, Fremont sold $1.75 billion in residential real estate loans, comprised of
$1.41 billion in loans sold in three securitizations and $343.5 million in whole
loan sales to other financial institutions. In 1998 and 1997, residential real
estate loan sales of $746.5 million and $162.8 million, respectively, were
represented entirely by whole loan sales. For the year ended December 31, 1999,
the Company has not recognized any gain on the residual interests retained from
the three securitizations, since the value of the residual interests is subject
to substantial credit, prepayment, and interest rate risks on the loans sold.
While this reduces current period income, income may be recognized in future
periods if the Company's original assumptions develop favorably. (See
"Variability of Operating Results.") The Company's financial services loan
disposition strategy will continue to include securitization in addition to
whole loan sale and retaining loans in its portfolio, depending on market
conditions, profitability and cash flows. (See "Residential Real Estate Loan
Securitization" and Notes A and D of Notes to Consolidated Financial
Statements.)
Income before taxes in the financial services operation was $79.9 million,
$55.5 million and $42.3 million for 1999, 1998 and 1997, respectively. The 44%
and 31% increases in income before taxes in 1999 and 1998 respectively, are
mainly due to the previously described growth in the average financial services
loan portfolio and the gain on the sale of the Company's commercial finance
subsidiary. Additionally, the Company recognized higher gains on residential
real estate whole loan sales in 1998, as compared to both 1999 and 1997.
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41
The following table identifies the interest income, interest expense,
average interest bearing assets and liabilities, and interest margins for
Fremont's financial services operation:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest bearing
assets(1):
Commercial real estate
loans................ $2,086,038 $193,491 9.28% $1,220,115 $120,718 9.89% $ 954,181 $ 93,973 9.85%
Residential real estate
loans................ 726,552 67,248 9.26 417,872 40,025 9.58 322,597 30,896 9.58
Commercial finance
loans................ 527,521 55,503 10.52 416,264 48,963 11.76 436,527 52,269 11.97
Syndicated loans....... 486,835 43,808 9.00 249,440 24,829 9.95 144,982 15,925 9.76
Insurance premium
finance loans........ 60,691 6,358 10.48 62,050 6,214 10.01 54,116 6,132 11.33
Investments............ 201,527 10,409 5.17 226,097 12,716 5.62 178,941 10,186 5.69
---------- -------- ---------- -------- ---------- --------
Total interest
bearing
assets......... $4,089,164 $376,817 9.22% $2,591,838 $253,465 9.78% $2,091,344 $209,381 10.01%
========== ======== ========== ======== ========== ========
Interest bearing
liabilities:
Time deposits.......... $2,163,215 $116,377 5.38% $1,339,116 $ 76,215 5.69% $1,030,787 $ 60,055 5.83%
Savings deposits....... 657,697 32,797 4.99 388,355 20,245 5.21 268,344 13,610 5.07
Securitization
obligation........... 332,873 18,160 5.46 287,386 17,588 6.12 301,545 18,551 6.15
Debt with banks........ 495,941 26,916 5.43 268,834 17,170 6.39 216,944 14,406 6.64
Debt from affiliates... 129,007 9,276 7.19 53,813 3,279 6.09 49,735 2,810 5.65
Other.................. 41,993 2,412 5.74 2,082 90 4.32 5,250 312 5.94
---------- -------- ---------- -------- ---------- --------
Total interest
bearing
liabilities.... $3,820,726 $205,938 5.39% $2,339,586 $134,587 5.75% $1,872,605 $109,744 5.86%
========== ======== ========== ======== ========== ========
Net interest income...... $170,879 $118,878 $ 99,637
Net yield on average
interest bearing
assets................. 4.18% 4.59% 4.76%
- ---------------
(1) Average loan balances include non-accrual loan balances, and exclude
residual interest in securitized loans.
The margin between the Company's interest income and expense ("net yield")
decreased in 1999 as compared to 1998 due mainly to the combined effect of a
decrease in the net yields on commercial real estate and commercial finance
loans and an increase in the level of average syndicated loans, which generally
carry lower yields. The Company's overall net yield decreased in 1998 as
compared to 1997, due primarily to the combined effect of a decrease in the net
yields on commercial finance loans and an increase in the level of average
syndicated loans.
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42
Loans Receivable and Reserve Activity. The following table shows loans
receivable in the various financing categories and the percentages of the total
represented by each category:
DECEMBER 31,
------------------------------------------------------------
1999 1998 1997
------------------ ------------------ ------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ----- ---------- ----- ---------- -----
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Term loans:
Commercial real estate loans....... $2,332,880 75% $1,561,145 52% $1,046,441 51%
Residential real estate loans...... 388,297 13 549,400 18 380,126 19
Syndicated loans................... 322,715 10 168,170 6 42,101 2
Insurance premium finance loans.... 64,596 2 58,319 2 54,257 3
Commercial finance loans........... -- -- 168,040 5 115,912 6
---------- --- ---------- --- ---------- ---
Total term loans........... 3,108,488 100 2,505,074 83 1,638,837 81
Revolving loans:
Syndicated loans................... 8,990 -- 191,980 6 104,689 5
Commercial finance loans........... -- -- 317,468 11 284,563 14
---------- --- ---------- --- ---------- ---
Total revolving loans...... 8,990 -- 509,448 17 389,252 19
---------- --- ---------- --- ---------- ---
Total loans................ 3,117,478 100 3,014,522 100 2,028,089 100
Less allowance for possible loan
losses............................. (56,494) (2) (56,346) (2) (44,402) (2)
---------- --- ---------- --- ---------- ---
Loans receivable................... $3,060,984 98% $2,958,176 98% $1,983,687 98%
========== === ========== === ========== ===
The following table illustrates the maturities of Fremont's loans
receivable:
MATURITIES AT DECEMBER 31, 1999
--------------------------------------------------
1 TO 24 25 TO 60 OVER 60
MONTHS MONTHS MONTHS TOTAL
---------- -------- ---------- ----------
(THOUSANDS OF DOLLARS)
Term loans -- variable rate................ $1,032,368 $795,411 $ 721,600 $2,549,379
Term loans -- fixed rate................... 129,309 89,944 339,856 559,109
Revolving loans -- variable rate........... -- 6,829 2,161 8,990
---------- -------- ---------- ----------
Total............................ $1,161,677 $892,184 $1,063,617 $3,117,478
========== ======== ========== ==========
The Company monitors the relationship of fixed and variable rate loans and
interest bearing liabilities in order to minimize interest rate risk. (See
"Variability of Operating Results.")
During 1997, the Company began originating both commercial and residential
real estate loans outside of California. The Company intends to seek portfolio
growth outside of California in order to achieve greater geographic diversity in
its loan portfolio and thereby lessen Fremont's exposure to regional economic
conditions. The total amount of commercial and residential real estate loans
outstanding, excluding loans held for sale, on properties located outside of
California at December 31, 1999 was $992 million and $176 million, respectively.
(See "Variability of Operating Results.")
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The following table describes the asset classifications, loss experience
and reserve reconciliation of the financial services operation as of or for the
periods ended as shown below:
DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Non-accrual loans...................................... $ 30,462 $ 22,520 $ 31,525
Accrual loans 90 days past due......................... 928 1,264 927
Real estate owned ("REO").............................. 3,720 4,918 9,571
---------- ---------- ----------
Total non-performing assets.................. $ 35,110 $ 28,702 $ 42,023
========== ========== ==========
Beginning allowance for possible loan losses........... $ 56,346 $ 44,402 $ 37,747
Provision for loan losses.............................. 25,470 11,059 12,319
Reserves (sold) established with portfolio
(dispositions) acquisitions.......................... (14,265) 3,465 --
Charge-offs:
Commercial real estate loans......................... 762 202 1,484
Residential real estate loans........................ 1,318 1,036 1,268
Syndicated loans..................................... 2,164 -- --
Insurance premium finance loans...................... 91 132 822
Commercial finance loans............................. 6,965 2,049 3,384
---------- ---------- ----------
Total charge-offs............................ 11,300 3,419 6,958
---------- ---------- ----------
Recoveries:
Commercial real estate loans......................... 74 534 469
Residential real estate loans........................ 59 161 777
Syndicated loans..................................... -- -- --
Insurance premium finance loans...................... 16 28 36
Commercial finance loans............................. 94 116 12
---------- ---------- ----------
Total recoveries............................. 243 839 1,294
---------- ---------- ----------
Net charge-offs........................................ 11,057 2,580 5,664
---------- ---------- ----------
Ending allowance for possible loan losses.............. $ 56,494 $ 56,346 $ 44,402
========== ========== ==========
Allocation of allowance for possible loan losses:
Commercial real estate loans......................... $ 41,535 $ 28,762 $ 24,964
Residential real estate loans........................ 9,053 11,335 8,002
Syndicated loans..................................... 5,344 6,798 3,338
Insurance premium finance loans...................... 562 468 375
Commercial finance loans............................. -- 8,983 7,723
---------- ---------- ----------
Total allowance for possible loan losses..... $ 56,494 $ 56,346 $ 44,402
========== ========== ==========
Total loans receivable................................. $3,117,478 $3,014,522 $2,028,089
Average total loans receivable......................... 3,887,637 2,365,741 1,906,448
Net charge-offs to average total loans receivable...... 0.28% 0.11% 0.30%
Non-performing assets to total loans receivable........ 1.13% 0.95% 2.07%
Allowance for possible loan losses to total loans
receivable........................................... 1.81% 1.87% 2.19%
Allowance for possible loan losses to non-performing
assets............................................... 160.91% 196.31% 105.66%
Allowance for possible loan losses to non-accrual loans
and accrual loans 90 days past due................... 179.97% 236.91% 136.82%
Non-performing assets increased to $35.1 million at December 31, 1999 from
$28.7 million at December 31, 1998, due to increases in non-performing
commercial and residential real estate loans. Non-performing assets at December
31, 1998 were lower than December 31, 1997 despite total loans receivable
increasing to $3.0 billion at December 31, 1998 from $2.0 billion at December
31, 1997.
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The higher provision for loan losses in the year ended December 31, 1999 as
compared to the prior year is consistent with the significant increase in
average total loans receivable to $3.9 billion in 1999 from $2.4 billion in
1998. While net charge-offs as a percentage of average total loans receivable
has increased in 1999 to 0.28% as compared to 0.11% in 1998, the increase is due
primarily to commercial finance loans charged off within the Company's
commercial finance subsidiary which was sold in December 1999. The coverage of
the allowance for possible loan losses to non-accrual loans and accrual loans 90
days past due has remained high at 179.97% as of December 31, 1999. The lower
provision for loan losses in the year ended December 31, 1998 as compared to the
year ended December 31, 1997 is due primarily to improved loan loss experience.
This improvement is evidenced by the decrease in net charge-offs to $2.6 million
in 1998 as compared to $5.7 million in 1997, while total loans receivable
increased during this same period.
Residential Real Estate Loan Securitizations. As previously discussed, the
Company's residential real estate operation began a program in 1999 of selling
loans through securitization. In the Company's securitizations, the Company
sells residential real estate loans to a special purpose entity, which is
established for the limited purpose of purchasing the loans and issuing interest
bearing securities that represent interests in the loans. The securitization is
treated as a sale and the loans sold are removed from the Company's balance
sheet. The securities issued to third party investors are collateralized by the
underlying pool of residential real estate loans. The investors and the special
purpose entity have no recourse to the Company for failure of the residential
loan borrowers to pay when due. The Company retains a residual interest, which
represents the right to receive certain future cash flows which are generally
equal to the value of the principal and interest to be collected on the loans in
excess of: (i) the principal and interest to be paid on the securities; and (ii)
various contractual net servicing fees and other expenses. Most of the Company's
residual interests, however, are generally restricted until investors and other
expenses have been paid or otherwise are subordinate to investor's interests.
Upon completion of the securitization, the Company records its residual
interests as an asset on the balance sheet. Gains or losses on a securitization
are based on the estimated fair value of the proceeds from the sale, net of
related transaction costs and the allocated carrying value of the loans sold.
Fair value is determined by computing the net present value of the estimated
cash flows retained, using the dates that such cash flows are expected to be
released to the Company (the cash-out method), at a discount rate considered
commensurate with the risks associated with the cash flows. The amounts and
timing of the cash flows are estimated after considering various economic
factors and other factors, including prepayment speeds and delinquency, default
and loss rates. The outstanding balance of the Company's residual interests at
December 31, 1999 was $63 million. Since the value of the residual interests is
subject to substantial credit, prepayment, and interest rate risks on the loans
sold, the Company has recognized no gain on the residual interests it has
retained. This reduces the amounts of gain recognized in the current period;
however, income may be recognized in future periods if the Company's original
assumptions develop favorably. (See "Variability of Operating Results.")
Variability of Operating Results. During periods when economic conditions
are unfavorable, the Company's financial services businesses may not be able to
originate new loan products or maintain the credit quality of its finance
receivables, both in its portfolio and for those loans that have been
securitized, at previously attained levels. This may result in increased levels
of non-performing assets and net credit losses. Changes in market interest
rates, or in the relationships between various interest rates could cause
Fremont's interest margins to be reduced and may result in significant changes
in the prepayment patterns of the Company's finance receivables. These risk
factors could adversely affect the value of Fremont's loans and their related
collateral, as well as, the valuation of the residual interests in the Company's
securitized loans, both of which could adversely affect Fremont's results of
operations and financial condition.
The Company's financial services businesses maintain reserves for credit
losses on its portfolio of finance receivables in amounts that the Company
believes are sufficient to provide adequate protection against potential losses.
The finance receivables that Fremont primarily originates, both for its
portfolio and for securitization, are generally non-conventional and
non-investment grade loans. To mitigate for the somewhat higher potential risk
of the lending that the Company is primarily engaged in and for the impact that
adverse economic developments could have on the Company's finance receivables,
Fremont lends primarily on a senior and secured basis and employs a proactive
asset management approach. The Company also attempts to
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carefully evaluate the underlying collateral that secures these loans and to
maintain underwriting standards that are designed to effect appropriate loan to
collateral valuations and cash flow coverages. Although the Company believes
that its consolidated level of reserves is sufficient to cover potential credit
losses, these reserves could prove to be inadequate due to unanticipated adverse
changes in economic conditions or discrete events that adversely affect specific
borrowers, industries or markets. Any of these changes could impair the
Company's ability to realize the expected value of the collateral securing
certain of its finance receivables or the timing of the realization thereof.
The Company's financial services businesses compete in markets that are
highly competitive and are characterized by factors that vary based upon product
and geographic region. The markets in which Fremont competes are typically
characterized by a large number of competitors who compete based primarily upon
price, terms and loan structure. The Company primarily competes with banks and
mortgage and finance companies, many of which are larger and have greater
financial resources than Fremont. The competitive forces of these markets could
adversely affect the Company's net finance income, loan origination volume or
net credit losses.
While the Company attempts to diversify its loan origination by geographic
region, the Company's geographic concentration of commercial and residential
real estate loans in California may subject its loan portfolio and securitized
loans to higher rates of delinquencies, defaults and losses in an economic
downturn in California than the rates experienced in loan portfolios having
greater geographic diversity. At December 31, 1999, approximately half of
Fremont's commercial and residential real estate loans, both in its portfolio
and those loans that have been securitized, were collateralized by properties
located in California. Adverse events in California, such as real estate market
declines or the occurrence of natural disasters upon property located therein,
may have a more significant adverse effect upon the Company's operating results
and financial condition than if a higher percentage of its loans were
collateralized by properties located outside California.
Fremont's financial services businesses include a Federal Deposit Insurance
Corporation ("FDIC") insured thrift and loan subject to supervision and
regulation by the California Department of Financial Institutions and the FDIC.
Federal and state regulations prescribe certain minimum capital requirements
and, while the Company's thrift is currently in compliance with such
requirements, in the future the Company could be required to make additional
contributions to its thrift in order to maintain compliance with such
requirements. Future changes in government regulation and policy could adversely
affect the thrift and loan industry, including Fremont's thrift. Such changes in
regulations and policies may place restrictions on or make changes to the
Company's lending business and increase the costs of compliance.
MARKET RISK
Fremont is subject to market risk resulting primarily from fluctuations in
interest rates arising from balance sheet financial instruments such as
investments, loans and debt. In the property and casualty insurance operation,
the greatest interest rate risk exposure occurs where the interest rate of the
financial instrument is fixed in nature and there is a difference between the
fixed rate of the financial instrument and the market rate. The greatest
interest rate risk exposure in the financial services operation occurs when
interest rate gaps arise wherein assets are funded with liabilities having
different repricing intervals or different market indices to which the
instruments' interest rates are tied. Changes in interest rates will affect the
Company's net investment income, loan interest, interest expense and total
stockholders' equity. The objective of Fremont's asset and liability management
activities is to provide the highest level of net interest income and to seek
cost effective sources of capital, while maintaining acceptable levels of
interest rate and liquidity risk. The Company has designated its entire
investment portfolio as investments that would be available for sale in response
to changing market conditions, liquidity requirements, interest rate movements
and other investment factors. (See "Item 1. Business -- Investment Portfolio.")
Fremont currently owns no derivative financial instruments and, consequently, is
not subject to market risk for such off-balance sheet financial instruments.
Furthermore, the Company does not have exposure to foreign currency or commodity
price risk.
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Property and Casualty Insurance Operation -- Interest Rate Risk
The property and casualty insurance operation has exposure to changes in
long-term interest rates due mainly to the significant investment in the
available-for-sale investment portfolio. Fluctuations in these interest rates
affect the carrying value of the fixed rate investments resulting in
fluctuations in unrealized gains and losses on investments, which also affects
the Company's stockholders' equity. For an investment in a fixed rate bond, a
rise in market interest rates for bonds with a similar remaining term and face
amount will result in a decline in the fair value of the fixed rate bond. The
converse situation applies as well.
The following table presents principal cash flows of the investment
portfolio by expected maturity dates. The weighted-average interest rate is
based on expected maturities for fixed interest rate investments. For variable
interest rate investments, the weighted-average interest rate is based on
implied forward rates from appropriate annual spot rate observations as of the
reporting date.
PROPERTY AND CASUALTY INSURANCE OPERATION
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT MATURING IN:
--------------------------------------------------------------------------- FAIR VALUE AT
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
-------- ------- ------- ------- -------- ---------- ---------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest rate sensitive assets:
Securities available for sale:
Fixed interest rate
investments................... $123,627 $98,803 $12,670 $29,308 $117,718 $1,433,744 $1,815,870 $1,732,844
Weighted-average interest
rate........................ 6.24% 8.84% 7.17% 7.80% 7.92% 6.82% 6.96%
Variable interest rate
investments................... -- -- -- $18,258 $ 22,866 $ 52,778 $ 93,902 $ 98,219
Weighted-average interest
rate........................ -- -- -- 8.19% 9.88% 5.61% 6.89%
Financial Services Operation -- Interest Rate Risk
Fremont's financial services operation is subject to interest rate risk
resulting from differences between the rates on, and repricing characteristics
of, interest-earning loans receivable and the rates on, and repricing
characteristics of, interest bearing liabilities used to finance its loans such
as thrift deposits and debt. Interest rate gaps may arise when assets are funded
with liabilities having different repricing intervals or different market
indices to which the instruments' interest rate is tied and to this degree
earnings will be sensitive to interest rate changes. Additionally, interest rate
gaps could develop between the market rate and the interest rate on loans in the
Company's financial services loan portfolio, which could result in borrowers'
prepaying their loan obligations to Fremont. While the Company attempts to match
the characteristics of interest rate sensitive assets and liabilities to
minimize the effect of fluctuations in interest rates, Fremont does not
currently utilize derivative financial instruments to meet these objectives. For
the financial services operation, the expected maturity date does not
necessarily reflect the net market risk exposure because certain instruments are
subject to interest rate changes before expected maturity.
The following table provides information about the assets and liabilities
of the Company's financial services operation that are sensitive to changes in
interest rates. For loans, investments, thrift deposits and other liabilities
with contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturity, adjusted for estimated
loan prepayments based upon the historical behavior of its financial services
loan portfolio. Thrift deposits that have no contractual maturity are presented
as maturing in 2000.
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FINANCIAL SERVICES OPERATION
INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT MATURING IN: FAIR
-------------------------------------------------------------------------------- VALUE AT
2000 2001 2002 2003 2004 THEREAFTER TOTAL 12/31/99
---------- -------- -------- -------- -------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest rate sensitive assets:
Variable rate
Commercial real estate
loans..................... $ 537,026 $762,576 $258,520 $129,696 $153,738 $ 38,479 $1,880,035 $1,880,134
Weighted-average interest
rate.................... 10.00% 9.99% 10.19% 10.16% 10.16% 9.71% 10.04%
Residential real estate
loans..................... $ 517,000 $ 49,673 $ 17,513 $ 17,091 $ 14,483 $ 27,616 $ 643,376 $ 667,309
Weighted-average interest
rate.................... 10.21% 7.44% 10.97% 10.15% 10.25% 12.06% 10.10%
Syndicated loans............ $ 21,439 $ 23,451 $ 25,650 $ 28,057 $ 30,688 $202,420 $ 331,705 $ 331,705
Weighted-average interest
rate.................... 9.05% 9.05% 9.05% 9.05% 9.05% 9.05% 9.05%
Investments................. $ 46,595 $ 5,973 $ 2,750 $ 1,182 $ 484 $ 323 $ 57,307 $ 57,307
Weighted-average interest
rate.................... 5.58% 6.12% 6.12% 6.12% 6.12% 6.12% 5.68%
Fixed Rate
Commercial real estate
loans..................... $ 47,668 $ 47,070 $ 62,802 $ 42,371 $ 34,941 $236,708 $ 471,560 $ 441,655
Weighted-average interest
rate.................... 9.84% 9.55% 8.95% 9.26% 9.05% 8.29% 8.80%
Residential real estate
loans..................... $ 6,576 $ 5,493 $ 4,180 $ 3,146 $ 2,455 $ 7,289 $ 29,139 $ 30,034
Weighted-average interest
rate.................... 10.38% 10.37% 10.40% 10.40% 10.52% 10.42% 10.40%
Premium finance loans....... $ 64,596 -- -- -- -- -- $ 64,596 $ 64,596
Weighted-average interest
rate.................... 10.30% -- -- -- -- -- 10.30%
Investments................. $ 175,613 -- -- -- -- $ 44,828 $ 220,441 $ 220,441
Weighted-average interest
rate.................... 5.50% -- -- -- -- 6.27% 5.65%
Interest rate sensitive
liabilities:
Variable Rate
Thrift deposits............. $ 671,834 -- -- -- -- -- $ 671,834 $ 671,834
Weighted-average interest
rate.................... 5.03% -- -- -- -- -- 5.03%
Debt from affiliates........ $ 156,612 -- -- -- -- -- $ 156,612 $ 156,612
Weighted-average interest
rate.................... 7.64% -- -- -- -- -- 7.64%
Fixed Rate
Thrift deposits............. $2,164,436 $259,520 $ 17,485 $ 57,518 $121,991 $130,459 $2,751,409 $2,734,548
Weighted-average interest
rate.................... 5.58% 5.61% 5.71% 5.60% 5.85% 6.05% 5.62%
Debt with Federal Home Loan
Bank...................... $ 10,000 -- -- -- -- -- $ 10,000 $ 10,000
Weighted-average interest
rate.................... 5.49% -- -- -- -- -- 5.49%
During 1999, the Company began a program to securitize certain of its
residential real estate loans. A securitization has the effect of reducing
interest rate risk since the securitized loans are typically removed from the
balance sheet. However, the Company retains a residual interest in the
securitized loans, and this residual interest is recorded on the balance sheet
at fair value ($63 million at December 31, 1999). These residual interests are
subordinated to the right of other investors. Residual interests do not have a
stated maturity or amortization period. The expected amount of the net cash
flow, as well as the timing of such cash flow, depends on the performance of the
underlying collateral supporting each securitization. The actual cash flow of
these instruments could vary substantially if performance is different from the
Company's assumptions.
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Fremont develops assumptions to value its residual interests by analyzing past
portfolio performance, current loan characteristics and current market and
interest rate conditions.
Fremont General Corporation (Parent-only) -- Interest Rate Risk
Fremont General Corporation is also subject to interest rate exposure
related to LIBOR and United States prime interest rates because of its long-term
debt and other obligations with both fixed and variable interest rates. For
fixed rate obligations, Fremont General Corporation runs the risk that if market
rates decline, the related required payments will exceed those based on the
current market rates. For obligations with variable interest rates, fluctuations
in the market rates will directly affect interest expense.
The following table provides information about interest rate sensitive
assets and liabilities of Fremont General Corporation. For short-term
investments with variable interest rates, the table presents principal cash
flows by expected maturity dates. The weighted-average interest rates are based
on implied forward rates as derived from appropriate annual spot rate
observations as of the reporting date.
PRINCIPAL AMOUNT MATURING IN: FAIR VALUE AT
------------------------------------------------------------------------ DECEMBER 31,
2000 2001 2002 2003 2004 THEREAFTER TOTAL 1999
-------- ------ ------ -------- -------- ---------- -------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Interest rate sensitive assets:
Fixed interest rate short-term
investments...................... $107,023 -- -- -- -- -- $107,023 $107,023
Weighted-average interest
rate......................... 5.39% -- -- -- -- -- 5.39%
Interest rate sensitive liabilities:
Fixed interest rate debt
borrowings....................... -- -- -- -- $198,871 $226,762 $425,633 $342,205
Weighted-average interest
rate......................... -- -- -- -- 7.70% 7.81% 7.76%
Variable interest rate debt
borrowings....................... -- $1,607 $1,945 -- -- -- $ 3,552 $ 3,552
Weighted-average interest
rate......................... -- 7.23% 7.23% -- -- -- 7.23%
Fixed interest rate
Company-obligated mandatorily
redeemable preferred securities
of subsidiary Trust holding
solely Company junior
subordinated debentures.......... -- -- -- -- -- $100,000 $100,000 $ 58,750
Weighted-average interest
rate......................... -- -- -- -- -- 9.00% 9.00%
LIQUIDITY AND CAPITAL RESOURCES
The property and casualty insurance operation must have cash and liquid
assets available to meet its obligations to policyholders in accordance with
contractual obligations, in addition to having the funds available to meet
ordinary operating costs. The operation has several sources of funds to meet its
obligations, including cash flow from operations, recoveries from reinsurance
contracts and investment securities. By statute, the majority of the cash from
the operation is required to be invested in investment grade securities to
provide protection for policyholders. Fremont invests in fixed income and
preferred equity securities with an objective of providing a reasonable return
while limiting credit and liquidity risk. The Company's investment portfolio had
an unrealized (loss) gain of $(106.3) million and $59.8 million at December 31,
1999 and 1998, respectively.
Fremont's property and casualty insurance subsidiaries are required in
certain states to maintain on deposit investments meeting specified standards
that have an aggregate market value equal to the Company's workers' compensation
loss reserves. At December 31, 1999, the Company had approximately $500 million
in cash and investment securities at amortized value that exceeded this
requirement.
The Company's thrift and loan subsidiary finances its lending activities
through customer deposits, which have grown to $3.42 billion at December 31,
1999 from $2.13 billion at December 31, 1998. Additionally, beginning in 1999,
the Company financed certain of its residential real estate loans through
securitization. During 1999, the Company sold approximately $1.41 billion of
residential real estate loans in three securitizations. (See "Financial Services
Operation.") The thrift is also eligible for financing through the Federal Home
Loan Bank of San Francisco ("FHLB"), which financing is available at varying
rates and
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terms. As of December 31, 1999, $364 million was available under the facility
from the FHLB of which $10 million was outstanding. In October 1999, the thrift
established a warehouse financing facility that may be used to finance certain
residential real estate loans held for sale through securitization or whole loan
sale. The facility permits secured borrowings up to $200 million with a variable
interest rate of LIBOR plus 0.375%. As of December 31, 1999, there were no
borrowings under this facility. Additionally in 1999, the thrift obtained a line
of credit with the Federal Reserve Bank of San Francisco, and at December 31,
1999 had a borrowing capacity of $272.5 million, with no amounts outstanding.
As a holding company, Fremont General Corporation ("the holding company")
pays its operating expenses, meets its other obligations and pays stockholders'
dividends from its cash on hand, management fees paid by its subsidiaries and
dividends paid by its subsidiaries. Stockholders' dividends declared aggregated
$21.7 million, $20.9 million and $18.9 million during 1999, 1998 and 1997,
respectively. Several of Fremont's subsidiaries are subject to certain statutory
and regulatory restrictions and various agreements, principally loan agreements,
that restrict their ability to distribute dividends to the holding company. The
holding company expects that during the next few years dividends from its
subsidiaries will consist of dividends from its property and casualty insurance
subsidiaries. The maximum amount available for payment of dividends by the
property and casualty insurance subsidiaries at December 31, 1999 without prior
regulatory approval is approximately $56.3 million.
On March 17, 1999, Fremont General Corporation issued $425 million of
Senior Notes consisting of $200 million of 7.70% Senior Notes due 2004 and $225
million of 7.875% Senior Notes due 2009. Net proceeds from the Senior Notes were
used to repay all indebtedness outstanding under a revolving line of credit and
for general corporate purposes, including working capital. The Senior Notes were
offered in a private placement to qualified institutional buyers and a limited
number of institutional accredited investors. The Company subsequently filed a
Registration Statement on Form S-4, which was declared effective by the
Securities and Exchange Commission on May 11, 1999, in connection with an
exchange offer by the Company and the issuance of an equal principal amount of
exchange notes upon tender of the initial $425 million of Senior Notes. The
exchange notes consist of $200 million of 7.70% Series B Senior Notes due 2004
and $225 million of 7.875% Series B Senior Notes due 2009. The form and terms of
the exchange notes are substantially identical to those of the initial notes,
except that the exchange notes have been registered under the Securities Act and
therefore, do not bear legends restricting their transfer and are not entitled
to registration rights or additional interest as did the initial notes. As of
June 11, 1999, the closing date for the exchange offer, all outstanding Senior
Notes had been exchanged for Series B Senior Notes. The exchange notes evidence
the same debt as the initial notes and both the initial notes and the exchange
notes are governed by the same indenture.
On February 28, 2000, Fremont reached an agreement with one of its
reinsurers, Reliance Insurance Company ("Reliance"), to settle all obligations
between the Company and Reliance under a contract of reinsurance which was in
effect for the period January 1, 1998 through December 31, 1999. Under the terms
of the settlement agreement, the Company will receive in excess of $100 million
in cash and will no longer have any involvement with the Reliance workers'
compensation reinsurance programs brokered for Reliance by Unicover Managers,
Inc. In recognition of this settlement, Fremont recorded a charge to its
operating results in the quarter ended December 31, 1999 of approximately $48.8
million after taxes, consisting primarily of the adjustment necessary to bring
the estimated unpaid reinsurance recoverables under the reinsurance contract to
a present value basis at December 31, 1999. The cash payment is expected to be
made to the Company on or shortly after the effective date of the agreement,
which is anticipated by the end of the first quarter of 2000. Upon receipt of
this cash settlement, the Company's reinsurance recoverables on unpaid loss will
be reduced by a like amount. (See "Property and Casualty Insurance
Operation -- Reinsurance Ceded.")
In December 1999, the Company discontinued its commercial finance lending
activities through the sale on December 20, 1999 of Fremont Financial
Corporation, its commercial finance subsidiary, to FINOVA Capital Corporation, a
subsidiary of The FINOVA Group, Inc. for approximately $708 million in cash
including the refinancing and assumption of existing debt. (See "Financial
Services Operation.")
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On August 1, 1997, the Company completed the acquisition of Industrial
which resulted in the ultimate disbursement of funds totaling $434 million,
comprised of $355 million in purchase price, as adjusted pursuant to certain
audit and settlement provisions in the purchase agreement, $79 million in the
pay-off of an outstanding debt obligation that Industrial owed to Talegen
Holdings, Inc., and $10 million in costs incurred in connection with the
acquisition. The disbursement of cash used to fund the acquisition included $219
million in borrowings under the Company's existing line of credit and the
remainder from internally generated funds.
During 1999, an aggregate $3.7 million principal amount at maturity of
Liquid Yield Option (TM) Notes due October 12, 2013 (Zero Coupon-Subordinated)
("LYONs") were converted into 141,000 shares of Fremont General Corporation's
common stock. The effect of these conversions was an increase in stockholders'
equity and a decrease in long-term debt of $1.7 million. During 1998, an
aggregate $21.0 million principal amount at maturity of LYONs were converted
into 809,000 shares of Fremont General Corporation's common stock. The effect of
the conversions was an increase in stockholders' equity and a decrease in long-
term debt of $10 million. During 1997, an aggregate $266.7 million principal
amount at maturity of LYONs were converted into 10.3 million shares of Fremont
General Corporation's common stock. The effect of the 1997 conversions was an
increase in stockholders' equity and a decrease in long-term debt of $117
million.
On March 1, 1996, Fremont General Financing I, a statutory business trust
(the "Trust") and consolidated wholly-owned subsidiary of the holding company,
sold $100 million of 9% Trust Originated Preferred Securities(SM) ("the
Preferred Securities") in a public offering. The Preferred Securities represent
preferred undivided beneficial interests in the assets of the Trust. The
proceeds from the sale of the Preferred Securities were invested in 9% Junior
Subordinated Debentures of the holding company ("the Junior Subordinated
Debentures"). The $100 million Junior Subordinated Debentures are the sole asset
of the Trust. The Preferred Securities will be redeemed upon maturity of the
Junior Subordinated Debentures in 2026, subject to the election available to
Fremont General Corporation to extend the maturity up to 2045, and they may be
redeemed, in whole or in part, at any time on or after March 31, 2001 and under
certain specified circumstances. The Junior Subordinated Debentures are
subordinate and junior to all senior indebtedness of the holding company.
Payment of distributions out of cash held by the Trust, and payments on
liquidation of the Trust or the redemption of the Preferred Securities are
guaranteed by Fremont General Corporation.
Net cash used in operating activities of continuing operations was $131.9
million, $199.7 million and $18.0 million for 1999, 1998 and 1997, respectively.
Net cash used in operating activities decreased in 1999 as compared to 1998 due
mainly to an increase in claims and policy liabilities in 1999 versus a
significant decline in 1998, and an increase in the provision for loan losses
resulting from the general growth in the average financial services loan
portfolio. (See "Property and Casualty Insurance Operation -- Special Discussion
Concerning Property and Casualty Insurance Results.") Partially offsetting these
decreases in cash used in operating activities were: (i) the decrease in income
from continuing operations to a loss in 1999; (ii) an increase in premiums
receivable resulting from the increase in premiums earned in 1999; (iii) the
recognition of residual interests in three securitizations completed by the
Company in 1999; and (iv) a decrease in the provision for deferred income taxes
to a benefit in 1999 due primarily to the net loss carryover generated in 1999.
(See Note G of Notes to Consolidated Financial Statements.) Net cash used in
operating activities increased in 1998 as compared to 1997, due primarily to a
higher reduction in claims and policy liabilities and an increase in premiums
receivable and agents' balances, offset partially by an increase in net income
and an increase in the provision for deferred income taxes. The higher reduction
in claims and policy liabilities is due mainly to an increase in 1998 in
reinsurance recoverables on unpaid losses resulting from the additional excess
of loss reinsurance purchased by Fremont and which became effective January 1,
1998. (See "Results of Operations -- Property and Casualty Insurance
Operation -- Premiums.") Additionally, the higher provision for deferred income
taxes is due predominately to this higher reduction in claims and policy
liabilities.
Net cash used in investing activities was $429.4 million, $721.4 million
and $393.2 million for 1999, 1998 and 1997, respectively. The decrease in net
cash used in investing activities in 1999 as compared to 1998 results mainly
from: (i) a decrease in loan originations and bulk purchases funded, net of
receipts from
48
51
repayments and bulk sales of loans; (ii) a reduction in cash used in
acquisitions of companies since the Company did not complete an acquisition in
1999; and (iii) an increase in securities sold, matured or called, net of
purchases. The decrease in loan originations net of repayments and bulk sales is
due primarily to $2.1 billion included in bulk loan sales in 1999, comprised of
$1.4 billion of residential real estate loans sold in three securitizations and
$655 million in commercial finance loans sold through the sale of the Company's
commercial finance subsidiary. Partially offsetting these decreases in net cash
used in investing activities is an increase in short-term investments resulting
primarily from the receipt of $131 million in cash from FINOVA Capital
Corporation pursuant to the December 1999 sale of the Company's commercial
finance subsidiary, and an increase in the short-term liquidity portfolio within
the Company's thrift. The increase in net cash used in investing activities in
1998 as compared to 1997 is due mainly to increases in loan originations and
bulk purchases funded, net of repayments and a smaller decrease in short-term
investments. This was partially offset by increases in securities sold, matured
or called, net of purchases and a decrease in the purchase of subsidiaries. The
decrease in the purchase of subsidiaries occurs as the 1998 acquisition of
Unicare at $110 million in purchase price was smaller than the 1997 acquisition
of Industrial.
Net cash provided by financing activities was $546.5 million, $936.1
million, and $420.8 million in 1999, 1998 and 1997, respectively. The decrease
in net cash provided by financing activities in 1999 as compared to 1998 is due
primarily to an increase in long-term and short-term debt repayments and an
increase in deferred compensation plans, offset partially by an increase in
thrift deposits and an increase in net long-term and short-term debt proceeds.
Included in the long-term and short-term debt repayments in 1999 is a $315
million payoff of the Company's bank line of credit from the proceeds of the
issuance in March 1999 of the Senior Notes, and $564 million in long-term and
short-term debt assumed by FINOVA Capital Corporation pursuant to the December
1999 sale of the Company's commercial finance subsidiary. The increase in
long-term debt proceeds resulted mainly from the March 1999 issuance of Senior
Notes. The increase in thrift deposits was used to support the growth in the
Company's financial services portfolio. The increase in deferred compensation
plans was due mainly to the Company's common stock buyback program initiated by
the Company in July 1999 and completed in September 1999. The increase in net
cash provided by financing activities in 1998 as compared to 1997 is due mainly
to increases in short-term and long-term debt proceeds, net of repayments and an
increase in thrift deposits. These increases resulted primarily from the
financing of the general growth of the Company's financial services loan
portfolio.
The amortized cost of Fremont's invested assets were $2.31 billion and
$2.33 billion at December 31, 1999 and 1998, respectively. The modest decrease
in invested assets is due mainly to a decrease in invested assets resulting from
cash requirements within the Company's property and casualty insurance operation
and payments under various incentive compensation plans, offset partially by the
receipt of $131 million in cash from the December 1999 sale of the Company's
commercial finance subsidiary.
The Company's property and casualty premium to surplus ratio for the year
ended December 31, 1999 was 1.6 to 1, which is within industry guidelines. The
FDIC has established certain capital and liquidity standards for its member
institutions, and Fremont's thrift was in compliance with these standards as of
December 31, 1999. (See "Item 1. Business -- Regulation -- Thrift and Loan
Regulation.")
The Company believes that its existing cash, revenues from operations and
other available sources of liquidity will be sufficient to satisfy its liquidity
needs for at least the next twelve months.
IMPACT OF YEAR 2000 READINESS
In prior years, the Company discussed the nature and progress of its Year
2000 readiness plans. In late 1999 Fremont completed its remediation and testing
of those systems considered at risk for potential failure from a Year 2000
problem. As a result of its planning and implementation efforts, the Company
experienced no significant disruptions in critical information technology and
non-information technology systems and believes those systems successfully
responded to the Year 2000 date change. The Company expensed approximately $5
million in connection with remediating its systems, of which approximately $4.5
million was expensed through December 31, 1998. Fremont is not aware of any
material problems resulting from Year 2000 issues, either with its products, its
internal systems, or the products and services of third parties. The
49
52
Company will continue to monitor its critical computer applications and those of
its suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
ITEM 7. (a) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under the subheadings "Market Risk," "Property
and Casualty Insurance Operation -- Interest Rate Risk," "Financial Services
Operation -- Interest Rate Risk," and "Fremont General Corporation
(Parent-only) -- Interest Rate Risk" in the Company's Management's Discussion
and Analysis is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, including supplementary
data, are set forth in the "Index" on page 56 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
53
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the subheadings "Election of Directors,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the subheadings "Election of Directors,"
"Compensation of Directors," "Executive Officers," "Summary Compensation Table,"
"Summary Compensation Table -- Explanations," "Option/SAR Grants In Last Fiscal
Year," "Option Exercises and Year-End Option Values," "Aggregated Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values Table,"
"Employment Agreements" and "Retirement and Other Benefit Plans," in the
Company's definitive Proxy Statement for the 2000 Annual Meeting of Stockholders
is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the subheading "Principal and Management
Stockholders" in the Company's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information immediately following the captions "Election of Directors,"
"Employment Agreements, and "Certain Relationships and Related Transactions" in
the Company's definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
51
54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) and (d) FINANCIAL STATEMENTS AND SCHEDULES. Reference is made
to the "Index -- Consolidated Financial Statements and Financial Statements
Schedules -- Annual Report on Form 10-K filed as part of this Annual Report.
(a)(3) and (c) EXHIBITS.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Stock Purchase Agreement, dated as of December 7, 1999
pertaining to the acquisition of FINOVA Capital Corporation
of all the outstanding shares of Fremont Financial
Corporation (Incorporated by reference to Exhibit No. 2.1 to
Current Report on Form 8-K, as of December 20, 1999,
Commission File Number 1-8007.)
3.1 Restated Articles of Incorporation of Fremont General
Corporation. (Incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q, for the
period ended June 30, 1998, Commission File Number 1-8007.)
3.2 Certificate of Amendment of Articles of Incorporation of
Fremont General Corporation. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K,
for the fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
3.3 Amended and Restated By-Laws of Fremont General Corporation.
(Incorporated by reference to Exhibit 3.3 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.1 Form of Stock Certificate for Common Stock of the
Registrant. (Incorporated by reference to Exhibit (1) to the
Registrant's Form 8-A filed on March 17, 1993, Commission
File Number 1-8007.)
4.2 Indenture with respect to Liquid Yield Option Notes Due 2013
between the Registrant and Bankers Trust Company.
(Incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3 filed on October 1, 1993.)
4.3 Indenture among the Registrant, the Trust and First
Interstate Bank of California, a California banking
corporation, as trustee. (Incorporated by reference to
Exhibit 4.3 to the Registrant's Annual Report on Form 10-K,
for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.4 Amended and Restated Declaration of Trust among the
Registrant, the Regular Trustees, The Chase Manhattan Bank
(USA), a Delaware banking corporation, as Delaware trustee,
and The Chase Manhattan Bank, N.A., a national banking
association, as Institutional Trustee. (Incorporated by
reference to Exhibit 4.5 to the Registrant's Annual Report
on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
4.5 Preferred Securities Guarantee Agreement between the
Registrant and The Chase Manhattan Bank, N.A., a national
banking association, as Preferred Guarantee Trustee.
(Incorporated by reference to Exhibit 4.6 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.6 Common Securities Guarantee Agreement by the Registrant.
(Incorporated by reference to Exhibit 4.7 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.7 Form of Preferred Securities. (Included in Exhibit 4.5).
(Incorporated by reference to Exhibit 4.8 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
10.1(a)* Fremont General Corporation Employee Stock Ownership Plan.
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
52
55
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.1(b)* Amendment Number One to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.1(b) to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
10.1(c)* Amendment Number Two to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.1(b) to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1997,
Commission File Number 1-8007.)
10.1(d)* Amendment Number Three to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.1(c) to the Registrant's Quarterly Report on form
10-Q, for the period ended September 30, 1998, Commission
File Number 1-8007.)
10.1(e)* Amendment Number Four to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.1(d) to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
10.2* Restated Trust Agreement for Fremont General Corporation
Employee Stock Ownership Plan. and amendment (Incorporated
by reference to Exhibit 10.2 to Annual Report on Form 10-K,
for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.3(a)* Fremont General Corporation and Affiliated Companies
Investment Incentive Plan. (Incorporated by reference to
Exhibit 10.3 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.3(b)* Amendments Number One, Two and Three to the Fremont General
Corporation and Affiliated Companies Investment Incentive
Plan. (Incorporated by reference to Exhibit 10.3(b) to the
Registrant's Quarterly Report on form 10-Q, for the period
ended September 30, 1997, Commission File Number 1-8007.)
10.3(c)* Amendment Number Four to the Fremont General Corporation and
Affiliated Companies Investment Incentive Plan.
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K, for the Fiscal Year
Ended December 31, 1997, Commission File Number 1-8007.)
10.3(d)* Amendment Number Five to the Fremont General Corporation and
Affiliated Companies Investment Incentive Plan.
(Incorporated by reference to Exhibit 10.3(d) to the
Registrant's Quarterly Report on form 10-Q, for the period
ended September 30, 1998, Commission File Number 1-8007.)
10.4(a)* Fremont General Corporation Investment Incentive Program
Trust. (Incorporated by reference to Exhibit (10)(xi) to the
Registrant's Annual Report on Form 10-K, for the Fiscal Year
Ended December 31, 1993, Commission File Number 1-8007.)
10.4(b)* Amendment to the Fremont General Corporation Investment
Incentive Program Trust. (Incorporated by reference to
Exhibit 10.4 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.5(a)* Fremont General Corporation Supplemental Retirement Plan, as
restated January 1, 1997. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q, for the period ended September 30, 1997, Commission
File Number 1-8007.)
10.5(b)* Amendment Number One to the Fremont General Corporation
Supplemental Retirement Plan. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q, for the period ended March 31, 1998, Commission File
Number 1-8007.)
10.5(c)* Amendment Number Two to the Fremont General Corporation
Supplemental Retirement Plan of the Company. (Incorporated
by reference to Exhibit 10.5(b) to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31,
1998, Commission File Number 1-8007.)
53
56
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.6* Trust Agreement for Fremont General Corporation Supplemental
Retirement Plan and Fremont General Corporation Senior
Supplemental Retirement Plan and amendment. (Incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.7(a)* Fremont General Corporation Senior Supplemental Retirement
Plan, as restated January 1, 1997. (Incorporated by
reference to Exhibit 10.7 to the Registrant's Quarterly
Report on Form 10-Q, for the period ended September 30,
1997, Commission File Number 1-8007.)
10.7(b)* First Amendment to the Fremont General Corporation Senior
Supplemental. (Incorporated by reference to Exhibit 10.7(b)
to the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1998, Commission File Number
1-8007.)
10.8(a)* Fremont General Corporation Excess Benefit Plan Restated
effective as of January 1, 1997 and First Amendment dated
December 21, 1998. (Incorporated by reference to Exhibit
10.8(a) to the Registrant's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
10.8(b)* Amendment to Excess Benefit Plan of Fremont General
Corporation. (Incorporated by reference to Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.8(c)* Trust Agreement for Fremont General Corporation Excess
Benefit Plan. (Incorporated by reference to Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.9* 1997 Stock Plan and related agreements. (Incorporated by
reference to Exhibit 10.10 to Quarterly Report on Form 10-Q,
for the period ended June 30, 1997, Commission File Number
1-8007.)
10.10* The 1999 Long Term Incentive Compensation Plan of the
Company.
10.11* 1995 Restricted Stock Award Plan As Amended and forms of
agreement thereunder. (Incorporated by reference to Exhibit
4.1 to Registration Statement on Registrant's Form S-8/ S-3
File 333-17525 which was filed on December 9, 1997.)
10.12(a)* Fremont General Corporation Employee Benefits Trust
Agreement ("Grantor Trust") dated September 7, 1995 between
the Company and Merrill Lynch Trust Company of California.
(Incorporated by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
10.12(b)* November 11, 1999 Amendment to Exhibit A to the Fremont
General Corporation Employee Benefits Trust ("Grantor
Trust") dated September 7, 1995 between the Company and
Merrill Lynch Trust Company of California. (Incorporated by
reference to Exhibit 10.13 (a) to the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1999,
Commission File Number 1-8007.)
10.13(a)* Employment Agreement between the Company and James A.
McIntyre dated January 1, 1994. (Incorporated by reference
to Exhibit (10)(i) to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994, Commission
File Number 1-8007.)
10.13(b)* First Amendment to Employment Agreement between the Company
and James A. McIntyre dated August 1, 1996. (Incorporated by
reference to Exhibit 10.10 to the Registrant's Quarterly
Report on Form 10-Q, for the period ended June 30, 1997,
Commission File Number 1-8007.)
10.13(c)* Second Amendment to Employment Agreement between the Company
and James A. McIntyre dated August 8, 1997. (Incorporated by
reference to Exhibit 10.14(c) to the Registrant's Quarterly
Report on Form 10-Q, for the period ended September 30,
1997, Commission File Number 1-8007.)
10.14(a)* Employment Agreement between the Company and Louis J.
Rampino dated February 8, 1996. (Incorporated by reference
to Exhibit 10.14(a) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
54
57
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.14(b)* Employment Agreement between the Company and Wayne R. Bailey
dated February 8, 1996. (Incorporated by reference to
Exhibit 10.14 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.15* Management Continuity Agreement between the Company and
Raymond G. Meyers dated February 8, 1996. (Incorporated by
reference to Exhibit 10.15 to the Registrant's Annual Report
on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.16* 1999 Management Incentive Compensation Plan of the Company.
(Incorporated by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1998, Commission File Number 1-8007.)
10.17 Continuing Compensation Plan for Retired Directors.
(Incorporated by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
10.18(a) Amended and Restated Credit Agreement among Fremont General
Corporation, Various Lending Institutions, and The Chase
Manhattan Bank, as Administrative Agent, Dated as of August
1, 1997 and amended and restated as of June 30, 1999.
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1999.)
10.18(b) First and Second Amendments to Amended and Restated Credit
Agreement.
10.19 Credit Agreement by and among Merrill Lynch Trust Company of
California as trustee for the Fremont General Corporation
Employee Stock Ownership Trust, the Plan Committee on behalf
of the Fremont General Corporation Employee Stock Ownership
Plan, Fremont General Corporation, and First Interstate Bank
of California dated August 10, 1995. (Incorporated by
reference to Exhibit (10)(viii) to the Registrant's
Quarterly Report on Form 10-Q for the period ended September
30, 1995.)
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP Independent Auditors.
27 Financial Data Schedule.
With respect to long-term debt instruments, the Company undertakes to provide
copies of such agreements upon request by the Commission.
- ---------------
* Management or compensatory plans or arrangements.
(b) REPORT ON FORM 8-K.
None.
55
58
FREMONT GENERAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ANNUAL REPORT ON FORM 10-K
INDEX
PAGE
----
Report of Independent Auditors.............................. 57
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
1998................................................... 58
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997....................... 59
Consolidated Statements of Cash Flows for the year ended
December 31, 1999, 1998 and 1997....................... 60
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998 and 1997... 61
Notes to Consolidated Financial Statements................ 62
Schedules:
II -- Condensed Financial Information of Registrant........87
III -- Supplementary Insurance Information.................91
IV -- Reinsurance..........................................92
V -- Valuation and Qualifying Accounts.....................93
VI -- Supplemental Information Concerning Property/Casualty
Insurance Operations......................................94
All other schedules are omitted because of the absence of conditions under
which they are required or because the necessary information is provided in the
consolidated financial statements or notes thereto.
56
59
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Fremont General Corporation
We have audited the accompanying consolidated balance sheets of Fremont
General Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. Our
audits also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fremont
General Corporation and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California
March 17, 2000
57
60
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(THOUSANDS OF DOLLARS)
ASSETS
Securities available for sale at fair value:
Fixed maturity investments (cost: 1999 -- $1,458,721;
1998 -- $1,597,585).................................... $1,391,229 $1,646,772
Non-redeemable preferred stock (cost: 1999 -- $407,903;
1998 -- $489,714)...................................... 369,103 500,376
---------- ----------
Total securities available for sale............... 1,760,332 2,147,148
Loans receivable............................................ 3,060,984 2,958,176
Loans held for sale......................................... 294,639 --
Short-term investments...................................... 410,457 222,719
Residual interests in securitized loans -- at fair value.... 62,959 --
Other investments........................................... 35,045 16,890
---------- ----------
TOTAL INVESTMENTS AND LOANS....................... 5,624,416 5,344,933
Cash........................................................ 65,102 79,875
Accrued investment income................................... 44,244 44,038
Premiums receivable and agents' balances.................... 265,714 184,355
Reinsurance recoverable on paid losses...................... 19,822 15,801
Reinsurance recoverable on unpaid losses.................... 1,049,477 829,002
Deferred policy acquisition costs........................... 59,198 44,996
Costs in excess of net assets acquired...................... 157,927 164,467
Deferred income taxes....................................... 243,645 145,410
Other assets................................................ 236,167 273,157
Assets held for discontinued operations..................... 249,523 243,578
---------- ----------
TOTAL ASSETS...................................... $8,015,235 $7,369,612
========== ==========
LIABILITIES
Claims and policy liabilities:
Loss and loss adjustment expenses......................... $2,434,757 $2,298,118
Life insurance benefits and liabilities................... 118,390 136,973
Unearned premiums......................................... 180,583 119,774
Dividends to policyholders................................ 20,144 16,162
---------- ----------
TOTAL CLAIMS AND POLICY LIABILITIES............... 2,753,874 2,571,027
Reinsurance premiums payable and funds withheld............. 63,806 46,124
Other liabilities........................................... 288,017 277,938
Thrift deposits............................................. 3,423,243 2,134,839
Short-term debt............................................. 10,000 165,702
Long-term debt.............................................. 429,185 913,006
Liabilities of discontinued operations...................... 216,009 210,064
---------- ----------
TOTAL LIABILITIES................................. 7,184,134 6,318,700
Commitments and contingencies
Company-obligated mandatorily redeemable preferred
securities of subsidiary Trust holding solely Company
junior subordinated debentures............................ 100,000 100,000
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share -- Authorized:
150,000,000 shares; Issued and outstanding:
(1999 -- 70,039,000 and 1998 -- 69,939,000)............... 70,039 69,939
Additional paid-in capital.................................. 285,922 308,369
Retained earnings........................................... 533,523 620,612
Deferred compensation....................................... (89,293) (86,910)
Accumulated other comprehensive income (loss)............... (69,090) 38,902
---------- ----------
TOTAL STOCKHOLDERS' EQUITY........................ 731,101 950,912
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $8,015,235 $7,369,612
========== ==========
See notes to consolidated financial statements.
58
61
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1999 1998 1997
------------- ------------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
REVENUES
Property and casualty premiums earned................... $ 831,005 $ 552,078 $601,183
Loan interest........................................... 366,408 240,749 199,195
Net investment income................................... 169,559 192,815 149,729
Realized investment losses.............................. (3,548) (605) (1,964)
Other revenue........................................... 34,186 44,143 23,020
---------- ---------- --------
TOTAL REVENUES................................ 1,397,610 1,029,180 971,163
EXPENSES
Loss and loss adjustment expenses....................... 770,523 335,450 389,201
Policy acquisition costs................................ 191,923 123,393 115,899
Provision for loan losses............................... 25,470 11,059 12,319
Other operating costs and expenses...................... 199,401 197,064 147,715
Dividends to policyholders.............................. 36,123 4,735 4,734
Interest expense........................................ 240,454 160,767 142,402
---------- ---------- --------
TOTAL EXPENSES................................ 1,463,894 832,468 812,270
---------- ---------- --------
Income (loss) before taxes.............................. (66,284) 196,712 158,893
Income tax expense (benefit)............................ (25,907) 63,748 50,601
---------- ---------- --------
Income (loss) from continuing operations................ (40,377) 132,964 108,292
Net loss from discontinued operations................... (25,000) -- --
---------- ---------- --------
NET INCOME (LOSS)............................. $ (65,377) $ 132,964 $108,292
========== ========== ========
PER SHARE DATA:
Basic:
Income (loss) from continuing operations.............. $ (0.64) $ 2.09 $ 1.90
Net loss from discontinued operations................. (0.39) -- --
Net income (loss)..................................... (1.03) 2.09 1.90
Diluted:
Income (loss) from continuing operations.............. (0.64) 1.90 1.62
Net loss from discontinued operations................. (0.39) -- --
Net income (loss)..................................... (1.03) 1.90 1.62
See notes to consolidated financial statements.
59
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FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Income (loss) from continuing operations................. $ (40,377) $ 132,964 $ 108,292
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Change in premiums receivable and agents' balances and
reinsurance recoverable on paid losses............... (85,380) (21,241) 1,194
Change in accrued investment income.................... (206) (1,871) 3,879
Change in claims and policy liabilities................ 487 (412,526) (212,274)
Amortization of policy acquisition costs............... 191,923 123,393 115,899
Policy acquisition costs deferred...................... (206,125) (130,214) (121,004)
Net change in residual interest in securitized loans... (62,959) -- --
Deferred income tax (benefit) expense.................. (29,028) 33,583 18,360
Provision for loan losses.............................. 25,470 11,059 12,319
Depreciation and amortization.......................... 44,207 40,318 33,524
Net amortization on fixed maturity investments......... (8,571) (25,991) (20,250)
Realized investment losses............................. 3,548 605 1,964
Change in other assets and liabilities................. 35,145 50,176 40,145
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES........... (131,866) (199,745) (17,952)
INVESTING ACTIVITIES
Securities available for sale:
Purchases of securities................................ (613,480) (1,122,255) (3,736,527)
Sales of securities.................................... 622,081 865,642 3,446,093
Securities matured or called........................... 217,097 389,253 62,288
(Increase) decrease in short-term and other
investments............................................ (205,893) 275,197 469,559
Loan originations and bulk purchases funded.............. (4,229,786) (2,651,041) (980,837)
Receipts from repayments and bulk sales of loans......... 3,806,869 1,665,493 672,871
Acquisition of companies, less cash acquired............. -- (109,989) (303,033)
Purchases of property and equipment...................... (26,332) (33,727) (23,617)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES........... (429,444) (721,427) (393,203)
FINANCING ACTIVITIES
Proceeds from short-term debt............................ -- 126,995 --
Repayments of short-term debt............................ (155,702) (13,300) (5,052)
Proceeds from long-term debt............................. 497,237 298,000 274,260
Repayments of long-term debt............................. (980,045) (41,228) (170,750)
Net increase in thrift deposits.......................... 1,288,404 641,854 378,633
Annuity contract receipts................................ 699 714 1,386
Annuity contract withdrawals............................. (39,252) (47,288) (32,637)
Dividends paid........................................... (21,704) (20,476) (17,838)
Stock options exercised.................................. 407 1,453 13,129
Increase in deferred compensation plans.................. (43,507) (10,664) (20,367)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 546,537 936,060 420,764
----------- ----------- -----------
INCREASE (DECREASE) IN CASH.............................. (14,773) 14,888 9,609
Cash at beginning of year.............................. 79,875 64,987 55,378
----------- ----------- -----------
CASH AT END OF YEAR...................................... $ 65,102 $ 79,875 $ 64,987
=========== =========== ===========
See notes to consolidated financial statements.
60
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FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN RETAINED DEFERRED COMPREHENSIVE
STOCK CAPITAL EARNINGS COMPENSATION INCOME (LOSS) TOTAL
------- ---------- -------- ------------ ------------- ---------
(THOUSANDS OF DOLLARS)
Balance at January 1, 1997................... $28,093 $168,452 $419,136 $(59,193) $ 2,629 $ 559,117
Net income for 1997........................ -- -- 108,292 -- -- 108,292
Cash dividends to stockholders............. -- -- (18,895) -- -- (18,895)
Conversion of LYONs........................ 5,144 112,051 -- -- -- 117,195
Stock options exercised.................... 1,334 21,158 -- 37 -- 22,529
Shares issued or acquired for employee
benefit plans............................ -- 8,234 -- (34,207) -- (25,973)
Amortization of restricted stock........... -- -- -- 7,536 -- 7,536
ESOP shares allocated less additional
shares purchased......................... -- 617 -- 7,043 -- 7,660
Other adjustments.......................... -- 12,553 -- (7,479) -- 5,074
Net change in unrealized gain (loss) on
investments, net of deferred taxes....... -- -- -- -- 50,280 50,280
------- -------- -------- -------- --------- ---------
Balance at December 31, 1997................. 34,571 323,065 508,533 (86,263) 52,909 832,815
Net income for 1998........................ -- -- 132,964 -- -- 132,964
Cash dividends to stockholders............. -- -- (20,885) -- -- (20,885)
Two-for-one stock split.................... 34,952 (34,952) -- -- -- --
Conversion of LYONs........................ 423 9,224 -- -- -- 9,647
Stock options exercised.................... 52 1,557 -- 577 -- 2,186
Retirement of common stock................. (59) (2,691) -- 2,750 -- --
Shares acquired or allocated for employee
benefit plans............................ -- 10,157 -- (23,287) -- (13,130)
Amortization of restricted stock........... -- -- -- 9,592 -- 9,592
ESOP shares allocated...................... -- 3,379 -- 3,906 -- 7,285
Other adjustments.......................... -- (1,370) -- 5,815 -- 4,445
Net change in unrealized gain (loss) on
investments, net of deferred taxes....... -- -- -- -- (14,007) (14,007)
------- -------- -------- -------- --------- ---------
Balance at December 31, 1998................. 69,939 308,369 620,612 (86,910) 38,902 950,912
Net loss for 1999.......................... -- -- (65,377) -- -- (65,377)
Cash dividends to stockholders............. -- -- (21,712) -- -- (21,712)
Conversion of LYONs........................ 141 1,599 -- -- -- 1,740
Stock options exercised.................... -- (923) -- 1,416 -- 493
Retirement of common stock................. (41) (919) -- 960 -- --
Shares acquired or allocated for employee
benefit plans............................ -- (13,862) -- (29,472) -- (43,334)
Amortization of restricted stock........... -- -- -- 10,564 -- 10,564
ESOP shares allocated...................... -- 294 -- 5,513 -- 5,807
Other adjustments.......................... -- (8,636) -- 8,636 -- --
Net change in unrealized gain (loss)on
investments, net of deferred taxes....... -- -- -- -- (107,992) (107,992)
------- -------- -------- -------- --------- ---------
Balance at December 31, 1999................. $70,039 $285,922 $533,523 $(89,293) $ (69,090) $ 731,101
======= ======== ======== ======== ========= =========
See notes to consolidated financial statements.
61
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FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Fremont General Corporation is a nationwide insurance and financial
services holding company operating select businesses in niche markets. The
insurance business of Fremont ( "the Company") includes one of the largest
underwriters of workers' compensation insurance in the nation. The Company's
financial services business includes a thrift and loan with commercial and
residential real estate lending, interests in large syndicated commercial loans
originated and serviced by other financial institutions ("syndicated loans") and
insurance premium financing. In December 1999, the Company sold its commercial
finance subsidiary that provided commercial working capital lines of credit
("commercial finance"). Real estate lending represents over 71% of loan interest
revenues (1998 -- 68%; 1997 -- 64%) and includes both commercial and residential
lending secured by real estate located primarily in California. Syndicated and
commercial finance loans account for substantially all of the remaining loan
interest revenues.
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles which, as to the
subsidiary insurance companies, differ from statutory accounting practices
prescribed or permitted by regulatory authorities. The significant accounting
policies followed by the Company that materially affect financial reporting are
summarized below.
Consolidation: The consolidated financial statements include the accounts
and operations, after intercompany eliminations, of Fremont General Corporation
and all subsidiaries. (See Note N for the accounting treatment of discontinued
operations.)
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investments: Fixed maturity investments represent bonds and redeemable
preferred stocks that mature more than one year after the purchase date.
Non-redeemable preferred stocks are equity securities, the majority of which do
not include adjustable dividend yield provisions.
Premiums and discounts on investments in securities are primarily amortized
using the interest method over the estimated lives of the investments. The
estimated lives of such investments are determined based upon the current
expectations of future cash flows. Adjustments for other-than-temporary market
declines are recorded when determination of loss is probable and is reflected
with a write-down of amortized cost to net realizable value. Short-term
investments are carried at cost, which approximates their fair value. Realized
investment gains and losses are included as a component of revenues based on
specific identification of the investment sold.
Loans and Residual Interests in Securitizations: Loans are stated net of
unearned income and allowance for possible loan losses. The allowance is
increased by provisions charged against operations and reduced by loan amounts
charged off by management. Allowances for credit losses are based on discounted
cash flows using the loans' effective interest rate or the fair value of the
collateral for collateral dependent loans. The allowance is maintained at a
level considered adequate to provide for inherent losses on loans based on
management's evaluation of the loan portfolio. While management uses all
available information to estimate the level of the allowance for credit losses,
future additions may be necessary based on changes in the amounts and timing of
future cash flows expected due to changes in collateral values supporting loans,
general economic conditions and borrowers' financial conditions.
Management classifies loans as non-accrual when the collection of future
interest is not assured by the borrower's financial condition and the value of
underlying collateral and guarantees securing the loan. Subsequent collections
on non-accrual loans are applied as a reduction of principal. The Company's
charge-off policy is based on a monthly loan-by-loan review.
62
65
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loans in process of foreclosure, repossessed assets, and in-substance
foreclosures are included in the financial statements at the lower of cost or
estimated realizable value (net of estimated costs to sell). Estimated
realizable values are based on management's evaluation of numerous factors,
including appraisals, sales of comparable assets and estimated market
conditions.
Loans held for sale are comprised of residential real estate loans and are
stated at the lower of aggregate amortized cost or market. Market value is based
on market quotes for such loans.
When the Company sells its residential loan receivables into
securitizations, it retains a residual interest in the securitized loans. The
residual interest that the Company retains represents the right to receive
certain future cash flows which are generally equal to the value of the
principal and interest to be collected on the loans in excess of: (i) the
principal and interest to be paid on the securities sold through a
securitization trust to third party investors; and (ii) various contractual net
servicing fees and other expenses. The residual interests that the Company
retains are carried at estimated fair value. Since active market quotes are
generally not available for residual interests, the Company determines fair
value by computing the present value of the estimated net cash flows retained,
using the dates that such cash flows are expected to be released to the Company
(the cash-out method), at a discount rate that management considers to be
commensurate with the risks associated with the cash flows. The Company
recognizes no initial gain on the residual interests it retains above the
carrying costs of the loans sold into a securitization and recognizes the
investment income on the residual interest. The carrying costs include direct
and indirect origination costs.
The Company also sells certain of its loans on a cash basis wherein the
buyer acquires all future rights to the loans sold with no recourse to the
Company. Gains and losses on these whole loan sales are recognized at the date
of settlement and are based upon the difference between the cash received for
the loans and the Company's carrying cost of the loans.
Furniture and Equipment: Furniture and equipment are included in other
assets and are stated at cost, less accumulated depreciation. Leasehold
improvements are amortized over the terms of the lease. Generally, depreciation
is computed by the straight-line method over periods ranging from two to twelve
years.
Premium Income: Revenues from property and casualty premiums are recognized
proportionately over the terms of the related policies. Direct property and
casualty insurance premiums earned but not billed at the end of each accounting
period are estimated and accrued, and differences between such estimates and
final billings are included in current operations. Premiums receivable and
agents' balances and reinsurance recoverable on paid and unpaid losses include
allowances for doubtful accounts of $16,243,000 and $14,660,000 at December 31,
1999 and 1998, respectively.
Loss and Loss Adjustment Expenses and Reinsurance Recoverables on Unpaid
Losses: The estimated liabilities for loss and loss adjustment expenses ("loss
reserves") include the accumulation of estimates for losses and claims reported
prior to the balance sheet dates, estimates (based primarily on projections of
historical developments) of claims incurred but not reported and estimates of
expenses for investigating and adjusting all incurred and unadjusted claims.
Amounts reported are estimates of the ultimate costs of settlement, net of
subrogation and salvage recoveries, which are necessarily subject to the impact
of future changes in economic and social conditions. Management believes that,
given the inherent variability in any such estimate, the recorded loss reserves
are within a reasonable and acceptable range of adequacy. Loss reserves are
continually monitored and reviewed, and as settlements are made or reserves
adjusted, differences are included in current operations.
Reinsurance recoverables on unpaid losses represent estimates of that
portion of the estimated liabilities for loss and loss adjustment expenses that
will be recovered after the balance sheet date from reinsurers under contracts
of reinsurance in place for current and prior years. Similar to gross loss and
loss adjustment expenses, amounts reported for reinsurance recoverables on
unpaid losses are estimates of the ultimate amounts to be recovered from
reinsurers after the balance sheet date, and are necessarily subject to the
impact
63
66
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of future changes in economic and social conditions, as well as other factors.
Management believes that, given the inherent variability in any such estimate,
the aggregate reinsurance recoverables on unpaid losses are within a reasonable
and acceptable range of adequacy. Reinsurance recoverable estimates are
continually monitored and reviewed, and as recoveries are made or estimates
adjusted, any differences are included in current operations.
Included in the loss and loss adjustment expense liability recorded on the
consolidated balance sheet at December 31, 1999 and 1998 is $64,742,000 and
$80,547,000, respectively, of workers' compensation accident and health
permanent disability and death reserves which have been discounted at 5%. The
Company discounts permanent disability loss reserves for both statutory
accounting practices and generally accepted accounting principles in those
states where discounting is provided for on a statutory basis.
Unearned Premiums: Property and casualty insurance unearned premiums are
calculated using the monthly pro rata basis.
Life Insurance Benefits and Liabilities: Policyholder contract liabilities
for universal life and investment-type products represent the premiums received
plus accumulated interest, less mortality and other administrative charges under
the contracts and before applicable surrender charges. Policy benefits and
claims that are charged to expense include benefit claims incurred in excess of
related policy account balances. (See Note F.)
Deferred Policy Acquisition Costs: Commissions, premium taxes and certain
sales and underwriting expenses are capitalized and amortized as premiums are
earned over the terms of the related property and casualty insurance policies.
Anticipated investment income is considered in determining if premium
deficiencies exist.
Dividends to Policyholders: Dividends, if applicable, to policyholders on
workers' compensation insurance policies are accrued during the period in which
the related premiums are earned.
Thrift Deposits: Thrift deposits consist of certificates of deposit at the
Company's California-chartered thrift and loan subsidiary. Such balances are
credited with interest at rates ranging from 2.57% to 8.68% at December 31,
1999. The estimated fair value of the thrift deposits was $3,406,382,000 at
December 31, 1999.
Intangibles: The excess of the costs of acquisitions over net assets
acquired (net of accumulated amortization: 1999 -- $34,126,000;
1998 -- $28,282,000) is being amortized over various periods ranging primarily
from 7 to 25 years, which represents the estimated life of the intangible assets
associated with such acquisitions. Additionally, the trade names acquired in the
acquisitions of Industrial Indemnity Holdings, Inc. and Casualty Insurance
Company (net of accumulated amortization: 1999 -- $5,556,000; 1998 --
$3,635,000) are being amortized over 40 years. The carrying values of intangible
assets, as well as other long-lived assets, are reviewed for impairment if
changes in the facts and circumstances indicate potential impairment of their
carrying values. Any impairment determined is recorded in the current period and
is measured by comparing the discounted cash flows of the related business
operations to the appropriate carrying values. (See Note B regarding intangibles
related to acquisitions.)
Credit Risk: Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments,
fixed maturity securities, preferred stocks, real estate and syndicated loans
and reinsurance recoverables. The Company places its temporary cash investments
with high credit quality financial institutions and limits the amounts of credit
exposure to any one financial institution. Concentrations of credit risk with
respect to investments in fixed maturities, preferred stocks and syndicated
loans are limited due to the large number of such investments and their
distribution across many different industries and geographic regions.
Concentration of credit risk with respect to residential real estate loans is
limited due to the large number of borrowers; however, approximately half of
these loans are from borrowers within the state of California. While the Company
attempts to limit the concentration of credit risk for commercial real estate
loans by generally limiting the size of its net loan originations to a range
between
64
67
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$1 million and $15 million for each loan transaction, at December 31, 1999 and
1998, there were 16 and 11 loans, respectively, each with loan balances in
excess of $15 million. To minimize its exposure to significant losses from
reinsurance insolvencies, the Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk arising from similar
geographic regions, activities, or economic characteristics of the reinsurers.
As of December 31, 1999, Gerling Global Reinsurance Corporation of America,
Reliance Insurance Company, Great Southern Insurance Company and United States
Fire Insurance Company were the only reinsurers that accounted for more than 10%
of total reinsurance recoverables on paid and unpaid losses. The remaining
reinsurance recoverables were spread over 189 reinsurers.
Fair Values of Financial Instruments: The Company uses various methods and
assumptions in estimating its fair value disclosures for financial instruments.
For fixed maturity investments and preferred stocks, fair values are determined
from certain valuation services, as well as from quoted market prices. Loans
receivable with variable rates, as well as thrift deposits for passbook and
money market type accounts, are deemed to be at fair value. The fair values of
thrift certificates of deposits, fixed rate real estate loans and other fixed
rate loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for similar accounts or loans to borrowers with
similar credit ratings.
For short-term debt, the carrying amount of the Company's borrowings
approximates fair value. The fair value of the Company's long-term debt and
mandatorily redeemable preferred securities of a subsidiary Trust is based on
quoted market prices for securities actively traded. For long-term debt not
actively traded, and for bank borrowings, the fair value is estimated using
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1999 are summarized in the following table:
CARRYING ESTIMATED
AMOUNT FAIR VALUE
---------- ----------
(THOUSANDS OF DOLLARS)
ASSETS
Fixed maturity investments (Note C)......................... $1,391,229 $1,391,229
Non-redeemable preferred stock (Note C)..................... 369,103 369,103
Loans receivable (Note D)................................... 3,060,984 3,045,046
Loans held for sale (Note A)................................ 294,639 305,600
Residual interests in securitized loans (Note D)............ 62,959 62,959
LIABILITIES
Thrift deposits (Note A).................................... 3,423,243 3,406,382
Short-term debt (Note H).................................... 10,000 10,000
Long-term debt (Note I)..................................... 429,185 345,757
Company-obligated mandatorily redeemable preferred
securities of subsidiary Trust holding solely Company
junior subordinated debentures (Note J)................... 100,000 58,750
Insurance related financial instruments, other than those classified as
investment contracts, are exempt from fair value disclosure requirements. The
carrying amount of reinsurance paid recoverables approximates their fair value
as they are expected to be realized within one year.
Reclassifications: Certain 1998 and 1997 amounts have been reclassified to
conform to the 1999 presentation.
65
68
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B -- DISPOSITION AND ACQUISITIONS
On December 20, 1999, the Company sold its commercial finance subsidiary,
Fremont Financial Corporation ("FFC"), to FINOVA Capital Corporation, a
subsidiary of The FINOVA Group, Inc. The selling price was $708 million in cash
including the refinancing and assumption of existing debt. The sale resulted in
a $10 million gain before taxes that is included in other revenue in the
Company's consolidated statement of operations for the year ended December 31,
1999. At date of sale, FFC had $701 million of assets, year-to-date revenues of
$82 million and $9 million of income before taxes. The operating results of FFC
were consolidated until the date of the sale.
On September 1, 1998, the Company acquired UNICARE Specialty Services,
Inc., ("Unicare") the workers' compensation insurance subsidiary of WellPoint
Health Networks Inc., for $110 million in cash. At acquisition date, Unicare's
assets approximated $424 million, including $348 million in investment
securities. Liabilities assumed approximated $333 million, including $293
million of loss reserves. The purchase price included $19 million of costs in
excess of net assets acquired that is being amortized over 25 years. Unicare's
operating results are included in the Company's consolidated statement of
operations from the date of acquisition.
On August 1, 1997, the Company acquired Industrial Indemnity Holdings, Inc.
("Industrial") from Talegen Holdings, Inc., a subsidiary of Xerox Corporation
("Talegen"). Industrial specializes in underwriting workers' compensation
insurance with a strong presence in the western United States dating back over
70 years. The acquisition was treated as a purchase for accounting purposes. The
adjusted purchase price paid by the Company consisted of $355 million in cash
and $10 million in acquisition costs bringing the total cost of the acquisition
to $365 million. Additionally, pursuant to the terms of the acquisition
agreement, the Company paid off a $79 million outstanding debt obligation that
Industrial owed to Talegen. The purchase price included $93 million of costs in
excess of net assets acquired that is being amortized over 25 years and
approximately $62 million of an intangible asset for the trade name that is
being amortized over 40 years.
The operating results of Industrial are included in the Company's
consolidated statement of operations from the date of acquisition. If the
acquisition of Industrial had occurred January 1, 1997, the pro forma effects
would have increased revenues and net income by $194 million and $6 million,
respectively. The pro forma effects on per share data would have increased basic
and diluted earnings per share by $0.10 and $0.09, respectively. The pro forma
results are not intended to be indicative of the consolidated results of
operations that would have been reported if the acquisition had occurred at the
dates indicated or of the consolidated results of future operations.
66
69
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C -- INVESTMENTS
The amortized cost and fair values of the fixed maturity investments and
non-redeemable preferred stock by major category are summarized in the following
table:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
At December 31, 1999
United States Treasury securities and
obligations of other US government
agencies and corporations............... $ 64,601 $ 53 $ 187 $ 64,467
Obligations of states and political
subdivisions............................ 139,559 154 7,575 132,138
Redeemable preferred stock................. 80,127 -- 6,327 73,800
Mortgage-backed securities................. 344,649 1,780 19,436 326,993
Corporate securities
Banks................................... 136,401 -- 10,405 125,996
Financial............................... 179,600 605 13,582 166,623
Industrial.............................. 513,784 7,011 19,583 501,212
---------- ------- -------- ----------
Total.............................. 1,458,721 9,603 77,095 1,391,229
Non-redeemable preferred stock............. 407,903 3,160 41,960 369,103
---------- ------- -------- ----------
Total.............................. $1,866,624 $12,763 $119,055 $1,760,332
========== ======= ======== ==========
At December 31, 1998
United States Treasury securities and
obligations of other US government
agencies and corporations............... $ 87,615 $ 1,773 $ 60 $ 89,328
Obligations of states and political
subdivisions............................ 240,067 7,155 -- 247,222
Redeemable preferred stock................. 38,035 271 -- 38,306
Mortgage-backed securities................. 355,747 14,553 1,054 369,246
Corporate securities
Banks................................... 79,398 4,595 -- 83,993
Financial............................... 195,937 6,788 4,101 198,624
Transportation.......................... 27,211 2,938 -- 30,149
Industrial.............................. 573,575 34,751 18,422 589,904
---------- ------- -------- ----------
Total.............................. 1,597,585 72,824 23,637 1,646,772
Non-redeemable preferred stock............. 489,714 17,185 6,523 500,376
---------- ------- -------- ----------
Total.............................. $2,087,299 $90,009 $ 30,160 $2,147,148
========== ======= ======== ==========
67
70
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value of fixed maturity investments at December
31, 1999 by contractual maturity, are summarized in the following table:
AMORTIZED FAIR
COST VALUE
---------- ----------
(THOUSANDS OF DOLLARS)
One year or less............................................ $ 57,793 $ 57,670
Over 1 year through 5 years................................. 126,604 131,546
Over 5 years through 10 years............................... 138,990 135,002
Over 10 years............................................... 790,685 740,018
Mortgage-backed securities.................................. 344,649 326,993
---------- ----------
Totals............................................ $1,458,721 $1,391,229
========== ==========
The contractual maturities in the foregoing table may differ from actual
maturities because certain borrowers have the right to sell or repay obligations
with or without call or prepayment penalties.
Proceeds from sales of securities and related realized gains and losses are
summarized in the following table:
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- ----------
(THOUSANDS OF DOLLARS)
Proceeds from sales....................................... $622,081 $865,642 $3,446,093
Gross realized gains...................................... 10,347 7,469 51,413
Gross realized losses..................................... 13,895 8,074 53,377
Investment income by major category of investments is summarized in the
following table:
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
Fixed maturities........................................... $126,606 $144,158 $111,798
Non-redeemable preferred stock............................. 34,860 34,976 29,343
Short-term................................................. 10,009 16,061 10,804
Other...................................................... 1,864 324 299
-------- -------- --------
173,339 195,519 152,244
Investment expenses........................................ 3,780 2,704 2,515
-------- -------- --------
Net investment income............................ $169,559 $192,815 $149,729
======== ======== ========
The Company relies on external rating agencies to establish quality ratings
for its investments. The Company only purchases securities that are rated
investment grade by at least one rating agency, but may hold investments that
are subsequently downgraded to non-investment grade. As of December 31, 1999,
all investments held by the Company are current as to principal and interest,
with no investment in default. Included in investments is $26,775,000 of fixed
maturity investments and $78,338,000 of non-redeemable preferred stock of
Citigroup Inc. and its subsidiaries, that in total exceeds 10% of stockholders'
equity at
68
71
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1999. Using Standard and Poor's, Moody's, Duff and Phelps and
Fitch's rating services, the quality mix of the Company's investment portfolio
at December 31, 1999 is summarized in the following table:
AAA (including US government obligations)................... 30%
AA.......................................................... 15
A........................................................... 34
BBB......................................................... 20
BB.......................................................... 1
---
100%
===
The par value of fixed maturity investments, non-redeemable preferred stock
and cash totaling $1,367,451,000 at December 31, 1999 were on deposit with
regulatory authorities in compliance with legal requirements related to the
insurance operations.
The Company currently holds no derivative financial instruments.
NOTE D -- LOANS RECEIVABLE AND RESIDUAL INTERESTS IN SECURITIZATIONS
Loans receivable consist of commercial and residential real estate loans,
syndicated loans and insurance premium notes receivable. Commercial finance
loans pertained to a subsidiary sold in December 1999. (See Note B.) Commercial
and residential real estate loans are secured by real property. Syndicated loans
represent the Company's interest in large commercial loans originated and
serviced by other financial institutions. Insurance premium notes receivable are
collateralized by security interests in return premiums. Commercial finance
loans were asset-based loans that were secured by the borrowers' eligible trade
accounts receivable, inventory, machinery and equipment, and real estate.
Commercial real estate loans represent loans secured primarily by first
mortgages on income-producing properties such as office, retail, industrial,
multi-family and mixed-use properties. Loan terms are generally for up to ten
years. Residential real estate loans have loan terms for up to thirty years and
are secured by single-family residences. Finance charges are recognized as
revenue over the life of the loan using the interest method. Loan origination
fees and the related costs are deferred and amortized over the life of the loan
using the interest method. The loans are net of allowance for possible loan
losses of $50,588,000 and $40,097,000 at December 31, 1999, and 1998,
respectively. Included in loans receivable are real estate loans which have been
placed on non-accrual status totaling $30,462,000 and $20,851,000 at December
31, 1999 and 1998, respectively. Real estate acquired in foreclosure, which is
classified under other assets, totaled $3,720,000 and $3,848,000 at December 31,
1999 and 1998, respectively, and is recorded at the lower of the carrying value
of the loan or the estimated fair value less disposal costs.
Syndicated loans are variable rate senior loans originated on both a
revolving and fixed-term basis, generally not in excess of seven years. These
loans are secured by substantially all of the assets of the borrower, and, if
applicable, of its subsidiaries. The loans are net of allowance for possible
loan losses of $5,344,000 and $6,798,000 at December 31, 1999 and 1998,
respectively. There were no syndicated loans on non-accrual status at either
December 31, 1999 or 1998.
Insurance premium notes receivable mature within one year. Interest income
on these notes is recognized using the rule-of-seventy-eight method which
results in approximately level interest rate yield over the life of the notes.
Commercial finance loans were stated at the unpaid balance of cash advanced
net of allowance for possible loan losses of $8,983,000 at December 31, 1998.
The amount of cash advanced under these loans was based on stated percentages of
the borrowers' eligible collateral. Interest on the commercial loans was
computed on the basis of daily outstanding balances times the contractual
interest rate and was reported as
69
72
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
earned income on the accrual method. Total loan balances on which income
recognition had been suspended was $1,669,000 at December 31, 1998.
In 1999, the Company securitized $1,411,383,000 of its residential real
estate loans in three separate transactions. The remaining principal balance
outstanding of the loans sold into these securitizations was $1,288,832,000 as
of December 31, 1999, and which carried a weighted average coupon rate of 9.94%.
The following are the primary assumptions used in the valuation of the Company's
residual interests as of December 31, 1999:
Expected weighted average annual constant prepayment rate... 31.6%
Expected weighted average cumulative net loss assumption.... 3.42%
Weighted average discount rate used......................... 16.0%
Weighted average remaining life of residual interests....... 2.0 years
Activity in the allowance for possible loan losses is summarized in the
following table:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
(THOUSANDS OF DOLLARS)
Balance, beginning of year........................... $ 56,346 $44,402 $37,747
Provision for loan losses............................ 25,470 11,059 12,319
Recoveries........................................... 243 839 1,294
Charge-offs.......................................... (11,300) (3,419) (6,958)
Reserves (sold) established with portfolio
(dispositions) acquisitions........................ (14,265) 3,465 --
-------- ------- -------
Balance, end of year................................. $ 56,494 $56,346 $44,402
======== ======= =======
At December 31, 1999, the recorded investment in loans that are considered
to be impaired was $30,462,000 all of which were on a non-accrual basis. The
Company's policy is to consider a loan impaired when, based on current
information and events, it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Evaluation of a loan's collectibility is based on the present value
of expected cash flows or the fair value of the collateral, if the loan is
collateral dependent. As a result of charge-offs, these impaired loans do not
necessarily have a related specific reserve for credit losses allocated to them.
However, $30,462,000 of loans considered impaired do have an allowance that
totaled $3,714,000. The average net investment in impaired loans was
$29,703,000, $25,373,000 and $27,391,000 for 1999, 1998 and 1997, respectively.
Interest income of $999,000 has been recognized on the cash basis of accounting
on loans classified as impaired during the year ended December 31, 1999.
70
73
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The carrying amounts at December 31, 1999 and 1998 and estimated fair
values at December 31, 1999 of loans receivable are summarized in the following
table:
1999 1998
------------------------ ----------
CARRYING ESTIMATED CARRYING
AMOUNT FAIR VALUE AMOUNT
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Commercial real estate loans........................... $2,351,595 $2,321,789 $1,575,152
Residential real estate loans.......................... 377,875 391,743 541,758
Syndicated loans....................................... 331,705 331,705 362,238
Premium finance loans.................................. 64,596 64,596 58,225
Commercial finance loans............................... -- -- 493,804
---------- ---------- ----------
3,125,771 3,109,833 3,031,177
Purchase discount and deferred fees.................... (8,293) (8,293) (16,655)
Allowance for possible loan losses..................... (56,494) (56,494) (56,346)
---------- ---------- ----------
Loans receivable, net.................................. $3,060,984 $3,045,046 $2,958,176
========== ========== ==========
NOTE E -- CLAIM LIABILITIES FOR LOSS AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances for the Company's claim liabilities for loss and loss
adjustment expenses ("LAE") on a net-of-reinsurance basis to the gross amounts
reported in the Company's consolidated balance sheets.
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Reserves for loss and LAE, net of reinsurance
recoverable,
at beginning of year................................. $1,597,116 $1,809,395 $1,010,886
Incurred loss and LAE:
Provision for insured events of the current year, net
of reinsurance.................................... 677,756 348,897 441,524
Increase (decrease) in provision for insured events
of prior years, net of reinsurance................ 92,767 (13,447) (52,323)
---------- ---------- ----------
Total incurred loss and LAE.................. 770,523 335,450 389,201
Payments:
Loss and LAE, net of reinsurance, attributable to
insured events of:
Current year...................................... (296,039) (245,177) (253,323)
Prior years....................................... (576,320) (590,197) (386,469)
---------- ---------- ----------
Total payments............................... (872,359) (835,374) (639,792)
---------- ---------- ----------
Subtotal..................................... 1,495,280 1,309,471 760,295
Liability for loss and LAE for companies acquired
during the year...................................... -- 287,645 1,049,100
---------- ---------- ----------
Reserves for loss and LAE, net of reinsurance
recoverable,
at end of year....................................... 1,495,280 1,597,116 1,809,395
Reinsurance recoverable for loss and LAE, at end of
year................................................. 939,477 701,002 353,928
---------- ---------- ----------
Reserves for loss and LAE, gross of reinsurance
recoverable, at end of year.......................... $2,434,757 $2,298,118 $2,163,323
========== ========== ==========
71
74
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1999, the Company increased its net loss and LAE reserves for 1998 and
prior accident years by $92.8 million. The increase resulted primarily from the
combined effect of a lower than expected level of reinsurance recoveries than
had been actuarially predicted, coupled with the effect on the 1998 accident
year of the Company's recognition of the settlement agreement with Reliance
Insurance Company ("Reliance") under a reinsurance treaty that expired December
31, 1999. With regard to the lower than expected reinsurance recoveries, in the
third and fourth quarters of 1999, the Company lowered its estimate of
reinsurance recoverables on unpaid losses for the 1998 accident year by
approximately $49 million. This re-estimation was in recognition of a lower than
actuarially predicted level of incurred losses ceded under certain reinsurance
contracts that were in effect from January 1, 1998 through December 31, 1999.
These reinsurance contracts reduced the Company's net loss exposure from a
historical retention of $1 million per occurrence to $50,000 per occurrence.
Prior to entering into these reinsurance agreements the Company had estimated
its expected gross incurred loss and LAE. Estimates of net incurred loss and LAE
were then established utilizing actuarial indications based upon historical
experience and other factors considered appropriate to forecast incurred losses
to be ceded under these reinsurance agreements. During the third quarter of 1999
and pursuant to its regular review of net incurred loss and LAE estimates, the
Company observed a deterioration in these net loss and LAE estimates as compared
to the actuarial predictions. To assist the Company in its determination of net
loss and LAE reserve estimates, the Company retained outside actuarial
consultants who performed an independent actuarial analysis of the Company's net
loss and LAE reserves as of June 30, 1999. These actuarial indications were
reaffirmed at September 30, 1999 and further re-evaluated by the independent
outside actuaries at December 31, 1999, which resulted in the Company's
recognition of the deterioration in reinsurance recoverables in the third and
fourth quarters of 1999. Based on the Company's review of these actuarial
indications and consequent recognition of the deterioration in estimated
reinsurance recoverables on the 1998 accident year, the Company believes its
estimates of reinsurance recoverables on unpaid losses are an adequate provision
for loss recoveries under reinsurance agreements. While the upward development
in the Company's estimates of net loss and LAE reserves during calendar year
1999 was comprised primarily of adjustments to reinsurance recoverables on
unpaid losses, the Company has observed for its primary regions relative
stability in its workers' compensation gross loss and allocated loss adjustment
expense ratios derived from the actuarial indications of reserves for loss and
allocated loss adjustment expense, gross of reinsurance recoverables.
Also contributing to the increase in 1999 to the Company's net loss and LAE
reserves for the 1998 and prior accident years is $26 million in lower
reinsurance recoverables on the 1998 accident year pursuant to a settlement
agreement entered into February 28, 2000 between the Company and Reliance under
a reinsurance contract that was in effect from January 1, 1998 through December
31, 1999. The reinsurance treaty afforded the Company coverage for loss and
certain loss adjustment expense that exceeded $100,000 per occurrence, up to a
maximum of $150,000. Under the settlement agreement, the Company is to receive
in excess of $100 million in cash and will no longer have any involvement with
Reliance under the reinsurance contract. The Company evaluated the adequacy of
the expected cash settlement under the agreement through an independent
actuarial analysis of the expected loss and allocated loss adjustment expenses
to be paid under the Reliance reinsurance contract after December 31, 1999. A
range of expected loss payments was estimated and then discounted to a present
value basis using investment yields considered appropriate. The $26 million
decrease in reinsurance recoverables represents primarily the adjustment
necessary to bring the estimated reinsurance recoverables relating to the 1998
accident year under the reinsurance contract with Reliance to a present value
basis at December 31, 1999.
In 1998, Fremont decreased its loss and LAE reserves for 1997 and prior
accident years by $13.4 million. This decrease resulted primarily from the
combined effect of a decrease to 1997 and prior accident year loss and LAE
reserves under certain assigned risk plans that the Company is required to
participate in, and an increase in the discount established for certain accident
and health permanent disability and death reserves.
72
75
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1997, the Company decreased its loss and LAE reserves for 1996 and prior
accident years by $52.3 million. This reserve decrease relates primarily to loss
and LAE reserves on workers' compensation policies written in the Company's
midwest region and represents the recognition of a decrease in the frequency of
reported claims on the 1996 and 1995 accident years. Additionally, the Company's
management believes that its implementation of more effective claims handling
procedures in the midwest region has contributed to the reduction in LAE
reserves during calendar year 1997 and relating to the 1996 and prior accident
years. 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 and a subjective evaluation of external factors.
NOTE F -- REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that
may arise from catastrophes or other events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liability associated with
the reinsured policy.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. The failure of reinsurers to honor their obligations could result
in losses to the Company; consequently, allowances are established for amounts
deemed uncollectible. The Company evaluates the financial condition and economic
characteristics of its reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
The effect of ceded reinsurance on property and casualty premiums are
summarized in the following table:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------- -------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
---------- ---------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Direct.......................... $1,145,104 $1,084,454 $750,301 $717,021 $611,211 $591,506
Assumed......................... 9,362 9,641 11,848 13,040 19,647 23,650
Ceded........................... 256,833 263,090 190,473 177,983 9,766 13,973
---------- ---------- -------- -------- -------- --------
Net property and
casualty premiums... $ 897,633 $ 831,005 $571,676 $552,078 $621,092 $601,183
========== ========== ======== ======== ======== ========
The effect of ceded reinsurance on loss and loss adjustment expenses
("LAE") was a decrease in expenses of $344,699,000, $371,378,000 and $14,167,000
for the three years ended December 31, 1999, 1998 and 1997, respectively. The
effect of ceded reinsurance on loss and LAE was lower in 1999 as compared to
1998 due primarily to the combined effect of the Company's reduction of
approximately $49 million in its estimate of reinsurance recoverables on unpaid
losses for the 1998 accident year, as well as a reduction in loss and LAE ceded
of $75 million from the Company's recognition of a settlement agreement under a
reinsurance contract (see discussion following). The re-estimation of
reinsurance recoverables was in recognition of a lower than actuarially
predicted level of incurred losses ceded under certain reinsurance contracts
that were in effect from January 1, 1998 through December 31, 1999. (See Note
E.)
On February 28, 2000, the Company reached an agreement with Reliance
Insurance Company ("Reliance") to settle all obligations between the Company and
Reliance under a contract of reinsurance which was in effect for the period
January 1, 1998 through December 31, 1999. Under the terms of this agreement,
the Company will receive in excess of $100 million in cash and will no longer
have any involvement with the Reliance workers' compensation reinsurance
programs brokered for Reliance by Unicover Managers, Inc. In recognition of this
settlement, the Company recorded a charge to its operating results for the year
ended December 31, 1999 of approximately $48.8 million after taxes ($75 million
before
73
76
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
taxes), consisting primarily of the adjustment necessary to bring the estimated
unpaid reinsurance recoverables under the reinsurance contract to a present
value basis at December 31, 1999. The Company anticipates this charge to be
mitigated through future investment income earned on the cash to be received
under the agreement. The cash payment is expected to be made to the Company on
or shortly after the effective date of the agreement, which is anticipated by
the end of the first quarter of 2000.
The Company entered into reinsurance and assumption agreements with a
reinsurer whereby substantially all of the Company's universal life insurance
and annuity business was ceded to the reinsurer effective December 31, 1995, and
all the annuity business was ceded to the reinsurer effective January 1, 1996.
As a result of these agreements, the Company's life insurance operations have
been substantially reduced with no significant gain or loss recorded. Included
in life insurance benefits and liabilities and reinsurance recoverable on unpaid
losses in the accompanying balance sheet is approximately $110,000,000 related
to one of the reinsurance contracts that continues to be on a co-insurance
basis.
NOTE G -- INCOME TAXES
The major components of income tax expense (benefit) are summarized in the
following table:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
(THOUSANDS OF DOLLARS)
Federal income tax
Current................................................... $ -- $27,314 $29,225
Deferred.................................................. (29,028) 33,583 18,360
-------- ------- -------
(29,028) 60,897 47,585
State income tax............................................ 3,121 2,851 3,016
-------- ------- -------
Income tax expense (benefit).............................. $(25,907) $63,748 $50,601
======== ======= =======
A reconciliation of the effective federal tax rates in the consolidated
statements of operations with the prevailing federal income tax rate of 35% is
summarized in the following table:
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- ------- -------
(THOUSANDS OF DOLLARS)
Federal income tax at 35%................................... $(23,199) $68,849 $55,613
Effects of:
Dividends received deduction.............................. (9,391) (8,857) (5,654)
Dividends in stock-based deferred compensation............ (927) (795) (785)
Amortization of costs in excess of net assets acquired.... 3,292 3,085 1,810
Reduction in prior years' tax liabilities................. -- -- (2,336)
Other..................................................... 1,197 (1,385) (1,063)
-------- ------- -------
Federal income tax expense (benefit)........................ $(29,028) $60,897 $47,585
======== ======= =======
Net payments made (net cash received) for federal and state income taxes
were $12,132,000, $188,000, and $(7,876,000) for 1999, 1998 and 1997,
respectively. Included in 1999 tax payments is $9.1 million paid in settlement
of an Internal Revenue Service ("IRS") review of tax losses carried back against
prior years' taxes paid. The majority of the amount paid was offset by an
increase to the Company's tax effect of its net loss carryover as determined by
the IRS in its review and is included in the Company's total tax effect of net
loss carryovers of $80,536,000. Additionally, there was $1.4 million paid to the
California Franchise Tax Board in 1999 in resolution of certain ongoing tax
matters. These tax settlements had been accrued in prior years.
74
77
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The deferred income tax balance includes the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and for income tax purposes. The components of the Company's
deferred tax assets as of December 31, 1999 and 1998 are summarized in the
following table:
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(THOUSANDS OF DOLLARS)
Discount on liabilities for loss and loss adjustment
expenses.................................................. $111,843 $106,120
NOL carryover............................................... 80,536 --
Net unrealized loss on investments.......................... 37,202 --
Allowance for possible loan losses and other doubtful
accounts.................................................. 24,557 25,861
Accrued expenses............................................ 22,407 29,256
Unearned premiums........................................... 16,269 12,424
Employee benefit expenses................................... 9,818 19,171
Dividends to policyholders.................................. 6,290 3,099
Other, net.................................................. 2,312 3,345
-------- --------
Deferred income tax asset amounts......................... 311,234 199,276
Deferred policy acquisition costs........................... (20,574) (15,568)
Net unrealized gain on investments.......................... -- (20,947)
Earned but unbilled premiums................................ (17,406) (10,390)
Residual interests in securitized loans..................... (15,886) --
Deferred loan origination costs............................. (10,941) (5,526)
Accrual of market discount.................................. (2,782) (1,435)
-------- --------
Deferred income tax liability amounts..................... (67,589) (53,866)
-------- --------
Net deferred income tax asset..................... $243,645 $145,410
======== ========
The Company's principal deferred tax assets arise due to the discounting of
liabilities for loss and loss adjustment expenses ("loss reserves") which delays
a portion of the loss reserve deduction for income tax purposes, the net
operating loss ("NOL") carryover, the net unrealized loss on investments, the
provision for doubtful loan accounts, the accrual of dividends to policyholders,
a portion of the unearned premiums, certain accrued expenses, and certain
employee benefit expenses. The majority of the Company's NOL carryover was
generated in 1999, resulting primarily from the losses recognized in the
Company's property and casualty insurance segment. (See Notes E and F.)
Additional NOL carryover amounts were generated through both amendments of prior
years' tax returns, as well as the previously described settlement with the IRS
in its review of certain tax losses carried back against prior years' tax
returns filed by the Company. At December 31, 1999, the Company's net loss
carryforwards totaled $230.1 million for income tax purposes that expire in
years 2015 through 2019.
In the Company's opinion, the deferred tax assets will be fully realized
and no valuation allowance is necessary because the Company has the ability to
generate sufficient future taxable income in both the insurance and financial
services segments to realize the tax benefits.
75
78
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H -- SHORT-TERM DEBT
Short-term debt is summarized in the following table:
DECEMBER 31,
------------------
1999 1998
------- --------
(THOUSANDS OF
DOLLARS)
Federal Home Loan Board of San Francisco ("FHLB") borrowings
of a subsidiary (weighted average interest rate;
1999 -- 5.49%; 1998 -- 4.83%);............................ $10,000 $115,000
Asset backed commercial paper facility of a subsidiary,
(weighted average interest rate, 1998 -- 5.30%)........... -- 24,985
Current portion of long-term debt........................... -- 25,717
------- --------
$10,000 $165,702
======= ========
At December 31, 1999, the thrift and loan subsidiary had a borrowing
capacity with the FHLB of $364 million. This subsidiary has pledged certain
loans to secure any borrowings which are available at varying rates and terms.
Additionally in 1999, the thrift and loan subsidiary obtained a line of credit
with the Federal Reserve Bank of San Francisco, and at December 31, 1999 had a
borrowing capacity of $272.5 million, with no amounts outstanding.
In October 1999, the thrift and loan subsidiary established a warehouse
financing facility that may be used to finance certain residential real estate
loans held for securitization or whole loan sale. The facility permits secured
borrowings for up to $200 million with a variable interest rate of LIBOR plus
0.375%. As of December 31, 1999, there were no borrowings under this facility.
NOTE I -- LONG-TERM DEBT
Long-term debt is summarized in the following table:
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
(THOUSANDS OF DOLLARS)
Fremont General Corporation:
Senior Notes due 2009, less discount (1999 -- $3,162)..... $221,838 $ --
Senior Notes due 2004, less discount (1999 -- $1,129)..... 198,871 --
Liquid Yield Option Notes due 2013, less discount
(1999 -- $4,949; 1998 -- $7,118)....................... 4,924 6,409
ESOP Note Payable due 2002................................ 3,552 6,554
Senior Credit Facility.................................... -- 300,000
Subsidiaries:
$450 million Senior Credit Facility....................... -- 351,500
Variable Rate Asset Backed Certificates................... -- 274,260
-------- --------
429,185 938,723
Less current portion...................................... -- 25,717
-------- --------
$429,185 $913,006
======== ========
On March 17, 1999, the Company issued $425,000,000 of Senior Notes ("the
Senior Notes") in a private placement. The Senior Notes were subsequently
exchanged for notes registered with the Securities and Exchange Commission under
a form S-4 Registration Statement effective on May 11, 1999. These notes consist
of $200,000,000 and $225,000,000 Series B 7.70% Senior Notes due 2004 and Series
B 7.875% Senior Notes due 2009, respectively. Total proceeds to the Company were
approximately $420,237,000. The Senior
76
79
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes may be redeemed at any time in whole or in part before maturity, but are
not subject to sinking fund payments. These notes are unsecured senior
indebtedness of the Company ranking equally with the Company's existing and
future unsubordinated indebtedness. Interest is payable on the notes
semi-annually in March and September.
The Company has a credit facility with several banks that permits
borrowings of up to $225,000,000 at December 31, 1999 ($400,000,000 at December
31, 1998). Borrowings and repayments are a minimum of $5,000,000 at the option
of the Company until the maturity date of June 30, 2003 . At the Company's
option, interest is based on the banks' prime lending rate, Eurodollar rates
plus an applicable margin or by competitive bids by the banks. All applicable
margins are based on the Company's credit rating. A facility fee, which
currently ranges from 0.200% to 0.375%, dependent on the Company's credit
rating, is charged on the total facility. The facility fee rate during 1999
ranged from 0.150% to 0.250%. Under certain conditions, based on the Company's
credit rating, the stock of subsidiary companies are to be pledged as collateral
for this loan. There were no outstanding advances under this facility at
December 31, 1999.
The Fremont General Employee Stock Ownership Plan ("ESOP") has a bank loan
with a maximum principal amount of $15 million that matures April 1, 2002. The
balance outstanding at December 31, 1999 was $3,552,000. The ESOP Note Payable
due 2002 is secured by certain shares of the ESOP and the interest and principal
payments are guaranteed by the Company. Interest is based on, at the Company's
option, the bank's prime lending rate, LIBOR plus 1%, or an applicable
certificate of deposit rate. The weighted average interest rate at December 31,
1999 was 7.23%. In January 2000, the Company paid off this note.
In 1993, the Company sold in a public offering an aggregate $373,750,000
principal amount at maturity of Liquid Yield Option Notes due October 12, 2013
(Zero Coupon-Subordinated) (the "LYONs") at an issue price of $372.42 for a
total net proceeds to the Company of approximately $135,000,000. The yield to
maturity is 5% with no periodic payments of interest. Each LYON is convertible
into 38.5735 shares of the Company's common stock and was non-callable for five
years. Holders converted aggregate principal amounts of $3,654,000, $20,974,000
and $266,744,000 of LYONs into 141,000, 809,000 and 10,289,000 shares of the
Company's common stock during 1999, 1998 and 1997, respectively.
The Variable Rate Asset Backed Certificates reflected the sale of
certificates pursuant to an asset securitization program established by the
commercial finance subsidiary of the Company that was sold in December 1999.
(See Note B.) The commercial finance subsidiary also had an agreement for a
committed unsecured bank line of credit that permitted borrowings of up to $438
million at December 31, 1998.
The carrying amounts and the estimated fair values of long-term borrowings
at December 31, 1999 are summarized in the following table:
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(THOUSANDS OF DOLLARS)
Senior Notes due 2009.................................. $221,838 $168,750
Senior Notes due 2004.................................. 198,871 170,000
LYONs.................................................. 4,924 3,455
ESOP Note Payable due 2002............................. 3,552 3,552
-------- --------
Total long-term borrowings................... $429,185 $345,757
======== ========
77
80
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The aggregate amount of maturities on long-term debt and sinking fund
requirements are summarized in the following table (thousands of dollars):
2000................................................... $ --
2001................................................... 1,607
2002................................................... 1,945
2003................................................... --
2004................................................... 198,871
Thereafter................................................ 226,762
--------
$429,185
========
Total interest payments were $231,500,000, $151,411,000, and $125,048,000
in 1999, 1998 and 1997, respectively. These payments represent interest expense
on thrift deposits, short-term debt, long-term debt (excluding LYONs) and the
Preferred Securities discussed in Note J.
NOTE J -- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY JUNIOR SUBORDINATED DEBENTURES
In 1996, Fremont General Financing I, a statutory business trust (the
"Trust") and consolidated wholly-owned subsidiary of the Company, sold $100
million of 9% Trust Originated Preferred Securities(SM) ("the Preferred
Securities") in a public offering. The Preferred Securities represent preferred
undivided beneficial interests in the assets of the Trust. The proceeds from the
sale of the Preferred Securities were invested in 9% Junior Subordinated
Debentures of the Company ("the Junior Subordinated Debentures"). The Junior
Subordinated Debentures are the sole asset of the Trust.
The Preferred Securities will be redeemed upon maturity of the Junior
Subordinated Debentures in 2026, subject to the election available to the
Company to extend the maturity up to 2045, and they may be redeemed, in whole or
in part, at any time on or after March 31, 2001 and under certain specified
circumstances.
The Junior Subordinated Debentures rank pari passu with the Company's
$9,873,000 aggregate principal amount at maturity of LYONs due 2013, and
subordinate and junior to all senior indebtedness of the Company. (See Note I.)
Payment of distributions out of cash held by the Trust, and payments on
liquidation of the Trust or the redemption of the Preferred Securities are
guaranteed by the Company to the extent that the Trust has funds available to
make such payments. Trust distributions of $9,000,000 in 1999, 1998 and 1997
were included in interest expense. The Company has provided for back-up
undertakings that, considered together, constitute a full and unconditional
guarantee by the Company of the Trust's obligations under the Preferred
Securities.
NOTE K -- STOCKHOLDERS' EQUITY AND RESTRICTIONS
The Company is authorized to issue up to 2,000,000 shares of $.01 par value
preferred stock; however, none has been issued to date.
On November 12, 1998, the Board of Directors approved a two-for-one stock
split of its common stock, payable December 10, 1998 to stockholders of record
on November 20, 1998.
Consolidated stockholders' equity is restricted by the provisions of
certain long-term debt agreements. At December 31, 1999, the most restrictive
loan covenants require the Company to maintain total stockholders' equity of at
least $675,000,000 before FASB 115 adjustments.
The Company has a stock award plan for the benefit of certain key members
of management that authorizes up to 4,686,000 shares of either stock options or
stock rights to be allocable to participants. Options
78
81
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are granted at exercise prices equal to the fair value of the stock on the date
of grant. Grantees vest at the rate of 25% per year beginning on the first
anniversary of the grant and expire after ten years.
The Company accounts for stock option grants in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Because the exercise price of the options equaled the fair value of the stock on
the date of the grant, no compensation expense was recognized. Pursuant to FASB
Statement No. 123 ("FASB 123") "Accounting for Stock-Based Compensation," the
pro forma net loss for the year ended December 31, 1999, calculated as if the
recognition and measurements provisions of FASB 123 had been adopted, would have
been $(66,651,000), or $(1.05) basic and diluted loss per share, compared to the
reported net loss of $(65,377,000), or ($1.03) basic and diluted loss per share.
For the years ended December 31, 1998 and 1997, the pro forma effects would have
reduced net income by $1,285,000 and $1,127,000, respectively, and reduced both
basic and diluted earnings per share by $0.02 for both years. The pro forma
effects are not likely to be representative of the effects on reported net
income for future years because FASB 123 has not been applied to options granted
prior to January 1, 1995.
The Black-Scholes option pricing method was used to value the options as of
the grant date with the following assumptions: risk-free interest rate of 5.68%;
expected life of 7 years; expected volatility of 23% and expected dividend yield
of 1.13%.
The stock option activity is summarized in the following table:
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
---------------- ----------------
Outstanding at January 1, 1997................... 3,180,942 $ 5.29
Granted........................................ 1,692,000 14.90
Exercised...................................... (2,670,194) 4.92
----------
Outstanding at December 31, 1997................. 2,202,748 13.12
Exercised...................................... (133,318) 10.90
Forfeited...................................... (228,572) 14.08
----------
Outstanding at December 31, 1998................. 1,840,858 13.16
Exercised...................................... (61,880) 6.58
----------
Outstanding at December 31, 1999................. 1,778,978 13.38
==========
The exercise prices of the option shares outstanding at December 31, 1999
range from $7.16 to $14.94. The weighted average remaining contractual life is
approximately four and three-fourths years for the 355,978 option shares that
range from $7.16 to $7.84 per share and seven years for the 1,423,000 option
shares that range from $14.00 to $14.94 per share.
The number of shares exercisable at the end of the year and related
weighted average exercise prices are summarized in the following table:
DECEMBER 31,
----------------------------------
1999 1998 1997
---------- -------- --------
Shares exercisable................................ 1,064,978 757,482 320,178
Related weighted average exercise price........... $ 12.38 $ 10.80 $ 7.14
The portion of the consolidated stockholders' equity represented by the
Company's investment in its insurance subsidiaries and its thrift and loan
subsidiary is subject to various laws and regulations, whereby amounts available
for payment of dividends are restricted. Retained earnings and additional
paid-in capital of the property and casualty insurance companies currently
available for dividend distribution is $56,288,000. No dividends are currently
expected from the thrift and loan subsidiary.
79
82
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net income and stockholders' equity of domestic insurance subsidiaries, as
filed with regulatory authorities on the basis of statutory accounting
practices, are summarized in the following table:
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
Statutory net income for the year.................. $ 2,060 $100,780 $113,058
Statutory stockholder's equity at year end......... 574,615 665,262 567,470
Unrealized gains or losses on the Company's securities available-for-sale
are included in other comprehensive income. Reclassification adjustments avoid
double counting in comprehensive income items that are included in comprehensive
income and net income in different periods. The reclassification adjustments for
the year ended December 31, 1999 and 1998 represent net unrealized gains
included in accumulated other comprehensive income at December 31, 1998 and
1997, respectively. Determination of a reclassification adjustment 1997 was not
practicable.
The components of total comprehensive income (loss) are summarized in the
following table:
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
--------- -------- --------
(THOUSANDS OF DOLLARS)
Net income (loss)......................................... $ (65,377) $132,964 $108,292
Other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of
tax:
Net change in unrealized gains (losses) during the
period, net of deferred income tax expense
(benefit) (1999 -- $(51,656), 1998 -- $(4,738) and
1997 -- $27,074)................................... (95,931) (8,797) 50,280
Less: reclassification adjustments, net of tax
(1999 -- $6,494 and 1998 -- $2,805 )............... (12,061) (5,210) --
--------- -------- --------
Other comprehensive income (loss).................. (107,992) (14,007) 50,280
--------- -------- --------
Total comprehensive income (loss)............... $(173,369) $118,957 $158,572
========= ======== ========
NOTE L -- EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan and a leveraged Employee Stock Ownership
Plan ("ESOP"), both of which cover substantially all employees with at least one
year of service. Contribution expense for these plans amounted to $11,649,000,
$10,536,000, and $10,681,000 for 1999, 1998 and 1997, respectively, of which
$5,005,000, $4,295,000 and $5,844,000 related to the ESOP. Cash contributions to
the ESOP, which relate to 1999, 1998 and 1997, were $3,751,000, $3,002,000 and
$2,028,000, respectively. The contributions, which are generally discretionary,
are based on total compensation of the participants.
Shares pledged as collateral under a loan made to the ESOP by a bank (see
Note I) are reported as deferred compensation in the consolidated balance sheet.
The annual contributions made by the Company to the ESOP are used to repay the
loan. As the debt is repaid, shares are released from collateral and are
allocated to participants based on total compensation. Dividends received by the
ESOP on its pledged shares, amounting to $174,000, $253,000 and $325,000 in
1999, 1998 and 1997, respectively, were additionally used to service these
loans. Interest expense was $187,000, $359,000 and $467,000 for 1999, 1998 and
1997, respectively. In January 2000, the Company paid off this note and these
shares are no longer pledged as security.
Of the 4,565,000 total shares of Company stock owned by the ESOP at
December 31, 1999, 4,116,000 shares are allocated to participants and 449,000
shares are not allocated to participants and are considered unearned. Unearned
shares acquired prior to January 1, 1993 (75,000 shares as of December 31, 1999)
80
83
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
continue to be accounted for in accordance with the historical cost approach
(AICPA Statement of Position 76-3). Unearned shares acquired subsequent to
December 31, 1992 (374,000 shares as of December 31, 1999) are accounted for in
accordance with the current fair value approach (AICPA Statement of Position
93-6) and are not considered outstanding for earnings per share purposes. At
December 31, 1999, the fair value of the unearned shares accounted for under the
current fair value approach was $2,755,000.
In August 1999, the Company initiated a stock repurchase program by the
Company's employee benefit trust ("the Trust") to buy back up to $75 million of
the Company's common stock. The program's purpose was to provide the Trust with
shares of the Company's common stock for funding future employee benefit plan
obligations. Under this program, the Trust purchased an aggregate of 4,524,000
shares at an aggregate cost of $43.7 million. The program was completed in
September 1999. The shares purchased are reported as deferred compensation until
they are used to fund the employee benefit plan obligation.
The Company has two stock award plans ("RSA") for the benefit of certain
key members of management. The Company purchased an aggregate of 2,105,000,
677,000 and 956,000 shares at an aggregate cost of approximately $11 million,
$16 million and $22 million in 1999, 1998 and 1997, respectively, to fund the
RSA. Amounts awarded under the RSA are amortized over 10 years. Amortization
expense for the RSA amounted to $10,564,000, $9,592,000 and $7,536,000 for 1999,
1998 and 1997, respectively. Unamortized amounts are reported as deferred
compensation in the consolidated balance sheet.
NOTE M -- COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of legal actions arising primarily
from claims made under insurance policies or in connection with previous
reinsurance agreements. Those actions have been considered in establishing the
Company's liabilities. Management and its legal counsel are of the opinion that
the settlement of those actions will not have a material effect on the Company's
financial position or results of operations.
An insurance subsidiary of the Company outsourced its data processing
operation to Electronic Data Systems in 1992. Under terms of the contract, this
subsidiary will pay a minimum $7,500,000 per year for a period of ten years,
until 2002.
Total rental expense for 1999, 1998 and 1997, was $18,024,000, $16,110,000,
and $13,019,000, respectively. The Company leases office facilities and certain
equipment under non-cancelable operating leases, the terms of which range from
one to ten years. Certain leases provide for an increase in the basic rental to
compensate the lessor for increases in operating and maintenance costs. The
leases also provide renewal options.
Under present leases, rental commitments are summarized in the following
table (thousands of dollars):
2000...................................................... $ 30,058
2001...................................................... 29,188
2002...................................................... 26,419
2003...................................................... 25,097
2004...................................................... 20,556
Thereafter................................................ 52,076
--------
$183,394
========
81
84
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE N -- DISCONTINUED OPERATIONS
The Company discontinued all of its assumed reinsurance operations, as well
as certain other insurance operations, during the period 1986 to 1991. In 1999,
the Company incurred a net loss of $25 million (net of $13.5 million of income
tax benefits) in recognition of an increase in asbestos and environmental claims
reserves over previous estimates. This charge is represented by the Company's
contribution of $25 million to the discontinued operations to ensure that
sufficient funds are available to discharge estimated liabilities as they become
due. These operations consisted primarily of facultative and treaty reinsurance
covering primary and excess property and casualty insurance coverages. All
discontinued insurance operations are accounted for using the liquidation basis
of accounting whereby all future cash inflows and outflows are considered in
determining whether dedicated assets are sufficient to meet all future
obligations.
The Company determines the adequacy of the assets dedicated to fund the
liabilities of discontinued operations by: (i) estimating the ultimate remaining
liabilities; (ii) discounting these liabilities using estimates of payment
patterns and investment yields derived from the dedicated investment portfolio;
and (iii) comparing this discounted estimate of liabilities to the dedicated
assets.
The Company estimates that with the additional contribution of $25 million,
the dedicated assets (primarily cash, investment securities and reinsurance
recoverables) 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.
A statement of financial condition of the discontinued operations is
summarized in the following table:
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(THOUSANDS OF DOLLARS)
Assets
Cash and invested assets, at amortized cost............... $177,911 $185,801
Reinsurance recoverables.................................. 49,667 50,350
Other assets(1)........................................... 21,945 7,427
-------- --------
Total............................................. $249,523 $243,578
======== ========
Liabilities
Reserves for loss and loss adjustment expenses............ $175,500 $148,605
Deferred income taxes..................................... 32,846 40,721
Reinsurance payable and funds withheld.................... 7,483 4,397
Other liabilities......................................... 180 16,341
-------- --------
Total............................................. $216,009 $210,064
======== ========
- ---------------
(1) Included in the 1999 balance is a $25 million contribution receivable from
an affiliate which was settled in cash in March 2000.
82
85
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The amortized cost and fair value of cash and invested assets of the
discontinued operations as of December 31, 1999 are summarized in the following
table:
AMORTIZED COST FAIR VALUE
-------------- ----------
(THOUSANDS OF DOLLARS)
Fixed maturities........................................... $108,376 $105,275
Non-redeemable preferred stock............................. 51,339 51,338
Cash and other invested assets............................. 18,196 18,196
-------- --------
Cash and invested assets.............................. $177,911 $174,809
======== ========
The average maturity of the fixed income portfolio was 7.14 years at
December 31, 1999. The quality mix of the fixed maturity portfolio as of
December 31, 1999 is summarized in the following table:
AA..................................... 16%
A...................................... 18
BBB.................................... 53
BB..................................... 13
---
100%
===
At December 31, 1999, all investments included in discontinued operations
were current with respect to principal and interest. It is the Company's belief
that the carrying value of the investments will be fully realized.
NOTE O -- OPERATIONS BY REPORTABLE SEGMENT
The Company's businesses are managed within two reportable segments:
property and casualty insurance and financial services. Additionally, there are
certain corporate revenues and expenses, comprised primarily of investment
income, interest expense and certain general and administrative expenses, that
the Company does not allocate to its segments.
The following data for the years ended December 31, 1999, 1998 and 1997
provide certain information necessary for reportable segment disclosure, as well
as a reconciliation to total consolidated financial
83
86
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
information. For both the property and casualty insurance and financial services
segments, interest revenue is reported net of interest expense. This net
interest revenue is used to assess segment performance.
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
REVENUES
Property and casualty insurance........................ $ 984,573 $ 729,728 $ 738,072
Financial services..................................... 411,575 297,469 232,342
Unallocated corporate.................................. 1,462 1,983 749
---------- ---------- ----------
Total........................................ 1,397,610 1,029,180 971,163
Intersegment:
Property and casualty insurance...................... 1,108 1,227 1,235
Unallocated corporate................................ 42,774 36,073 25,643
---------- ---------- ----------
43,882 37,300 26,878
---------- ---------- ----------
Total revenue................................ 1,441,492 1,066,480 998,041
Reconciling items:
Intersegment revenues................................ (43,882) (37,300) (26,878)
---------- ---------- ----------
Total consolidated........................... $1,397,610 $1,029,180 $ 971,163
========== ========== ==========
INCOME (LOSS) BEFORE INCOME TAXES
Property and casualty insurance........................ $ (116,178) $ 169,235 $ 144,667
Financial services..................................... 79,874 55,506 42,286
Unallocated corporate.................................. (25,824) (23,751) (23,782)
---------- ---------- ----------
Total........................................ (62,128) 200,990 163,171
Reconciling items -- intercompany dividends............ (4,156) (4,278) (4,278)
---------- ---------- ----------
Total consolidated........................... $ (66,284) $ 196,712 $ 158,893
========== ========== ==========
INTEREST REVENUE, NET OF INTEREST EXPENSE
Property and casualty insurance........................ $ 130,052 $ 151,357 $ 107,165
Financial services..................................... 170,877 118,878 99,637
Unallocated corporate.................................. (6,480) 1,545 (4,601)
---------- ---------- ----------
Total........................................ 294,449 271,780 202,201
RECONCILING ITEMS:
Intersegment elimination............................... 4,844 3,721 6,836
---------- ---------- ----------
Total consolidated........................... $ 299,293 $ 275,501 $ 209,037
========== ========== ==========
AMORTIZATION AND DEPRECIATION EXPENSE
Property and casualty insurance........................ $ 26,593 $ 25,540 $ 16,377
Financial services..................................... 9,455 6,993 6,403
Unallocated corporate.................................. 8,159 7,785 10,744
---------- ---------- ----------
Total consolidated........................... $ 44,207 $ 40,318 $ 33,524
========== ========== ==========
SEGMENT ASSETS
Property and casualty insurance........................ $3,785,364 $3,826,885 $3,353,114
Financial services..................................... 3,805,135 3,258,522 2,436,976
Unallocated corporate.................................. 175,213 40,627 44,030
---------- ---------- ----------
Total........................................ 7,765,712 7,126,034 5,834,120
Reconciling items:
Assets held for discontinued operations.............. 249,523 243,578 256,507
---------- ---------- ----------
Total consolidated........................... $8,015,235 $7,369,612 $6,090,627
========== ========== ==========
84
87
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P -- EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number
of shares adjusted retroactively for a two-for-one split of common stock
effected on December 10, 1998. The following table sets forth the computation of
basic and diluted earnings per share:
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income (loss) from continuing operations (numerator for
basic earnings per share)................................ $(40,377) $132,964 $108,292
Effect of dilutive securities:
LYONs.................................................... -- 327 2,527
-------- -------- --------
Income (loss) from continuing operations available to
common stockholders after assumed conversions (numerator
for diluted earnings per share).......................... $(40,377) $133,291 $110,819
======== ======== ========
Weighted-average shares (denominator for basic earnings per
share)................................................... 63,650 63,529 57,059
Effect of dilutive securities:
Restricted stock......................................... -- 4,729 3,804
Stock options............................................ -- 917 374
LYONs.................................................... -- 907 7,348
-------- -------- --------
Dilutive potential common shares........................... -- 6,553 11,526
Adjusted weighted-average shares and assumed conversions
(denominator for diluted earnings per share)............. 63,650 70,082 68,585
======== ======== ========
Basic earnings per share from continuing operations........ $ (0.64) $ 2.09 $ 1.90
======== ======== ========
Diluted earnings per share from continuing operations...... $ (0.64) $ 1.90 $ 1.62
======== ======== ========
For additional disclosures regarding the LYONs, the stock options and
restricted stock see Notes I, K and L, respectively.
For the year ended December 31, 1999, dilutive securities of 5,103,000 were
not included in dilutive weighted average shares outstanding because the effects
would have been antidilutive.
85
88
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE Q -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1999
Revenues.................................... $298,779 $336,111 $349,726 $412,994
Income (loss) from continuing operations.... 34,311 34,975 (60,913) (48,750)
Net income (loss)........................... 34,311 34,975 (85,913) (48,750)
Income (loss) from continuing operations per
share:
Basic..................................... 0.51 0.52 (0.92) (0.80)
Diluted................................... 0.49 0.50 (0.92) (0.80)
Net income (loss) per share:
Basic..................................... 0.51 0.52 (1.30) (0.80)
Diluted................................... 0.49 0.50 (1.30) (0.80)
1998
Revenues.................................... $261,953 $236,260 $250,787 $280,180
Net income.................................. 31,652 32,583 34,187 34,542
Net income per share:
Basic..................................... 0.50 0.51 0.53 0.54
Diluted................................... 0.45 0.47 0.49 0.49
The loss from continuing operations in the quarter ended September 30, 1999
was due primarily to a deterioration in the Company's reserves for workers'
compensation net incurred loss and loss adjustment expenses ("LAE").
Additionally, the net loss in the quarter ended September 30, 1999 is higher
than the loss from continuing operations due to the Company's recognition of a
net loss from discontinued operations of $25 million. The net loss from
discontinued operations resulted primarily from a deterioration in the Company's
estimated reserves for asbestos and environmental claims. (See Notes E and N and
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Property and Casualty Insurance Operation -- Special Discussion
Concerning Property and Casualty Insurance Results ("MD&A -- Special
Discussion."))
The quarter ended December 31, 1999 includes a net charge of $48.8 million
associated with a settlement agreement reached February 28, 2000 with Reliance
Insurance Company under a workers' compensation reinsurance contract that was in
effect from January 1, 1998 through December 31, 1999. There was also an
additional recognition of a deterioration in the reserves for net incurred loss
and LAE related to the Company's workers' compensation insurance operation. (See
Note F and MD&A -- Special Discussion.)
86
89
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31,
------------------------
1999 1998
---------- ----------
(THOUSANDS OF DOLLARS)
ASSETS
Cash........................................................ $ 1,118 $ 147
Notes receivable from subsidiaries*......................... 424,880 345,532
Investment in subsidiaries*................................. 720,476 1,000,392
Short-term investments...................................... 107,023 18,894
Other receivables from subsidiaries*........................ 6,895 17,348
Deferred income taxes....................................... 243,645 145,410
Other assets................................................ 44,921 22,239
---------- ----------
TOTAL ASSETS...................................... $1,548,958 $1,549,962
========== ==========
LIABILITIES
Accrued expenses and other liabilities...................... $ 55,752 $ 34,004
Amounts due to subsidiaries*................................ 229,827 148,990
Notes payable to subsidiary*................................ 103,093 103,093
Current portion of long-term debt........................... -- 717
Long-term debt.............................................. 429,185 312,246
---------- ----------
TOTAL LIABILITIES................................. 817,857 599,050
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01 -- authorized 2,000,000
shares; none issued
Common Stock, par value $1 per share -- Authorized:
150,000,000
Issued and outstanding: (1999 -- 70,039,000 and
1998 -- 69,939,000).................................... 70,039 69,939
Additional paid-in capital.................................. 285,922 308,369
Retained earnings........................................... 533,523 620,612
Deferred compensation....................................... (89,293) (86,910)
Accumulated other comprehensive income (loss)............... (69,090) 38,902
---------- ----------
TOTAL STOCKHOLDERS' EQUITY........................ 731,101 950,912
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,548,958 $1,549,962
========== ==========
- ---------------
* Eliminated in consolidation
See notes to condensed financial statements.
87
90
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(THOUSANDS OF DOLLARS)
REVENUES
Interest income from subsidiaries*......................... $ 29,340 $ 22,517 $ 12,086
Dividends from consolidated subsidiaries*.................. 4,156 4,278 4,278
Net investment income...................................... 1,450 1,836 650
Realized investment gains.................................. -- 8 34
Other income*.............................................. 9,012 8,139 11,180
-------- -------- --------
TOTAL REVENUES................................... 43,958 36,778 28,228
EXPENSES
Interest expense........................................... 32,427 18,086 12,615
Interest on notes payable to subsidiary*................... 9,278 9,278 9,278
General and administrative................................. 29,473 33,770 30,723
-------- -------- --------
TOTAL EXPENSES................................... 71,178 61,134 52,616
-------- -------- --------
(27,220) (24,356) (24,388)
Income tax benefit......................................... (11,282) (13,694) (14,578)
-------- -------- --------
Loss before equity in undistributed income (loss) of
subsidiary companies and net loss from discontinued
operations............................................... (15,938) (10,662) (9,810)
Equity in undistributed income (loss) of subsidiary
companies................................................ (24,439) 143,626 118,102
-------- -------- --------
Income (loss) from continuing operations................... (40,377) 132,964 108,292
Net loss from discontinued operations...................... (25,000) -- --
-------- -------- --------
NET INCOME (LOSS)..................................... $(65,377) $132,964 $108,292
======== ======== ========
- ---------------
* Eliminated in consolidation
See notes to condensed financial statements.
88
91
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Income (loss) from continuing operations................ $ (40,377) $ 132,964 $ 108,292
Adjustments to reconcile income (loss) from continuing
operations to net cash provided by operating
activities:
Equity in undistributed (income) loss from
continuing operations of subsidiaries............ 24,439 (143,626) (118,102)
Change in accrued investment income................ (4) 2 (3)
Change in amounts due to or from subsidiaries...... 37,322 (18,051) (76,761)
Deferred income tax (benefit) expense.............. (29,028) 33,583 18,360
Provision for depreciation and amortization........ 8,159 7,562 10,744
Realized investment gains.......................... -- (8) (34)
Change in other assets and liabilities............. 2,148 1,005 73,137
--------- --------- ---------
NET CASH PROVIDED BY CONTINUING OPERATIONS....... 2,659 13,431 15,633
Effect of discontinued operations..................... (9,745) 3,252 (9,934)
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................... (7,086) 16,683 5,699
INVESTING ACTIVITIES
Purchases of fixed maturity investments............... -- (44,653) (11,369)
Sales of fixed maturity investments................... -- -- 11,403
Fixed maturity investments matured or called.......... -- 44,884 --
Increase in short-term and other investments.......... (88,129) (3,476) (9,334)
Net increase in credit lines with subsidiaries........ (79,348) (43,924) (221,391)
Purchase of and additional investments in
subsidiaries....................................... -- (32) (10)
Distribution from subsidiary.......................... 124,341 -- 18,000
Purchase of property and equipment.................... (759) (1,917) (1,658)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES............ (43,895) (49,118) (214,359)
FINANCING ACTIVITIES
Repayment of short-term debt.......................... (717) (800) (3,092)
Proceeds from long-term debt.......................... 497,237 100,000 265,000
Repayment of long-term debt........................... (379,285) (41,228) (35,000)
Dividends paid........................................ (21,704) (20,476) (17,838)
Stock options exercised............................... 407 1,453 13,129
Increase in deferred compensation plans............... (43,986) (7,256) (14,328)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES........ 51,952 31,693 207,871
--------- --------- ---------
INCREASE (DECREASE) IN CASH...................... 971 (742) (789)
Cash at beginning of year............................. 147 889 1,678
--------- --------- ---------
CASH AT END OF YEAR.............................. $ 1,118 $ 147 $ 889
========= ========= =========
See notes to condensed financial statements.
89
92
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
In the parent company financial statements, the parent's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since date of acquisition. Parent company financial statements
should be read in conjunction with the Company's consolidated financial
statements.
NOTE 2 -- SALE OF SUBSIDIARY
In connection with the December 1999 sale of Fremont Financial Corporation
by a subsidiary, the parent company received a distribution of $124 million from
that subsidiary. See Note B of the Company's Notes to Consolidated Financial
Statements.
90
93
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, YEAR ENDED DECEMBER 31,
-------------------------------------------------- ------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
-------- ----------- ------------ -------- ---------- -------- ---------- ------------
RESERVES
DEFERRED FOR CLAIMS, CLAIMS,
POLICY BENEFITS AND DIVIDENDS NET BENEFITS AND
ACQUISITION SETTLEMENT UNEARNED TO POLICY- PREMIUM INVESTMENT SETTLEMENT
SEGMENT COSTS EXPENSES PREMIUMS HOLDERS REVENUE INCOME EXPENSES
------- ----------- ------------ -------- ---------- -------- ---------- ------------
(THOUSANDS OF DOLLARS)
1999
Life insurance................... $ 250 $ 118,390 $ -- $ -- $ 912 $ 517 $ --
Property and casualty
insurance..................... 58,948 2,434,757 180,583 20,144 831,005 157,700 770,523
------- ---------- -------- ------- -------- -------- --------
$59,198 $2,553,147 $180,583 $20,144 $831,917 $158,217 $770,523
======= ========== ======== ======= ======== ======== ========
1998
Life insurance................... $ 350 $ 136,973 $ -- $ -- $ 453 $ 713 $ --
Property and casualty
insurance..................... 44,646 2,298,118 119,774 16,162 552,078 178,263 335,450
------- ---------- -------- ------- -------- -------- --------
$44,996 $2,435,091 $119,774 $16,162 $552,531 $178,976 $335,450
======= ========== ======== ======= ======== ======== ========
1997
Life insurance................... $ 450 $ 180,976 $ -- $ -- $ 696 $ 1,690 $ --
Property and casualty
insurance..................... 37,564 2,163,323 78,625 37,626 601,183 138,894 389,201
------- ---------- -------- ------- -------- -------- --------
$38,014 $2,344,299 $ 78,625 $37,626 $601,879 $140,584 $389,201
======= ========== ======== ======= ======== ======== ========
YEAR ENDED DECEMBER 31,
-----------------------------------
COLUMN A COLUMN I COLUMN J COLUMN K
-------- ------------ --------- --------
AMORTIZATION
OF DEFERRED
POLICY OTHER NET
ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
------- ------------ --------- --------
(THOUSANDS OF DOLLARS)
1999
Life insurance................... $ -- $ 6,116 $ N/A
Property and casualty
insurance..................... 191,923 52,531 897,633
-------- ------- --------
$191,923 $58,647 $897,633
======== ======= ========
1998
Life insurance................... $ -- $ 1,314 $ N/A
Property and casualty
insurance..................... 123,393 58,146 571,676
-------- ------- --------
$123,393 $59,460 $571,676
======== ======= ========
1997
Life insurance................... $ -- $ 3,093 $ N/A
Property and casualty
insurance..................... 115,899 43,551 621,092
-------- ------- --------
$115,899 $46,644 $621,092
======== ======= ========
91
94
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- ---------- --------- --------- -------- ----------
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- --------- -------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
YEAR ENDED DECEMBER 31, 1999
Life insurance inforce*............ $ 96,748 $ 64,902 $ -- $ 31,846 0%
========== ======== ======= ========
Premium Revenue
Life insurance................... $ 1,992 $ 1,080 $ -- $ 912 0%
Property and casualty
insurance..................... 1,084,454 263,090 9,641 831,005 1%
---------- -------- ------- --------
$1,086,446 $264,170 $ 9,641 $831,917
========== ======== ======= ========
YEAR ENDED DECEMBER 31, 1998
Life insurance inforce*............ $ 107,094 $ 69,054 $ -- $ 38,040 0%
========== ======== ======= ========
Premium Revenue
Life insurance................... $ 986 $ 533 $ -- $ 453 0%
Property and casualty
insurance..................... 717,021 177,983 13,040 552,078 2%
---------- -------- ------- --------
$ 718,007 $178,516 $13,040 $552,531
========== ======== ======= ========
YEAR ENDED DECEMBER 31, 1997
Life insurance inforce*............ $ 156,866 $100,910 $ -- $ 55,956 0%
========== ======== ======= ========
Premium Revenue
Life insurance................... $ 2,479 $ 1,783 $ -- $ 696 0%
Property and casualty
insurance..................... 591,506 13,973 23,650 601,183 4%
---------- -------- ------- --------
$ 593,985 $ 15,756 $23,650 $601,879
========== ======== ======= ========
- ---------------
* Balance at end of year.
Intercompany transactions have been eliminated.
92
95
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------------------------- ---------- ----------
ADDITIONS
----------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- -------------- ---------- ----------
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31, 1999
Deducted from asset accounts:
Allowance for possible loan
losses................... $56,346 $25,470 $(14,265)(1) $11,057(2) $56,494
Premiums receivable and
agents' balances and
reinsurance
recoverable.............. 14,660 1,834 -- 251 16,243
------- ------- -------- ------- -------
Totals................ $71,006 $27,304 $(14,265) $11,308 $72,737
======= ======= ======== ======= =======
YEAR ENDED DECEMBER 31, 1998
Deducted from asset accounts:
Allowance for possible loan
losses................... $44,402 $11,059 $ 3,465(1) $ 2,580(2) $56,346
Premiums receivable and
agents' balances and
reinsurance
recoverable.............. 17,052 (2,392) -- -- 14,660
------- ------- -------- ------- -------
Totals................ $61,454 $ 8,667 $ 3,465 $ 2,580 $71,006
======= ======= ======== ======= =======
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
Allowance for possible loan
losses................... $37,747 $12,319 $ -- $ 5,664(2) $44,402
Premiums receivable and
agents' balances and
reinsurance
recoverable.............. 9,288 8,369 -- 605(2) 17,052
------- ------- -------- ------- -------
Totals................ $47,035 $20,688 $ -- $ 6,269 $61,454
======= ======= ======== ======= =======
- ---------------
(1) Reserves (sold) established with company and portfolio (dispositions)
acquisitions.
(2) Uncollectible accounts written off, net of recoveries and reclassifications.
93
96
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
DECEMBER 31, YEAR ENDED DECEMBER 31,
---------------------------------------------- -------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
-------- ----------- ---------- -------- -------- -------- ---------- -------------------
CLAIMS AND CLAIM
ADJUSTMENT
RESERVES EXPENSES INCURRED
FOR UNPAID DISCOUNT RELATED TO
DEFERRED CLAIMS IF ANY -------------------
POLICY AND CLAIM DEDUCTED NET (1) (2)
AFFILIATION WITH ACQUISITION ADJUSTMENT IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME YEAR YEARS
---------------- ----------- ---------- -------- -------- -------- ---------- -------- --------
(THOUSANDS OF DOLLARS)
Fremont Compensation Insurance
Group and Consolidated
Subsidiaries
1999............................ $58,948 $2,434,757 $25,742 $180,583 $831,005 $157,700 $677,756 $ 92,767
1998............................ $44,646 $2,298,118 $25,908 $119,774 $552,078 $178,263 $348,897 $(13,447)
1997............................ $37,564 $2,163,323 $19,782 $78,625 $601,183 $138,894 $441,524 $(52,323)
YEAR ENDED DECEMBER 31,
--------------------------------
COLUMN A COLUMN I COLUMN J COLUMN K
-------- ------------------- ---------- --------
PAID
CLAIMS AND
AMORTIZATION OF CLAIM NET
AFFILIATION WITH DEFERRED POLICY ADJUSTMENT PREMIUMS
REGISTRANT ACQUISITION COSTS EXPENSES WRITTEN
---------------- ------------------- ---------- --------
(THOUSANDS OF DOLLARS)
Fremont Compensation Insurance
Group and Consolidated
Subsidiaries
1999............................ $191,923 $872,359 $897,633
1998............................ $123,393 $835,374 $571,676
1997............................ $115,899 $639,792 $621,092
94
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
March 2000.
FREMONT GENERAL CORPORATION
By: /s/ JOHN A. DONALDSON
--------------------------------------
Title: Senior Vice President,
Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES A. MCINTYRE Chairman of the Board and March 28, 2000
- ----------------------------------------------------- Chief Executive Officer
James A. McIntyre (Principal Executive Officer)
/s/ LOUIS J. RAMPINO President, Chief Operating March 28, 2000
- ----------------------------------------------------- Officer and Director
Louis J. Rampino
/s/ WAYNE R. BAILEY Executive Vice President, March 28, 2000
- ----------------------------------------------------- Treasurer, Chief Financial
Wayne R. Bailey Officer and Director
(Principal Financial Officer)
/s/ JOHN A. DONALDSON Senior Vice President, March 28, 2000
- ----------------------------------------------------- Controller and Chief Accounting
John A. Donaldson Officer (Principal Accounting
Officer)
/s/ HOUSTON I. FLOURNOY Director March 28, 2000
- -----------------------------------------------------
Houston I. Flournoy
/s/ C. DOUGLAS KRANWINKLE Director March 28, 2000
- -----------------------------------------------------
C. Douglas Kranwinkle
/s/ DAVID W. MORRISROE Director March 28, 2000
- -----------------------------------------------------
David W. Morrisroe
/s/ DICKINSON C. ROSS Director March 28, 2000
- -----------------------------------------------------
Dickinson C. Ross
95
98
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
2.1 Stock Purchase Agreement, dated as of December 7, 1999
pertaining to the acquisition of FINOVA Capital Corporation
of all the outstanding shares of Fremont Financial
Corporation (Incorporated by reference to Exhibit No. 2.1 to
Current Report on Form 8-K, as of December 20, 1999,
Commission File Number 1-8007.)
3.1 Restated Articles of Incorporation of Fremont General
Corporation. (Incorporated by reference to Exhibit 3.1 to
the Registrant's Quarterly Report on Form 10-Q, for the
period ended June 30, 1998, Commission File Number 1-8007.)
3.2 Certificate of Amendment of Articles of Incorporation of
Fremont General Corporation. (Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K,
for the fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
3.3 Amended and Restated By-Laws of Fremont General Corporation.
(Incorporated by reference to Exhibit 3.3 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.1 Form of Stock Certificate for Common Stock of the
Registrant. (Incorporated by reference to Exhibit (1) to the
Registrant's Form 8-A filed on March 17, 1993, Commission
File Number 1-8007.)
4.2 Indenture with respect to Liquid Yield Option Notes Due 2013
between the Registrant and Bankers Trust Company.
(Incorporated by reference to Exhibit 4.4 to Registration
Statement on Form S-3 filed on October 1, 1993.)
4.3 Indenture among the Registrant, the Trust and First
Interstate Bank of California, a California banking
corporation, as trustee. (Incorporated by reference to
Exhibit 4.3 to the Registrant's Annual Report on Form 10-K,
for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
4.4 Amended and Restated Declaration of Trust among the
Registrant, the Regular Trustees, The Chase Manhattan Bank
(USA), a Delaware banking corporation, as Delaware trustee,
and The Chase Manhattan Bank, N.A., a national banking
association, as Institutional Trustee. (Incorporated by
reference to Exhibit 4.5 to the Registrant's Annual Report
on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
4.5 Preferred Securities Guarantee Agreement between the
Registrant and The Chase Manhattan Bank, N.A., a national
banking association, as Preferred Guarantee Trustee.
(Incorporated by reference to Exhibit 4.6 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.6 Common Securities Guarantee Agreement by the Registrant.
(Incorporated by reference to Exhibit 4.7 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
4.7 Form of Preferred Securities. (Included in Exhibit 4.5).
(Incorporated by reference to Exhibit 4.8 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
99
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.1(a)* Fremont General Corporation Employee Stock Ownership Plan.
(Incorporated by reference to Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
10.1(b)* Amendment Number One to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.1(b) to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
10.1(c)* Amendment Number Two to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.1(b) to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1997,
Commission File Number 1-8007.)
10.1(d)* Amendment Number Three to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.1(c) to the Registrant's Quarterly Report on form
10-Q, for the period ended September 30, 1998, Commission
File Number 1-8007.)
10.1(e)* Amendment Number Four to the Fremont General Corporation
Employee Stock Ownership Plan. (Incorporated by reference to
Exhibit 10.1(d) to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1998,
Commission File Number 1-8007.)
10.2* Restated Trust Agreement for Fremont General Corporation
Employee Stock Ownership Plan. and amendment (Incorporated
by reference to Exhibit 10.2 to Annual Report on Form 10-K,
for the fiscal year ended December 31, 1995, Commission File
Number 1-8007.)
10.3(a)* Fremont General Corporation and Affiliated Companies
Investment Incentive Plan. (Incorporated by reference to
Exhibit 10.3 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.3(b)* Amendments Number One, Two and Three to the Fremont General
Corporation and Affiliated Companies Investment Incentive
Plan. (Incorporated by reference to Exhibit 10.3(b) to the
Registrant's Quarterly Report on form 10-Q, for the period
ended September 30, 1997, Commission File Number 1-8007.)
10.3(c)* Amendment Number Four to the Fremont General Corporation and
Affiliated Companies Investment Incentive Plan.
(Incorporated by reference to Exhibit 10.3 to the
Registrant's Annual Report on Form 10-K, for the Fiscal Year
Ended December 31, 1997, Commission File Number 1-8007.)
10.3(d)* Amendment Number Five to the Fremont General Corporation and
Affiliated Companies Investment Incentive Plan.
(Incorporated by reference to Exhibit 10.3(d) to the
Registrant's Quarterly Report on form 10-Q, for the period
ended September 30, 1998, Commission File Number 1-8007.)
10.4(a)* Fremont General Corporation Investment Incentive Program
Trust. (Incorporated by reference to Exhibit (10)(xi) to the
Registrant's Annual Report on Form 10-K, for the Fiscal Year
Ended December 31, 1993, Commission File Number 1-8007.)
10.4(b)* Amendment to the Fremont General Corporation Investment
Incentive Program Trust. (Incorporated by reference to
Exhibit 10.4 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
100
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.5(a)* Fremont General Corporation Supplemental Retirement Plan, as
restated January 1, 1997. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q, for the period ended September 30, 1997, Commission
File Number 1-8007.)
10.5(b)* Amendment Number One to the Fremont General Corporation
Supplemental Retirement Plan. (Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on Form
10-Q, for the period ended March 31, 1998, Commission File
Number 1-8007.)
10.5(c)* Amendment Number Two to the Fremont General Corporation
Supplemental Retirement Plan of the Company. (Incorporated
by reference to Exhibit 10.5(b) to the Registrant's Annual
Report on Form 10-K, for the fiscal year ended December 31,
1998, Commission File Number 1-8007.)
10.6* Trust Agreement for Fremont General Corporation Supplemental
Retirement Plan and Fremont General Corporation Senior
Supplemental Retirement Plan and amendment. (Incorporated by
reference to Exhibit 10.6 to the Registrant's Annual Report
on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.7(a)* Fremont General Corporation Senior Supplemental Retirement
Plan, as restated January 1, 1997. (Incorporated by
reference to Exhibit 10.7 to the Registrant's Quarterly
Report on Form 10-Q, for the period ended September 30,
1997, Commission File Number 1-8007.)
10.7(b)* First Amendment to the Fremont General Corporation Senior
Supplemental. (Incorporated by reference to Exhibit 10.7(b)
to the Registrant's Annual Report on Form 10-K, for the
fiscal year ended December 31, 1998, Commission File Number
1-8007.)
10.8(a)* Fremont General Corporation Excess Benefit Plan Restated
effective as of January 1, 1997 and First Amendment dated
December 21, 1998. (Incorporated by reference to Exhibit
10.8(a) to the Registrant's Annual Report on Form 10-K, for
the fiscal year ended December 31, 1998, Commission File
Number 1-8007.)
10.8(b)* Amendment to Excess Benefit Plan of Fremont General
Corporation. (Incorporated by reference to Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.8(c)* Trust Agreement for Fremont General Corporation Excess
Benefit Plan. (Incorporated by reference to Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number
1-8007.)
10.9* 1997 Stock Plan and related agreements. (Incorporated by
reference to Exhibit 10.10 to Quarterly Report on Form 10-Q,
for the period ended June 30, 1997, Commission File Number
1-8007.)
10.10* The 1999 Long Term Incentive Compensation Plan of the
Company.
10.11* 1995 Restricted Stock Award Plan As Amended and forms of
agreement thereunder. (Incorporated by reference to Exhibit
4.1 to Registration Statement on Registrant's Form S-8/S-3
File 333-17525 which was filed on December 9, 1997.)
101
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
10.12(a)* Fremont General Corporation Employee Benefits Trust
Agreement ("Grantor Trust") dated September 7, 1995 between
the Company and Merrill Lynch Trust Company of California.
(Incorporated by reference to Exhibit 10.12 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
10.12(b)* November 11, 1999 Amendment to Exhibit A to the Fremont
General Corporation Employee Benefits Trust ("Grantor
Trust") dated September 7, 1995 between the Company and
Merrill Lynch Trust Company of California. (Incorporated by
reference to Exhibit 10.13 (a) to the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30, 1999,
Commission File Number 1-8007.)
10.13(a)* Employment Agreement between the Company and James A.
McIntyre dated January 1, 1994. (Incorporated by reference
to Exhibit (10)(i) to the Registrant's Quarterly Report on
Form 10-Q for the period ended March 31, 1994, Commission
File Number 1-8007.)
10.13(b)* First Amendment to Employment Agreement between the Company
and James A. McIntyre dated August 1, 1996. (Incorporated by
reference to Exhibit 10.10 to the Registrant's Quarterly
Report on Form 10-Q, for the period ended June 30, 1997,
Commission File Number 1-8007.)
10.13(c)* Second Amendment to Employment Agreement between the Company
and James A. McIntyre dated August 8, 1997. (Incorporated by
reference to Exhibit 10.14(c) to the Registrant's Quarterly
Report on Form 10-Q, for the period ended September 30,
1997, Commission File Number 1-8007.)
10.14(a)* Employment Agreement between the Company and Louis J.
Rampino dated February 8, 1996. (Incorporated by reference
to Exhibit 10.14(a) to the Registrant's Annual Report on
Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.14(b)* Employment Agreement between the Company and Wayne R. Bailey
dated February 8, 1996. (Incorporated by reference to
Exhibit 10.14 to the Registrant's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.15* Management Continuity Agreement between the Company and
Raymond G. Meyers dated February 8, 1996. (Incorporated by
reference to Exhibit 10.15 to the Registrant's Annual Report
on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007.)
10.16* 1999 Management Incentive Compensation Plan of the Company.
(Incorporated by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1998, Commission File Number 1-8007.)
102
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
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10.17 Continuing Compensation Plan for Retired Directors.
(Incorporated by reference to Exhibit 10.17 to the
Registrant's Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007.)
10.18(a) Amended and Restated Credit Agreement among Fremont General
Corporation, Various Lending Institutions, and The Chase
Manhattan Bank, as Administrative Agent, Dated as of August
1, 1997 and amended and restated as of June 30, 1999.
(Incorporated by reference to Exhibit 10.19 to the
Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 1999.)
10.18(b) First and Second Amendments to Amended and Restated Credit
Agreement.
10.19 Credit Agreement by and among Merrill Lynch Trust Company of
California as trustee for the Fremont General Corporation
Employee Stock Ownership Trust, the Plan Committee on behalf
of the Fremont General Corporation Employee Stock Ownership
Plan, Fremont General Corporation, and First Interstate Bank
of California dated August 10, 1995. (Incorporated by
reference to Exhibit (10)(viii) to the Registrant's
Quarterly Report on Form 10-Q for the period ended September
30, 1995.)
21 Subsidiaries of the Company.
23 Consent of Ernst & Young LLP Independent Auditors.
27 Financial Data Schedule.
With respect to long-term debt instruments, the Company undertakes to provide
copies of such agreements upon request by the Commission.
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* Management or compensatory plans or arrangements.