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FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
COMMISSION FILE NUMBER 1-8007
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FREMONT GENERAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 95-2815260
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2020 SANTA MONICA BOULEVARD,
SANTA MONICA, CALIFORNIA 90404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 315-5500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
LIQUID YIELD OPTION(TM) NOTES DUE 2013 (ZERO COUPON-SUBORDINATED)
FREMONT GENERAL FINANCING I -- 9% TRUST ORIGINATED PREFERRED SECURITIES(SM)
(TITLE OF EACH CLASS)
NEW YORK STOCK EXCHANGE
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 22, 1996:
COMMON STOCK, $1.00 PAR VALUE -- $395,582,000
The number of shares outstanding of each of the issuer's classes of common
stock as of March 22, 1996:
COMMON STOCK, $1.00 PAR VALUE -- 25,393,000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the 1996 annual meeting of stockholders
are incorporated by reference into Part III of this report.
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ITEM 1. BUSINESS
GENERAL
Fremont General Corporation is a nationwide insurance and financial
services holding company, operating select businesses in niche markets. The
primary operating strategy of Fremont General is to build upon its core business
units through acquisition opportunities and new business development. Fremont
General's secondary strategy is to achieve income balance and geographic
diversity among its business units in order to limit the exposure of Fremont
General and its subsidiaries ("Fremont General" or "the Company") to industry,
market and regional concentrations.
The Company is one of the largest mono-line workers' compensation insurers
in the United States, with major market positions in California and Illinois,
and a presence in Arizona, Indiana, Michigan and Wisconsin. For the year ended
December 31, 1995, the Company's workers' compensation insurance premiums were
evenly divided between the western and the mid-western regions. For the year
ended December 31, 1995 and 1994, the Company had workers' compensation
insurance premiums earned of $575 million and $401 million, respectively. See
"Insurance Operations." The Company recently expanded its workers' compensation
insurance operations through the acquisition on February 22, 1995 of Casualty
Insurance Company ("Casualty") and its wholly-owned subsidiary Workers'
Compensation and Indemnity Company ("WCIC"). Casualty is the largest underwriter
of workers' compensation insurance in Illinois with additional operations,
directly or indirectly, in Indiana, Michigan and Wisconsin. Fremont General
believes that this acquisition provides the Company with a national platform
upon which to build its workers' compensation insurance business, while
providing greater geographic diversification. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Note B of Notes to Consolidated Financial Statements. A.M. Best rates the
Company's workers' compensation insurance subsidiaries on a consolidated basis
as "A-" (Excellent). An "A-" rating is A.M. Best's fourth highest rating
category out of fifteen rating categories ranging from "A++" (Superior) to "F"
(In Liquidation).
The Company also has growing financial services operations engaged
primarily in commercial and residential real estate lending in California and
commercial finance lending, principally to small and middle market companies
nationwide. The Company's financial services loan portfolio has grown from $536
million at December 31, 1991 to $1.5 billion at December 31, 1995. By engaging
in several selected businesses which are geographically diverse the Company
believes it can achieve greater stability in its operating results. Over the
five years ended December 31, 1995, the Company's income before taxes grew at a
compound annual rate of approximately 21% to $100 million in 1995. The Company's
book value increased from $175 million at December 31, 1990 to $498 million at
December 31, 1995. The Company's assets were $4.5 billion at December 31, 1995.
See "Financial Services Operations."
Management believes that ownership of the Company's Common Stock by
employees has been an important element in the Company's success by enabling the
Company to attract and retain the best available personnel for positions of
substantial responsibility and to provide additional incentive and motivation to
such individuals to promote the success of the Company. As of December 31, 1995,
officers and directors of the Company, their families and the Company's ESOP
beneficially owned approximately 30% of the Company's outstanding Common Stock.
The following Business section contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in this section and
elsewhere in this
Form 10-K.
Fremont General, a Nevada corporation, was incorporated in 1972.
INSURANCE OPERATIONS
Workers' Compensation Insurance
Fremont Compensation Insurance Company and its subsidiaries ("Fremont
Compensation") underwrites workers' compensation insurance principally in
California and Illinois, with a smaller presence in Arizona, Indiana, Michigan,
and Wisconsin. With the acquisition of Casualty in 1995, Fremont Compensation is
one of the largest mono-line workers' compensation insurers in the United
States. In 1995, Fremont
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Compensation's workers' compensation insurance premiums were evenly divided
between the western and mid-western regions. The Company believes this
geographic diversity mitigates potential fluctuations in earnings from cyclical
downturns in various regional economies. A.M. Best rates the Company's workers'
compensation insurance subsidiaries on a consolidated basis as "A-" (Excellent).
In 1995, income before taxes from workers' compensation insurance operations was
$85 million.
Workers' compensation is a statutory system which requires every employer
to either purchase insurance or self-insure in order to provide its employees
with medical care and other specified benefits for work-related injuries or
illnesses. Compensation is payable regardless of who was at fault. Most
employers provide for this potential liability by purchasing workers'
compensation insurance from insurance carriers. There are four types of benefits
payable under workers' compensation policies: medical benefits, vocational
rehabilitation benefits, disability benefits and death benefits. The amounts of
disability and death benefits payable for claims are established by statute,
vocational rehabilitation benefits are provided with certain limitations in some
jurisdictions, including California, and no dollar limitation is set forth for
medical benefits. See "Regulation -- Insurance Regulation."
Premiums. Workers' compensation insurance premiums are based upon the
policyholder's payroll and may be significantly affected by changes in general
economic conditions which impact employment and wage levels, as well as by
government regulation. Insurance premiums are also subject to supervision and
regulation by the state insurance authority in each state. In July 1993, the
California legislature enacted legislation to reform the workers' compensation
system and to, among other things, adopt an open rating system through the
repeal of the minimum rate law effective January 1, 1995. Illinois has been
operating under an open rating system since 1982. In an open rating system,
workers' compensation insurers are provided with advisory rates by job
classification and each insurance company determines its own rates based in part
upon its particular operating and loss costs. Although insurance companies are
not required to adopt such advisory rates, companies in Illinois generally
follow such rates. However, insurance companies in California have, since the
adoption of an open rating system, generally set their premium rates below such
advisory rates. Before January 1, 1995, California operated under a minimum rate
law, whereby premium rates established by the California Department of Insurance
were the minimum rates which could be charged by an insurance carrier. See
"Regulation -- Insurance Regulation." The repeal of the minimum rate law has
resulted in lower premiums and lower profitability on the Company's California
workers' compensation insurance policies due to increased price competition. The
Company expects that the premiums earned in California will continue to
decrease, principally due to price competition. In addition, the Company
anticipates price competition to continue in Illinois, where an additional
overall decrease in advisory rates of 13.6% was effective January 1, 1996. See
"Competition."
Underwriting and Loss Control. Prior to insuring a workers' compensation
account, the Company's underwriting department reviews the employer's prior loss
experience, safety record, credit history, operations, geographic location and
employment classifications. The Company generally avoids industries and
businesses involving hazardous conditions or high exposure to multiple injuries
resulting from a single occurrence. The Company targets accounts that appear to
have a strong work ethic among employees, long-term employees, and a genuine
interest in the adoption of and adherence to loss control standards.
The loss control department participates in the initial underwriting
process and provides continuing services while the policy is in force. In the
initial underwriting phase, a Company loss control consultant will generally
survey the employer's operations, review the employer's prior loss patterns and
assess the extent to which such losses may be prevented. The loss control
consultant will also meet with the employer's management to assess the extent to
which management is committed to safety in the workplace. After the policy is
issued, the loss control department provides continuing assistance to the
employer in developing and maintaining safety programs and procedures, reviews
periodic loss reports, attempts to identify weaknesses in the employer's loss
control procedures and assists the employer in correcting these weaknesses.
Policyholders' Dividends. In 1995, the Company's workers' compensation
insurance policies, both in California and those underwritten by Casualty, were
predominately written as non-participating, which does not include provisions
for the insurer to declare and pay dividends to a policyholder after the
expiration of the
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policy. In 1994 and prior, the Company's policies were predominately written as
participating, thereby obligating the Company to consider the payment of
dividends to a policyholder, based upon the policyholder's loss experience, the
Company's overall loss experience and competitive conditions. This shift in
policy type is due primarily to the increased competition in the California
market which has resulted from the repeal of the minimum rate law, effective
January 1, 1995. See "Premiums" and "Regulation -- Insurance Regulation." The
Company anticipates that this shift to non-participating policies will continue
and be a characteristic element of the competitive environment.
Claims Administration. The Company's policy is to settle valid claims
promptly and to work closely with policyholders to return injured workers to the
job quickly, while avoiding litigation if possible. Claims personnel communicate
frequently with policyholders, injured employees and medical providers. The
Company's policy is to control the number of cases assigned to its claims
personnel, to identify and investigate questionable claims and to produce early
and cost-effective case settlements of valid claims. As part of its "zero
tolerance" program, the Company refuses to settle any claim that it believes to
be fraudulent. In most claims litigated administratively, the Company utilizes
its own non-lawyer hearing representatives and has found this practice to be
significantly less expensive than using legal counsel.
The Company provides rehabilitation programs for insured employees and
medical cost containment programs. The Company monitors medical care bills to
determine if they are reasonable, audits hospital bills, reviews hospital
utilization and becomes involved in the selection of treatment facilities.
Competition. The insurance industry is characterized by competition on the
basis of price and service. Prior to January 1, 1995, minimum premium rates were
prescribed for workers' compensation insurance in California by the Department
of Insurance, and competition for underwriting such insurance in California had
been based principally upon an insurance carrier's financial strength and
history of paying policyholders' dividends. Secondary considerations included
loss control and claims administration, the ability to respond promptly to
agents and brokers, and commission schedules for agents and brokers. The repeal
of the California minimum rate law effective January 1, 1995 has resulted in
increased price competition which is adversely affecting the Company's results
of operations for its workers' compensation insurance business in California.
See "Regulation -- Insurance Regulation." The Company recently expanded its
workers' compensation operation through the acquisition on February 22, 1995 of
Casualty, which underwrites workers' compensation insurance in several
mid-western states, primarily in Illinois. Although Casualty is the largest
underwriter of workers' compensation insurance in the Illinois market, based on
the competitive nature of the insurance industry and the inherent risks
associated with the Company entering into a new geographic market, there can be
no assurance that Casualty will continue to maintain its market share in the
future. In addition, advisory premium rates established by the National Council
on Compensation Insurance, which workers' compensation insurance companies in
Illinois generally tend to follow, decreased in 1995. An additional average
overall decrease in such advisory rates of 13.6% went into effect on January 1,
1996. As a result, the Company anticipates price competition to continue in
Illinois. Furthermore, state regulatory changes could affect competition in the
states where the Company transacts insurance business. Although the Company is
one of the largest writers of workers' compensation insurance in California and
Illinois, certain of the Company's competitors are larger and have greater
resources than the Company.
Marketing. The Company markets its workers' compensation insurance
products through more than 1,200 non-exclusive independent insurance agents and
brokers, many of whom have been associated with the Company for more than 15
years. During 1995, the ten largest agents accounted for approximately 9% of the
Company's workers' compensation insurance premiums written, and no single agent
or broker accounted for more than 2% of premiums written.
Medical Malpractice Insurance
The Company's medical malpractice insurance operation underwrites primarily
standard professional liability insurance on a "claims made" basis in
California. Coverage is provided for claims reported to the Company during the
policy period arising from incidents that occurred at any time that the insured
was covered by the policy. Fremont Indemnity Company, within which the medical
malpractice insurance is
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written, is currently rated "B++" (Very Good) by A.M. Best. The Company offers
coverage for individual medical doctors, anesthesiologists, podiatrists, as well
as medical groups, community clinics, laboratories and miscellaneous medical
clinics. The Company markets its policies exclusively through approximately 300
non-exclusive independent insurance agents and brokers. Revenues from this
subsidiary were not significant in 1995, 1994 and 1993.
Reinsurance Ceded
Reinsurance is ceded primarily to reduce the liability on individual risks
and to protect against catastrophic losses. The Company follows the industry
practice of reinsuring a portion of its risks. For this coverage, the Company
pays the reinsurer a portion of the premiums received on all policies.
The Company maintains excess of loss reinsurance treaties with various
reinsurers for each of its insurance lines. Under the current workers'
compensation reinsurance treaties, various reinsurers assume liability on that
portion of the loss that exceeds $1 million per occurrence, up to a maximum of
$199 million per occurrence. Further, in conjunction with the acquisition of
Casualty, certain treaties were established between the Company and The
Continental Insurance Company ("Continental") whereby certain liabilities of
Casualty, which were not part of the business acquired, were ceded to
Continental. For medical malpractice insurance, excess of loss reinsurance
treaties cover claims and losses above $1 million, up to a maximum of $5
million. Although reinsurance makes the assuming reinsurer liable to the insurer
to the extent of the reinsurance ceded, it does not legally discharge an insurer
from its primary liability for the full amount of the policy liability. All of
the foregoing reinsurance is with non-affiliated reinsurers. The Company
believes that the terms of its reinsurance contracts are consistent with
industry practice and, based on its review of the reinsurers' financial
statements and reputations in the reinsurance marketplace, that its reinsurers
are financially sound. The Company encounters disputes from time to time with
its reinsurers, which, if not settled, are typically resolved in arbitration.
The Company's treaties are generally for annual terms. The Company has
maintained reinsurance treaties with many of these same reinsurers for a number
of years and believes that suitable alternative reinsurance treaties are readily
obtainable at the present time. In general, the reinsurance agreements are of
the treaty variety and cover all underwritten risks of types specified in the
treaties. As of December 1995, The Continental Insurance Company and General
Reinsurance Corporation were the only reinsurers that accounted for more than
10% of total amounts recoverable from all reinsurers on paid and unpaid losses.
Operating Data
Set forth below is certain information pertaining to the Company's workers'
compensation insurance business as determined in accordance with GAAP for the
years indicated. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of certain of this
information.
1995 1994 1993 1992 1991
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(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Workers' Compensation
Net premiums earned............... $574,952 $401,455 $426,793 $378,468 $371,981
Net investment income and
other(1)....................... 87,304 52,747 56,733 67,458 62,370
Underwriting profit (loss)........ (2,295) 9,452 (6,958) (25,659) (21,132)
Net income before taxes........... 85,009 62,199 49,775 41,799 41,238
Loss Ratio..................... 75.9% 62.1% 70.4% 82.2% 70.9%
Expense ratio.................. 24.5% 23.1% 20.6% 21.8% 25.0%
Policyholders' dividend
ratio........................ 0.0% 12.4% 10.6% 2.8% 9.8%
-------- -------- -------- -------- --------
Total combined ratio...... 100.4% 97.6% 101.6% 106.8% 105.7%
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(1) Includes net realized investment gains and interest expense.
Statutory Combined Ratio. The following table reflects the combined ratios
of the Company's insurance subsidiaries determined in accordance with statutory
accounting practices, together with the property and
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casualty industry-wide combined ratios after policyholders' dividends, as
compiled by A.M. Best for the years indicated.
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
------------- ----- ----- ----- -----
Workers' compensation:
Company.................................... 100.1% 98.5% 98.8% 110.4% 104.8%
Industry(1)................................ not available 101.4% 109.1% 121.5% 122.6%
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(1) Nationwide statutory combined ratio information for the workers'
compensation insurance industry for 1991 through 1994 is from A.M. Best's
Aggregates & Averages, Property-Casualty (1992 through 1995 editions).
Premium-to-Surplus Ratio. Regulatory authorities regard the
premium-to-surplus ratio as an important indicator of operating leverage, since
the lower the ratio, the greater the insurer's ability to withstand abnormal
loss experience. Guidelines established by the National Association of Insurance
Commissioners ("NAIC") provide that a property and casualty insurer's
premium-to-surplus ratio is satisfactory if it is below 3 to 1.
The following table sets forth the Company's consolidated ratio of net
property and casualty premiums written during the period to policyholders'
surplus on a statutory basis at the end of the period, for the periods
indicated:
YEAR ENDED DECEMBER 31,
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1995 1994 1993 1992 1991
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(THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Net premiums written during the
year.............................. $683,711(1) $425,631 $454,867 $414,218 $404,701
Policyholders' surplus at end of
year.............................. 299,408 235,294 221,857 162,714 158,512
Ratio............................... 2.3x 1.8x 2.1x 2.5x 2.6x
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(1) Includes net written premium for Casualty and WCIC for the period January 1,
1995 through February 21, 1995, which was prior to the Company's acquisition
of Casualty on February 22, 1995.
Loss and Loss Adjustment Expense Reserves
In many cases, significant periods of time, ranging up to several years or
more, may elapse between the occurrence of an insured loss, the reporting of the
loss to the insurer, and the insurer's payment of that loss. To recognize
liabilities for future unpaid losses, insurers establish reserves, which are
balance sheet liabilities, representing estimates of future amounts needed to
pay claims with respect to insured events that have occurred. Reserves are also
established for loss adjustment expense reserves ("LAE") representing the
estimated expenses of settling claims, including legal and other fees, and
general expenses of administering the claims adjustment process.
Reserves for losses and LAE are based not only on historical experience but
also on management's judgment of the effects of matters such as future economic
and social forces likely to impact the insurer's experience with the type of
risk involved, circumstances surrounding individual claims, and trends that may
affect the probable number and nature of claims arising from losses not yet
reported. Consequently, loss reserves are inherently subject to a number of
highly variable circumstances.
Reserves for losses and LAE are revalued periodically using a variety of
actuarial and statistical techniques for producing current estimates of expected
claim costs. Claim frequency and severity and other economic and social factors
are considered in the reevaluation process. A provision for inflation in the
calculation of estimated future claim costs is implicit since reliance is placed
on both actual historical data, which reflect past inflation, and on other
factors which are judged to be appropriate modifiers of past experience.
Adjustments to liabilities are reflected in operating results for the periods to
which they are made.
Reconciliation of Loss and Loss Adjustment Expense Reserves. The following
table shows in accordance with GAAP the reconciliation of the estimated
liability for losses and LAE for the Company's property
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and casualty insurance subsidiaries (excluding discontinued operations) and the
effect on income for each of the three years indicated.
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
YEAR ENDED DECEMBER 31,
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1995 1994 1993
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(THOUSANDS OF DOLLARS)
Reserves for losses and LAE, net of reinsurance
recoverable, at beginning of year.................... $ 610,510 $ 644,190 $ 633,394
Incurred losses and LAE:
Provision for insured events of the current year, net
of reinsurance.................................... 459,951 290,833 323,279
Increase (decrease) in provision for insured events
of prior years, net of reinsurance................ 1,382 (17,234)(1) (4,126)
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Total incurred losses and LAE................ 461,333 273,599 319,153
Payments:
Losses and LAE, net of reinsurance, attributable to
insured events of:
Current year...................................... (132,358) (70,505) (67,805)
Prior years....................................... (358,423) (236,774) (240,552)
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Total payments............................... (490,781) (307,279) (308,357)
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Subtotal..................................... 581,062 610,510 644,190
Liability for losses and LAE for Casualty Insurance
Company acquired during the current year............. 604,644 -- --
---------- --------- ---------
Reserves for losses and LAE, net of reinsurance
recoverable, at end of year.......................... 1,185,706 610,510 644,190
Reinsurance recoverable for losses and LAE, at end of
year................................................. 269,986 136,151 138,737
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Reserves for losses and LAE, gross of reinsurance
recoverable, at end of year.......................... $1,455,692 $ 746,661 $ 782,927
========== ========= =========
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(1) See "Analysis of Loss and Loss Adjustment Expense Development" below for
discussion of the decrease in reserve estimates during 1994.
Analysis of Loss and Loss Adjustment Expense Development. The following
table shows the cumulative amount paid against the previously recorded liability
at the end of each succeeding year and the cumulative development of the
estimated liability for the ten years ending December 31, 1995. Conditions and
trends that have affected the development of these reserves and payments in the
past will not necessarily recur in the future. Accordingly, it would not be
appropriate to use this cumulative history to project future performance.
The re-estimated liability portion of the following table shows the year by
year development of the previously estimated liability at the end of each
succeeding year. The re-estimated liabilities are increased or decreased as more
information becomes known about the frequency and severity of claims for
individual years. The increases or decreases are reflected in the current year's
operating earnings. Each column shows the reserve held at the indicated calendar
year-end and cumulative data on re-estimated liabilities for the year and all
prior years making up those calendar year end liabilities. The effect on income
of the charge (credit) during the current period (i.e., the difference between
the estimated liability at December 31 and the liability estimated one year
later) is shown in the table above for each of three most recent years as
"Increase (decrease) in provision for insured events of prior years."
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CHANGES IN HISTORICAL RESERVES FOR LOSS AND LAE FOR THE LAST TEN YEARS
GAAP BASIS AS OF DECEMBER 31, 1995
YEAR ENDED DECEMBER 31,
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1985 1986 1987 1988 1989 1990 1991
-------- -------- -------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Reserves for Loss and LAE, net of reinsurance
recoverable.................................... $382,066 $384,923 $390,799 $406,823 $647,559 $652,284 $627,103
Net reserve re-estimated as of:
One year later.................................. 409,681 413,549 402,902 396,091 636,039 624,953 668,107
Two years later................................. 406,550 410,654 389,973 377,080 607,253 647,959 660,729
Three years later............................... 390,847 403,767 374,330 356,961 607,492 638,879 651,482
Four years later................................ 392,108 394,868 361,209 350,736 599,052 627,194 654,403
Five years later................................ 385,919 384,891 358,645 375,550 593,527 631,165
Six years later................................. 385,247 385,732 369,320 373,514 596,808
Seven years later............................... 382,482 391,036 371,863 375,364
Eight years later............................... 385,334 394,790 372,920
Nine years later................................ 388,250 396,359
Ten years later................................. 388,744
Net cumulative redundancy (deficiency)........... (6,678) (11,436) 17,879 31,459 50,751 21,119 (27,300)
Cumulative amount of reserve paid, net of reserve
recoveries, through:
One year later.................................. 134,969 136,523 128,565 125,563 226,101 245,777 257,591
Two years later................................. 226,952 228,926 213,323 211,529 374,876 403,105 419,638
Three years later............................... 282,748 286,155 266,605 263,229 461,366 495,707 521,729
Four years later................................ 317,928 320,729 298,956 291,817 514,890 550,404 583,013
Five years later................................ 339,771 342,673 316,483 320,511 547,535 585,094
Six years later................................. 352,179 354,069 333,461 339,998 567,871
Seven years later............................... 359,469 365,410 346,547 351,805
Eight years later............................... 367,029 375,384 353,517
Nine years later................................ 373,853 380,437
Ten years later................................. 377,177
Net reserve -- December 31.......................
Reinsurance recoverable..........................
Gross reserve -- December 31.....................
Net re-estimated reserve.........................
Re-estimated reinsurance recoverable.............
Gross re-estimated reserve.......................
Gross cumulative redundancy (deficiency).........
YEAR ENDED DECEMBER 31,
-------------------------------------------
1992 1993 1994 1995
-------- -------- -------- ----------
Reserves for Loss and LAE, net of reinsurance
recoverable.................................... $633,394 $644,190 $610,510 $1,185,709
Net reserve re-estimated as of:
One year later.................................. 629,268 626,956 611,892 --
Two years later................................. 615,747 633,333
Three years later............................... 621,348
Four years later................................
Five years later................................
Six years later.................................
Seven years later...............................
Eight years later...............................
Nine years later................................
Ten years later.................................
Net cumulative redundancy (deficiency)........... 12,046 10,857 (1,382) --
Cumulative amount of reserve paid, net of reserve
recoveries, through:
One year later.................................. 240,552 236,774 241,667(1) --
Two years later................................. 402,048 392,237
Three years later............................... 499,924
Four years later................................
Five years later................................
Six years later.................................
Seven years later...............................
Eight years later...............................
Nine years later................................
Ten years later.................................
Net reserve -- December 31....................... $610,510 $1,185,709
Reinsurance recoverable.......................... 136,151 269,983
-------- ----------
Gross reserve -- December 31..................... $746,661 $1,455,692
========= ===========
Net re-estimated reserve......................... $611,892
Re-estimated reinsurance recoverable............. 135,931
--------
Gross re-estimated reserve....................... $747,823
=========
Gross cumulative redundancy (deficiency)......... $ (1,162)
=========
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(1) Excludes $116,756,000 in loss and LAE payments on 1994 and prior years
related to reserves acquired from Casualty.
The Company is required to maintain reserves to cover its estimated
ultimate liability for losses and LAE with respect to reported and unreported
claims incurred as of the end of each accounting period. These reserves do not
represent an exact calculation of liabilities, but rather are estimates
involving actuarial projections at a given time of what the Company expects the
ultimate settlement and administration of claims will cost based on facts and
circumstances then known, predictions of future events, estimates of future
trends in claims' frequency and severity and judicial theories of liability as
well as other factors. The Company regularly reviews its reserving techniques,
overall reserve position and its reinsurance. In light of present facts and
current legal interpretations, management believes that adequate provision has
been made for loss reserves. In making this determination, management has
considered its claims experience to date, loss development history for prior
accident years, estimates of future trends of claims frequency and severity, and
various external factors such as judicial theories of liability. However,
establishment of appropriate reserves is an inherently uncertain process, and
there can be no certainty that currently established reserves will prove
adequate in light of subsequent actual experience. Subsequent actual experience
has resulted and could result
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in loss reserves being too high or too low. Future loss development could
require reserves for prior periods to be increased, which would adversely impact
earnings in future periods.
In 1995, there was relatively insignificant development on 1994 and prior
accident years of $1.4 million. In 1994, the Company decreased its losses and
LAE reserves for 1993 and prior accident years by $17.2 million. This reserve
decrease was partially offset by an increase in the liability for dividends to
policyholders. Further, this reduction in reserves represents the recognition of
a continued decrease in the frequency and severity of reported claims on 1994
and prior accident years. For the 1993 calendar year, losses and LAE development
on 1992 and prior accident years was a relatively modest $4.1 million decrease
in loss and LAE reserves. The Company is not able to determine with certainty
the specific cause or causes of increases and decreases in claims experience
that led to these changes in reserves but has reached its own conclusion based
on a review of its internal data base and a subjective evaluation of external
factors. The following discussion is a summary of the principal considerations
that the Company evaluated in determining workers' compensation insurance
reserve adjustments during 1994 and 1993.
The Company believes that a number of factors including the economic
recession in California (including unemployment rates) in the early 1990's,
primarily 1990 and 1991, led to increases in the occurrence and magnitude of
post-employment stress claims submitted to the Company, including many
fraudulent claims. These conditions mirrored those of the California workers'
compensation industry in general as private workers' compensation insurers in
California, including the Company, substantially increased loss reserves in
calendar year 1992 for the 1990 and 1991 accident years. The effect of fraud on
the industry during 1990 and 1991 is further supported by the impact of actions
taken by the California legislature in 1992 to limit workers' compensation
fraud. In connection with this legislation, the Company instituted its "zero
tolerance" program and began to aggressively investigate and prosecute those
attempting to defraud policyholders through filing and encouraging fraudulent
workers' compensation insurance claims. Thus, while unemployment continued to
remain high in California during 1992 the number of claims and loss ratios for
the industry on the 1992 accident year declined. The Company believes the
decline in claim frequency and severity, which continued into 1994, is due
primarily to the anti-fraud legislation enacted in California and the anti-fraud
campaigns thereafter undertaken by the Company and other members of the workers'
compensation insurance industry. In 1993, the Company only partially recognized
this decline in claim frequency and severity, due in part to a lack of
sufficient information to confirm the continued trend in claim frequency and
severity decreases. The significant reserve decrease in 1994 for losses and LAE
on 1993 and prior accident years of $17.2 million represents the Company's
additional recognition of these claim frequency and severity decreases, and
reflects the results of the Company's review of statistical evidence that
emerged in 1994 which further confirmed the claim frequency and severity
decreases related to the 1993 and prior accident years.
INVESTMENT PORTFOLIO
The Company manages its investments internally. The following portfolio
information reflects the Company's continuing operations. See "Discontinued
Operations."
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10
The following table reflects the amortized cost and fair value of fixed
maturity investments and non-redeemable preferred equity securities by major
category, as well as the amortized cost and fair value of cash and short-term
investments on the dates indicated.
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------- ---------- --------- --------
(THOUSANDS OF DOLLARS)
Available for sale:
United States Treasury securities and
obligations of other US government
agencies and corporations............. $ 136,626 $ 149,250 $ 53,045 $ 45,152
Redeemable preferred stock............... 15,887 15,764 4,249 3,491
Mortgage-backed securities............... 340,682 337,133 189,551 130,675
Corporate securities
Banks................................. 123,144 125,836 24,744 20,125
Financial............................. 117,013 120,242 10,000 8,225
Transportation........................ 16,888 17,241 -- --
Utilities............................. 13,427 13,820 -- --
Industrial............................ 491,767 517,264 30,112 27,774
---------- ---------- -------- --------
Total............................ 1,255,434 1,296,550 311,701 235,442
Non-redeemable preferred stock........... 285,337 277,451 213,935 189,632
---------- ---------- -------- --------
Total............................ $1,540,771 $1,574,001 $ 525,636 $425,074
========== ========== ======== ========
Held to maturity:
United States Treasury securities and
obligations of other US government
agencies and corporations............. $ -- $ -- $ 53,695 $ 51,407
Mortgage-backed securities............... -- -- 152,721 147,696
---------- ---------- -------- --------
Total............................ $ -- $ -- $ 206,416 $199,103
========== ========== ======== ========
Short-term investments..................... $ 362,163 $ 362,163 $ 255,751 $255,751
Cash....................................... 39,559 39,559 31,058 31,058
As of December 31, 1995, substantially all of the fixed maturity
investments in the portfolio were rated investment grade. Using Standard and
Poor's, Moody's and Fitch's rating services, 59% were rated "A" or higher, 40%
were rated BBB and 1% were rated BB. As of December 31, 1995, these investment
securities had an approximate fair value of $1.3 billion, which was higher than
amortized cost by approximately $41 million. The Company does not currently plan
or intend to invest in securities rated below investment grade.
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The following table reflects the average cash and investment assets of the
Company and its subsidiaries for the periods indicated.
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- --------
(THOUSANDS OF DOLLARS, EXCEPT
PERCENTS)
Average cash and investment assets
Cash.................................................. $ 24,657 $ 29,693 $ 33,700
Investment assets..................................... 1,591,972 1,060,001 925,794
----------- ----------- --------
Total......................................... $1,616,629 $1,089,694 $959,494
=========== =========== ========
Percent earned on (excluding realized gains and losses):
Cash and investment assets............................ 7.38% 6.99% 7.83%
Investment assets only................................ 7.49% 7.19% 8.11%
Percent earned on (including realized gains and losses):
Cash and investment assets............................ 7.38% 6.97% 8.05%
Investment assets only................................ 7.49% 7.16% 8.34%
The Company's general investment philosophy is to hold fixed income
securities for long term investment. As a result of changing accounting and
industry practice and management's evaluation of the investment portfolio, the
Company has segregated its portfolio into investments held to maturity and those
that would be available for sale in response to changing market conditions,
liquidity requirements, interest rate movements and other investment factors. At
December 31, 1995 and 1994, Company held securities having an amortized cost of
$1.5 billion and $526 million, respectively, as available for sale. See "Item 7.
Management's Discussion and Analysis" and Notes A and C of Notes to Consolidated
Financial Statements.
The following table sets forth maturities in the fixed maturity and
short-term investment portfolios at December 31, 1995:
AMORTIZED
COST PERCENTAGE
---------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
One year or less..................................... $ 389,521 24%
Over 1 year through 5 years.......................... 245,447 15
Over 5 years through 10 years........................ 495,154 31
Over 10 years........................................ 146,793 9
Mortgage-backed securities........................... 340,682 21
----------- ---
Totals..................................... $1,617,597 100%
=========== ===
Using Standard and Poor's, Moody's and Fitch's rating services, the
following table sets forth the quality mix of the Company's fixed maturity
investment portfolio at December 31, 1995:
PERCENTAGE
-----------
AAA (Including US government obligations)....................... 31%
AA.............................................................. 2
A............................................................... 26
BBB............................................................. 40
BB.............................................................. 1
---
Total................................................. 100%
===
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FINANCIAL SERVICES OPERATIONS
Real Estate Lending
In 1990, the Company acquired Investors Bancor, a holding company for
Fremont Investment & Loan (formerly Investors Thrift), a California thrift and
loan from Tomar Financial Corporation for approximately $6.7 million. Fremont
Investment & Loan ("Fremont I & L") serves more than 23,000 customers through
its 12 branches, and its deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). See "Regulation -- Thrift and Loan Regulation." Fremont I
& L's operations are primarily engaged in commercial and residential real estate
lending. Income before taxes from the real estate lending operation has
increased significantly from $2.5 million in 1991 to $10.6 million in 1995.
Assets of the real estate lending operation have grown from $278 million at the
end of 1991 to $1.05 billion at the end of 1995, due to increased loan
originations and to the purchase of loan portfolios from other financial
institutions. Fremont I & L funds its lending activities through its deposits
and capital. Deposits consists of full-paid investment certificates (which are
similar to certificates of deposit) and installment investment certificates
(which are similar to passbook accounts and money market accounts). Deposits
totaled $926 million at December 31, 1995.
The ability of the Company to continue to originate loans, and of borrowers
to repay outstanding loans, may be impaired by adverse changes in local or
regional economic conditions which affect such areas or by adverse changes in
the real estate market in those areas. Such events could also significantly
impair the value of the underlying collateral. If the Company's collateral were
to prove inadequate, the Company's results of operations could be adversely
affected. In addition, the financial services industry is characterized by
competition on the basis of price and service.
Loan Origination. Fremont I & L originates loans through independent loan
brokers and through its own loan agents. In 1994, Fremont I & L purchased an
aggregate of $366 million in primarily California commercial real estate loan
portfolios from financial institutions. Acquisition costs of purchased loan
portfolios are significantly lower than if loans were originated by the Company.
In 1995, no portfolios of commercial real estate loans were purchased, primarily
due to increased competition which resulted in inadequate yields or unacceptable
risk profiles for the portfolios considered. The Company originates and
purchases loans primarily for its own portfolio rather than for resale to third
parties. The Company performs an internal evaluation of the underlying
collateral at the time each loan is purchased and applies strict underwriting
guidelines that include conservative loan-to-value ratios.
Fremont I & L has primarily focused on the origination of commercial real
estate loans secured by first trust deeds on income-producing properties in
California. The real estate securing these loans include a wide variety of
property types, such as small office buildings, small shopping centers,
owner-user office/warehouses and retail properties. Fremont I & L does not
originate commercial real estate construction and development loans. The
majority of the commercial real estate loans originated are adjustable rate
loans and generally range between $1 to $5 million. As of December 31, 1995, the
average loan size was $1,030,000 and the approximate average loan-to-value ratio
was 66%, using the most current available appraised values and current balances
outstanding. The total amount of commercial real estate loans outstanding at
December 31, 1995 was $731 million or 81% of the loan portfolio. Loans secured
by commercial real estate are generally considered to entail a higher level of
risk than loans secured by residential real estate. Although the properties
securing the Company's commercial real estate loans generally have good
operating histories, there is no assurance that such properties will continue to
generate sufficient funds to allow their owners to make full and timely mortgage
loan payments. At December 31, 1995, Fremont I & L had forty-seven non-accrual
commercial real estate loans totaling approximately $21.5 million and commercial
real estate owned of approximately $4.4 million.
Fremont I & L also originates loans secured by single-family residences. At
December 31, 1995, single family residential real estate secured loans,
represented $166 million, or 18%, of Fremont I & L's loan portfolio.
Substantially all of these loans are secured by first trust deeds. These loans
have principal amounts primarily below $300,000, have maturities of nine to
thirty years and are approved in accordance with lending policies approved by
Fremont I & L's Board of Directors which includes standards covering, among
other things, collateral value, loan to value and debt ratio. At December 31,
1995, the average single-family loan amount was $118,000, and the approximate
average loan-to-value ratio was 74%, using appraised values at the time of loan
origination and current balances outstanding.
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13
The portfolio of Fremont I & L's loans receivable as of the dates indicated
are summarized in the following table by type of primary collateral.
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
Commercial real estate loans................................... $730,599 $687,198 $302,202
Residential real estate loans.................................. 165,888 103,532 64,608
Contract loans................................................. 547 32,990 52,214
Installment loans.............................................. 1,783 3,191 5,638
Finance leases................................................. -- 114 794
-------- -------- --------
Loans receivable before deferred fees and costs................ 898,817 827,025 425,456
Purchase discount and deferred fees and costs.................. (9,865) (19,498) (24)
-------- -------- --------
Total loans receivable, purchase discount and deferred
fees and costs.......................................... 888,952 807,527 425,432
Less allowance for possible loan losses........................ (17,498) (14,391) (11,880)
-------- -------- --------
Loans receivable, net..................................... $871,454 $793,136 $413,552
======== ======== ========
Funding Sources. Fremont I & L obtains funds from depositors by offering
full-paid investment certificates and installment investment certificates
insured by the FDIC to the legal maximum through its 12 branches in California.
Fremont I & L has typically offered higher interest rates to its depositors than
do most full service financial institutions. At the same time, it has minimized
the cost of maintaining these accounts by not offering transaction accounts or
services such as checking, safe deposit boxes, money orders, ATM access and
other traditional retail services. Fremont I & L generally effects deposit
withdrawals by issuing checks rather than disbursing cash, which minimizes
operating costs associated with handling and storing cash. Additional financing
became available from the Federal Home Loan Bank of San Francisco effective
January 1995. This financing is available at varying rates and terms. As of
December 31, 1995, $170 million was available under the facility and no
borrowings were outstanding.
The table below summarizes Fremont I & L's investment certificates as of
December 31, 1995 which are stated in amounts of $100,000 or more, by maturity
and by type.
INVESTMENT CERTIFICATES $100,000 OR MORE, MATURING
------------------------------------------------------
3 MONTHS OVER 3 THROUGH OVER 6 THROUGH OVER
OR LESS 6 MONTHS 12 MONTHS 12 MONTHS TOTAL
-------- -------------- -------------- --------- -------
(THOUSANDS OF DOLLARS)
Retail.................................. $2,285 $2,500 $3,845 $ 6,624 $15,254
IRA's................................... 227 201 316 436 1,180
Wholesale............................... 311 300 2,967 5,359 8,937
Brokered................................ 5,550 2,494 1,451 46,027 55,522
------ ------ ------ ------- -------
Total.............................. $8,373 $5,495 $8,579 $58,446 $80,893
====== ====== ====== ======= =======
Commercial Finance
The Company's commercial finance subsidiary, Fremont Financial Corporation
("Fremont Financial"), provides working capital loans, primarily secured by
accounts receivable and inventory, to small and middle market companies on a
nationwide basis. Fremont Financial's total loan portfolio has grown from $189
million at December 31, 1991 to $569 million at December 31, 1995. This growth
has been achieved through development of Fremont Financial's customer base
through loan originations and through participation in syndicated loan
transactions. In 1995, income before taxes from commercial finance was $22.8
million. The lending market has become increasingly competitive for small to
middle market commercial borrowers. As a result, Fremont Financial has
experienced decreasing yields on its commercial finance loans. In addition,
adverse economic developments can negatively affect the Company's business and
results of operations in a number of ways. Such developments can reduce the
demand for loans, impair the ability of borrowers to pay loans and impair the
value of the underlying collateral. Commercial finance loans made by Fremont
Financial
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are primarily on a revolving short-term basis (generally two or three years) and
secured by assets which primarily include accounts receivable, inventory,
machinery and equipment and, to a lesser extent, real estate and other types of
collateral. In addition, Fremont Financial also makes term loans secured
primarily by equipment and real estate. The term loans originated in conjunction
with revolving loans are cross-collateralized (i.e., the same collateral is used
to support both the term loans and all the related revolving loans) and
coterminous with the related revolving loan made to the same borrower. The term
to maturity for the term loans is generally five to seven years; however,
certain term loans are "balloon loans" that amortize over a longer period and
therefore do not amortize fully before their respective maturities. Commercial
loans also include secured loans originated and serviced by other asset-based
lenders and participated in by Fremont Financial. As of December 31, 1995, the
average outstanding commercial loan balance was $2.7 million. Loans outstanding
to a single borrower generally range in size from $500,000 to $15,000,000.
The major avenue of growth for Fremont Financial remains the establishment
of new lending relationships. The Company has a national presence with regional
offices in Santa Monica, Chicago, New York and Atlanta, as well as eight other
marketing offices across the country. To provide a stable source of funds to
facilitate the continued expansion of its asset-based lending business, the
Company, in 1993, established the Fremont Small Business Loan Master Trust
("Fremont Trust") for the purpose of securitizing the greater part of its
commercial finance loan portfolio. The Fremont Trust is a master trust that can
issue multiple series of asset-backed certificates which represent undivided
interests in the Fremont Trust's assets (primarily commercial finance loans) and
Fremont Financial will continue to service the loans thereunder. The proceeds
from the sale of the initial series of asset-backed certificates ("Series A")
under this program in April 1993 were $200 million bearing interest at the rate
of LIBOR plus 0.47%. In November 1993, an additional $100 million of these
certificates ("Series B") were sold bearing interest at the rate of LIBOR plus
0.5%. The securities issued in this program have a scheduled maturity of three
and four years, but could mature earlier depending on fluctuations in
outstanding balances of loans in the portfolio and other factors. During April
1995, the Company issued $30 million in subordinated variable rate asset-backed
certificates, which mature in 2000, via a private placement. As of December 31,
1995, up to $500 million in additional publicly offered asset-backed
certificates may be issued pursuant to a shelf registration statement to fund
future growth in the commercial finance loan portfolio. In February 1996, $135
million in asset-backed certificates ("Series C") were issued which mature in
2000. The proceeds were used, in conjunction with existing cash, to retire the
$200 million in Series A certificates. The Series B certificates are scheduled
to mature in 1997. In December 1995, a commercial paper facility was established
as part of the asset securitization program. This facility provides for the
issuance of up to $150 million in commercial paper, dependent upon the level of
assets within the asset securitization program. This facility, which expires in
December 1998, had no amounts outstanding under it as of December 31, 1995. The
commercial finance operation also has an unsecured revolving line of credit with
a syndicated bank group that presently permits borrowings of up to $300 million,
of which $185 million was outstanding as of December 31, 1995. This credit line
is primarily used to finance assets which are not included in the Company's
asset securitization program. This credit line expires August 1998.
The Company's customer base consists primarily of small to middle market
manufacturers and distributors which generally require financing for working
capital and debt restructuring. At December 31, 1995, the Company had
approximately 195 loans outstanding in 34 states and the District of Columbia.
Approximately 32% of total loans outstanding were made to companies based in
California, and no other state accounted for more than 10% of total loans
outstanding.
Asset-based revolving loans permit a company to borrow from the lender at
any time during the term of the loan agreement, up to the lesser of a maximum
amount set forth in the loan agreement or a percentage of the value of the
collateral which primarily secures such loans. Under an asset-based lending
agreement, the borrower retains the credit and collection risk with respect to
the collateral in which the lender takes a security interest. Cash collections
are received as often as daily by or on behalf of the borrower after the loan is
initially made. These collections are paid to the lender to reduce the loan
balance.
While consideration is given to the net worth and profitability of a
client, asset-based loans are generally extended to borrowers who do not have
bank sources of credit readily available and are based on the estimated
liquidation value of the collateral pledged to secure the loan. The largest
percentage of realized losses has resulted from fraud or collateral
misrepresentations by the borrower. Fremont Financial seeks to protect itself
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15
against this risk through a comprehensive system of collateral monitoring and
control. Fremont Financial's auditors perform auditing procedures of a
borrower's books and records and physically inspects the collateral prior to
approval and funding, as well as approximately every 90 days during the term of
the loan. General economic conditions beyond the Company's control can and do
impact the ability of borrowers to repay loans and also the value of the assets
collateralizing such loans.
Over the past four years, the majority of Fremont Financial's loans that
have been liquidated have been fully repaid, as Fremont Financial attempts to
work closely with the borrower through the liquidation to ensure repayment of
the loan. Fremont Financial seeks to maintain conservative collateral valuations
and perfection of security interests.
Fremont Financial primarily competes with commercial finance companies and
banks, most of whom are larger and have greater financial resources than Fremont
Financial. The principal competitive factors are the rates and terms upon which
financing is provided and customer service. The lending market has become
increasingly competitive for small to middle market commercial borrowers. As a
result, Fremont Financial has experienced decreasing yields on its commercial
finance loans.
Premium Financing and Life Insurance
The Company finances property and casualty insurance premiums through its
subsidiary, Fremont Premium Finance Corporation. This premium finance loan
portfolio is collateralized by the unearned premiums of the underlying insurance
policies. Revenues and operating income from this subsidiary were not
significant in 1995, 1994 or 1993.
Prior to January 1, 1996, the Company offered life insurance products,
including annuities, credit life and disability insurance and term life
insurance for consumers, through its subsidiary, Fremont Life Insurance Company.
On December 31, 1995 and on January 1, 1996, the Company entered into
reinsurance and assumption agreements with a reinsurer whereby assets and
liabilities related to certain life insurance and annuity policies were ceded to
the reinsurer. These reinsurance agreements are part of several other agreements
which collectively act to significantly reduce the Company's life insurance
operations. The effect on operations from these agreements is not expected to be
material, and revenues and operating income from this subsidiary were not
significant in 1995, 1994 or 1993.
DISCONTINUED OPERATIONS
The Company's discontinued operations consist primarily of assumed treaty
and facultative reinsurance business that was discontinued between 1986 and
1991. In 1990, the Company established a management group to actively manage the
liquidation of this business. The liabilities associated with this business are
long term in duration and therefore, the Company continues to be subject to
claims being reported. Claims under these reinsurance treaties include
professional liability, product liability and general liability which include
environmental claims.
The Company supports these discontinued operations with $191 million in
cash and investment grade fixed income securities, reinsurance recoverables of
$54 million and other assets totaling $18 million. The Company estimates that
the dedicated assets supporting these operations and all future cash inflows
will be adequate to fund future obligations. However, should those assets
ultimately prove to be insufficient, the Company believes that its property and
casualty subsidiaries would be able to provide whatever additional funds might
be needed to complete the liquidation without having a material adverse effect
on the Company's consolidated financial position or results of operations. See
Note M of Notes to Consolidated Financial Statements. The discontinued
operations have investment portfolios which resemble the portfolios in the
ongoing operations with regard to asset allocation, quality, performance and
maturities.
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REGULATION
Insurance Regulation
The Company's workers' compensation insurance operations are concentrated
in California and Illinois, with additional writings in Arizona, Indiana,
Michigan and Wisconsin. Insurance companies are subject to supervision and
regulation by the state insurance authority in each state in which they transact
business. Such supervision and regulation relate to numerous aspects of an
insurance company's business and financial condition. The primary purpose of
such supervision and regulation is the protection of policyholders rather than
investors or shareholders of an insurer. The extent of such regulation varies,
but generally derives from state statutes that delegate regulatory, supervisory
and administrative authority to state insurance departments. Accordingly, the
authority of the state insurance departments includes the establishment of
standards of solvency which must be met and maintained by insurers, the
licensing to do business of insurers and agents, the nature of and limitations
on investments by insurers, premium rates for certain property and casualty
insurance, and life and disability insurance, the provisions which insurers must
make for current losses and future liabilities and the approval of policy forms.
Additionally, most states require issuers to participate in assigned risk plans
which provide insurance coverage to individuals or entities who are unable to
obtain coverage from existing insurers in those states. The net profit or loss
incurred in the administration of these plans is allocated back to participant
insurers based on the insurers' relative market share (i.e. insurance premiums)
in each state. State insurance departments also conduct periodic examinations of
the affairs of insurance companies and require the filing of annual and other
reports relating to the financial condition of insurance companies. The
Company's multistate insurance operations require, and will continue to require,
significant resources of the Company in order to continue to comply with the
regulations of each state in which it transacts business.
Workers' Compensation Regulation. Illinois began operating under an open
rating system in 1982 and California began operating under such a system
effective January 1, 1995. In an open rating system, workers' compensation
companies are provided with advisory rates by job classification and each
insurance company determines its own rates based in part upon its particular
operating and loss costs. Although insurance companies are not required to adopt
such advisory rates, companies in Illinois generally follow such rates. However,
insurance companies in California have, since the adoption of an open rating
system, generally set their premium rates below such advisory rates. Before
January 1, 1995, California operated under a minimum rate law, whereby premium
rates established by the California Department of Insurance were the minimum
rates which could be charged by an insurance carrier.
In July 1993, California enacted legislation to reform the workers'
compensation insurance system and to, among other things, (i) reduce workers'
compensation manual premium rates by 7% effective July 16, 1993 and (ii) adopt
an open rating system through the repeal of the minimum rate law effective
January 1, 1995. In addition to the July 1993 legislation, in December 1993, the
California Insurance Commissioner reduced workers' compensation manual premium
rates on new and renewal business an additional 12.7% effective January 1, 1994.
In September 1994, California workers' compensation manual premium rates were
further reduced by 16% effective October 1, 1994 on all business incepting on or
after January 1, 1994.
The repeal of the minimum rate law on January 1, 1995 has resulted in lower
premiums and lower profitability in the Company's California workers'
compensation insurance business due to increased price competition. The Company
believes that its acquisition of Casualty, with policies written primarily
outside of California, has lessened the impact of the repeal of the minimum rate
law by providing geographic diversity, which mitigates the impact of economic
and regulatory changes within a regional marketplace.
Prior to January 1, 1995, the Company's policies were predominately written
as participating, thereby obligating the Company to consider the payment of
dividends to policyholders. The ability of the Company's subsidiaries to pay
policyholder dividends on workers' compensation insurance policies was subject
to California regulations which stated in part that dividends under a workers'
compensation policy could only be paid from surplus accumulated on workers'
compensation policies issued in California. Beginning in 1995, the payment of
policyholder dividends in respect of workers' compensation policies written in
California is not limited. However, in 1995 the Company's workers' compensation
insurance policies, both in California and Illinois, were predominately written
as non-participating, which does not include provisions for dividend
consideration. This shift in policy type
15
17
is due primarily to the increased competition in the California market which has
resulted from the repeal of the minimum rate law, effective January 1, 1995. The
Company anticipates that this shift to non-participating policies will continue
and be a characteristic element of the competitive environment. In addition, the
Company's subsidiaries are required, with respect to their workers' compensation
line of business, to maintain on deposit investments meeting specified standards
that have an aggregate market value equal to the Company's loss reserves.
Insurance Guaranty Association Laws. Under insolvency or guaranty fund
laws in most states in which the Company's insurance subsidiaries operate,
insurers doing business in those states can be assessed, up to the prescribed
limits, for losses incurred by policyholders as a result of the insolvency of
other insurance companies. The amount and timing of such assessments are beyond
the control of the Company and generally have not had an adverse impact on the
Company's earnings in years in which such assessments have been made. Premiums
written under workers' compensation policies are subject to assessment only with
respect to covered losses incurred by the insolvent insurer under workers'
compensation policies. The Company believes it does not face any material
exposure to guaranty fund assessments.
Holding Company Regulation. The Company is subject to the California
Insurance Holding Company System Regulatory Act (the "Holding Company Act").
This act, and similar laws in other states, require the Company to periodically
file information with the California Department of Insurance and other state
regulatory authorities, including information relating to its capital structure,
ownership, financial condition and general business operations. Certain
transactions between an insurance company and its affiliates, including sales,
loans or investments which in any twelve month period aggregate at least 5% of
its admitted assets or 25% of its statutory capital and surplus, also are
subject to prior approval by the Department of Insurance.
The Holding Company Act also provides that the acquisition or change of
"control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
that controls a California insurance company, such as Fremont General. The
Liquid Yield Option(TM) Notes ("LYONs") constitute a security convertible into
the voting Common Stock of the Company, and the shares of Common Stock into
which a holder's LYONs are convertible and any other securities convertible into
Common Stock must be aggregated with any other shares of Common Stock of the
holder for purposes of determining the percentage ownership. A person seeking to
acquire "control," directly or indirectly, of the Company must generally file
with the Insurance Commissioner an application for change of control containing
certain information required by statute and published regulations and provide a
copy of the application to the Company. The Holding Company Act also effectively
restricts the Company from consummating certain reorganizations or mergers
without prior regulatory approval.
The Holding Company Act also limits the ability of the Company's insurance
subsidiaries to pay dividends to the Company. The act permits a property and
casualty insurance company to pay dividends in any year which, together with
other dividends or other distributions made within the preceding twelve months,
do not exceed the greater of 10% of its statutory surplus or 100% of its net
income as of the end of the preceding year, subject to a limit equal to prior
year end unassigned funds less unrealized capital gains contained within
unassigned funds. Larger dividends are payable only upon prior regulatory
approval. Applicable regulations further require that an insurer's statutory
surplus following a dividend or other distribution be reasonable in relation to
its outstanding liabilities and adequate to its financial needs. Based upon
restrictions presently in effect, the maximum amount available for payment of
dividends by the Company's direct property and casualty subsidiaries during 1996
without prior regulatory approval is approximately $30 million. In addition,
insurance regulations require that the Department of Insurance be given fifteen
days advance notice of any dividend payment.
Other Regulations. The NAIC has adopted a formula to calculate risk based
capital ("RBC") of property and casualty insurance companies for inclusion in
annual statements. The purpose of the RBC model is to help state regulatory
authorities monitor the capital adequacy of property and casualty insurance
companies by measuring several major areas of risk facing property and casualty
insurers including underwriting, credit and investment risks. Companies having
less statutory surplus than the RBC model calculates will be required to
adequately address these risk factors and will be subject to varying degrees of
16
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regulatory intervention, depending on the level of capital inadequacy. As of
December 31, 1995 the Company's insurance subsidiaries engaged in continuing
operations exceed all RBC levels requiring any regulatory intervention.
Thrift and Loan Regulation
Fremont I & L is subject to supervision and regulation by the Department of
Corporations of the State of California (the "DOC") and, as an insured
institution, by the FDIC. Neither Investors Bancor nor Fremont I & L is
regulated or supervised by the Office of Thrift Supervision, which regulates
savings and loan institutions. Fremont General is generally not directly
regulated or supervised by the DOC, the FDIC, the Federal Reserve Board or any
other bank regulatory authority, except with respect to guidelines concerning
its relationship with Investors Bancor and Fremont I & L. Such guidelines
include (i) general regulatory and enforcement authority of the DOC and the FDIC
over transactions and dealings between Fremont General and Fremont I & L, (ii)
specific limitations regarding ownership of the capital stock of the parent
company of any thrift and loan company, and (iii) specific limitations regarding
the payment of dividends from Fremont I & L as discussed below. Fremont I & L is
examined on a regular basis by both agencies.
Federal and state regulations prescribe certain minimum capital
requirements and, while Fremont I & L is currently in compliance with such
requirements, the Company could in the future be required to make additional
investments in Fremont I & L in order to maintain compliance with such
requirements. Federal and state regulatory authorities have the power to
prohibit or limit the payment of dividends by Fremont I & L. Future changes in
government regulation and policy could adversely affect the thrift and loan
industry, including Fremont I & L.
The FDIC conducted an examination of Fremont I & L as of August 31, 1994.
The examination resulted in the FDIC requiring Fremont I & L to enter into a
Memorandum of Understanding in January 1995 ("the MOU"). The MOU requires, among
other things, that Fremont I & L: (a) maintain management acceptable to the
FDIC, (b) maintain a ratio of Tier 1 capital as a percentage of average
quarterly assets of at least 8.5%, (c) maintain an adequate reserve for loan
losses, (d) reduce its dependence on volatile liabilities, (e) not pay cash
dividends without the prior written consent of the FDIC, and (f) effect
revisions and enhancements to certain policies and procedures, including
lending, collection, reserve for loan losses, asset/liability management and
affiliate transaction policies and procedures.
The FDIC conducted another examination as of March 31, 1995, in conjunction
with a DOC examination as of the same date. The FDIC's and DOC's reports issued
as a result of this examination indicated that Fremont I & L's compliance with
the MOU was satisfactory. The Company does not believe that the restrictions on
Fremont I & L's ability to pay dividends imposed by the MOU or by federal or
state law will adversely affect the ability of Fremont General to meet its
obligations. However, no assurances can be given as to when, or if, the MOU will
be terminated.
California Law. The thrift and loan business conducted by Fremont I & L is
governed by the California Industrial Loan Law and the rules and regulations of
the Commissioner which, among other things, regulate the collateral requirements
and maximum maturities of the various types of loans that are permitted to be
made by California-chartered industrial loan companies, i.e., thrift and loan
companies or investment and loans.
Subject to restrictions imposed by applicable California law, Fremont I & L
is permitted to make secured and unsecured consumer and non-consumer loans. The
maximum term for repayment of loans made by thrift and loan companies range up
to forty years and thirty days depending upon collateral and priority of secured
position, except that loans with repayment terms in excess of thirty years and
thirty days may not in the aggregate exceed 5% of total outstanding loans and
obligations of the thrift. Consumer loans secured by real property with terms in
excess of three years must be repayable in substantially equal periodic payments
unless such loans are covered under the Garn-St. Germain Depository Institutions
Act of 1982 (primarily single-family residential loans). Non-consumer loans may
be repayable in unequal periodic payments during their respective terms.
California law limits lending activities outside of California by thrift and
loan companies to no more than 30% of total assets.
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California law contains extensive requirements for the diversification of
the loan portfolios of thrift and loan companies. A thrift and loan with
outstanding investment certificates may not, among other things, place more than
5% of its loans or other obligations in loans or obligations which are secured
only partially, but not primarily, by real property; may not make any one loan
secured primarily by improved real property which exceeds 20% of its paid-up and
unimpaired capital stock and surplus not available for dividends; may not lend
an amount in excess of 5% of its paid-up and unimpaired capital stock and
surplus not available for dividends upon the security of the stock of any one
corporation; may not make loans to, or hold the obligations of, any one person
as primary obligor in an aggregate principal amount exceeding 20% of its paid-up
and unimpaired capital stock and surplus not available for dividends; and may
have no more than 70% of its total assets in loans which have remaining terms to
maturity in excess of seven years and are secured solely or primarily by real
property. At December 31, 1995, Fremont I & L was in compliance with all of
these requirements.
A thrift and loan generally may not make any loans to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the DOC. Further, a thrift and loan may not make any loan to, or
hold an obligation of, any of its shareholders or any shareholder of its holding
company or affiliates, except that this prohibition does not apply to persons
who own less than 10% of the stock of a holding company or affiliate which is
listed on a national securities exchange, such as Fremont General. Any person
who wishes to acquire (i) 10% or more of the voting securities of a California
thrift and loan company, or (ii) 10% or more of the voting securities of a
holding company of a California thrift and loan company, such as the Company,
must obtain the prior approval of the DOC. The LYONs are not voting securities
of the Company, but the shares of Common Stock into which such LYONs are
convertible constitute voting securities of the Company. Fremont I & L must also
obtain prior written approval from the DOC before it may open or relocate any
branch or loan production office or close a branch office.
The Industrial Loan Law prohibits an industrial loan company from having
deposits at any time in an aggregate sum in excess of 20 times the aggregate
amount of its paid-up unimpaired capital and such of its unimpaired surplus as
is declared by its by-laws not to be available for cash dividends. Fremont I & L
currently has an authorized ratio of deposits to such capital of 17 to 1.
Federal Law. Fremont I & L's deposits are insured by the FDIC to the full
extent permitted by law. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and generally supervises
the operations of institutions to which it provides deposit insurance. Fremont I
& L is subject to the rules and regulations of the FDIC to the same extent as
other financial institutions which are insured by that entity. The approval of
the FDIC is required prior to any merger, consolidation or change in control or
the establishment or relocation of any branch office of Fremont I & L. This
supervision and regulation is intended primarily for the protection of the
insured deposit funds. Prior written notice to the FDIC is required to close a
branch office.
Fremont I & L is subject to federal risk-based capital adequacy guidelines
which provide a measure of capital adequacy and are intended to reflect the
degree of risk associated with both on- and off-balance sheet items, including
residential real estate loans sold with recourse, legally binding loan
commitments and standby letters of credit. A financial institution's risk-based
capital ratio is calculated by dividing its qualifying capital by its
risk-weighted assets. Financial institutions are generally expected to meet a
minimum ratio of qualifying total capital to risk-weighted assets of 8%, of
which at least 4% of qualifying total capital must be in the form of core
capital ("Tier 1") -- common stock, noncumulative perpetual preferred stock,
minority interests in equity capital accounts of consolidated subsidiaries and
allowed mortgage servicing rights, less all intangible assets other than allowed
mortgage servicing rights and eligible purchased credit card relationships.
Supplementary capital ("Tier 2") consists of the allowance for loan and lease
losses up to 1.25% of risk-weighted assets, cumulative perpetual preferred
stock, long-term preferred stock (original maturity of at least 20 years),
perpetual preferred stock, hybrid capital instruments, term subordinated debt
and intermediate term preferred stock (original average maturity of five years
or more). The maximum amount of Tier 2 capital which may be recognized for
risk-based capital purposes is limited to 100% of Tier 1 capital (after any
deductions for disallowed intangibles). The aggregate amount of term
subordinated debt and intermediate term preferred stock that may be treated as
Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations
and restrictions also apply. At December 31, 1994, the Tier 2 capital of Fremont
I & L consisted of
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approximately $10.6 million of allowance for possible loan losses. As of
December 31, 1995, Fremont I & L's allowance for possible loan losses for Tier 2
capital increased to $11.9 million. See "Financial Services -- Real Estate
Lending." The following table presents Fremont I & L's risk-based capital
position at the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
PERCENT OF PERCENT OF
RISK-WEIGHTED RISK-WEIGHTED
AMOUNT ASSETS AMOUNT ASSETS
--------- ------------- --------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 capital.......................... $ 89,374 9.46% $ 80,385 9.57%
Minimum requirement..................... 37,782 4.00 33,590 4.00
-------- ----- -------- -----
Excess........................ $ 51,592 5.46% $ 46,795 5.57%
======== ===== ======== =====
Total capital........................... $ 101,248 10.72% $ 90,937 10.83%
Minimum requirement..................... 75,564 8.00 67,179 8.00
-------- ----- -------- -----
Excess........................ $ 25,684 2.72% $ 23,758 2.83%
======== ===== ======== =====
Risk-weighted assets.................... $ 944,553 $ 839,743
======== ========
The FDIC has adopted a 3% minimum leverage ratio which is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions continue to maintain a minimum level of core capital. A minimum
leverage ratio of 3% is required for institutions which have been determined to
be the highest of five categories used by regulators to rate financial
institutions. All other institutions (including Fremont I & L) will likely be
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum. It is improbable, however, that an institution with a 3% core
capital-to-total assets ratio would be rated in the highest category since a
strong capital position is so closely tied to the rating system. Therefore, the
"minimum" leverage ratio is, for all practical purposes, significantly above 3%.
The following table presents Fremont I & L's leverage ratio (the ratio of Tier 1
capital to the quarterly average of total assets) at the dates indicated:
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
PERCENT OF PERCENT OF
AVERAGE TOTAL AVERAGE TOTAL
AMOUNT ASSETS AMOUNT ASSETS
--------- ------------- --------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 capital............................ $ 89,374 9.02% $ 80,385 9.79%
Minimum requirement....................... 29,735 3.00 24,643 3.00
-------- ---- -------- ----
Excess.......................... 59,639 6.02% $ 55,742 6.79%
======== ==== ======== ====
Average total assets for the quarter ended
December 31,............................ $ 991,163 $ 821,434
======== ========
The FDIC has designated Fremont I & L as a "well-capitalized" institution
under the regulations promulgated under the Federal Deposit Insurance
Corporation Improvement Act of 1991. A "well-capitalized" institution has a
total risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital
ratio of at least 6.0%, has a leverage ratio of at least 5.0% and is not subject
to any written agreement, order, capital directive or prompt corrective action
directive issued by the FDIC under Section 8 or Section 38 of the Federal
Deposit Insurance Act to meet and maintain a specific capital level for any
capital measure. The total risk-based capital ratio is the ratio of qualifying
total capital to risk-weighted assets and the Tier 1 risk-based capital ratio is
the ratio of Tier 1 capital to risk-weighted assets. In August 1994, an
additional $23 million was contributed to the capital of Fremont I & L to
support the growth in the loan portfolio during 1994.
As a "well-capitalized" institution, Fremont I & L's annual FDIC insurance
premiums were 23 cents per $100 of eligible domestic deposits in 1994. In 1995,
this annual insurance premium rate was increased to 26 cents for the period
January 1, 1995 through June 30, 1995, and then significantly decreased to 7
cents for the period July 1, 1995 through December 31, 1995. This rate has been
further decreased to 3 cents effective for the period January 1, 1996 through
June 30, 1996. The insurance premium payable is subject to semi-
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annual adjustment. The FDIC, by the first day of the month preceding each
semi-annual period, is required to notify each insured institution of its
assessment risk-classification upon which the insurance premium assessment for
the following period will be based. The FDIC has the authority to assess to all
insured institutions collectively, additional premiums to cover losses and
expenses associated with insuring deposits maintained at financial institutions
and for other purposes it deems necessary.
Limitations on Dividends. Under California law, a thrift is not permitted
to declare dividends on its capital stock unless it has at least $750,000 of
unimpaired capital plus additional capital of $50,000 for each branch office
maintained. In addition, no distribution of dividends is permitted unless: (i)
such distribution would not exceed a thrift's retained earnings; (ii) any
payment would result in violation of the approved maximum capital to thrift
investment certificate ratio; or (iii) in the alternative, after giving effect
to the distribution, the sum of a thrift and loan's qualified assets would be
not less than 125% of certain of its liabilities, or with certain exceptions,
current assets would be not less than current liabilities. In addition, a thrift
and loan is prohibited from paying dividends from that portion of capital which
its board of directors has declared restricted for dividend payment purposes. In
policy statements, the FDIC has advised insured institutions that the payment of
cash dividends in excess of current earnings from operations is inappropriate
and may be cause for supervisory action. Under the Financial Institutions
Supervisory Act and the Financial Institutions Reform, Recovery and Enforcement
Act of 1989, federal regulators also have authority to prohibit financial
institutions from engaging in business practices which are considered to be
unsafe or unsound. It is possible that, depending upon the financial condition
of Fremont I & L and other factors, such regulators could assert that the
payment of dividends in some circumstances might constitute unsafe or unsound
practices and could prohibit payment of dividends even though technically
permissible.
Fremont I & L is also subject to federal consumer protection laws,
including the Truth In Savings Act, the Truth in Lending Act, the Community
Reinvestment Act and the Real Estate Settlement Procedures Act.
Commercial Finance
Fremont Financial is licensed under the California Finance Lenders Law by
the California Department of Corporations as a commercial finance lender and a
personal property broker and holds certain other licenses.
Intercompany Transactions
The payment of stockholders' dividends and the advancement of loans to the
Company by its subsidiaries are and may continue to be subject to certain
statutory and regulatory restrictions.
EMPLOYEES
At December 31, 1995, the Company had 1,826 employees, none of whom is
represented by a collective bargaining agreement. The Company believes its
relations with employees are good.
ITEM 2. PROPERTIES
Substantially all facilities used by the Company are leased.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries and affiliates are parties to various
legal proceeding, which in some instances include claims for punitive damages,
all of which are considered routine and incidental to their business. The
Company believes that ultimate resolution or settlement of such matters will not
have a material adverse effect on its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange
("NYSE") under the trading symbol "FMT." The following table sets forth the high
and low sales prices of the Company's Common Stock adjusted retroactively for a
three for two stock split effective January 8, 1996 and a ten percent stock
dividend distributed June 15, 1995 as reported as composite transactions on the
NYSE and the adjusted cash dividends declared on the Company's Common Stock
during each quarter presented.
DIVIDENDS
HIGH LOW DECLARED
------ ------ ---------
1995
1st Quarter...................................... 14 5/32 11 3/4 $0.12
2nd Quarter...................................... 17 13/32 17 7/16 0.13
3rd Quarter...................................... 19 5/32 16 0.13
4th Quarter...................................... 24 27/32 17 21/32 0.13
-----
Total.......................................... $0.51
=====
1994
1st Quarter...................................... 15 1/16 13 1/32 $0.11
2nd Quarter...................................... 14 15/16 13 1/32 0.11
3rd Quarter...................................... 15 3/4 13 7/8 0.11
4th Quarter...................................... 15 13 11/32 0.12
-----
Total.......................................... $0.45
=====
On December 31, 1995, the closing sale price of the Company's Common Stock
on the NYSE was $24.50 per share. There were 1,320 stockholders of record as of
December 31, 1995.
The Company has paid cash dividends in every quarter since its initial
public offering in 1977. While the Company intends to continue to pay dividends,
the decision to do so is made quarterly by the Board of Directors and is
dependent on the earnings of the Company, management's assessment of future
capital needs, and other factors. As a holding company, Fremont General's
ability to pay dividends to its stockholders is partially dependent on dividends
from its subsidiaries. The ability of several of these subsidiaries to
distribute dividends is subject to certain statutory and regulatory restrictions
and various agreements, principally loan agreements, of the subsidiaries that
restrict the ability of the respective subsidiaries to pay cash dividends or
advance loans and other payments to the Company and is contingent upon the
earnings of those subsidiaries. See Note J to Consolidated Financial Statements
and "Business -- Regulation."
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995(1) 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS AND PER SHARE DATA)
INCOME STATEMENT DATA:
Property and casualty premiums
earned.......................... $ 606,917 $ 433,584 $ 455,765 $ 411,956 $ 413,156
Net investment income.............. 119,523 76,821 77,198 70,820 73,796
Loan interest income............... 162,992 113,382 87,244 73,310 60,685
Realized investment gains
(losses)........................ 1 (315) 2,165 16,208 5,290
Other revenue...................... 34,381 29,676 29,033 26,399 28,247
---------- ---------- ---------- ---------- ----------
Total revenues..................... $ 923,814 $ 653,148 $ 651,405 $ 598,693 $ 581,174
========= ========= ========= ========= =========
Property and casualty income....... $ 83,092 $ 61,265 $ 52,092 $ 45,187 $ 37,946
Financial services income.......... 35,737 28,014 21,456 14,878 9,340
Other interest and corporate
expense......................... (18,502) (7,708) (9,200) (11,484) (6,277)
---------- ---------- ---------- ---------- ----------
Income before taxes, discontinued
operations and cumulative effect
of accounting change............ 100,327 81,571 64,348 48,581 41,009
Income tax expense................. (32,305) (25,759) (21,638) (13,381) (8,878)
Discontinued operations............ -- -- -- -- (964)
Cumulative effect of accounting
change for income taxes......... -- -- -- 43,509 --
---------- ---------- ---------- ---------- ----------
Net income......................... $ 68,022 $ 55,812 $ 42,710 $ 78,709 $ 31,167
========= ========= ========= ========= =========
GAAP RATIOS FOR PROPERTY AND CASUALTY
SUBSIDIARIES:
Loss ratio......................... 76.0% 63.1% 70.0% 80.4% 72.7%
Expense ratio...................... 24.5% 23.4% 21.3% 22.5% 24.5%
Policyholder dividends ratio....... 0.0% 11.5% 9.9% 2.5% 8.8%
---------- ---------- ---------- ---------- ----------
Combined ratio..................... 100.5% 98.0% 101.2% 105.4% 106.0%
========= ========= ========= ========= =========
PER SHARE DATA (2):
Cash dividends declared............ $ 0.51 $ 0.45 $ 0.44 $ 0.39 $ 0.35
Stockholders' equity:
Including FASB 115 for 1994 and
1995 (3)...................... 19.62 13.82 N/A N/A N/A
Excluding FASB 115 for 1994 and
1995 (3)...................... 18.76 16.40 14.55 13.39 9.79
Income before discontinued
operations and cumulative effect
of accounting change:
Primary......................... 2.61 2.16 1.85 1.73 1.57
Fully diluted................... 2.17 1.82 1.65 1.53 1.43
Net income:
Primary......................... 2.61 2.16 1.85 3.84 1.52
Fully diluted................... 2.17 1.82 1.65 3.29 1.39
WEIGHTED AVERAGE SHARES USED TO
CALCULATE PER SHARE DATA (2):
Primary............................ 26,079 25,823 23,039 20,498 20,491
Fully diluted...................... 33,343 33,034 28,243 24,734 24,481
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DECEMBER 31,
--------------------------------------------------------------
1995(1) 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
BALANCE SHEET DATA:
Total assets....................... $4,477,399 $3,134,390 $2,669,290 $2,070,533 $1,952,169
Fixed income and other
investments..................... 1,937,890 888,918 1,055,289 782,542 772,947
Loans receivable................... 1,499,043 1,440,774 846,443 689,443 519,874
Claims and policy liabilities...... 1,971,719 1,012,704 1,007,054 812,081 838,459
Short-term debt.................... 72,191 176,325 78,087 208,013 147,450
Long-term debt..................... 693,276 468,390 451,581 100,572 101,303
Stockholders' equity:
Including FASB 115 for 1994 and
1995(3)....................... 498,090 351,013 N/A N/A N/A
Excluding FASB 115 for 1994 and
1995(3)....................... 476,491 416,378 369,369 271,710 198,724
- ---------------
(1) The Company acquired Casualty Insurance Company on February 22, 1995.
(2) Adjusted for a three-for-two split of the Common Stock distributed on
February 7, 1996 to stockholders of record at close of business on January
8, 1996; a ten percent stock dividend distributed June 1995; and a
three-for-two split of the Common Stock effected June 1993.
(3) Effective January 1994, FASB 115 changed the accounting treatment afforded
the Company's investment portfolio wherein unrealized gains and losses on
securities designated by the Company as available for sale are included, net
of deferred taxes, as a component of stockholders' equity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Fremont General Corporation, a nationwide property and casualty insurance
and financial services holding company, operates through its wholly-owned
subsidiaries in select businesses in niche markets. The three core operating
lines of business are workers' compensation insurance, real estate lending and
commercial finance lending. Additionally, on a smaller scale, the Company is
involved in underwriting various other insurance products. The primary operating
strategy of the Company is to build upon its core business units through
acquisition opportunities and new business development. The Company's secondary
strategy is to achieve income balance and geographic diversity among its
business units in order to limit the exposure of the Company to industry, market
and regional concentrations.
The Company began its workers' compensation insurance operations in 1959
and continues to derive the majority of its revenues from this business. The
Company's workers' compensation insurance business has grown through internal
expansion, as well as through the acquisition of other workers' compensation
insurance companies. In 1989, the Company restructured its workers' compensation
insurance operations under a single management group. By consolidating duplicate
offices and functions, this management group has increased efficiency and
achieved substantial cost savings.
More recently, on February 22, 1995, the Company completed the acquisition
of all outstanding stock of Casualty Insurance Company ("Casualty") and its
wholly-owned subsidiary Workers' Compensation and Indemnity Company ("WCIC")
from the Buckeye Union Insurance Company ("Buckeye"). Casualty underwrites
workers' compensation insurance primarily in Illinois and several other
mid-western states, as well as a modest amount through WCIC in California.
Casualty currently is the largest underwriter of workers' compensation insurance
in Illinois and has provided the Company with a significant presence in the mid-
western region. The Casualty acquisition has provided geographic diversity
within the Company's workers' compensation insurance business segment and the
Company's 1995 revenues from workers' compensation insurance premiums were
evenly divided between the west and mid-west regions. The Company believes this
geographic diversity mitigates potential fluctuations in earnings from cyclical
downturns in various regional economies.
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The Company's balance sheet at December 31, 1995 has been significantly
impacted by the acquisition of Casualty. The purchase price was $250 million,
comprised of $225 million in cash and $25 million in a note payable to Buckeye.
In addition, $6.5 million of costs were incurred in connection with the
acquisition bringing the total cost to $256.5 million. The acquisition was
treated as a purchase for accounting purposes and approximately ten months of
Casualty's operating results are included in the Company's results of operations
for the year ended December 31, 1995. At the acquisition date, the assets
acquired and liabilities assumed, net of the purchase price and purchase
accounting adjustments, are summarized in the following table:
(THOUSANDS OF DOLLARS)
Assets acquired:
Fixed maturity investments -- at fair value............. $ 15,646
Short-term investments.................................. 472,166
Premiums receivable and agents' balances................ 67,117
Reinsurance recoverable on paid and unpaid losses....... 185,145
Deferred policy acquisition costs....................... 12,656
Deferred income taxes................................... 59,830
Costs in excess of net assets acquired.................. 45,036
Other assets, including cash, accrued investment income,
state deferred taxes and trade name.................. 37,719
--------
Total assets acquired........................... $895,315
========
Liabilities assumed:
Losses and loss adjustment expenses..................... $787,663
Unearned premiums....................................... 83,323
Dividends to policyholders.............................. 17,660
Other liabilities....................................... 6,669
--------
Total liabilities assumed....................... $895,315
========
Since the date of acquisition, the Company has re-invested the short-term
investments acquired into longer term investments. This accounts for the
significant increase in the Company's fixed maturity and non-redeemable
preferred stock portfolios for the year ended December 31, 1995. See Note B of
Notes to Consolidated Financial Statements for additional information with
respect to the acquisition of Casualty.
In July 1993, California enacted legislation to reform the workers'
compensation insurance system and to, among other things, adopt an open rating
system through the repeal of the minimum rate law effective January 1, 1995. The
repeal of the minimum rate law has resulted in lower premiums and lower
profitability on the Company's California workers' compensation insurance
policies due to increased price competition. The Company expects that the
premiums earned in California will continue to decrease, principally due to
price competition. See "Results of Operations -- Property and Casualty Insurance
Operations -- Premiums." The Company believes that its acquisition of Casualty,
with policies written primarily outside of California, has lessened the impact
of the repeal of the minimum rate law by providing geographic diversity, which
mitigates the impact of economic and regulatory changes within a regional
marketplace. In Illinois, where Casualty underwrites the majority of its
workers' compensation insurance premiums, price competition will continue to
impact workers' compensation companies due to an overall average decrease in
advisory rates of 13.6% which became effective January 1, 1996. Although
insurance companies are not required to adopt such advisory rates, companies in
Illinois generally follow such rates. See "Results of Operations -- Property and
Casualty Insurance Operations -- Workers' Compensation Regulation."
In 1990, the Company acquired Fremont Investment & Loan (formerly Investors
Thrift), a California thrift and loan that now serves more than 23,000 customers
through its 12 branches. The thrift and loan operations are primarily engaged in
commercial and residential real estate lending. For commercial real estate
loans, principal amounts primarily range between $1 to $5 million and for
residential real estate loans, principal amounts are generally below $300,000.
The Company's operating strategy is to pursue growth of the
24
26
loan portfolio through origination of new loans and acquisition of loan
portfolios that meet its underwriting guidelines applied to origination of new
loans. Assets of the real estate lending operation grew from $278 million at the
end of 1991 to $1.05 billion at the end of 1995, due primarily to increased loan
originations and to the purchase of loan portfolios from other financial
institutions. See "Item 1. Business -- Financial Services Operations -- Real
Estate Lending." The ability of the Company to continue to originate loans, and
of borrowers to repay outstanding loans, may be impaired by adverse changes in
local or regional economic conditions which affect such areas or by adverse
changes in the real estate market in those areas. Such events could also
significantly impair the value of the underlying collateral. If the Company's
collateral were to prove inadequate, the Company's results of operations could
be adversely affected.
The Company's commercial finance subsidiary, Fremont Financial Corporation
("Fremont Financial"), provides working capital loans, primarily secured by
accounts receivable and inventory, to small and middle market companies on a
nationwide basis. Fremont Financial's total loan portfolio grew from $189
million at December 31, 1991 to $569 million at December 31, 1995. This growth
has been achieved through development of Fremont Financial's customer base
through loan originations and through participation in syndicated loan
transactions. See "Item 1. Business -- Financial Service
Operations -- Commercial Finance." The lending market has become increasingly
competitive for small to middle market commercial borrowers. As a result,
Fremont Financial has experienced decreasing yields on its commercial finance
loans.
Adverse economic developments can negatively affect the Company's business
and results of operations in a number of ways. Such developments can reduce the
demand for loans, impair the ability of borrowers to pay loans and impair the
value of the underlying collateral.
Between 1986 and 1991, the Company discontinued its domestic treaty
reinsurance business, its other primary and excess property and casualty
insurance operations and the underwriting of all remaining assumed reinsurance.
In 1990, a single management group was put in charge of all discontinued
operations, and it is the intention of the Company to complete the liquidation
of these operations by the commutation of liabilities and as claims are paid.
See "Item 1. Business -- Discontinued Operations" and Note M of Notes to
Consolidated Financial Statements.
On December 4, 1995, the Company announced a three-for-two stock split of
its Common Stock for stockholders of record at January 8, 1996. The stock split
was distributed on February 7, 1996.
Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934. Actual results could differ materially
from those projected in the forward-looking statements as a result of a variety
of factors, including the risk factors set forth within Management's Discussion
and Analysis of Financial Condition and Results of Operations and elsewhere
herein.
RESULTS OF OPERATIONS
By providing diverse insurance and financial services to small and
medium-sized businesses, the Company has achieved growth in both revenues and
net income during the three years ended December 31, 1995. Higher revenues and
net income in 1995 were also achieved through the acquisition of Casualty. The
25
27
following table presents information for each of the three years in the period
ended December 31, 1995 with respect to the Company's core business segments.
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
Revenues:
Workers' compensation............................ $671,110 $458,461 $489,126
Professional medical liability, corporate and
other......................................... 37,077 37,251 33,999
-------- -------- --------
Total property and casualty................... 708,187 495,712 523,125
Financial services............................... 214,975 154,398 125,732
Corporate........................................ 652 3,038 2,548
-------- -------- --------
Total......................................... $923,814 $653,148 $651,405
======== ======== ========
Income (Loss) Before Taxes:
Workers' compensation............................ $ 85,009 $ 62,199 $ 49,775
Professional medical liability, corporate and
other......................................... (1,917) (934) 2,317
-------- -------- --------
Total property and casualty................... 83,092 61,265 52,092
Financial services............................... 35,737 28,014 21,456
Corporate........................................ (18,502) (7,708) (9,200)
-------- -------- --------
Total......................................... $100,327 $ 81,571 $ 64,348
======== ======== ========
The Company generated revenues of $924 million for 1995, as compared to
revenues of $653 million and $651 million for 1994 and 1993, respectively.
Revenues were higher in 1995 as compared to 1994, due primarily to higher
workers' compensation insurance premiums, net investment income and loan
interest income. The higher workers' compensation insurance premiums and net
investment income are due primarily to the acquisition of Casualty, partially
offset by lower insurance premiums earned in California. See "Property and
Casualty Insurance Operations -- Premiums." Revenues between 1994 and 1993 were
flat due primarily to the combined effects of higher loan interest,
substantially offset by lower workers' compensation insurance premiums. Realized
investment gains (losses) were $1,000, $(315,000) and $2,165,000 in 1995, 1994
and 1993, respectively.
The Company had net income of $68.0 million or $2.61 per share for 1995, as
compared to $55.8 million or $2.16 per share and $42.7 million or $1.85 per
share for 1994 and 1993, respectively. Income before taxes for 1995 was $100.3
million as compared to $81.6 million and $64.3 million for 1994 and 1993,
respectively.
Workers' compensation insurance operations posted income before taxes of
$85.0 million for 1995, as compared to $62.2 million for 1994 and $49.8 million
for 1993. The 37% increase in income before taxes in 1995 is due primarily to
the acquisition of Casualty, offset partially by lower income on the Company's
California business. The 25% increase in income before taxes in 1994 is due
primarily to the continued decline in the frequency and severity of reported
claims incurred on the 1992 through 1994 accident years and lower than expected
operating costs, offset partially by lower premiums. The combined ratio for 1995
was 100.4% compared to 97.6% and 101.6% for 1994 and 1993, respectively.
The Company's professional medical liability, corporate and other segment
is composed principally of revenues and expenses that pertain to the Company's
professional medical liability business ("medical malpractice"), as well as
miscellaneous expenses associated with the Company's downstream property and
casualty insurance holding company, Fremont Insurance Group, Inc., ("Fremont
Insurance Group"). Medical malpractice revenues were flat at $34.3 million in
1995 as compared to $33.0 million for 1994. Medical malpractice revenues
increased in 1994 from $29.2 million in 1993 due primarily to a shift in
underwriting focus towards those medical specialties that had higher premiums.
Income before taxes for the medical malpractice business was $5.2 million, $6.6
million and $10.2 million for 1995, 1994 and 1993, respectively. The decrease in
income before taxes in 1995 and 1994, as compared to 1993, is due primarily to
an increase in the frequency and severity of reported claims. Expenses of
Fremont Insurance Group include
26
28
interest expense on debt and other obligations of $6.7 million, $5.5 million and
$4.5 million, respectively, for 1995, 1994 and 1993, and overhead expenses of
$2.2 million, $3.1 million and $3.3 million for the corresponding periods. Since
the operations of Fremont Insurance Group consist primarily of interest expense
and overhead expenses management does not expect it to operate at a profit.
The financial services business segment posted increases of 28% and 31% in
income before taxes for 1995 and 1994, respectively. These increases are
consistent with increases in financial services revenues and are due primarily
to the significant growth in the average loan portfolio over the three year
period ended December 31, 1995 from $783 million in 1993 to $1.5 billion in
1995. Contributing to this growth in the average loan portfolio is the
acquisition of approximately $366 million in primarily commercial real estate
loan portfolios which were completed during the last six months of 1994. This
segment, which consists principally of real estate lending and commercial
finance operations, recorded income before taxes of $35.7 million, $28.0 million
and $21.5 million for 1995, 1994 and 1993, respectively.
Corporate revenues consisted primarily of investment income, while
corporate expenses consisted primarily of interest expense and general and
administrative expense. The corporate loss before income taxes was $18.5
million, $7.7 million and $9.2 million for 1995, 1994 and 1993, respectively.
The increase in the corporate loss before taxes in 1995 over 1994 was due
primarily to increased interest expense and decreased investment income. The
increase in interest expense is due primarily to additional debt incurred in the
acquisition of Casualty, along with modest increases in administrative expenses.
The decrease in corporate loss before taxes in 1994 compared to 1993 was
primarily due to increased investment income and higher intercompany interest
income from the Company's subsidiaries.
Income tax expense of $32.3 million, $25.8 million and $21.6 million for
1995, 1994 and 1993, respectively, represent effective tax rates of 32%, 32% and
34% on pretax income of $100.3 million, $81.6 million and $64.3 million for the
corresponding periods. The Company's effective tax rates for all years presented
are lower than the enacted federal income tax rate of 35%, due primarily to tax
exempt investment income which reduces the Company's taxable income.
Property and Casualty Insurance Operations
The following table represents information with respect to the Company's
property and casualty insurance operations:
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
Revenues........................................... $708,187 $495,712 $523,125
Expenses........................................... 625,095 434,447 471,033
-------- -------- --------
Income Before Taxes................................ $ 83,092 $ 61,265 $ 52,092
======== ======== ========
Revenues from the property and casualty insurance operations consist
primarily of workers'compensation insurance premiums earned and net investment
income. Expenses consist primarily of loss and loss adjustment expenses, policy
acquisition costs, other operating costs and expenses and, for the years ended
December 1994 and 1993, dividends to policyholders.
Premiums. Premiums earned from the Company's workers' compensation
insurance operations were $575.0 million in 1995, as compared to $401.5 million
and $426.8 million in 1994 and 1993, respectively. Premiums were significantly
higher in 1995 due primarily to the acquisition of Casualty, partially offset by
lower premiums earned in California. For the year ended December 31, 1995, the
Company's workers' compensation insurance premiums earned in its western region,
consisting primarily of California, accounted for $292 million, or 51% of the
Company's total workers' compensation insurance premiums earned for such period,
representing a decrease of $109 million from 1994. This decrease was due
primarily to the increased price competition resulting from California's
adoption of an open rating system and the repeal of the minimum rate law. See
"Workers' Compensation Regulation." This increased price competition has led to
(i) lower premium rates and (ii) a lower average policy size due to the
Company's shift in focus to smaller employers.
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29
Additionally, non-renewing polices have increased in 1995 which has also
contributed to the lower premium volume in California. The increase in
non-renewing polices occurs as a result of certain premium prices falling below
required minimum pricing pursuant to the Company's underwriting standards. The
Company expects that the premiums earned in California will continue to
decrease, principally due to price competition. For the year ended December 31,
1995, the Company's workers' compensation insurance premiums earned in its mid-
western region, consisting primarily of Illinois, accounted for $283 million, or
49% of the Company's total workers' compensation insurance premiums earned. In
addition, the Company anticipates price competition to continue in Illinois,
where an additional overall average decrease of 13.6% in advisory rates, which
workers' compensation insurance companies in Illinois tend to follow, became
effective January 1, 1996. Premiums were lower in 1994 as compared to 1993, due
primarily to reductions in California workers' compensation manual premium rates
which occurred in the last six months of 1993.
Net Investment Income. Net investment income within the property and
casualty insurance operations was $101.3 million, $62.2 million and $65.7
million in 1995, 1994 and 1993, respectively. Significantly higher invested
assets, due primarily to the acquisition of Casualty, resulted in increased
investment income in 1995 as compared to 1994 and 1993. The effects of lower
invested assets and lower investment yields during 1994 resulted in net
investment income levels lower as compared to 1993. See "Item 1.
Business -- Investment Portfolio."
Loss and Loss Adjustment Expense. Workers' compensation loss and loss
adjustment expenses ("LAE") were $436.7 million, $249.4 million and $300.5
million in 1995, 1994 and 1993, respectively. In addition, the ratio of these
losses and LAE to workers' compensation insurance premiums earned was 75.9%,
62.1% and 70.4% in 1995, 1994 and 1993, respectively. The increase in incurred
loss and LAE in 1995 as compared to 1994 is due primarily to the acquisition of
Casualty, partially offset by lower incurred loss and LAE in California.
Additionally, the increase in the loss and LAE ratio in 1995 as compared to
1994, is partially due to lower premiums on California policies which resulted
from increased competition in 1995. See "Premiums." The decrease in California
premiums was greater than the decrease in California incurred loss and LAE,
thereby resulting in a higher loss and LAE ratio. The negative impact on the
Company's profitability resulting from the higher loss and LAE ratio has been
mitigated to an extent by the elimination of dividends accrued on California
workers' compensation business in 1995. The dividend elimination occurred as the
majority of the workers' compensation policies written in 1995 were
non-participating. This type of policy is not eligible for dividend
consideration. See "Dividends to Policyholders." The decrease in the loss ratio
in 1994 as compared to 1993 is due primarily to the positive impacts of the
continued decrease in the frequency and severity of reported claims on the 1992
and subsequent accident years, particularly in Southern California, which began
in mid-1992. The Company attributes this reduction in claim frequency and
severity to aggressive loss control and improved underwriting. Improved loss
control has been achieved through a significant effort to reduce fraudulent
workers' compensation claims by California law enforcement and regulatory
authorities, the insurance industry and the Company under its "zero tolerance"
program. Underwriting improvements were made to focus on businesses with stable
work environments and less hazardous occupations. See "Item 1.
Business -- Insurance Operations -- Loss and Loss Adjustment Expense Reserves."
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 reserves. In making this determination, management has considered its
claims experience to date, loss development history for prior accident years and
estimates of future trends of claims frequency and severity. However,
establishment of appropriate reserves is an inherently uncertain process, and
there can be no certainty that currently established reserves will prove
adequate in light of subsequent actual experience. Subsequent actual experience
has resulted and could result in loss reserves being too high or too low. Future
loss development could require reserves for prior periods to be increased, which
would adversely impact earnings in future periods.
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 24.5%, 23.4% and 21.3% in
1995, 1994 and 1993, respectively. The increase in this ratio in 1995 and 1994,
as compared to 1993, was due primarily to higher agents' commission costs.
28
30
Dividends to Policyholders. In 1995 there were no dividends accrued. This
is compared to $49.7 million and $45.2 million in dividends accrued in 1994 and
1993, respectively. The ratio of dividends accrued to workers' compensation
insurance premiums earned therefore decreased to 0% in 1995 from 12.4% and 10.6%
in 1994 and 1993, respectively. The significant decrease in dividends accrued is
due in part to a change in the type of workers' compensation insurance policy
written on and after January 1, 1995. In 1995, the Company's workers'
compensation insurance policies, both in California and those underwritten by
Casualty, were predominately written as non-participating, which does not
include provisions for dividend consideration. In 1994 and prior, the Company's
policies were predominately written as participating, thereby obligating the
Company to consider the payment of dividends. This shift in policy type is due
primarily to the increased competition in the California market which has
resulted from the repeal of the minimum rate law, effective January 1, 1995. The
Company anticipates that this shift to non-participating policies will continue
and be a characteristic element of the competitive environment established by
the July 1993 California legislation. See "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, interest rates, regulations, court decisions, the judicial
climate, and general economic conditions and trends, all of which are outside of
the Company's control. These factors have contributed, and in the future could
contribute, to significant variation of results of operations in different
aspects of the Company's business from quarter to quarter and year to year. With
respect to the 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 claims. Legislative and regulatory changes can also
contribute to variable operating results for workers' compensation insurance
businesses. For example, in 1995, the Company experienced the negative impact of
lower premiums and lower profitability on the Company's California workers'
compensation business due to increased price competition resulting from
legislation enacted in California in July 1993 which, among other things,
repealed the minimum rate law effective January 1, 1995. See "Workers'
Compensation Regulation." The Company anticipates that its workers' compensation
insurance premiums earned in California will continue to decrease as a result of
this increased price competition, which could adversely affect the Company's
results of operations and financial condition. See "Premiums." Also, the
establishment of appropriate reserves necessarily involves estimates, and
reserve adjustments have caused significant fluctuations in operating results
from year to year.
Workers' Compensation Regulation. Illinois began operating under an open
rating system in 1982 and California began operating under such a system
effective January 1, 1995. In an open rating system, workers' compensation
companies are provided with advisory rates by job classification and each
insurance company determines its own rates based in part upon its particular
operating and loss costs. Although insurance companies are not required to adopt
such advisory rates, companies in Illinois generally follow such rates. However,
insurance companies in California have, since the adoption of an open rating
system, generally set their premium rates below such advisory rates. Before
January 1, 1995, California operated under a minimum rate law, whereby premium
rates established by the California Department of Insurance were the minimum
rates which could be charged by an insurance carrier.
In July 1993, California enacted legislation to reform the workers'
compensation insurance system and to, among other things, (i) reduce workers'
compensation manual premium rates by 7% effective July 16, 1993 and (ii) repeal
the minimum rate law effective January 1, 1995. In addition to the July 1993
legislation, in December 1993, the California Insurance Commissioner reduced
workers' compensation manual premium rates on new and renewal business an
additional 12.7% effective January 1, 1994. In September 1994, California
workers' compensation manual premium rates were further reduced by 16% effective
October 1, 1994 on all business incepting on or after January 1, 1994.
The repeal of the minimum rate law on January 1, 1995 has resulted in lower
premiums and lower profitability in the Company's California workers'
compensation insurance business due to increased price competition. The Company
believes that its acquisition of Casualty, with policies written primarily
outside of California, has lessened the impact of the repeal of the minimum rate
law by providing geographic diversity, which mitigates the impact of economic
and regulatory changes within a regional marketplace. See "Item 1.
Business -- Regulation -- Insurance Regulation."
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Financial Services
The Company's financial services operations are principally engaged in
commercial and residential real estate lending through Fremont Investment & Loan
and asset-based lending through Fremont Financial. The Company also has small
life insurance and premium finance operations included in this segment. See Note
P of Notes to Consolidated Financial Statements. Revenues consist principally of
interest income and, to a lesser extent, life insurance premiums, fees and other
income.
The following table presents information with respect to the Company's
financial services operations:
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
Revenues........................................... $214,975 $154,398 $125,732
Expenses........................................... 179,238 126,384 104,276
-------- -------- --------
Income Before Taxes................................ $ 35,737 $ 28,014 $ 21,456
======== ======== ========
Revenues increased 39% in 1995 and 23% in 1994, due primarily to greater
loan interest and fee revenue attributable to the growth in the average loan
portfolios of the real estate lending and commercial finance operations from
$1.1 billion in 1994 to $1.5 billion in 1995. Contributing to this growth in the
average loan portfolio was the acquisition of approximately $366 million in
primarily commercial real estate loan portfolios which were completed during the
last six months of 1994. In 1995, no portfolios of commercial real estate loans
were purchased, primarily due to increased competition which resulted in
inadequate yields or unacceptable risk profiles for the portfolios considered.
Income before taxes in the financial services operations was $35.7 million,
$28.0 million and $21.5 million for 1995, 1994 and 1993, respectively. The 28%
increase in income before taxes in 1995 as compared to 1994 is due primarily to
continued growth in the loan portfolios, offset partially by increases in the
provision for loan losses and other expenses. The 31% increase in 1994 as
compared to 1993, is due primarily to the growth in the loan portfolios and a
lower provision for loan losses. See "Item 1. Business -- Financial Services
Operations."
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32
The following table identifies the interest income, interest expense,
average interest-bearing assets and liabilities, and interest margins for the
Company's thrift and loan and commercial finance subsidiaries:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------ ------------------------------ ----------------------------
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 finance and other
assets..................... $ 619,431 $ 73,376 11.85 % $ 483,778 $ 52,128 10.78 % $323,479 $ 33,474 10.35 %
Thrift and loan:
Cash equivalents........... 105,470 5,883 5.58 56,014 2,282 4.07 34,744 1,032 2.97
Investments................ 1,053 33 3.13 4,503 450 9.99 220 6 2.73
Commercial real estate
loans.................... 683,331 67,952 9.94 452,950 43,582 9.62 243,701 23,732 9.74
Residential real estate
loans.................... 133,761 12,843 9.60 67,053 8,293 12.37 100,646 14,170 14.08
Contract loans............. 5,640 743 13.17 42,204 5,595 13.26 58,113 8,104 13.95
Installment loans.......... 2,433 310 12.74 4,294 541 12.60 6,799 866 12.74
Finance leases............. 37 3 8.11 377 47 12.47 1,903 223 11.72
---------- -------- ---------- -------- -------- -------
Total interest bearing
assets................... $1,551,156 $161,143 10.39 % $1,111,173 $112,918 10.16 % $769,605 $ 81,607 10.60 %
========== ======== ========== ======== ======== =======
Interest bearing liabilities:
Savings deposits............. $ 136,588 $ 7,279 5.33 % $ 81,475 $ 2,940 3.61 % $ 95,674 $ 3,824 4.00 %
Time deposits................ 664,397 40,072 6.03 464,960 23,928 5.15 277,765 15,868 5.71
Commercial paper and other... 15,873 1,189 7.49 14,332 820 5.72 14,545 882 6.06
Securitization obligation.... 321,667 21,200 6.59 300,094 14,653 4.88 165,278 6,171 3.73
Debt with banks.............. 174,816 12,308 7.04 80,770 4,921 6.09 71,572 3,561 4.98
Debt from affiliates......... 49,369 2,388 4.84 28,499 2,205 7.74 24,830 1,905 7.67
---------- -------- ---------- -------- -------- -------
Total interest bearing
liabilities................ $1,362,710 $ 84,436 6.20 % $ 970,130 $ 49,467 5.10 % $649,664 $ 32,211 4.96 %
========== ======== ========== ======== ======== =======
Net interest income............ $ 76,707 $ 63,451 $ 49,396
======== ======== =======
Net yield...................... 4.95 % 5.71 % 6.42 %
- ---------------
(1) Average loan balances include non-accrual loan balances.
The margin between the Company's interest income and cost of funds
decreased in 1995 and 1994, due primarily to changes in the mix of loans in the
real estate lending operation, as well as a decrease in the net margins in the
commercial finance lending segment. In the real estate lending operation, the
change in portfolio mix occurred under a corporate strategy which began in 1993,
to shift away from high rate, high risk loans secured by personal property or
junior liens on real estate, to lower yielding commercial and residential first
trust deed real estate loans. The lower yields on the commercial and residential
real estate portfolios are compensated for by the improved underlying collateral
and by the improved lien position on the collateral. The net margins decreased
in the commercial finance segment due primarily to increases in the credit
quality of the loan portfolio which has resulted in lower net margins, as well
as to an increase in the competitive environment.
Interest rate sensitivity data for the Company's thrift and loan and
commercial finance subsidiaries as of December 31, 1995 is presented in the
table below. The relationships shown are for one day only and significant
changes can occur in the sensitivity relationships as a result of market forces
and management decisions. The interest rate gaps reported in the table arise
when assets are funded with liabilities having different repricing intervals and
to this degree earnings will be sensitive to interest rate changes. The Company
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33
attempts to match interest rate sensitive assets and liabilities to minimize the
effect of fluctuations in interest rates.
REPRICING PERIODS
--------------------------------------------------------------------
WITHIN WITHIN WITHIN OVER
0-3 MONTHS 4-12 MONTHS 1-5 YEARS 5 YEARS TOTAL
---------- ----------- --------- -------- ----------
(THOUSANDS OF DOLLARS)
Interest sensitive assets:
Commercial finance and other........... $ 577,236 $ 37,571 $ 1,516 $ 28,939 $ 645,262
Thrift and loan:
Cash equivalents..................... 152,118 -- -- -- 152,118
Investments.......................... 1,715 -- -- -- 1,715
Commercial real estate loans......... 344,317 215,909 153,175 17,198 730,599
Residential real estate loans........ 58,495 82,972 20,844 3,577 165,888
Contract loans....................... 96 207 244 -- 547
Installment loans.................... 341 739 702 -- 1,782
---------- -------- -------- -------- --------
Total interest sensitive assets........ $1,134,318 $ 337,398 $ 176,481 $ 49,714 $1,697,911
========== ======== ======== ======== ========
Interest sensitive liabilities:
Savings deposits....................... $ 228,151 $ -- $ -- $ -- $ 228,151
Time deposits.......................... 223,542 308,605 166,014 -- 698,161
Commercial paper and other............. 5,953 1,238 -- -- 7,191
Securitization obligation.............. 330,000 -- -- -- 330,000
Debt with banks........................ 185,000 -- -- -- 185,000
Debt from affiliates................... 34,760 -- 20,000 -- 54,760
---------- -------- -------- -------- --------
Total interest sensitive liabilities... $1,007,406 $ 309,843 $ 186,014 $ -- $1,503,263
========== ======== ======== ======== ========
Incremental interest rate sensitivity
gap.................................... $ 126,912 $ 27,555 $ (9,533) $ 49,714 $ 194,648
========== ======== ======== ======== ========
Cumulative gap........................... $ 126,912 $ 154,467 $ 144,934 $194,648
========== ======== ======== ========
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:
1995 1994 1993
-------------------- -------------------- ------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ----- ---------- ----- -------- -----
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Accounts receivable and inventory loans:
Commercial finance...................... 415,038 27% $ 409,580 28% $315,467 36%
Term loans:
Commercial finance...................... 110,647 7 124,379 8 63,814 7
Thrift and loan......................... 888,952 58 807,527 55 425,432 49
Other................................... 116,187 8 126,694 9 66,952 8
---------- --- ---------- --- -------- ---
Total term loans...................... 1,115,786 73 1,058,600 72 556,198 64
---------- --- ---------- --- -------- ---
Total loans........................... 1,530,824 100% 1,468,180 100% 871,665 100%
Less allowance for possible loan losses... 31,781 2 27,406 2 25,222 3
---------- --- ---------- --- -------- ---
Loans receivable........................ 1,499,043 98% $1,440,774 98% $846,443 97%
========== === ========== === ======== ===
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The following table illustrates the maturities of the Company's loans
receivable:
MATURITIES AT DECEMBER 31, 1995
--------------------------------------------------
1 TO 24 25 TO 60 OVER 60
MONTHS MONTHS MONTHS TOTAL
--------- --------- --------- -----------
(THOUSANDS OF DOLLARS)
Accounts receivable and inventory
loans -- variable rate.............. $ 415,038 $ -- $ -- $ 415,038
Term loans -- variable rate........... 164,620 147,324 623,402 935,346
Term loans -- fixed rate.............. 90,523 48,911 41,006 180,440
-------- -------- -------- ----------
Total....................... $ 670,181 $ 196,235 $ 664,408 $ 1,530,824
======== ======== ======== ==========
The Company monitors the relationship of fixed and variable rate loans and
interest bearing liabilities in order to minimize interest rate risk.
Adverse economic developments can negatively affect the Company's business
and results of operations in a number of ways. Such developments can reduce the
demand for loans, impair the ability of borrowers to pay loans and impair the
value of the underlying collateral.
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35
The following table describes the asset classifications, loss experience
and reserve reconciliation of the real estate lending and commercial finance
operations as of or for the periods ended as shown below:
DECEMBER 31,
---------------------------------------
1995 1994 1993
---------- ---------- --------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Non-accrual loans............................... $ 33,467 $ 21,834 $ 17,304
Accrual loans 90 days past due.................. 3,025 1,711 1,763
Real estate owned ("REO")....................... 4,941 17,467 842
---------- ---------- --------
Total non-performing assets..................... $ 41,433 $ 41,012 $ 19,909
========== ========== ========
Beginning allowance for possible loan losses.... $ 27,406 $ 25,222 $ 22,819
Provision for loan losses....................... 14,575 11,980 16,873
Reserves established with portfolio
acquisitions.................................. -- 3,605 --
Charge-offs:
Commercial finance and other loans............ 2,421 4,265 7,614
Thrift and loan:
Commercial real estate loans............... 9,248 4,833 176
Residential real estate loans.............. 1,012 2,685 4,835
Contract and installment loans............. 480 2,434 2,627
Finance leases............................. -- 37 314
---------- ---------- --------
Total charge-offs............................. 13,161 14,254 15,566
---------- ---------- --------
Recoveries:
Commercial finance and other loans............ 1,034 207 360
Thrift and loan:
Commercial real estate loans............... 37 10 --
Residential real estate loans.............. 1,659 265 128
Contract and installment loans............. 230 349 468
Finance leases............................. 1 22 140
---------- ---------- --------
Total recoveries.............................. 2,961 853 1,096
---------- ---------- --------
Net charge-offs................................. 10,200 13,401 14,470
---------- ---------- --------
Ending allowance for possible loan losses....... $ 31,781 $ 27,406 $ 25,222
========== ========== ========
Allocation of allowance for possible loan
losses:
Commercial finance and other loans............ $ 14,283 $ 13,015 $ 13,092
Thrift and loan............................... 17,498 14,391 12,130
---------- ---------- --------
Total allowance for possible loan losses...... $ 31,781 $ 27,406 $ 25,222
========== ========== ========
Total loans receivable.......................... $1,530,824 $1,468,180 $871,665
Average total loans receivable.................. 1,505,779 1,082,622 783,132
Net charge-offs to average total loans
receivable.................................... 0.68% 1.24% 1.85%
Non-performing assets to total loans
receivable.................................... 2.71% 2.79% 2.28%
Allowance for possible loan losses to total
loans receivable.............................. 2.08% 1.87% 2.89%
Allowance for possible loan losses to
non-performing assets......................... 76.70% 66.82% 126.69%
Allowance for possible loan losses to
non-accrual loans and accrual loans 90 days
past due...................................... 87.09% 116.40% 132.28%
Non-performing assets remained relatively stable at December 31, 1995 as
compared to December 31, 1994, due primarily to a $11.6 million increase in
non-accrual loans, more than offset by a $12.5 million decrease in REO assets.
Of the increase in non-accrual loans, $8.9 million is represented by one loan in
the
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commercial finance operation. The collateral securing this loan is closely
monitored by the Company and the Company believes it currently has adequate
reserves in the allowance for possible loan losses to cover any potential loss
on this loan. The decrease in REO assets during 1995 relates entirely to the
real estate lending operation. At December 31, 1995, the balance in REO includes
eight commercial real estate properties totaling $4.4 million. Non-performing
assets increased $21.1 million at December 31, 1994 as compared to the prior
year end due primarily to a $16.6 million increase in REO assets in the real
estate lending operation.
The higher provision for loan losses in 1995 as compared to 1994 is
consistent with the significant overall growth in average loans receivable.
Charge-offs in 1995 as compared to 1994 decreased in the commercial finance
operation and remained relatively stable in the real estate lending operation.
In 1994 total charge-offs decreased from the prior year due to lower charge-offs
in the commercial finance operation, partially offset by higher charge-offs in
the real estate lending operation. The commercial finance charge-offs were
unusually high in 1993 as the Company charged-off substantially all of the loans
from the Company's terminated commercial mortgage banking operation. (These
loans had already been provided for in the allowance for possible loan losses in
prior years.) Higher charge-offs in the real estate lending operation in 1994 as
compared to 1993 are consistent with the significant growth in the real estate
loan portfolio in 1994. Overall, total charge-offs have decreased over the three
years ended December 31, 1995 and these reductions occurred during a period in
which loans receivable increased.
Included in the reserves established with portfolio acquisitions in 1994 is
$3.2 million in reserves relating to a $225 million commercial real estate loan
portfolio acquisition by Fremont Investment & Loan which was completed in August
1994.
LIQUIDITY AND CAPITAL RESOURCES
The property and casualty insurance operations must have cash and liquid
assets available to meet their obligations to policyholders in accordance with
contractual obligations, in addition to having the funds available to meet
ordinary operating costs. These operations have several sources of funds to meet
their obligations, including cash flow from operations, recoveries from
reinsurance contracts and investment securities. By statute, the majority of the
cash from these operations is required to be invested in investment grade
securities to provide protection for policyholders. The Company 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 gain (loss) of $33.2 million and $(107.9)
million at December 31, 1995 and 1994, respectively.
The Company's thrift and loan subsidiary finances its lending activities
primarily through customer deposits, which have grown from $747 million at
December 31, 1994 to $926 million at December 31, 1995. In January 1995, Fremont
Investment & Loan became eligible for financing through the Federal Home Loan
Bank of San Francisco. This financing is available at varying rates and terms.
As of December 31, 1995, $170 million was available under the facility and no
borrowings were outstanding.
The Company's commercial finance operation funds its lending activities
primarily through its asset securitization program, an unsecured revolving line
of credit with a syndicated bank group and its capital. The asset securitization
program was established to provide a stable and cost effective source of funds
to facilitate the expansion of this business. The proceeds from the sale of the
initial series of asset-backed certificates ("Series A") under this program in
April 1993 were $200 million bearing interest at the rate of LIBOR plus 0.47%.
In November 1993, an additional $100 million of these certificates ("Series B")
were sold bearing interest at the rate of LIBOR plus 0.5%. The securities issued
in this program have a scheduled maturity of three and four years, but could
mature earlier depending on fluctuations in outstanding balances of loans in the
portfolio and other factors. During April 1995, the Company issued $30 million
in subordinated variable rate asset-backed certificates, which mature in 2000,
via a private placement. As of December 31, 1995, up to $500 million in
additional publicly offered asset-backed certificates may be issued pursuant to
a shelf registration statement to fund future growth in the commercial finance
loan portfolio. In February 1996, $135 million in asset-backed certificates
("Series C") were issued which mature in 2000. The proceeds were used, in
conjunction with existing cash, to retire the $200 million in Series A
certificates. The Series B
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37
certificates are scheduled to mature in 1997. In December 1995, a commercial
paper facility was established as part of the asset securitization program. This
facility provides for the issuance of up to $150 million in commercial paper,
dependent upon the level of assets within the asset securitization program. This
facility, which expires in December 1998, had no amounts outstanding under it as
of December 31, 1995. The commercial finance operation's unsecured revolving
line of credit is with a syndicated bank group that presently permits borrowings
of up to $300 million, of which $185 million was outstanding as of December 31,
1995. This credit line is primarily used to finance assets which are not
included in the Company's asset securitization program. This credit line expires
August 1998.
As a holding company, Fremont General 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.
During 1995, stockholders' dividends totaling $12.6 million were paid.
Stockholders' dividends declared aggregated $13.1 million, $11.5 million and
$10.1 million during 1995, 1994 and 1993, respectively. Several of the Company'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 Company. The Company expects that during the next
few years dividends from its subsidiaries will consist of dividends from its
property and casualty subsidiaries and dividends on preferred stock of its
thrift and loan holding company and commercial finance subsidiaries. The maximum
amount available for payment of dividends by the property and casualty
subsidiaries at December 31, 1995 without prior regulatory approval is
approximately $30 million.
To facilitate general corporate operations, in August 1994 the Company
obtained a revolving line of credit with a syndicated bank group that permitted
borrowings of up to $150 million. In August 1995, the Company negotiated an
increase of this line to $200 million, of which $85 million was outstanding as
of December 31, 1995. In August 1997, this credit line converts to a term loan
of up to $100 million, with scheduled semi-annual payments through August 2001.
In addition, in July 1994 the Company replaced its internally financed loan to
its Employee Stock Ownership Plan ("ESOP") with an external bank-financed loan
totaling $11 million. The maximum principal amount of this loan was increased to
$15 million in August 1995. The loan is due in seven equal annual installments
commencing on April 1, 1996 and is secured by certain shares of the ESOP. The
balance outstanding at December 31, 1995 was $6.6 million. 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 deposit rate. The rate at December 31, 1995 was 6.69%.
On February 22, 1995, the Company completed the acquisition of Casualty
which resulted in the disbursement of funds totaling $256.5 million, comprised
of $231.5 million in cash and $25 million in a note payable to the seller. In
September 1995, the note payable to the seller was refinanced using the
Company's existing revolving line of credit. The cash used to fund the
acquisition includes $55 million in borrowings under the Company's existing line
of credit and the remainder from internally generated funds. See "General. "
On March 1, 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 SecuritiesSM ("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 $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 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 $373,750,000
aggregate principal amount at maturity of Liquid Yield Option(TM) Notes due
2013, and subordinate and junior to all senior indebtedness of the 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 the Company. The Company will use the proceeds from the sale of
the Junior Subordinated Debentures to reduce outstanding debt under the
Company's revolving line of credit by approximately $50 million, with the
remaining proceeds used for general corporate purposes.
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38
Net cash provided by operating activities of continuing operations was
$39.5 million, $68.0 million and $85.1 million for the years ended December 31,
1995, 1994 and 1993, respectively. Net cash provided by continuing operations
decreased in 1995 over 1994 due primarily to the following items: (i) a smaller
net decrease in agents' balances and reinsurance recoverables; (ii) an increase
in accrued investment income; (iii) a greater decrease in claims and policy
liabilities; (iv) and higher policy acquisition costs deferred, net of
amortization. These conditions were partially offset by higher net income, a net
increase in other liabilities, net of other assets and a significant increase in
the provision for deferred income taxes. The decreases in agents' balances and
claims and policy liabilities are primarily due to lower premium volume in the
Company's California workers' compensation insurance business. Higher policy
acquisition costs deferred are due primarily to increases in annuity contract
receipts in the Company's life insurance operation (see Notes F and P of Notes
to Consolidated Financial Statements). The net increase in other liabilities,
net of other assets, is due primarily to increased accruals for other operating
costs. Net cash provided by continuing operations decreased in 1994 compared to
the prior year due primarily to a decrease in claims and policy liabilities,
partially offset by an increase in net income and a net decrease in agents'
balances and reinsurance recoverables.
Net cash used in investing activities was $514.0 million, $551.1 million
and $448.1 million in 1995, 1994 and 1993, respectively. Net cash used in
investing activities decreased in 1995 as compared to 1994, due primarily to a
decrease in bulk loan purchases, net of loan repayments, in the real estate
lending operation. This net decrease is due in part to $366 million in bulk
commercial real estate loan purchases which the Company completed in 1994. The
decrease in net loan purchases was offset partially by the acquisition of
Casualty and an increase in investment purchases, net of sales, maturities, and
calls. Net cash used in investing activities increased in 1994 as compared to
1993, due primarily to an increase in bulk loan purchases and loan originations,
net of loan repayments, offset partially by a decrease in investment purchases,
net of sales, maturities and calls.
Net cash provided by financing activities was $483.0 million, $485.6
million and $346.7 million for 1995, 1994 and 1993, respectively. Net cash
provided by financing activities decreased modestly in 1995 as compared to 1994,
due primarily to a lower increase in thrift deposits partially offset by a net
increase in short-term and long-term debt and an increase in annuity contract
receipts. Repayments of short-term debt increased and proceeds from long-term
debt increased primarily due to a reclassification of the commercial finance
operation's credit line from short-term debt to long-term debt as of December
31, 1995. This reclassification was made pursuant to the terms of the credit
line, which was renegotiated in August 1995. Net cash provided by financing
activities increased in 1994 as compared to 1993, due primarily to an increase
in net thrift deposits, partially offset by a net decrease in short-term and
long-term debt. The 1993 year is additionally impacted by $40.8 million in
proceeds from a public offering of the Company's Common Stock in July 1993.
The amortized cost of the Company's invested assets were $1.91 billion,
$.99 billion, and $1.06 billion at December 31, 1995, 1994 and 1993,
respectively. Contributing to the $.92 billion increase in the invested assets
was approximately $512 million resulting from the Casualty acquisition and $199
million increase in net annuity receipts in the Company's life insurance
operation. The modest decrease in 1994 as compared to 1993 is due primarily to a
decrease in premium volume. As of July 1, 1995 the Company's held to maturity
portfolio totaling $319.4 million was transferred to available for sale in
accordance with the provisions of Financial Accounting Standards Board Statement
115 ("FASB 115"), "Accounting for Certain Investments in Debt and Equity
Securities." In addition, at this date there was a net unrealized gain of $9.9
million (net of deferred taxes of $5.3 million) on the held to maturity
portfolio which was transferred to stockholders' equity. The transfer became
necessary as the Company sold certain investment securities in July which were
classified as held to maturity at June 30, 1995. These investment sales were
part of an overall review and restructuring of the investment portfolio
performed in conjunction with the investing of cash received in the acquisition
of Casualty. This review and restructuring caused the Company to consider the
appropriateness of the remaining held to maturity investments, which resulted in
the reclassification.
The Company's property and casualty premium to surplus ratio for the year
ended December 31, 1995 was 2.3 to 1, which is within industry guidelines. The
FDIC has established certain capital and liquidity
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39
standards for its member institutions, and Fremont Investment & Loan was in
compliance with these standards as of December 31, 1995. See "Item 1.
Business -- Regulation -- Thrift and Loan Regulation." In August 1994 an
additional $23 million was contributed to the capital of Fremont Investment &
Loan to support the growth in the loan portfolio during 1994.
The Company believes that its existing cash, its bank lines of credit,
revenues from operations and other available sources of liquidity will be
sufficient to satisfy its liquidity needs for the next several years.
The Company's strategy is to expand its business to the extent possible
without adversely impacting its loan portfolio and policyholder base. However,
the Company's strategic model is not dependent on growth as a source of
liquidity. While the level of revenues will obviously affect results of
operations, the Company's liquidity is not dependent on future revenue growth.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("FASB 121"), "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of ", which requires impairment
losses to be recorded on long-lived assets used in operations, including
intangible assets, when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. FASB 121 also addresses the accounting for
long-lived assets that are expected to be disposed of. The Company will adopt
FASB 121 in the first quarter of 1996 and, based on current circumstances, the
effect of adoption will not be material.
Also, in 1995, the FASB issued Statement 123 ("FASB 123"), "Accounting for
Stock-Based Compensation" that is effective for fiscal years beginning after
December 15, 1995. FASB 123 establishes a method of accounting for stock-based
compensation that is based on the fair value of stock options and similar
instruments and encourages, but does not require, adoption of that method. The
Company has elected to continue following Accounting Principles Board Opinion
No. 25 for measuring compensation cost. Pursuant to FASB 123, the Company will
disclose pro forma net income and earnings per share calculated as if the
recognition and measurement provisions of the new standard had been adopted.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements, including supplementary
data, are set forth in the "Index" on page 43 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth under the subheadings "Election of Directors,"
"Executive Officers and Compensation," and the last paragraph under the
subheading "Principal and Management Stockholders" in the Company's Proxy
Statement for the 1996 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," "Officers and Compensation," "Summary Compensation
Table," "Summary Compensation Table -- Explanations," "Option/SAR Grants in Last
Fiscal Year," "Option Exercises and Year-End Values Table/Aggregate Option
Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Employment
Agreements" and "Retirement and Other Benefit Plans, A-D" in the Company's Proxy
Statement for the 1996 Annual Meeting of Stockholders is incorporated herein by
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 Proxy Statement for the 1996 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information immediately following the caption "Election of Directors"
and "Employment Agreements" in the Company's Proxy Statement for the 1996 Annual
Meeting of Stockholders is incorporated herein by reference.
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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) an (c) EXHIBITS.
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------------------
2.1 Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont
General Corporation, the Buckeye Union Insurance Company, The Continental
Corporation and Casualty Insurance Company, Dated as of December 16, 1994.
(Filed as Exhibit No. 2.1 to Current Report on Form 8-K, as of February 22,
1995, Commission File Number 1-8007, and incorporated herein by reference.)
2.2 Amendment No. 1 to Stock Purchase Agreement among Fremont Compensation
Insurance Company, Fremont General Corporation, the Buckeye Union Insurance
Company, The Continental Corporation and Casualty Insurance Company, Dated as
of December 16, 1994. (Filed as Exhibit No. 2.2 to Current Report on Form 8-K,
as of February 22, 1995, Commission File Number 1-8007, and incorporated
herein by reference.)
3.1 Restated Articles of Incorporation of Fremont General Corporation. (Filed as
Exhibit No. 3.1 to Registration Statement on Form S-3 File No 33-64771 which
was declared effective on March 1, 1996, and incorporated herein by
reference.)
3.2 Certificate of Amendment of Articles of Incorporation of Fremont General
Corporation. (Filed as Exhibit 3.2 to Registration Statement on Form S-3 File
No. 33-64771 which was declared effective on March 1, 1996 and herein
incorporated by reference.)
3.3 Amended and Restated By-Laws of Fremont General Corporation.
4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed as
Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File Number
1-8007, and incorporated herein by reference.)
4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the
Registrant and Bankers Trust Company. (Filed as Exhibit No. (4)(iv) to
Registration Statement on Form S-3 filed on October 1, 1993, and incorporated
herein by reference.)
4.3 Indenture among the Registrant, the Trust and First Interstate Bank of
California, a California banking corporation, as trustee.
4.4 Declaration of Trust among the Registrant, the Regular Trustees and The Chase
Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee.
4.5 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.
4.6 Preferred Securities Guarantee Agreement between the Registrant and The Chase
Manhattan Bank, N.A., a national banking association, as Preferred Guarantee
Trustee.
4.7 Common Securities Guarantee Agreement by the Registrant.
4.8 Form of Preferred Securities. (included in Exhibit 4.5).
4.9 Form of 9% Junior Subordinated Debenture. (included in Exhibit 4.3).
10.1 Fremont General Corporation Employee Stock Ownership Plan as amended.
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42
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------------------
10.2 Amended and Restated Trust Agreement for Fremont General Corporation Employee
Stock Ownership Plan.
10.3 Fremont General Corporation and Affiliated Companies Investment Incentive
Program as amended.
10.4(a) Trust Agreement for Investment Incentive Program. (Filed as Exhibit No.
(10)(xi) to Annual Report on Form 10-K, for the fiscal year ended December 31,
1993, Commission File Number 1-8007, and incorporated herein by reference.)
10.4(b) Amendment to Trust Agreement for Investment Incentive Program.
10.5(a) Supplemental Retirement Plan of the Company. (Filed as Exhibit No. (10)(v) to
Annual Report on Form 10-K, for the fiscal year ended December 31, 1990,
Commission File Number 1-8007, and incorporated herein by reference.)
10.5(b) Amendment to Supplemental Retirement Plan.
10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the Senior
Supplemental Retirement Plan of the Company, as amended.
10.7 Senior Supplemental Retirement Plan, as amended.
10.8(a) Excess Benefit Plan of The Company. (Filed as Exhibit No. (10)(vi) to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1993, Commission
File No.> 1-8007 and incorporated herein by reference.)
10.8(b) Amendment to Excess Benefit Plan of the Company.
10.8(c) Trust Agreement for Excess Benefit Plan.
10.9 Non-Qualified Stock Option Plan of 1989 of the Company.
10.10 Long-Term Incentive Compensation Plan of the Company.
10.11 1995 Restricted Stock Award Plan.
10.12 Fremont General Corporation Employee Benefits Trust Agreement ("Grantor
Trust") dated September 7, 1995 between the Company and Merrill Lynch Trust
Company of California.
10.13 Employment Agreement between the Company and James A. McIntyre. (Filed as
Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period ended
March 31, 1994, Commission File Number 1-8007, and incorporated herein by
reference.)
10.14(a) Employment Agreement between the Company and Louis J. Rampino.
10.14(b) Employment Agreement between the Company and Wayne R. Bailey.
10.15 Management Continuity Agreement between the Company and Raymond G. Meyers.
10.16 1995 Management Incentive Compensation Plan of the Company. (Filed as Exhibit
No. (10)(vi) to Quarterly Report on Form 10-Q, for the period ended June 30,
1995, Commission File Number 1-8007, and incorporated herein by reference.)
10.17 Continuing Compensation Plan for Retired Directors.
10.18 Non-Employee Directors' Deferred Compensation Plan.
10.19(a) Credit Agreement among Fremont General Corporation, Various Lending
Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as Exhibit
No. (10)(xiv) to Quarterly Report on Form 10-Q for the period ended September
30, 1994, Commission File Number 1-8007, and incorporated herein by
reference.)
10.19(b) Amendment to Credit Agreement.
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43
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------------------
10.20 Keep Well Agreement, dated as of August 24, 1995 by the Company in connection
with the Credit Agreement among Fremont General Corporation, Various Lending
Institutions and the Chase Manhattan Bank, N.A., As Agent.
10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company of
California as trustee for the Fremont General Corporation Employee Stock
Ownership Trust. The Plan Committee (hereinafter described) on behalf of the
Fremont General Corporation Employee Stock Ownership Plan, Fremont General
Corporation, and First Interstate Bank of California August 10, 1995. (Filed
as Exhibit No. (10)(viii) to Quarterly Report on Form 10-Q for the period
ended September 30, 1995, and incorporated herein by reference.)
(11) Statement re: Computation of per share earnings.
(21) Subsidiaries of the Company.
(23) Consent of Ernst & Young LLP independent Auditors.
(27) Financial Data Schedule
(28) Information from reports provided to state insurance regulatory authorities.
(b) REPORT ON FORM 8-K. None filed during the quarter ended December 31,
1995.
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44
FREMONT GENERAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ANNUAL REPORT ON FORM 10-K
------------------------
INDEX
PAGES
-----
Report of Independent Auditors....................................................... 44
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1994....................... 45
Consolidated Statements of Income for the years ended
December 31, 1995, 1994 and 1993................................................ 46
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993................................................ 47
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993................................................ 48
Notes to Consolidated Financial Statements......................................... 49
Schedules:
III -- Condensed Financial Information of Registrant........................... 72
V -- Supplementary Insurance Information..................................... 76
VI -- Reinsurance............................................................. 77
VIII -- Valuation and Qualifying Accounts....................................... 78
Supplemental Information Concerning Property/Casualty Insurance
X -- Operations.............................................................. 79
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.
43
45
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, 1995 and 1994, and the
related consolidated statements of income, cash flows and changes in
stockholders' equity for each of the three years in the period ended December
31, 1995. 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 consolidated financial statements and schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 consolidated financial position of
Fremont General Corporation and subsidiaries at December 31, 1995 and 1994, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1995, in conformity with
generally accepted accounting principles. 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.
As discussed in Note A to the consolidated financial statements, the
Company made certain accounting changes in 1994.
ERNST & YOUNG LLP
Los Angeles, California
March 14, 1996
44
46
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
(THOUSANDS OF DOLLARS)
ASSETS
Securities available for sale at fair value:
Fixed maturity investments (cost: 1995 -- $1,255,434;
1994 -- $311,701)................................................ $1,296,550 $ 235,442
Non-redeemable preferred stock (cost: 1995 -- $285,337;
1994 -- $213,935)................................................ 277,451 189,632
----------- -----------
Total securities available for sale......................... 1,574,001 425,074
Securities held to maturity at amortized cost:
Fixed maturity investments (fair value: 1994 -- $199,103)........... -- 206,416
Loans receivable...................................................... 1,499,043 1,440,774
Short-term investments................................................ 362,163 255,751
Other investments..................................................... 1,726 1,677
----------- -----------
TOTAL INVESTMENTS AND LOANS................................. 3,436,933 2,329,692
Cash.................................................................. 39,559 31,058
Accrued investment income............................................. 30,396 13,622
Premiums receivable and agents' balances.............................. 107,973 48,556
Reinsurance recoverable on paid losses................................ 9,422 7,204
Reinsurance recoverable on unpaid losses.............................. 289,461 136,151
Deferred policy acquisition costs..................................... 76,638 59,286
Costs in excess of net assets acquired................................ 70,656 28,776
Deferred income taxes................................................. 78,619 88,426
Other assets.......................................................... 75,240 54,806
Assets held for discontinued operations............................... 262,502 336,813
----------- -----------
TOTAL ASSETS................................................ $4,477,399 $3,134,390
=========== ===========
LIABILITIES
Claims and policy liabilities:
Losses and loss adjustment expenses................................. $1,455,692 $ 746,661
Life insurance benefits and liabilities............................. 374,724 172,425
Unearned premiums................................................... 100,481 47,551
Dividends to policyholders.......................................... 40,822 46,067
----------- -----------
TOTAL CLAIMS AND POLICY LIABILITIES......................... 1,971,719 1,012,704
Reinsurance premiums payable and funds withheld....................... 5,452 6,961
Other liabilities..................................................... 81,371 68,721
Thrift deposits....................................................... 926,312 746,977
Short-term debt....................................................... 72,191 176,325
Long-term debt........................................................ 693,276 468,390
Liabilities of discontinued operations................................ 228,988 303,299
----------- -----------
TOTAL LIABILITIES........................................... 3,979,309 2,783,377
Commitments and contingencies.........................................
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share -- Authorized: 1995 -- 49,500,000
and 1994 -- 30,000,000 shares; issued and outstanding:
(1995 -- 25,393,000 and 1994 -- 15,388,000)......................... 25,393 15,388
Additional paid-in capital............................................ 110,103 80,264
Retained earnings..................................................... 347,607 331,713
Unearned Employee Stock Ownership Plan shares......................... (6,612) (10,987)
Net unrealized gain (loss) on investments, net of deferred taxes...... 21,599 (65,365)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY.................................. 498,090 351,013
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $4,477,399 $3,134,390
=========== ===========
See notes to consolidated financial statements.
45
47
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS, EXCEPT
PER SHARE DATA)
REVENUES
Property and casualty premiums earned.......................... $606,917 $433,584 $455,765
Net investment income.......................................... 119,523 76,821 77,198
Loan interest.................................................. 162,992 113,382 87,244
Realized investment gains (losses)............................. 1 (315) 2,165
Other revenue.................................................. 34,381 29,676 29,033
-------- -------- --------
Total Revenues............................................ 923,814 653,148 651,405
EXPENSES
Losses and loss adjustment expenses............................ 461,333 273,599 319,153
Policy acquisition costs....................................... 126,099 86,990 82,255
Provision for loan losses...................................... 14,575 11,980 16,873
Other operating costs and expenses............................. 120,963 90,078 79,180
Dividends to policyholders..................................... -- 49,654 45,218
Interest expense............................................... 100,517 59,276 44,378
-------- -------- --------
Total Expenses............................................ 823,487 571,577 587,057
-------- -------- --------
Income before taxes............................................ 100,327 81,571 64,348
Income tax expense............................................. 32,305 25,759 21,638
-------- -------- --------
NET INCOME........................................... $ 68,022 $ 55,812 $ 42,710
======== ======== ========
PER SHARE DATA:
Net Income:
Primary...................................................... $ 2.61 $ 2.16 $ 1.85
Fully diluted................................................ 2.17 1.82 1.65
See notes to consolidated financial statements.
46
48
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- --------- -----------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income......................................................... $ 68,022 $ 55,812 $ 42,710
Adjustments to reconcile net income to net cash provided by
operating activities:
Change in premiums receivable and agents' balances and
reinsurance recoverable on paid losses........................ 7,495 32,411 (10,060)
Change in accrued investment income.............................. (21,186) 5,349 (6,429)
Change in claims and policy liabilities.......................... (72,824) (43,741) 29,750
Amortization of policy acquisition costs......................... 126,099 86,990 82,255
Policy acquisition costs deferred................................ (148,365) (91,048) (79,936)
Provision for deferred income taxes.............................. 22,810 (4,391) (973)
Provision for loan losses........................................ 14,575 11,980 16,873
Provision for depreciation and amortization...................... 20,334 15,709 10,512
Net amortization on fixed maturity investments................... (1,793) 1,001 1,270
Realized investment (gains) losses............................... (1) 315 (2,165)
Change in other assets and liabilities........................... 24,323 (2,338) 1,316
----------- ---------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES..................... 39,489 68,049 85,123
INVESTING ACTIVITIES
Securities available for sale:
Purchases of securities.......................................... (2,773,842) (975,495) (1,079,114)
Sales of securities.............................................. 2,000,772 1,302,486 788,946
Securities matured or called..................................... 101,957 61,752 24,907
Securities held to maturity:
Purchases of securities.......................................... (117,660) (206,416) --
Sales of securities.............................................. -- -- 6,354
Securities matured or called..................................... 5,464 -- 65,946
Decrease (increase) in short-term and other investments............ 615,705 (116,668) (74,691)
Loan originations and bulk purchases funded........................ (458,801) (727,715) (401,493)
Receipts from repayments of loans.................................. 377,768 121,404 227,620
Acquisition of Casualty Insurance Company, less cash acquired...... (255,803) -- --
Purchases of property and equipment................................ (9,527) (10,402) (6,557)
----------- ---------- -----------
NET CASH USED IN INVESTING ACTIVITIES......................... (513,967) (551,054) (448,082)
FINANCING ACTIVITIES
Proceeds from short-term debt...................................... 30,134 140,813 29,740
Repayments of short-term debt...................................... (199,268) (46,646) (159,666)
Proceeds from long-term debt....................................... 325,000 26,000 435,013
Repayments of long-term debt....................................... (42,808) (12,500) (56,790)
Net increase in thrift deposits.................................... 179,335 334,661 45,141
Annuity contract receipts.......................................... 217,648 57,929 27,315
Annuity contract withdrawals....................................... (18,874) (5,952) (1,221)
Dividends paid..................................................... (12,618) (11,344) (9,369)
Proceeds from sale of Common Stock................................. -- -- 40,803
Stock options exercised............................................ 80 22 251
Purchase of fractional shares...................................... (25) -- (8)
Decrease (increase) in unearned Employee Stock Ownership Plan
shares........................................................... 4,375 2,647 (4,475)
----------- ---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES..................... 482,979 485,630 346,734
----------- ---------- -----------
INCREASE (DECREASE) IN CASH........................................ 8,501 2,625 (16,225)
Cash at beginning of year........................................ 31,058 28,433 44,658
----------- ---------- -----------
CASH AT END OF YEAR................................................ $ 39,559 $ 31,058 $ 28,433
=========== ========== ===========
See notes to consolidated financial statements.
47
49
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NET
ADDITIONAL UNEARNED UNREALIZED
COMMON PAID-IN RETAINED ESOP GAIN (LOSS) ON
STOCK CAPITAL EARNINGS SHARES INVESTMENTS TOTAL
------- ---------- -------- -------- -------------- --------
(THOUSANDS OF DOLLARS)
Balance at January 1, 1993...... $ 8,200 $ 17,891 $254,778 $ (9,159) $ -- $271,710
Net income for 1993........... -- -- 42,710 -- -- 42,710
Cash dividends to
stockholders............... -- -- (10,089) -- -- (10,089)
Conversion of 7 1/4%
debentures................. 1,201 27,266 -- -- -- 28,467
Issuance of Common Stock...... 1,250 39,553 -- -- -- 40,803
Three-for-two stock split..... 4,725 (4,725) -- -- -- --
Purchase of fractional
shares..................... -- (8) -- -- -- (8)
Stock options exercised....... 11 240 -- -- -- 251
Additional loan to ESOP less
amount collected........... -- -- -- (4,475) -- (4,475)
------- -------- -------- -------- -------- --------
Balance at December 31, 1993.... 15,387 80,217 287,399 (13,634) -- 369,369
Cumulative effect of change in
accounting for
investments................ -- -- -- -- 28,532 28,532
Net income for 1994........... -- -- 55,812 -- -- 55,812
Cash dividends to
stockholders............... -- -- (11,498) -- -- (11,498)
Stock options exercised....... 1 21 -- -- -- 22
ESOP contribution accrual cost
to market adjustment....... -- 26 -- -- -- 26
ESOP shares allocated less
additional shares
purchased.................. -- -- -- 2,647 -- 2,647
Net change in unrealized gain
(loss) on investments, net
of deferred taxes.......... -- -- -- -- (93,897) (93,897)
------- -------- -------- -------- -------- --------
Balance at December 31, 1994.... 15,388 80,264 331,713 (10,987) (65,365) 351,013
Net income for 1995........... -- -- 68,022 -- -- 68,022
Cash dividends to
stockholders............... -- -- (13,080) -- -- (13,080)
Ten percent stock dividend.... 1,538 37,498 (39,036) -- -- --
Three-for-two stock split..... 8,464 (8,464) -- -- -- --
Purchase of fractional
shares..................... -- (13) (12) -- -- (25)
Stock options exercised....... 3 77 -- -- -- 80
Accrued reductions to option
exercise price............. -- 741 -- -- -- 741
ESOP shares allocated......... -- -- -- 4,375 -- 4,375
Net change in unrealized gain
(loss) on investments, net
of deferred taxes.......... -- -- -- -- 86,964 86,964
------- -------- -------- -------- -------- --------
Balance at December 31, 1995.... $25,393 $ 110,103 $347,607 $ (6,612) $ 21,599 $498,090
======= ======== ======== ======== ======== ========
See notes to consolidated financial statements.
48
50
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Fremont General Corporation, a nationwide insurance and financial services
holding company, operates through its wholly-owned subsidiaries in select
businesses in niche markets. The three core operating business lines are
workers' compensation insurance, real estate lending and commercial finance
lending. Additionally, on a smaller scale, various other insurance products are
underwritten. Workers' compensation insurance has accounted for over 90% of
property and casualty premiums earned. In 1995 workers' compensation premiums
were evenly divided between the western region, primarily California, and the
mid-west region, primarily Illinois. Prior to 1995, substantially all of the
premium revenue was derived from the California market. Real estate lending
represents over 50% of loan interest revenues (1994 -- 51%; 1993 -- 54%) and
represents both commercial and residential lending secured by real estate
located in California. Commercial finance accounts for substantially all of the
remaining loan interest revenues (1994 -- 44%; 1993 -- 38%) and represents
asset-based loans to middle market companies nationwide (32% in California),
primarily secured by accounts receivable and inventory.
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 Fremont General Corporation and subsidiaries ("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 M 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
include adjustable dividend yield provisions. As of January 1, 1994, the Company
adopted the provisions of Financial Accounting Standards Board Statement 115
("FASB 115"), "Accounting for Certain Investments in Debt and Equity
Securities." The cumulative effect as of January 1, 1994 of adopting FASB 115
was to increase stockholders' equity by $28,532,000 (net of deferred income
taxes of $15,634,000) to reflect the net unrealized holding gains on securities
classified as available for sale that were previously carried at amortized cost.
There was no effect on net income.
Premiums and discounts on investments are amortized using the interest
method over the contractual lives of the investments. 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: 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. The allowance is
maintained at a level considered adequate to provide for potential 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.
49
51
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Beginning in 1995, the Company adopted FASB Statement No. 114 ("FASB 114"),
"Accounting by Creditors for Impairment of a Loan." Under FASB 114, the 1995
allowance for credit losses on loans that are identified for evaluation in
accordance with the new standard are based on discounted cash flows using the
loans' effective interest rate or the fair value of the collateral for
collateral dependent loans. Prior to 1995, the allowance for credit losses on
these loans was based on undiscounted cash flows or the fair value of the
collateral for collateral dependent loans. The effect on net income was not
material.
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.
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.
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 three 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 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. Revenues for
universal life and investment-type insurance products consist of policy charges
for the cost of insurance, policy initiation, administration and surrender fees
and are included in other revenue. Premiums receivable and agents' balances and
reinsurance recoverable on paid and unpaid losses include allowances for
doubtful accounts of $11,147,000 and $6,959,000 at December 31, 1995 and 1994,
respectively.
Losses and Loss Adjustment Expenses: The estimated liabilities for losses
and loss adjustment expenses include the accumulation of estimates for losses
and claims reported prior to the balance sheet dates, estimates (based 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 estimates,
the aggregate reserves are within a reasonable and acceptable range of adequacy.
Reserves are continually monitored and reviewed, and as settlements are made or
reserves adjusted, differences are included in current operations.
Included in the loss and loss adjustment expense liability recorded on the
consolidated balance sheet at December 31, 1995 is $100,413,000 of workers'
compensation accident and health permanent disability and death reserves which
have been discounted at 5%. These reserves arise from the acquisition on
February 22, 1995 of Casualty Insurance Company ("Casualty"), which is an
Illinois domiciled insurance company (see Note B). The Company has continued the
practice previously adopted by Casualty of discounting permanent disability loss
reserves for both statutory accounting practices and generally accepted
accounting principles.
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
50
52
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
that are charged to expense include benefit claims incurred in excess of related
policy account balances. Interest credited on such policies ranged from 4.5% to
6.5% at December 31, 1995. (See Notes F and P).
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 policies. Anticipated
investment income is considered in determining if premium deficiencies exist.
The costs of acquiring new and renewal life and annuity insurance contracts,
principally commissions and certain variable selling expenses which vary with,
and are primarily related to, the acquisition of new and renewal insurance
contracts have been deferred. These deferred acquisition costs are being
amortized over anticipated gross margins for such contracts.
Dividends to Policyholders: Dividends, if applicable, to policyholders on
workers' compensation insurance contracts are accrued during the period in which
the related premiums are earned.
Thrift Deposits: Thrift deposits consist primarily of investment
certificates at the Company's California thrift and loan subsidiary. Such
balances are credited with interest at rates ranging from 3.60% to 8.81% at
December 31, 1995. The estimated fair value of the thrift deposits was
$929,560,000 at December 31, 1995.
Intangibles: The excess of the costs of acquisitions over net assets
acquired (net of accumulated amortization: 1995 -- $17,513,000;
1994 -- $14,357,000) 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 name acquired in the
acquisition of Casualty (net of accumulated amortization: 1995 -- $326,000) is
being amortized over 40 years. See Note B regarding intangibles related to the
acquisition of Casualty.
Per Share Data: Primary earnings per share data have been computed based
on the weighted average number of common and common equivalent shares
outstanding, which were as follows: 1995 -- 26,079,000, 1994 -- 25,823,000 and
1993 -- 23,039,000. The weighted average number of shares were adjusted
retroactively for a 10% stock dividend distributed June 15, 1995 and a
three-for-two stock split effected January 8, 1996. Stock options granted to
certain key members of management are considered common stock equivalents for
the computation of primary earnings per share.
For the computation of fully-diluted earnings per share, stock options (see
Note J) and convertible securities (see Note I) had a dilutive effect of $0.44,
$0.34 and $0.20 per share for 1995, 1994 and 1993, respectively. Fully-diluted
earnings per share were computed based on 33,343,000, 33,034,000 and 28,243,000
weighted average number of shares outstanding for 1995, 1994 and 1993,
respectively.
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, mortgage and
commercial finance 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 commercial finance loans are limited due to the large
number of such investments and their distribution across many different
industries and geographics. Concentration of credit risk with respect to thrift
and loan finance receivables is limited due to the large number of borrowers;
however, substantially all thrift and loan finance receivables are from
borrowers within the state of California. 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 1995, Continental Insurance Company and
General Reinsurance Corporation, were the only reinsurers that accounted for
more than 10% of total amounts recoverable from all reinsurers on paid and
unpaid losses. The remaining reinsurance recoverables were spread over 146
reinsurers.
51
53
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 investment certificates, mortgage 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 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, 1995 are summarized in the following table:
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
---------- ----------
(THOUSANDS OF DOLLARS)
ASSETS
Fixed maturity investments (Note C)......................... $1,296,550 $1,296,550
Non-redeemable preferred stock (Note C)..................... 277,451 277,451
Loans receivable (Note D)................................... 1,499,043 1,503,101
LIABILITIES
Thrift deposits (Note A).................................... 926,312 929,560
Short-term debt (Note H).................................... 72,191 72,191
Long-term debt (Note I)..................................... 693,276 717,304
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.
New Accounting Standards: In March 1995, the FASB issued Statement No. 121
("FASB 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations, including intangible assets,
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. FASB 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Company will adopt FASB 121 in the first quarter
of 1996 and, based on current circumstances, the effect of adoption will not be
material.
Also in 1995, the FASB issued Statement 123 ("FASB 123"), "Accounting for
Stock-Based Compensation," that is effective for fiscal years beginning after
December 15, 1995. FASB 123 establishes a method of accounting for stock-based
compensation that is based on the fair value of stock options and similar
instruments and encourages, but does not require, adoption of that method. The
Company has elected to continue following Accounting Principles Board Opinion
No. 25 for measuring compensation cost. Pursuant to FASB 123, the Company will
disclose pro forma net income and earnings per share calculated as if the
recognition and measurement provisions of the new standard had been adopted.
Reclassifications: Certain 1994 and 1993 amounts have been reclassified to
conform to the 1995 presentation.
52
54
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- ACQUISITION
On February 22, 1995 the Company, through its subsidiary Fremont
Compensation Insurance Company, completed the acquisition of 100% of the
outstanding common stock of Casualty Insurance Company ("Casualty") from the
Buckeye Union Insurance Company ("Buckeye"). The purchase price paid by the
Company was $250 million, comprised of $225 million in cash and $25 million in a
note payable to Buckeye. In addition, $6.5 million of costs were incurred in
connection with the acquisition bringing the total cost to $256.5 million. The
acquisition, accounted for as a purchase, included approximately $45 million of
costs in excess of net assets acquired which is being amortized over 25 years,
and approximately $15 million of an intangible asset for the trade name which is
being amortized over 40 years. Income from Casualty has been included in the
consolidated income statement since February 22, 1995.
Casualty, based in Chicago, Illinois and its California-based subsidiary,
Workers' Compensation and Indemnity Company, underwrites workers' compensation
insurance primarily in Illinois and California. Casualty is currently the
largest underwriter of workers' compensation insurance in Illinois and is
licensed in six states.
The following schedule summarizes certain proforma unaudited results of
operations for the years ended December 31, 1995 and 1994, assuming the purchase
of Casualty had been consummated as of January 1, 1994:
YEAR ENDED
DECEMBER 31,
-----------------------
1995 1994
-------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE DATA)
Property and casualty premiums earned........................ $663,917 $ 819,981
Net investment income........................................ 124,523 115,261
Other revenues............................................... 197,374 149,680
-------- ----------
Total revenues............................................. 985,814 1,084,922
Losses and loss adjustment expenses.......................... 509,327 579,383
Policy acquisition costs..................................... 128,483 161,646
Other operating costs and expenses........................... 244,274 230,390
-------- ----------
882,084 971,419
-------- ----------
Income before taxes.......................................... 103,730 113,503
Income tax expense........................................... 33,708 40,360
-------- ----------
Net income................................................. $ 70,022 $ 73,143
======== ==========
Per share data:
Net income................................................. $ 2.68 $ 2.83
======== ==========
53
55
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assets acquired and liabilities assumed, net of the purchase price, at
the date of the acquisition of Casualty, are summarized in the following table:
(THOUSANDS OF DOLLARS)
Assets acquired:
Fixed maturity investments -- at fair value..................... $ 15,646
Short-term investments.......................................... 472,166
Premiums receivable and agents' balances........................ 67,117
Reinsurance recoverable on paid and unpaid losses............... 185,145
Deferred policy acquisition costs............................... 12,656
Deferred income taxes........................................... 59,830
Costs in excess of net assets acquired.......................... 45,036
Other assets, including cash, accrued investment income, state
deferred taxes and trade name................................ 37,719
--------
Total assets acquired................................... $895,315
========
Liabilities assumed:
Losses and loss adjustment expenses............................. $787,663
Unearned premiums............................................... 83,323
Dividends to policyholders...................................... 17,660
Other liabilities............................................... 6,669
--------
Total liabilities assumed............................... $895,315
========
54
56
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)
Available for sale:
At December 31, 1995
United States Treasury securities and
obligations of other US government agencies
and corporations............................ $ 136,626 $ 13,914 $ 1,290 $ 149,250
Redeemable preferred stock.................... 15,887 1,940 2,063 15,764
Mortgage-backed securities.................... 340,682 11,223 14,772 337,133
Corporate securities
Banks....................................... 123,144 4,944 2,252 125,836
Financial................................... 117,013 3,266 37 120,242
Transportation.............................. 16,888 353 -- 17,241
Utilities................................... 13,427 393 -- 13,820
Industrial.................................. 491,767 25,771 274 517,264
---------- -------- -------- ----------
Total.................................... 1,255,434 61,804 20,688 1,296,550
Non-redeemable preferred stock................ 285,337 5,392 13,278 277,451
---------- -------- -------- ----------
Total.................................... $1,540,771 $ 67,196 $ 33,966 $1,574,001
========== ======== ======== ==========
Available for sale:
At December 31, 1994
United States Treasury securities and
obligations of other US government agencies
and corporations............................ $ 53,045 $ 78 $ 7,971 $ 45,152
Redeemable preferred stock.................... 4,249 -- 758 3,491
Mortgage-backed securities.................... 189,551 -- 58,876 130,675
Corporate securities
Banks....................................... 24,744 -- 4,619 20,125
Financial................................... 10,000 -- 1,775 8,225
Industrial.................................. 30,112 -- 2,338 27,774
---------- -------- -------- ----------
Total.................................... 311,701 78 76,337 235,442
Non-redeemable preferred stock................ 213,935 -- 24,303 189,632
---------- -------- -------- ----------
Total.................................... $ 525,636 $ 78 $ 100,640 $ 425,074
========== ======== ======== ==========
Held to maturity:
At December 31, 1994
United States Treasury securities and
obligations of other US government agencies
and corporations............................ $ 53,695 $ 31 $ 2,319 $ 51,407
Mortgage-backed securities.................... 152,721 -- 5,025 147,696
---------- -------- -------- ----------
Total.................................... $ 206,416 $ 31 $ 7,344 $ 199,103
========== ======== ======== ==========
55
57
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of debt securities at December 31, 1995
by contractual maturity, are summarized in the following table:
AMORTIZED FAIR
COST VALUE
---------- ----------
(THOUSANDS OF DOLLARS)
Available for sale:
One year or less.......................................... $ 27,358 $ 27,461
Over 1 year through 5 years............................... 245,447 247,933
Over 5 years through 10 years............................. 495,154 520,484
Over 10 years............................................. 146,793 163,539
Mortgage-backed securities................................ 340,682 337,133
---------- ----------
Totals............................................ $1,255,434 $1,296,550
========== ==========
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 investments in debt securities and related realized
gains and losses are summarized in the following table:
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- --------
(THOUSANDS OF DOLLARS)
Proceeds from sales............................. $2,000,772 $1,302,486 $795,300
Gross realized gains............................ 20,923 13,987 14,028
Gross realized losses........................... 20,922 14,302 11,863
Investment income by major category of investments is summarized in the
following table:
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
(THOUSANDS OF DOLLARS)
Fixed maturities..................................... $ 75,581 $48,677 $71,476
Non-redeemable preferred stock....................... 25,661 19,407 238
Short-term........................................... 19,354 9,520 5,701
Other................................................ 109 206 255
-------- ------- -------
120,705 77,810 77,670
Investment expenses.................................. 1,182 989 472
-------- ------- -------
Net investment income...................... $119,523 $76,821 $77,198
======== ======= =======
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, 1995,
all investments held by the Company are current as to principal and interest,
with no investment in default. Included in investments is $27,794,000 of fixed
maturity investments and $31,223,000 of non-redeemable preferred stock of
Bankers Trust Company that in total exceeds 10% of stockholders' equity at
December 31,
56
58
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995. Using Standard and Poor's, Moody's and Fitch's rating services, the
quality mix of the Company's fixed maturity investment portfolio at December 31,
1995 is summarized in the following table:
AAA (including US government obligations).............................. 31%
AA..................................................................... 2
A...................................................................... 26
BBB.................................................................... 40
BB..................................................................... 1
---
100%
===
As of July 1, 1995 the Company's held to maturity portfolio totaling $319.4
million was transferred to available for sale in accordance with the provisions
of FASB 115. In addition, at this date there was a net unrealized gain of $9.9
million (net of deferred taxes of $5.3 million) on the held to maturity
portfolio which was transferred to stockholders' equity. The transfer became
necessary as the Company sold certain investment securities in July which were
classified as held to maturity at June 30, 1995. These investment sales were
part of an overall review and restructuring of the investment portfolio
performed in conjunction with the investing of cash received in the acquisition
of Casualty (see Note B). This review and restructuring caused the Company to
consider the appropriateness of the remaining held to maturity investments,
which resulted in the reclassification.
The par value of fixed maturity investments and cash totaling $834,433,000
at December 31, 1995 were on deposit with regulatory authorities in compliance
with legal requirements related to the insurance operations.
The Company currently holds no derivative financial instruments subject to
FASB Statement 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments."
NOTE D -- LOANS RECEIVABLE
Loans receivable consist of commercial finance, commercial and residential
real estate loans, and insurance premium notes receivable. Commercial finance
loans are asset-based loans that are secured by the borrowers' eligible trade
accounts receivable, inventories and equipment. Commercial and residential real
estate loans are secured by real property. Insurance premium notes receivable
are collateralized by security interests in return premiums.
Commercial finance loans are stated at the unpaid balance of cash advanced
net of allowance for possible loan losses of $12,554,000 and $12,464,000 at
December 31, 1995 and 1994, respectively. The amount of cash advanced under
these loans is based on stated percentages of the borrowers' eligible
collateral. The majority of the loans are callable within 30 days at the option
of the Company. Interest on the commercial loans is computed on the basis of
daily outstanding balances times the contractual interest rate and is reported
as earned income on the accrual method. Total loan balances on which income
recognition has been suspended were $9,344,000 and $380,000 at December 31, 1995
and 1994, respectively. The 1995 balance consists of three loans, including one
with a balance of $8,881,000. The 1994 balance consists of six loans.
Commercial finance loans are shown net of participation by other financial
institutions of $8,119,000 at December 31, 1995 and $9,764,000 at December 31,
1994. The participation agreements are generally made for a fixed percentage of
the commercial loan balance and are made without recourse to the Company.
The Company's thrift and loan subsidiary generates primarily real estate
loans. Commercial and residential real estate loans have terms ranging from one
to thirty years. 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
57
59
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
possible loan losses of $17,498,000 and $14,391,000 at December 31, 1995, and
1994, respectively. Included in loans receivable are real estate loans which
have been placed on non-accrual status totaling $23,544,000 and $21,454,000 at
December 31, 1995 and 1994, respectively. Real estate acquired in foreclosure,
which is classified under other assets, totaled $4,942,000 and $17,467,000 at
December 31, 1995 and 1994, respectively, and is recorded at the lower of the
carrying value of the loan or the estimated fair value less disposal costs.
Insurance premium notes receivable mature within one year and are net of
allowances for possible loan losses of $1,024,000 and $551,000 at December 31,
1995 and 1994, respectively. 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.
Activity in the allowance for possible loan losses is summarized in the
following table:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(THOUSANDS OF DOLLARS)
Balance, beginning of year.................................... $27,406 $25,222 $22,819
Provision for loan losses..................................... 14,575 11,980 16,873
Recoveries.................................................... 2,961 853 1,096
Charge-offs................................................... (13,161) (14,254) (15,566)
Reserves established with portfolio acquisitions.............. -- 3,605 --
------- ------- -------
Balance, end of year.......................................... $31,781 $27,406 $25,222
======= ======= =======
At December 31, 1995, the recorded investment in loans that are considered
to be impaired under FASB 114 was $33,425,000, of which $32,889,000 were on a
non-accrual basis. The Company's policy is to place on a non-accrual basis any
loans deemed impaired under FASB 114 as the Company's loans are generally
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, $18,427,000 of loans considered impaired do have an allowance that
totaled $2,575,000. The average net investment in impaired loans during the year
ended December 31, 1995 was $31,325,000 and no interest income has been
recognized on loans classified as impaired during the year ended December 31,
1995.
The carrying amounts at December 31, 1995 and 1994 and estimated fair
values at December 31, 1995 of loans receivable are summarized in the following
table:
1995 1994
------------------------- ----------
CARRYING ESTIMATED CARRYING
AMOUNT FAIR VALUE AMOUNT
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Commercial finance loans............................... $ 532,693 $ 532,693 $ 472,193
Real estate loans...................................... 980,283 984,341 969,921
Other loans............................................ 45,896 45,896 67,809
---------- ---------- ----------
1,558,872 1,562,930 1,509,923
Purchase discount and deferred fees.................... (28,048) (28,048) (41,743)
Allowance for possible loan losses..................... (31,781) (31,781) (27,406)
---------- ---------- ----------
Loans receivable....................................... $1,499,043 $1,503,101 $1,440,774
========== ========== ==========
58
60
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E -- CLAIM LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and ending
reserve balances for the Company's claim liabilities for losses 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,
---------------------------------------
1995 1994 1993
---------- ---------- ---------
(THOUSANDS OF DOLLARS)
Reserves for losses and LAE, net of reinsurance
recoverable, at beginning of year.................... $ 610,510 $ 644,190 $ 633,394
Incurred losses and LAE:
Provision for insured events of the current year, net
of reinsurance.................................... 459,951 290,833 323,279
Increase (decrease) in provision for insured events
of prior years, net of reinsurance................ 1,382 (17,234) (4,126)
---------- -------- ---------
Total incurred losses and LAE................ 461,333 273,599 319,153
Payments:
Losses and LAE, net of reinsurance, attributable to
insured events of:
Current year...................................... (132,358) (70,505) (67,805)
Prior years....................................... (358,423) (236,774) (240,552)
---------- -------- ---------
Total payments............................... (490,781) (307,279) (308,357)
---------- -------- ---------
Subtotal................................... 581,062 610,510 $ 644,190
Liability for losses and LAE for Casualty Insurance
Company acquired during the current year............. 604,644 -- --
---------- -------- ---------
Reserves for losses and LAE, net of reinsurance
recoverable, at end of year.......................... 1,185,706 610,510 $ 644,190
Reinsurance recoverable for losses and LAE, at end of
year................................................. 269,986 136,151 138,737
---------- -------- ---------
Reserves for losses and LAE, gross of reinsurance
recoverable, at end of year.......................... $1,455,692 $ 746,661 $ 782,927
========== ======== =========
The foregoing reconciliation shows that a $17 million redundancy in the
December 31, 1993 reserve emerged in 1994. This redundancy resulted primarily
from lower than previously estimated claim frequency and severity on workers'
compensation claims incurred in 1993 and prior years.
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.
59
61
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effect of ceded reinsurance on property and casualty premiums are
summarized in the following table:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1995 1994 1993
--------------------- --------------------- ---------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Direct..................... $564,675 $580,442 $431,500 $438,482 $460,164 $459,293
Assumed.................... 41,613 55,572 4,264 4,224 3,109 3,916
Ceded...................... 22,498 29,097 9,332 9,122 7,606 7,444
-------- -------- -------- -------- -------- --------
Net property and casualty
premiums............... $583,790 $606,917 $426,432 $433,584 $455,667 $455,765
======== ======== ======== ======== ======== ========
The effect of ceded reinsurance on losses and loss adjustment expenses was
a decrease (increase) in expenses of $19,651,000, $7,456,000 and $(12,427,000)
for the three years ended December 31, 1995, 1994 and 1993, respectively.
Effective December 31, 1995, the Company entered into a reinsurance and
assumption agreement with a reinsurer whereby all of the Company's universal
life insurance business was ceded to the reinsurer. This reinsurance agreement
was entered into as of December 31, 1995 as part of several other agreements
that became effective January 1, 1996. These agreements collectively act to
significantly reduce the Company's life insurance operations. (See Note P). The
effect of reinsurance on life insurance premiums and life insurance benefits was
not significant for the three years ended December 31, 1995.
NOTE G -- INCOME TAXES
The major components of income tax expense (benefit) are summarized in the
following table:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(THOUSANDS OF DOLLARS)
Federal income tax
Current............................................. $ 6,964 $30,132 $20,460
Deferred............................................ 22,810 (4,391) (973)
------- ------- -------
29,774 25,741 19,487
State income tax...................................... 2,531 18 2,151
------- ------- -------
Total income tax provision.......................... $32,305 $25,759 $21,638
======= ======= =======
60
62
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the effective federal tax rates in the consolidated
statements of income with the prevailing federal income tax rate of 35% is
summarized in the following table:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(THOUSANDS OF DOLLARS)
Federal income tax at 35%............................. $35,114 $28,550 $21,769
Effects of:
Dividends received deduction........................ (5,678) (3,865) (229)
Dividends in Employee Stock Ownership Plan shares... (432) (455) (402)
Amortization of costs in excess of net assets
acquired......................................... 839 366 511
Change in tax rate.................................. -- -- (1,408)
Other............................................... (69) 1,145 (754)
------- ------- -------
Federal income tax provision..................... $29,774 $25,741 $19,487
======= ======= =======
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. Details of the deferred tax
expense (benefit) are summarized in the following table:
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ------- -------
(THOUSANDS OF DOLLARS)
Discount on loss reserves............................. $22,134 $ 703 $ 1,460
Dividends to policyholders............................ 7,985 60 (2,508)
Life insurance benefits and liabilities............... (6,862) (1,669) (83)
Deferred loan origination costs....................... 3,832 -- --
Accrued compensation expense.......................... (2,441) (1,131) --
Unearned premiums..................................... 2,373 (811) (235)
Retrospective premium payable......................... (1,400) 1,228 (1,604)
Provisions for loan losses and other doubtful
accounts............................................ (1,164) (1,984) (50)
Deferred policy acquisition costs..................... (128) 2,008 (1,568)
Earned but unbilled premiums.......................... -- (3,363) --
Deferred income....................................... -- -- 1,454
Salvage and subrogation............................... -- -- 1,268
Effect of change in tax rate.......................... -- -- (1,408)
Other................................................. (1,519) 568 2,301
------- ------- -------
Deferred tax expense (benefit)...................... $22,810 $(4,391) $ (973)
======= ======= =======
Net payments made for federal and state income taxes were $13,429,000,
$18,471,000 and $9,000,000 for 1995, 1994 and 1993, respectively.
61
63
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred tax assets as of December 31, 1995
and 1994 are summarized in the following table:
DECEMBER 31,
---------------------
1995 1994
-------- --------
(THOUSANDS OF
DOLLARS)
Discount on loss reserves...................................... $ 68,619 $ 35,656
Net unrealized loss on investments............................. -- 35,196
Dividends to policyholders..................................... 14,288 16,088
Life insurance benefits and liabilities........................ 13,432 6,570
Allowance for possible loan losses and other doubtful
accounts..................................................... 12,507 10,739
Unearned premiums.............................................. 12,316 3,538
Other, net..................................................... 3,431 3,123
-------- --------
Deferred income tax asset amounts.................... 124,593 110,910
Deferred policy acquisition costs.............................. (26,814) (19,731)
Net unrealized gain on investments............................. (11,630) --
Deferred loan origination costs................................ (3,832) --
Earned but unbilled premiums................................... (3,698) --
Excess intangibles amortization................................ -- (2,753)
-------- --------
Deferred income tax liability amounts................ (45,974) (22,484)
-------- --------
Net deferred income tax asset................... $ 78,619 $ 88,426
======== ========
The Company's principal deferred tax assets arise due to the discounting of
loss reserves (which delays a portion of the loss reserve deduction for income
tax purposes), the accrual of dividends to policyholders, certain life insurance
benefits and liabilities, the provision for doubtful loan accounts and a portion
of the unearned premiums. The effect of discounting the loss reserves for tax
purposes is to effectively tax the future investment income stream associated
with holding the investments necessary to support the reserves. Future
investment income, irrespective of other operating income, should be sufficient
to allow the future loss reserve deduction (i.e., the accretion of the discount
for income tax purposes) to be utilized. Similarly, the recognition of the tax
benefits in future periods associated with life insurance benefits and
liabilities will be realized through future investment income to be earned on
the underlying policies. With respect to the accrual of policyholders'
dividends, the future periods will permit the recognition of the tax benefits
associated with these accruals as the amounts are linked to future taxable
income arising from existing policyholders of the Company.
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.
62
64
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,
--------------------
1995 1994
------- --------
(THOUSANDS OF
DOLLARS)
Bank lines of credit by a subsidiary of the Company (weighted
average interest rate; 1994 - 6.91%).......................... $ -- $157,000
Commercial paper issued by a subsidiary, maturity dates through
May 10, 1996 (weighted average interest rate, 1995 - 7.13%;
1994 - 6.68%)................................................. 7,191 17,754
Current portion of long-term debt............................... 65,000 1,571
-------- ---------
$72,191 $176,325
======== =========
The commercial finance subsidiary has lines of credit with banks totaling
$15,000,000 that expire September 30, 1996. Interest is based on the prime
lending rate. At December 31, 1995, there were no outstanding advances under
these lines of credit.
NOTE I -- LONG-TERM DEBT
Long-term debt is summarized in the following table:
DECEMBER 31,
---------------------
1995 1994
-------- --------
(THOUSANDS OF
DOLLARS)
Fremont General Corporation
Liquid Yield Option Notes due 2013, less discount
(1995 - $222,115; 1994 - $229,810)........................ $151,635 $143,940
$200 million Revolving Credit Facility....................... 85,000 15,000
Note Payable due 2002........................................ 6,620 11,000
Subsidiaries:
Variable Rate Asset Backed Certificates...................... 330,000 300,000
$300 million Senior Revolving Credit Facility................ 185,000 --
Other Notes Payable, interest rate at year end, 7.25%........ 21 21
-------- --------
758,276 469,961
Less current portion......................................... 65,000 1,571
-------- --------
$693,276 $468,390
======== ========
In August 1995, the Company amended and restated an agreement on a
$200,000,000 Revolving Credit Facility with several banks. Borrowings and
repayments are at the option of the Company until the conversion date of August
31, 1997, at which time the facility converts to a term loan with a limit of
$100 million that matures in 2001. Interest is based on, at the Company's
option, the higher of the Federal Funds rate plus 1/2% or the banks' prime
lending rate plus an applicable margin, Eurodollar rates plus an applicable
margin or by competitive bids by the banks. All applicable margins are based on
the Company's credit rating. The rate at December 31, 1995 on the outstanding
balance of $85,000,000 was 6.20%. A facility fee ranging from .25% to .45%,
dependent on the Company's credit rating, is charged on the total facility. The
facility fee rate during 1995 was .30%. The stock of a subsidiary insurance
holding company has been pledged as collateral for this loan.
During July 1994, the Fremont General Employee Stock Ownership Plan
("ESOP") borrowed $11,000,000 (see Note K) from a bank due in seven equal annual
installments commencing on April 1, 1996.
63
65
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maximum principal amount of this loan was increased to $15 million in
August, 1995 and the term was extended to April 1, 2002. The note payable 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 rate at December 31, 1995 was 6.69%.
In October 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. The LYONs are
convertible into the Company's Common Stock at a price of $19.31 per share and
are non-callable for 5 years.
The Variable Rate Asset Backed Certificates reflect the sale of
certificates pursuant to the asset securitization program established in 1993 by
a commercial finance subsidiary of the Company. The proceeds from the sale of
the initial series of certificates ("Series A") under this program in April 1993
were $200 million bearing interest at the rate of LIBOR plus 0.47%. In November
1993, this subsidiary sold an additional $100 million principal amount of these
certificates ("Series B") bearing interest at the rate of LIBOR plus 0.5%. The
securities issued in this program have a scheduled maturity of three to four
years but could mature earlier depending on fluctuations in outstanding balances
of loans in the portfolio and other factors. In April 1995, $30 million
principal amount of certificates which mature in 2000, bearing interest at the
rate of LIBOR plus .95%, were sold via a private placement. In February 1996,
$135 million in certificates ("Series C") were issued which mature in 2000. The
proceeds were used, in conjunction with existing cash, to retire the $200
million in Series A certificates. In December 1995, a commercial paper facility
was established as part of the asset securitization program. This facility
provides for the issuance of up to $150 million in commercial paper, dependent
upon the level of assets within the asset securitization program. This facility,
which expires in December 1998, had no amounts outstanding under it as of
December 31, 1995.
This subsidiary also has an unsecured revolving line of credit with a
syndicated bank group that presently permits borrowings of up to $300 million,
of which $185 million was outstanding as of December 31, 1995. This credit line
which expires August 1998 replaced a short-term credit facility that expired in
August, 1995. The weighted average interest rate at December 31, 1995 was 6.39%
The carrying amounts and the estimated fair values of long-term borrowings
at December 31, 1995 are summarized in the following table:
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(THOUSANDS OF DOLLARS)
LYONs.......................................................... $151,635 $ 175,663
Variable Rate Asset Backed Certificates........................ 330,000 330,000
$200 million Revolving Credit Facility, expiring 1997.......... 85,000 85,000
$300 million Senior Revolving Credit Facility.................. 185,000 185,000
Note Payable due 2002.......................................... 6,620 6,620
Other Notes Payable............................................ 21 21
-------- --------
Total long-term borrowings........................... $758,276 $ 782,304
======== ========
64
66
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):
1996.............................................................. $ 65,000
1997.............................................................. 100,356
1998.............................................................. 197,196
1999.............................................................. 16,446
2000.............................................................. 194,197
Thereafter........................................................ 185,081
--------
$758,276
========
Total interest payments on all debt were $91,278,000, $49,294,000, and
$37,433,000 in 1995, 1994 and 1993, respectively.
NOTE J -- STOCKHOLDERS' EQUITY AND RESTRICTIONS
On December 4, 1995, the Board of Directors declared a three-for-two Common
Stock split for stockholders of record on January 8, 1996 that was distributed
on February 7, 1996. Also during 1995, a ten percent stock dividend was
distributed June 15, 1995 to stockholders of record May 30, 1995.
In 1993 the Company distributed a three-for-two split of Common Stock and
sold 3,094,000 shares of Common Stock in a public offering.
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.
Consolidated stockholders' equity is restricted by the provisions of
certain long-term debt agreements. At December 31, 1995, the most restrictive
loan covenants require the Company to maintain total stockholders' equity before
FASB 115 adjustments of at least $375,000,000.
The Company has adopted a stock option plan for the benefit of certain key
members of management. Under the plan, up to 2,681,000 shares are allocable to
participants. Options are granted at exercise prices not less than the fair
value of the stock on the date of grant. Upon the fifth anniversary of the date
of the option grant and on each successive anniversary thereafter (until that
option is either exercised or expires) the exercise price of each unexercised
option is automatically reduced by one-sixth of the original option price, as
reflected in the table below and a charge to compensation expense is recorded.
Grantees vest at the rate of 25%
65
67
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
per year beginning on the first anniversary of the grant. The stock option
activity is summarized in the following table:
NUMBER OF
SHARES OPTION PRICES
--------- --------------
Outstanding at January 1, 1993............................ 1,237,985 $ 5.05 - 10.81
Granted................................................. 227,123 13.44 - 15.00
Exercised............................................... (17,162) 5.05 - 10.10
Forfeited............................................... (14,334) 5.05 - 10.10
----------
Outstanding at December 31, 1993.......................... 1,433,612 5.05 - 15.00
Granted................................................. 367,538 14.32 - 14.62
Exercised............................................... (1,546) 8.89
----------
Outstanding at December 31, 1994.......................... 1,799,604 5.05 - 15.00
Granted................................................. 30,938 15.68
Exercised............................................... (19,488) 8.89 - 13.43
Forfeited............................................... (11,013) 10.81 - 15.00
----------
Outstanding at December 31, 1995.......................... 1,800,041 4.21 - 15.68
==========
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 companies currently available for
dividend distribution is $29,941,000. No dividends are currently available from
the thrift and loan subsidiary.
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:
1995 1994 1993
-------- -------- --------
(THOUSANDS OF DOLLARS)
Statutory net income for the year.................. $104,032 $ 48,220 $ 56,366
Statutory stockholder's equity at year end......... 321,148 250,633 234,604
NOTE K -- 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 $11,015,000,
$8,464,000 and $5,947,000 for 1995, 1994 and 1993, respectively, of which
$8,656,000, $5,961,000 and $4,227,000 related to the ESOP. Cash contributions to
the ESOP, which relate to 1995, 1994 and 1993, were $3,000,000, $4,375,000 and
$4,147,000, respectively. The contributions, which are generally discretionary,
are based on total compensation of the participants.
From 1990 to 1994, the ESOP purchased 2,904,000 shares of the Company's
Common Stock with funds provided by the Company in return for a note maturing in
2000 and bearing interest at 8%. In July 1994 the ESOP borrowed $11 million from
a bank under a term loan due 2001 (See Note I). Proceeds from the loan were used
to repay the note with the Company. The principal of the bank loan has been
recorded as a liability of the Company. The maximum principal amount of this
loan was increased to $15,000,000 in August, 1995 and the term was extended to
April 1, 2002. Shares pledged as collateral are reported as unearned ESOP shares
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 investment in the Company's
Common Stock, amounting to $374,000, $545,000 and $645,000 in 1995, 1994 and
1993,
66
68
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively, were additionally used to service these loans. Interest expense
was $196,000 for the year ended December 31, 1995.
All shares held by the ESOP are considered outstanding for earnings per
share purposes. Of the 2,814,000 shares of Company stock owned by the plan at
December 31, 1995, 2,088,000 shares are allocated to participants and 726,000
shares are not allocated to participants. Unearned shares acquired prior to
December 31, 1992 continue to be accounted for in accordance with the historical
cost approach (AICPA Statement of Opinion 76-3). All of the unearned ESOP shares
held as of December 31, 1995 were acquired prior to December 31, 1992.
NOTE L -- COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of legal actions arising primarily
from claims made under insurance polices 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 1995, 1994 and 1993, was $14,909,000, $9,115,000,
and $8,926,000, 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):
1996............................................................... $13,604
1997............................................................... 12,808
1998............................................................... 11,194
1999............................................................... 9,876
2000............................................................... 7,570
Thereafter......................................................... 2,238
-------
$57,290
=======
NOTE M -- DISCONTINUED OPERATIONS
The Company discontinued all of its assumed reinsurance operations, as well
as certain other insurance operations, during the period 1986 to 1991. 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 the dedicated assets (primarily cash, investment
securities and reinsurance recoverables) supporting these operations and all
future cash inflows will be adequate to fund future
67
69
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
obligations. However, should those assets ultimately prove to be insufficient,
the Company believes that its property and casualty subsidiaries would be able
to provide whatever additional funds might be needed to complete the liquidation
without having a material adverse effect on the Company's consolidated financial
position or results of operations.
A statement of financial condition of the discontinued operations is
summarized in the following table:
DECEMBER 31,
---------------------
1995 1994
-------- --------
(THOUSANDS OF
DOLLARS)
Assets
Cash and invested assets, at amortized cost.................. $190,777 $249,737
Reinsurance recoverables..................................... 54,448 71,493
Federal income taxes......................................... 6,125 5,762
Other assets................................................. 11,152 9,821
-------- --------
Total................................................ $262,502 $336,813
======== ========
Liabilities
Reserves for loss and loss adjustment expenses............... $162,219 $190,433
Deferred income taxes........................................ 41,810 34,736
Reinsurance payable and funds withheld....................... 21,713 30,658
Other liabilities............................................ 3,246 47,472
-------- --------
Total................................................ $228,988 $303,299
======== ========
The amortized cost and fair value of cash and invested assets of the
discontinued operations as of December 31, 1995 are summarized in the following
table:
AMORTIZED FAIR
COST VALUE
-------- --------
(THOUSANDS OF
DOLLARS)
Fixed maturities............................................... $ 87,920 $ 88,725
Non-redeemable preferred stock................................. 71,878 69,808
Cash and other invested assets................................. 30,979 30,979
-------- --------
Cash and invested assets..................................... $190,777 $189,512
======== ========
The average maturity of the fixed income portfolio was 5.10 years at
December 31, 1995. The quality mix of the fixed maturity portfolio as of
December 31, 1995 is summarized in the following table:
AAA (including US government obligations)...................................... 50%
A.............................................................................. 10
BBB............................................................................ 11
BB............................................................................. 29
----
100%
====
At December 31, 1995, 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.
68
70
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- OPERATIONS BY INDUSTRY SEGMENT
The following data for the years ended December 31, 1995, 1994 and 1993
provide certain information necessary for industry segment disclosure.
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
REVENUES
Workers' compensation.................................. $ 671,110 $ 458,461 $ 489,126
Professional medical liability, corporate and other.... 37,077 37,251 33,999
---------- ---------- ----------
Total property and casualty.................. 708,187 495,712 523,125
Financial services..................................... 214,975 154,398 125,732
Corporate.............................................. 652 3,038 2,548
---------- ---------- ----------
$ 923,814 $ 653,148 $ 651,405
========== ========== ==========
INCOME (LOSS) BEFORE INCOME TAXES
Workers' compensation.................................. $ 85,009 $ 62,199 $ 49,775
Professional medical liability, corporate and other.... (1,917) (934) 2,317
---------- ---------- ----------
Total property and casualty.................. 83,092 61,265 52,092
Financial services..................................... 35,737 28,014 21,456
Corporate.............................................. (18,502) (7,708) (9,200)
---------- ---------- ----------
$ 100,327 $ 81,571 $ 64,348
========== ========== ==========
AMORTIZATION AND DEPRECIATION EXPENSE
Workers' compensation.................................. $ 8,501 $ 4,808 $ 5,051
Professional medical liability, corporate and other.... 176 377 517
---------- ---------- ----------
Total property and casualty.................. 8,677 5,185 5,568
Financial services..................................... 3,032 2,442 1,962
Corporate.............................................. 8,625 8,082 2,982
---------- ---------- ----------
$ 20,334 $ 15,709 $ 10,512
========== ========== ==========
CAPITAL EXPENDITURES
Property and casualty*................................. $ 7,404 $ 5,642 $ 3,362
Financial services..................................... 1,931 4,107 2,982
Corporate.............................................. 192 653 213
---------- ---------- ----------
$ 9,527 $ 10,402 $ 6,557
========== ========== ==========
69
71
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
----------------------------------------
1995 1994 1993
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
IDENTIFIABLE ASSETS
Property and casualty*................................. $2,055,511 $1,096,781 $1,139,899
Financial services..................................... 2,131,412 1,678,039 1,119,534
Corporate.............................................. 27,974 22,757 85,661
---------- ---------- ----------
$4,214,897 $2,797,577 $2,345,094
========== ========== ==========
- ---------------
* It is not practicable to allocate asset amounts among lines of business within
the property and casualty insurance segment. Assets held for discontinued
operations are excluded from the above table.
NOTE O -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS ENDED
---------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1995
Revenues.................................... $ 199,157 $252,995 $ 238,499 $233,163
Net Income.................................. 14,206 16,867 18,265 18,684
Net income per share........................ 0.55 0.65 0.70 0.71
1994
Revenues.................................... $ 156,058 $157,992 $ 173,749 $165,349
Net Income.................................. 13,487 14,077 14,095 14,153
Net income per share........................ 0.52 0.55 0.55 0.55
The revenues, net income, and net income per share for the quarters ended
after March 31, 1995 are greater than all other quarters presented, due
primarily to the acquisition of Casualty Insurance Company which was completed
on February 22, 1995. (See Note B).
NOTE P -- SUBSEQUENT EVENTS
Public Offering: On March 1, 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 $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 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
$373,750,000 aggregate principal amount at maturity of Liquid Yield Option Notes
due 2013, and subordinate and junior to all senior indebtedness of the 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 the Company.
70
72
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reinsurance: On January 1, 1996, the Company entered into a reinsurance
and assumption agreement with a reinsurer whereby assets and liabilities related
to certain life and annuity insurance polices, primarily investment-type
contracts and credit life and accident and health, were ceded to the reinsurer.
This reinsurance agreement is part of several other agreements which
collectively act to significantly reduce the Company's life insurance operations
(see Note F). The effect on operations from these agreements is not expected to
be material.
Stockholders' Equity: During the first quarter of 1996, the Company
completed a stock repurchase program. This program, previously announced on
November 17, 1995, was initiated to fund stock-based management and employee
benefit programs. A total of 819,300 shares (adjusted for the three-for-two
stock split effected January 8, 1996) were purchased at a cost of $19,535,000.
71
73
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
DECEMBER 31,
---------------------
1995 1994
-------- --------
(THOUSANDS OF
DOLLARS)
ASSETS
Cash................................................................... $ 304 $ 794
Notes receivable from subsidiaries*.................................... 85,310 91,403
Investment in subsidiaries*............................................ 660,663 413,529
Short-term investments................................................. 8,554 7,405
Excess of cost of acquisition of subsidiaries over net assets
acquired............................................................. 7,876 8,204
Other receivables from subsidiaries*................................... 4,033 3,330
Deferred income taxes.................................................. 78,619 88,426
Other assets........................................................... 27,222 5,709
-------- --------
TOTAL ASSETS......................................................... $872,581 $618,800
======== ========
LIABILITIES
Accrued expenses and other liabilities................................. $ 14,318 $ 18,818
Amounts due to subsidiaries*........................................... 110,793 73,267
Amounts due to run-off subsidiaries*................................... 6,125 5,762
Current portion of long-term debt...................................... -- 1,571
Long-term debt......................................................... 243,255 168,369
-------- --------
TOTAL LIABILITIES.................................................... 374,491 267,787
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: 1995 - 49,500,000
and 1994 - 30,000,000 shares; issued and outstanding:
(1995 - 25,393,000 and 1994 - 15,388,000)............................ 25,393 15,388
Additional paid-in capital............................................. 110,103 80,264
Retained earnings...................................................... 347,607 331,713
Unearned Employee Stock Ownership Plan shares.......................... (6,612) (10,987)
Net unrealized gain (loss) on investments, net of deferred taxes....... 21,599 (65,365)
-------- --------
TOTAL STOCKHOLDERS' EQUITY........................................... 498,090 351,013
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................... $872,581 $618,800
======== ========
- ---------------
* Eliminated in consolidation
See notes to condensed financial statements.
72
74
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ------- -------
(THOUSANDS OF DOLLARS)
INCOME
Interest income from subsidiaries*........................... $ 4,170 $ 3,623 $ 654
Dividends from consolidated subsidiary*...................... 6,051 3,407 6,155
Net investment income........................................ 648 3,014 2,296
Realized investment gains.................................... -- -- 248
Other income*................................................ 8,518 5,508 5,221
------- ------- -------
TOTAL INCOME............................................... 19,387 15,552 14,574
EXPENSES
Interest expense............................................. 13,282 8,163 6,439
General and administrative................................... 18,883 12,018 11,505
------- ------- -------
TOTAL EXPENSES............................................. 32,165 20,181 17,944
------- ------- -------
(12,778) (4,629) (3,370)
Income tax expense (benefit)................................. (1,632) (3,351) 1,573
------- ------- -------
Loss before equity in undistributed income of subsidiary
companies.................................................. (11,146) (1,278) (4,943)
Equity in undistributed income of subsidiary companies....... 79,168 57,090 47,653
------- ------- -------
NET INCOME................................................. $ 68,022 $55,812 $42,710
======= ======= =======
- ---------------
* Eliminated in consolidation
See notes to condensed financial statements.
73
75
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE III-CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- ---------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income................................................ $ 68,022 $ 55,812 $ 42,710
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income from continuing
operations of subsidiaries......................... (79,168) (57,090) (47,653)
Change in accrued investment income.................. (1) 216 (220)
Change in amounts due to or from subsidiaries........ 6,676 102 3,337
Provision for (reduction in) deferred income taxes... 22,810 (4,391) (973)
Provision for depreciation and amortization.......... 8,612 8,082 2,982
Realized investment gains............................ -- -- (248)
Change in other assets and liabilities............... (9,002) 6,022 (1,693)
--------- --------- ----------
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATIONS.................................... 17,949 8,753 (1,758)
Effect of discontinued operations....................... 363 (9,573) 9,380
--------- --------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................... 18,312 (820) 7,622
INVESTING ACTIVITIES
Purchases of fixed maturity investments................. (4,988) (46,712) (113,569)
Sales of fixed maturity investments..................... -- 92,003 113,817
Fixed maturity investments matured or called............ 5,000 11,600 --
Decrease (increase) in short-term and other
investments.......................................... (1,149) 7,928 (69,273)
Net decrease (increase) in credit lines with
subsidiaries......................................... 6,094 (57,652) (18,648)
Purchase of and additional investments in
subsidiaries......................................... (81,000) (23,000) (35,088)
Purchase of property and equipment...................... (192) (653) (213)
--------- --------- ----------
NET CASH USED IN INVESTING ACTIVITIES........... (76,235) (16,486) (122,974)
FINANCING ACTIVITIES
Repayment of short-term debt............................ (1,571) -- (8,250)
Proceeds from long-term debt............................ 110,000 26,000 135,013
Repayment of long-term debt............................. (42,808) -- (38,040)
Dividends paid.......................................... (12,618) (11,344) (9,369)
Proceeds from sale of Common Stock...................... -- -- 40,803
Stock options exercised................................. 80 22 251
Purchase of fractional shares........................... (25) -- (8)
Decrease (increase) in unearned Employee Stock Stock
Ownership Plan shares................................ 4,375 2,647 (4,475)
--------- --------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 57,433 17,325 115,925
--------- --------- ----------
INCREASE (DECREASE) IN CASH..................... (490) 19 573
Cash at beginning of year............................... 794 775 202
--------- --------- ----------
CASH AT END OF YEAR............................. $ 304 $ 794 $ 775
========= ========= ==========
See notes to condensed financial statements.
74
76
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE III -- 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.
75
77
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31,
-------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------- ------------ -------- ---------
RESERVES
DEFERRED FOR CLAIMS, DIVIDENDS
POLICY BENEFITS AND TO
ACQUISITION SETTLEMENT UNEARNED POLICY-
SEGMENT COSTS EXPENSES PREMIUMS HOLDERS
------- ----------- ------------ -------- ---------
(THOUSANDS OF DOLLARS)
1995
Life insurance.................................... $48,938 $ 374,724 $ -- $ --
Workers' compensation............................. 25,610 1,419,821 93,229 40,822
Professional medical liability,
corporate and other............................. 2,090 35,871 7,252 --
------- ---------- ------- -------
$76,638 $1,830,416 $100,481 $40,822
======= ========== ======= =======
1994
Life insurance.................................... $42,156 $ 172,425 $ -- $ --
Workers' compensation............................. 13,237 703,567 37,690 46,067
Professional medical liability,
corporate and other............................. 3,893 43,094 9,861 --
------- ---------- ------- -------
$59,286 $ 919,086 $47,551 $46,067
======= ========== ======= =======
1993
Life insurance.................................... $37,985 $ 123,066 $ -- $ --
Workers' compensation............................. 13,364 728,582 45,472 46,337
Professional medical liability,
corporate and other............................. 3,879 54,345 9,252 --
------- ---------- ------- -------
$55,228 $ 905,993 $54,724 $46,337
======= ========== ======= =======
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
-------- ---------- ------------ ------------ --------- --------
AMORTIZATION
CLAIMS, OF DEFERRED
NET BENEFITS AND POLICY OTHER NET
PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
------- -------- ---------- ------------ ------------ --------- --------
(THOUSANDS OF DOLLARS)
1995
Life insurance.................................... $ 14,469 $ 19,457 $ 19,928 $ 7,716 $ 4,412 $ N/A
Workers' compensation............................. 574,952 96,158 435,040 113,404 24,074 554,459
Professional medical liability,
corporate and other............................. 31,965 5,112 26,293 4,979 2,821 29,331
-------- -------- -------- -------- ------- --------
$621,386 $120,727 $481,261 $126,099 $31,307 $583,790
======== ======== ======== ======== ======= ========
1994
Life insurance.................................... $ 14,689 $ 10,595 $ 13,002 $ 6,669 $ 3,453 $ N/A
Workers' compensation............................. 401,455 57,047 249,370 74,621 17,137 393,755
Professional medical liability,
corporate and other............................. 32,129 5,122 24,229 5,700 2,629 32,677
-------- -------- -------- -------- ------- --------
$448,273 $ 72,764 $286,601 $ 86,990 $23,219 $426,432
======== ======== ======== ======== ======= ========
1993
Life insurance.................................... $ 14,268 $ 11,404 $ 8,829 $ 9,809 $ 4,276 $ N/A
Workers' compensation............................. 426,793 60,710 300,468 66,911 19,933 427,651
Professional medical liability,
corporate and other............................. 28,972 5,027 18,685 5,535 2,681 28,016
-------- -------- -------- -------- ------- --------
$470,033 $ 77,141 $327,982 $ 82,255 $26,890 $455,667
======== ======== ======== ======== ======= ========
76
78
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI -- REINSURANCE
COLUMN D COLUMN F
COLUMN C --------- ----------
COLUMN B --------- ASSUMED COLUMN E PERCENTAGE
---------- CEDED TO FROM ---------- OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
COLUMN A AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- --------------------------------- ---------- --------- --------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
YEAR ENDED DECEMBER 31, 1995
Life insurance in force*......... $1,513,199 $822,309 $ 8,742 $ 699,632 1%
========== ======== ======== ==========
Premium Revenue
Life insurance premiums........ $ 15,166 $ 2,333 $ 1,636 $ 14,469 11%
Workers' compensation.......... 543,892 22,368 53,428 574,952 9%
Professional medical liability,
corporate and other......... 35,953 6,729 2,741 31,965 9%
---------- -------- -------- ----------
$ 595,011 $ 31,430 $ 57,805 $ 621,386
========== ======== ======== ==========
YEAR ENDED DECEMBER 31, 1994
Life insurance in force*......... $1,559,869 $380,609 $334,124 $1,513,384 22%
========== ======== ======== ==========
Premium Revenue
Life insurance premiums........ $ 11,990 $ (1,114) $ 1,585 $ 14,689 11%
Workers' compensation.......... 408,519 7,064 -- 401,455 0%
Professional medical liability,
corporate and other......... 34,187 2,058 -- 32,129 0%
---------- -------- -------- ----------
$ 454,696 $ 8,008 $ 1,585 $ 448,273
========== ======== ======== ==========
YEAR ENDED DECEMBER 31, 1993
Life insurance in force*......... $1,769,668 $460,946 $297,060 $1,605,782 18%
========== ======== ======== ==========
Premium Revenue
Life insurance premiums........ $ 13,427 $ 551 $ 1,392 $ 14,268 10%
Workers' compensation.......... 432,743 5,950 -- 426,793 0%
Professional medical liability,
corporate and other......... 29,658 1,494 808 28,972 3%
---------- -------- -------- ----------
$ 475,828 $ 7,995 $ 2,200 $ 470,033
========== ======== ======== ==========
- ---------------
* Balance at end of year.
Intercompany transactions have been eliminated.
77
79
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
---------------------------
COLUMN B ADDITIONS COLUMN E
---------- --------------------------- COLUMN D ----------
COLUMN A BALANCE AT CHARGED TO CHARGED TO ---------- BALANCE AT
- ------------------------------------- BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ------------------------------------- ---------- ---------- -------------- ---------- ----------
(THOUSANDS OF DOLLARS)
YEAR ENDED DECEMBER 31, 1995
Deducted from asset accounts:
Allowance for possible loan
losses........................ $ 27,406 $ 14,575 $ -- $ 10,200(2) $ 31,781
Premiums receivable and agents'
balances and reinsurance
recoverable................... 6,959 2,465 1,723(1) -- 11,147
------- ------- ------ ------- -------
Totals..................... $ 34,365 $ 17,040 $1,723 $ 10,200 $ 42,928
======= ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1994
Deducted from asset accounts:
Allowance for possible loan
losses........................ $ 25,222 $ 11,980 $3,605(1) $ 13,401(2) $ 27,406
Premiums receivable and agents'
balances and reinsurance
recoverable................... 6,991 320 -- 352(2) 6,959
------- ------- ------ ------- -------
Totals..................... $ 32,213 $ 12,300 $3,605 $ 13,753 $ 34,365
======= ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1993
Deducted from asset accounts:
Allowance for possible loan
losses........................ $ 22,819 $ 16,873 $ -- $ 14,470(2) $ 25,222
Premiums receivable and agents'
balances and reinsurance
recoverable................... 5,866 3,143 -- 2,018(2) 6,991
------- ------- ------ ------- -------
Totals..................... $ 28,685 $ 20,016 $ -- $ 16,488 $ 32,213
======= ======= ====== ======= =======
- ---------------
(1) Reserves established with company and portfolio acquisitions.
(2) Uncollectible accounts written off, net of recoveries and reclassifications.
78
80
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE X -- SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------------
DECEMBER 31, COLUMN H
---------------------------------------------- --------------------------
COLUMN C
---------- COLUMN D CLAIMS AND CLAIM
COLUMN B RESERVES -------- ADJUSTMENT
----------- FOR UNPAID DISCOUNT COLUMN G EXPENSES INCURRED
COLUMN A DEFERRED CLAIMS IF ANY COLUMN E COLUMN F ---------- RELATED TO
- ------------------------ POLICY AND CLAIM DEDUCTED -------- -------- NET --------------------------
AFFILIATION WITH ACQUISITION ADJUSTMENT IN UNEARNED EARNED INVESTMENT (1) (2)
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUMS INCOME CURRENT YEAR PRIOR YEARS
- ------------------------ ----------- ---------- -------- -------- -------- ---------- ------------ -----------
(THOUSANDS OF DOLLARS)
Fremont Insurance Group and Consolidated Subsidiaries
1995.................... $27,700 $1,455,692 $23,126 $100,481 $606,917 $101,270 $459,951 $ 1,382
1994.................... $17,130 $ 746,661 $ -- $ 47,551 $433,584 $ 62,169 $290,833 $ (17,234)
1993.................... $17,243 $ 782,927 $ -- $ 54,724 $455,765 $ 65,737 $323,279 $ (4,126)
YEAR ENDED DECEMBER 31,
-----------------------------------
COLUMN I
----------- COLUMN J
AMORTIZA- ----------
TION OF PAID
COLUMN A DEFERRED CLAIMS COLUMN K
- ------------------------ POLICY AND CLAIM --------
AFFILIATION WITH ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
- ------------------------ ----------- ---------- --------
(THOUSANDS OF DOLLARS)
Fremont Insurance Group and Consolidated Subsidiaries
1995.................... $ 118,383 $490,781 $583,790
1994.................... $ 80,321 $307,279 $426,432
1993.................... $ 72,446 $308,357 $455,667
79
81
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 1996.
FREMONT GENERAL CORPORATION
By: /s/ JOHN A. DONALDSON
--------------------------------
Title: 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, 1996
- ------------------------------------------ Chief Executive Officer
James A. McIntyre (Principal Executive
Officer)
/s/ LOUIS J. RAMPINO President, Chief Operating March 28, 1996
- ------------------------------------------ Officer and Director
Louis J. Rampino
/s/ WAYNE R. BAILEY Executive Vice President, March 28, 1996
- ------------------------------------------ Treasurer and Chief
Wayne R. Bailey Financial Officer (Principal
Financial Officer)
/s/ JOHN A. DONALDSON Controller and March 28, 1996
- ------------------------------------------ Chief Accounting Officer
John A. Donaldson (Principal Accounting
Officer)
/s/ HOUSTON I. FLOURNOY Director March 28, 1996
- ------------------------------------------
Houston I. Flournoy
/s/ C. DOUGLAS KRANWINKLE Director March 28, 1996
- ------------------------------------------
C. Douglas Kranwinkle
/s/ DAVID W. MORRISROE Director March 28, 1996
- ------------------------------------------
David W. Morrisroe
/s/ DICKINSON C. ROSS Director March 28, 1996
- ------------------------------------------
Dickinson C. Ross
/s/ KENNETH L. TREFFTZS Director March 28, 1996
- ------------------------------------------
Kenneth L. Trefftzs
80
82
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- ------------
2.1 Stock Purchase Agreement among Fremont Compensation Insurance Company,
Fremont General Corporation, the Buckeye Union Insurance Company, The
Continental Corporation and Casualty Insurance Company, Dated as of
December 16, 1994. (Filed as Exhibit No. 2.1 to Current Report on Form
8-K, as of February 22, 1995, Commission File Number 1-8007, and
incorporated herein by reference)......................................
2.2 Amendment No. 1 to Stock Purchase Agreement among Fremont Compensation
Insurance Company, Fremont General Corporation, the Buckeye Union
Insurance Company, The Continental Corporation and Casualty Insurance
Company, Dated as of December 16, 1994. (Filed as Exhibit No. 2.2 to
Current Report on Form 8-K, as of February 22, 1995, Commission File
Number 1-8007, and incorporated herein by reference)...................
3.1 Restated Articles of Incorporation of Fremont General Corporation.
(Filed as Exhibit No. 3.1 to Registration Statement on Form S-3 File No
33-64771 which was declared effective on March 1, 1996, and
incorporated herein by reference.).....................................
3.2 Certificate of Amendment of Articles of Incorporation of Fremont
General Corporation. (Filed as Exhibit 3.2 to Registration Statement on
Form S-3 File No. 33-64771 which was declared effective on March 1,
1996 and herein incorporated by reference).............................
3.3 Amended and Restated By-Laws of Fremont General Corporation............
4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed as
Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File
Number 1-8007, and incorporated herein by reference)...................
4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between
the Registrant and Bankers Trust Company. (Filed as Exhibit No. (4)(iv)
to Registration Statement on Form S-3 filed on October 1, 1993, and
incorporated herein by reference)......................................
4.3 Indenture among the Registrant, the Trust and First Interstate Bank of
California, a California banking corporation, as trustee...............
4.4 Declaration of Trust among the Registrant, the Regular Trustees and The
Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware
trustee................................................................
4.5 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.................
4.6 Preferred Securities Guarantee Agreement between the Registrant and The
Chase Manhattan Bank, N.A., a national banking association, as
Preferred Guarantee Trustee............................................
4.7 Common Securities Guarantee Agreement by the Registrant................
4.8 Form of Preferred Securities. (included in Exhibit 4.5)................
4.9 Form of 9% Junior Subordinated Debenture. (included in Exhibit 4.3)....
10.1 Fremont General Corporation Employee Stock Ownership Plan as amended...
10.2 Amended and Restated Trust Agreement for Fremont General Corporation
Employee Stock Ownership Plan..........................................
83
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- ------------
10.3 Fremont General Corporation and Affiliated Companies Investment
Incentive Program as amended...........................................
10.4(a) Trust Agreement for Investment Incentive Program. (Filed as Exhibit No.
(10)(xi) to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1993, Commission File Number 1-8007, and incorporated
herein by reference)...................................................
10.4(b) Amendment to Trust Agreement for Investment Incentive Program..........
10.5(a) Supplemental Retirement Plan of the Company. (Filed as Exhibit No.
(10)(v) to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1990, Commission File Number 1-8007, and incorporated
herein by reference)...................................................
10.5(b) Amendment to Supplemental Retirement Plan..............................
10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the
Senior Supplemental Retirement Plan of the Company, as amended.........
10.7 Senior Supplemental Retirement Plan, as amended........................
10.8(a) Excess Benefit Plan of The Company. (Filed as Exhibit No. (10)(vi) to
Annual Report on Form 10-K, for the fiscal year ended December 31,
1993, Commission File No.> 1-8007 and incorporated herein by
reference).............................................................
10.8(b) Amendment to Excess Benefit Plan of the Company........................
10.8(c) Trust Agreement for Excess Benefit Plan................................
10.9 Non-Qualified Stock Option Plan of 1989 of the Company.................
10.10 Long-Term Incentive Compensation Plan of the Company...................
10.11 1995 Restricted Stock Award Plan.......................................
10.12 Fremont General Corporation Employee Benefits Trust Agreement ("Grantor
Trust") dated September 7, 1995 between the Company and Merrill Lynch
Trust Company of California............................................
10.13 Employment Agreement between the Company and James A. McIntyre. (Filed
as Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period
ended March 31, 1994, Commission File Number 1-8007, and incorporated
herein by reference)...................................................
10.14(a) Employment Agreement between the Company and Louis J. Rampino..........
10.14(b) Employment Agreement between the Company and Wayne R. Bailey...........
10.15 Management Continuity Agreement between the Company and Raymond G.
Meyers.................................................................
10.16 1995 Management Incentive Compensation Plan of the Company. (Filed as
Exhibit No. (10)(vi) to Quarterly Report on Form 10-Q, for the period
ended June 30, 1995, Commission File Number 1-8007, and incorporated
herein by reference)...................................................
10.17 Continuing Compensation Plan for Retired Directors.....................
10.18 Non-Employee Directors' Deferred Compensation Plan.....................
10.19(a) Credit Agreement among Fremont General Corporation, Various Lending
Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as
Exhibit No. (10)(xiv) to Quarterly Report on Form 10-Q for the period
ended September 30, 1994, Commission File Number 1-8007, and
incorporated herein by reference)......................................
10.19(b) Amendment to Credit Agreement..........................................
10.20 Keep Well Agreement, dated as of August 24, 1995 by the Company in
connection with the Credit Agreement among Fremont General Corporation,
Various Lending Institutions and the Chase Manhattan Bank, N.A., As
Agent..................................................................
84
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- ------------
10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company
of California as trustee for the Fremont General Corporation Employee
Stock Ownership Trust. The Plan Committee (hereinafter described) on
behalf of the Fremont General Corporation Employee Stock Ownership
Plan, Fremont General Corporation, and First Interstate Bank of
California August 10, 1995. (Filed as Exhibit No. (10)(viii) to
Quarterly Report on Form 10-Q for the period ended September 30, 1995,
and incorporated herein by reference)..................................
(11) Statement re: Computation of per share earnings........................
(21) Subsidiaries of the Company............................................
(23) Consent of Ernst & Young LLP independent Auditors......................
(27) Financial Data Schedule................................................
(28) Information from reports provided to state insurance regulatory
authorities............................................................ P