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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
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 OFFICER) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 315-5500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
LIQUID YIELD OPTION(TM) NOTES DUE 2013 (ZERO COUPON-SUBORDINATED)
FREMONT GENERAL FINANCING I -- 9% TRUST ORIGINATED PREFERRED SECURITIES(SM)
(TITLE OF EACH CLASS)
NEW YORK STOCK EXCHANGE
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 28, 1997:
COMMON STOCK, $1.00 PAR VALUE -- $549,866,000
The number of shares outstanding of each of the issuer's classes of common
stock as of February 28, 1997:
COMMON STOCK, $1.00 PAR VALUE -- 29,403,000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the 1997 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 engaged domestically in select insurance and
financial services businesses. Fremont General's insurance business includes one
of the largest underwriters of workers' compensation insurance in the nation.
The Company also provides medical malpractice insurance. Fremont General's
financial services business includes commercial real estate lending, residential
real estate lending, commercial finance and premium financing. The Company's
total assets as of December 31, 1996 were $4.3 billion, with 1996 pre-tax
earnings of $128 million. 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's stock is traded on the New York Stock Exchange under the symbol "FMT"
(NYSE:FMT).
The Company is one of the largest workers' compensation insurers in the
United States, with major market positions in California and Illinois, and a
presence in 11 other states. For the year ended December 31, 1996 and 1995, the
Company had workers' compensation insurance premiums earned of $457.2 million
and $575.0 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 & Indemnity Company of
California ("WCIC"). Casualty is the largest underwriter of workers'
compensation insurance in Illinois with additional operations in several other
mid-western states. This acquisition has provided the Company with a national
platform upon which to build its workers' compensation insurance business, while
providing greater geographic diversification. (See "Insurance 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's financial services operations have grown significantly and
are engaged primarily in commercial and residential real estate lending,
primarily in California, commercial finance lending, principally to small and
middle market companies nationwide, and insurance premium financing. The
Company's financial services loan portfolio has grown from $536 million at
December 31, 1991 to $1.7 billion at December 31, 1996. (See "Financial Services
Operations.")
In an effort to provide a clearer understanding of the Company's financial
services business segment, the Company has consolidated the real estate lending
operations of Fremont Investment & Loan, a California thrift and loan, and the
commercial finance operations of Fremont Financial Corporation, under a newly
formed company, Fremont General Credit Corporation ("FGCC"). At December 31,
1996, FGCC had assets of approximately $2 billion, and reported pre-tax income
of $36.6 million.
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, 1996, the Company's income before taxes
grew at a compound annual rate of approximately 26% to $128 million in 1996. The
Company's book value increased from $175 million at December 31, 1990 to $559
million at December 31, 1996. The Company's assets were $4.3 billion at December
31, 1996.
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, 1996,
officers and directors of the Company, their families and the Company's benefit
plans beneficially owned approximately 33% 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
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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 Group and its subsidiaries ("Fremont
Compensation") underwrites workers' compensation insurance principally in
California and Illinois, with a smaller presence in 11 other states. With the
acquisition of Casualty in 1995, Fremont Compensation is one of the largest
workers' compensation insurers in the United States. In 1996, Fremont
Compensation's workers' compensation insurance premiums were divided between the
western region, primarily California (1996 -- 37%; 1995 -- 51%) and the mid-west
region, primarily Illinois (1996 -- 63%; 1995 -- 49%). The Company believes this
geographic diversity has mitigated 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 1996, income before taxes from workers' compensation insurance
operations was $120.1 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 premium 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 premium rates, companies in Illinois
generally follow such rates. This characteristic has resulted in price
competition in Illinois, where overall average decreases in advisory premium
rates of 13.6% and 10.0% became effective January 1, 1996 and 1997,
respectively. However, insurance companies in California have, since the
adoption of an open rating system, generally set their premium rates below such
advisory premium 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 resulted in lower premiums and lower profitability on the Company's
California workers' compensation insurance policies due to increased price
competition. (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.
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The Company's loss control department participates in both the initial
underwriting process and provides on-going services to policyholders based on
individual needs and potential risk exposure. In the initial underwriting phase,
the Company underwriter will review both the loss experience and description of
operations, and where there is a concern about the potential hazards or claim
trends, a loss control consultant will be requested to pre-screen the account
prior to policy issuance. This screening process involves meetings with the
employer's management to assess the extent to which management is committed to
safety in the workplace, surveying the employer's operations, reviewing past
loss patterns and evaluating the safety program.
After the policy is issued, the loss control department will provide
service calls to the insured based on both regulatory requirements and specific
needs to assist the employer in developing and maintaining safety programs and
procedures, review periodic loss reports, identify weaknesses in the employer's
loss prevention procedures and assist in correcting these weaknesses. In some
states, loss control must target those employers who have a high claim
frequency, and provide specific services to assist in accident prevention.
Accident and claim records maintained by the Company are also reviewed by the
loss control department and service calls are initiated when adverse claim
trends develop. Any insured who requests loss control service is provided this
service free of charge. Accident prevention services include physical surveys
for hazard recognition, safety program evaluation, loss trend analysis and
employee training.
Policyholders' Dividends. Beginning 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 policy. Prior to 1995, the Company's
California 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 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 injured workers and
aggressively pursues the containment of medical costs through a subsidiary,
Fremont Health. This subsidiary provides services to the Company's claims
personnel which are designed to reduce medical costs and return injured workers
to the job quickly. Such services include integrated medical case management; a
proprietary, directly-contracted group of preferred providers who have unique
experience in industrial medicine; an in-house staff of auditors who review
medical bills using the Company's own data along with specialized software;
medical peer review panels of credentialed regional medical providers; and
comprehensive return-to-work programs designed to return injured workers back to
work as quickly as medical treatment standards permit. The integrated case
management service involves nurses employed by Fremont Health who work closely
with the claims personnel to provide prompt and aggressive medical treatment to
mitigate the effects of the workers' injuries.
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
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promptly to agents and brokers, and commission schedules for agents and brokers.
The repeal of the California minimum rate law effective January 1, 1995 has
resulted in increased price competition which has adversely affected the
Company's results of operations for its workers' compensation insurance business
in California. (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 6.7% in 1995 (effective January 1,
1995). Additional average overall decreases in such advisory premium rates of
13.6% and 10.0% went into effect on January 1, 1996 and 1997, respectively. As a
result, the Company anticipates price competition to continue in Illinois which
will impact the Company's results of operations. 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 1996, the ten largest agents accounted for approximately 10% 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, a subsidiary of Fremont
Compensation Insurance Group and within which the medical malpractice insurance
is written, is currently rated "A-" (Excellent) by A.M. Best. The Company offers
coverage for individual medical doctors, anesthesiologists, podiatrists,
chiropractors, 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 1996, 1995 and
1994.
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. For medical malpractice insurance, excess of loss
reinsurance covers 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.
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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 31, 1996, Employers Reassurance Corporation was the
only reinsurer that accounted for more than 10% of total reinsurance
recoverables while 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 property and casualty paid and unpaid
losses.
With respect to the Company's life insurance operations within the
financial services segment, the Company entered into reinsurance and assumption
agreements with a reinsurer whereby substantially all of the Company's universal
life insurance was ceded to the reinsurer effective December 31, 1995, and all
the annuity business was ceded to the reinsurer effective January 1, 1996. As a
result of these agreements, substantially all of the Company's life insurance
operations have been disposed of with no significant gain or loss recorded. (See
"Financial Services Operations.")
Operating Data
Set forth below is certain information pertaining to the Company's workers'
compensation insurance business as determined in accordance with generally
accepted accounting principles ("GAAP") for the years indicated. (See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of certain of this information.)
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Workers' Compensation
Net premiums earned............... $457,236 $574,952 $401,455 $426,793 $378,468
Net investment income and
other(1)....................... 94,378 87,304 52,747 56,733 67,458
Underwriting profit (loss)........ 25,675 (2,295) 9,452 (6,958) (25,659)
Net income before taxes........... 120,053 85,009 62,199 49,775 41,799
Loss ratio..................... 68.3% 75.9% 62.1% 70.4% 82.2%
Expense ratio.................. 26.1% 24.5% 23.1% 20.6% 21.8%
Policyholders' dividend
ratio........................ 0.0% 0.0% 12.4% 10.6% 2.8%
-------- -------- -------- -------- --------
Total combined ratio...... 94.4% 100.4% 97.6% 101.6% 106.8%
======== ======== ======== ======== ========
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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 property and casualty insurance subsidiaries determined in
accordance with statutory accounting practices, together with the property and
casualty industry-wide combined ratios after policyholders' dividends, as
compiled by A.M. Best for the years indicated.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------ ------ ------ ------
Workers' Compensation
Company.............................. 97.9% 100.1% 98.5% 98.8% 110.4%
Industry(1).......................... not available 97.0% 101.4% 109.1% 121.5%
- ---------------
(1) Nationwide statutory combined ratio information for the workers'
compensation insurance industry for 1992 through 1995 is from A.M. Best's
Aggregates & Averages, Property-Casualty (1993 through 1996 editions).
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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,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS, EXCEPT RATIOS)
Net premiums written during the
year.............................. $473,123 $683,711(1) $425,631 $454,867 $414,218
Policyholders' surplus at end of
year.............................. 399,893 299,408 235,294 221,857 162,714
Ratio............................... 1.2x 2.3x 1.8x 2.1x 2.5x
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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 ("loss reserves") are based not only on
historical experience but also on management's judgment of the effects of
matters such as future economic and social forces likely to impact the insurer's
experience with the type of risk involved, circumstances surrounding individual
claims, and trends that may affect the probable number and nature of claims
arising from losses not yet reported. Consequently, loss reserves are inherently
subject to a number of highly variable circumstances.
Loss reserves 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.
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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 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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1996 1995 1994
---------- ---------- ---------
(THOUSANDS OF DOLLARS)
Reserves for losses and LAE, net of reinsurance
recoverable, at beginning of year.................... $1,185,706 $ 610,510 $ 644,190
Incurred losses and LAE:
Provision for insured events of the current year, net
of reinsurance.................................... 334,657 459,951 290,833
Increase (decrease) in provision for insured events
of prior years, net of reinsurance................ 750 1,382 (17,234)(1)
---------- ---------- --------
Total incurred losses and LAE................ 335,407 461,333 273,599
Payments:
Losses and LAE, net of reinsurance, attributable to
insured events of:
Current year...................................... (108,247) (132,358) (70,505)
Prior years....................................... (401,980) (358,423) (236,774)
---------- ---------- --------
Total payments............................... (510,227) (490,781) (307,279)
---------- ---------- --------
Subtotal..................................... 1,010,886 581,062 610,510
Liability for losses and LAE for Casualty Insurance
Company acquired during the year..................... -- 604,644 --
---------- ---------- --------
Reserves for losses and LAE, net of reinsurance
recoverable, at end of year.......................... 1,010,886 1,185,706 610,510
Reinsurance recoverable for losses and LAE, at end of
year................................................. 245,459 269,986 136,151
---------- ---------- --------
Reserves for losses and LAE, gross of reinsurance
recoverable, at end of year.......................... $1,256,345 $1,455,692 $ 746,661
========== ========== ========
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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, 1996. 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
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estimated one year later) is shown in the previous table above for each of the
three most recent years as "Increase (decrease) in provision for insured events
of prior years."
CHANGES IN HISTORICAL RESERVES FOR LOSS AND LAE FOR THE LAST TEN YEARS
GAAP BASIS AS OF DECEMBER 31, 1996
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Reserves for
Loss and
LAE, net of
reinsurance
recoverable... $384,923 $390,799 $406,823 $647,559 $652,284 $627,103 $633,394 $644,190 $ 610,510 $1,185,706 $1,010,886
Net reserve
re-estimated
as of:
One year
later..... 413,549 402,902 396,091 636,039 624,953 668,107 629,268 626,956 611,892 1,186,456 --
Two years
later..... 410,654 389,973 377,080 607,253 647,959 660,729 615,747 633,333 632,397
Three years
later..... 403,767 374,330 356,961 607,492 638,879 651,482 621,348 641,166
Four years
later..... 394,868 361,209 350,736 599,052 627,194 654,403 626,174
Five years
later..... 384,891 358,645 375,550 593,527 631,165 659,050
Six years
later..... 385,732 369,320 373,514 596,808 634,628
Seven years
later..... 391,036 371,863 375,364 600,646
Eight years
later..... 394,790 372,920 380,467
Nine years
later..... 396,359 378,011
Ten years
later..... 401,472
Net cumulative
redundancy
(deficiency)... (16,549) 12,788 26,356 46,913 17,656 (31,947) 7,220 3,024 (21,887) (750) --
Cumulative
amount of
reserve
paid, net of
reserve
recoveries,
through:
One year
later..... 136,523 128,565 125,563 226,101 245,777 257,951 240,552 236,774 241,667(1) 401,980 --
Two years
later..... 228,926 213,323 211,529 374,876 403,105 419,638 402,048 392,237 397,640
Three years
later..... 286,155 266,605 263,229 461,366 495,707 521,729 499,924 484,474
Four years
later..... 320,729 298,956 291,817 514,890 550,404 583,013 558,935
Five years
later..... 342,673 316,483 320,511 547,535 585,094 623,022
Six years
later..... 354,069 333,461 339,998 567,871 608,802
Seven years
later..... 365,410 346,547 351,805 583,580
Eight years
later..... 375,384 353,517 362,802
Nine years
later..... 380,437 361,092
Ten years
later..... 386,883
Net reserve -- December
31 $1,185,706 $1,010,886
Reinsurance recoverable 269,986 245,459
-------- ----------
Gross
reserve -- December
31 $1,455,692 $1,256,345
======== ==========
Net re-estimated
reserve $1,186,456
Re-estimated
reinsurance
recoverable 276,564
--------
Gross re-estimated
reserve $1,463,020
========
Gross cumulative redundancy
(deficiency) $ (7,328)
========
- ---------------
(1) Excludes $116,756,000 in loss and LAE payments on 1994 and prior years
related to reserves acquired from Casualty.
8
10
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 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 1996 and 1995, there was relatively insignificant aggregate development
on prior accident years. 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 loss reserves represents the
recognition of a continued decrease in the frequency and severity of reported
claims on 1993 and prior accident years. The Company is not able to determine
with certainty the specific cause or causes of increases and decreases in claims
experience that led to these changes in reserves but has reached its own
conclusion based on a review of its internal data 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.
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.
INVESTMENT PORTFOLIO
The Company manages its investments internally. The following portfolio
information reflects the Company's continuing operations.
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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, 1996 DECEMBER 31, 1995
----------------------- -----------------------
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Available for sale:
United States Treasury securities and
obligations of other US government agencies
and corporations........................... $ 70,039 $ 76,314 $ 136,626 $ 149,250
Redeemable preferred stock.................... -- -- 15,887 15,764
Mortgage-backed securities.................... 324,011 308,228 340,682 337,133
Corporate securities
Banks...................................... 35,000 35,155 123,144 125,836
Financial.................................. 115,382 118,443 117,013 120,242
Transportation............................. 27,163 27,559 16,888 17,241
Utilities.................................. 10,939 11,173 13,427 13,820
Industrial................................. 421,714 428,275 491,767 517,264
----------- ----------- -----------
Total................................. 1,004,248 1,005,147 1,255,434 1,296,550
Non-redeemable preferred stock................ 351,812 354,958 285,337 277,451
----------- ----------- -----------
Total................................. $1,356,060 $1,360,105 $1,540,771 $1,574,001
=========== =========== ===========
Short-term investments.......................... $ 118,582 $ 118,582 $ 362,163 $ 362,163
Cash............................................ 55,378 55,378 39,559 39,559
As of December 31, 1996, 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, 65% were rated A or higher, 34%
were rated BBB and 1% were rated BB. As of December 31, 1996, these investment
securities had an approximate fair value of $1.0 billion, which was higher than
amortized cost by approximately $1 million. The Company does not currently plan
or intend to invest in securities rated below investment grade.
The following table reflects the average cash and investment assets of the
Company and its subsidiaries for the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Average cash and investment assets
Cash............................................... $ 40,467 $ 24,657 $ 29,693
Investment assets.................................. 1,752,181 1,591,972 1,060,001
----------- ----------- -----------
Total...................................... $1,792,648 $1,616,629 $1,089,694
=========== =========== ===========
Investment yield earned on (excluding realized gains
and losses):
Cash and investment assets......................... 7.06% 7.38% 6.99%
Investment assets only............................. 7.22% 7.49% 7.19%
Investment yield earned on (including realized gains
and losses):
Cash and investment assets......................... 6.97% 7.38% 6.97%
Investment assets only............................. 7.13% 7.49% 7.16%
Due to changing accounting and industry practice and management's
evaluation of the investment portfolio, the Company has designated its entire
portfolio as investments that would be available for sale in response to
changing market conditions, liquidity requirements, interest rate movements and
other investment factors. At December 31, 1996 and 1995, the Company held
securities having an amortized cost of
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$1.356 billion and $1.541 billion, respectively, as available for sale. (See
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, 1996:
AMORTIZED
COST PERCENTAGE
---------- ----------
(THOUSANDS OF DOLLARS,
EXCEPT PERCENTS)
One year or less..................................... $ 118,582 10%
Over 1 year through 5 years.......................... 77,192 7
Over 5 years through 10 years........................ 346,217 31
Over 10 years........................................ 256,828 23
Mortgage-backed securities........................... 324,011 29
---------- ----
Totals............................................. $1,122,830 100%
========== ====
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, 1996:
PERCENTAGE
----------
AAA (Including US government obligations)......... 29%
AA................................................ 5
A................................................. 31
BBB............................................... 34
BB................................................ 1
----
100%
====
FINANCIAL SERVICES OPERATIONS
Real Estate Lending
The real estate lending operations of FGCC, which began in 1990 through the
acquisition of a California thrift and loan ("the thrift"), now serves more than
28,000 customers through 11 branch offices, and its deposits are insured by the
Federal Deposit Insurance Corporation ("FDIC"). (See "Regulation -- Thrift and
Loan Regulation.") The thrift'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 $17.3
million in 1996. Assets of the real estate lending operation have grown from
$278 million at the end of 1991 to $1.24 billion at the end of 1996, due to
increased loan originations and to the purchase of loan portfolios from other
financial institutions. The thrift funds its lending activities through its
deposits and capital. Deposits consist 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 $1.114 billion at December 31, 1996.
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. The thrift originates loans through independent loan
brokers and through its own loan agents. In 1996, the thrift purchased an
aggregate of $14 million in California commercial and residential real estate
loans from third parties, primarily financial institutions. 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. In 1994, the thrift purchased an
aggregate of
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$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. 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.
The thrift's commercial real estate loan originations are primarily 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. The thrift 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
million to $5 million. As of December 31, 1996, the average loan size was
$1,650,000 and the approximate average loan-to-value ratio was 72%, using the
most current available appraised values and current balances outstanding. The
total amount of commercial real estate loans outstanding at December 31, 1996
was $855 million or 76% 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, 1996, the thrift had 35 non-accrual commercial real estate loans
totaling approximately $11.0 million and commercial real estate owned of
approximately $6.2 million.
The thrift also originates loans secured by single-family residences. At
December 31, 1996, single family residential real estate secured loans
represented $267 million, or 24%, of the thrift'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 the thrift's Board
of Directors which includes standards covering, among other things, collateral
value, loan to value and customer debt ratio. At December 31, 1996, the average
single-family loan amount was $118,000, and the approximate average
loan-to-value ratio was 75%, using appraised values at the time of loan
origination and current balances outstanding.
The portfolio of the thrift's loans receivable as of the dates indicated
are summarized in the following table by type of primary collateral.
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- -------- --------
(THOUSANDS OF DOLLARS)
Commercial real estate loans............... $ 855,150 $730,599 $687,198
Residential real estate loans.............. 267,428 165,888 103,532
Other thrift loans......................... 305 2,330 36,295
---------- -------- --------
Loans receivable before deferred fees and
costs.................................... 1,122,883 898,817 827,025
Purchase discount and deferred fees and
costs.................................... (8,933) (9,865) (19,498)
---------- -------- --------
Total loans receivable, purchase discount
and deferred fees and costs........... 1,113,950 888,952 807,527
Less allowance for possible loan losses.... (24,759) (17,498) (14,391)
---------- -------- --------
Loans receivable, net.................... $1,089,191 $871,454 $793,136
========== ======== ========
Funding Sources. The thrift obtains funds from depositors by offering
full-paid investment certificates and installment investment certificates
insured by the FDIC to the legal maximum through its 11 branches in California.
The thrift 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. The thrift 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
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financing is available at varying rates and terms. As of December 31, 1996, $231
million was available under the facility and no borrowings were outstanding.
The table below summarizes the thrift's investment certificates as of
December 31, 1996 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................................... $5,603 $ 10,095 $ 22,664 $ 4,963 $43,325
IRA's.................................... 323 201 2,289 628 3,441
Wholesale................................ 200 600 3,409 1,150 5,359
Brokered................................. 2,000 1,201 -- 42,724 45,925
------ ------- ------- ------- -------
Total.......................... $8,126 $ 12,097 $ 28,362 $49,465 $98,050
====== ======= ======= ======= =======
Commercial Finance
The Company's commercial finance subsidiary provides working capital loans,
primarily secured by accounts receivable and inventory, to small and middle
market companies on a nationwide basis. Additionally, insurance premium
financing is provided and is collateralized by security interests in return
premiums. The total commercial finance loan portfolio has grown from $189
million at December 31, 1991 to $612 million at December 31, 1996. This growth
has been achieved through development of the customer base through loan
originations and through participation in syndicated loan transactions. In 1996,
income before taxes from commercial and premium financing was $20.0 million. The
lending market has become increasingly competitive for small to middle market
commercial borrowers. As a result, the Company 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 the Company 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, the
Company 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 finance loans also include
secured loans originated and serviced by other asset-based lenders and
participated in by the Company. As of December 31, 1996, the average outstanding
commercial finance loan balance was $2.5 million. Loans outstanding to a single
borrower generally range in size from $250,000 to $15 million.
The major avenue of growth for the commercial finance operations 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 the Company will continue to service the loans thereunder. As of
December 31, 1996, an aggregate $235 million of senior series and a $30 million
subordinated series of asset-backed certificates were outstanding. The interest
rate on the certificates, set monthly, ranged from LIBOR plus 0.34% to LIBOR
plus 0.95% at December 31, 1996. The securities issued in this program have a
scheduled maturity of three to five years, but could mature earlier depending on
fluctuations in the outstanding balances of loans in the portfolio and other
factors. As of December 31, 1996, up to $365 million in additional
13
15
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 of the senior series certificates
("Series C") were issued. The proceeds were used, in conjunction with existing
cash, to retire $200 million in Series A certificates, which were outstanding as
of December 31, 1995. The $30 million subordinated certificates were issued by
the Company in April 1995 via a private placement. 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
approximately $15 million outstanding under it as of December 31, 1996. The
commercial finance operation also has an unsecured revolving line of credit with
a syndicated bank group that presently permits borrowings of up to $400 million,
which includes a revolving credit facility of $300 million expiring August 1998
and a term loan of $100 million maturing 2001. The balance outstanding at
December 31, 1996 of the revolving credit facility and the term loan was $123
million and $100 million, respectively, with a weighted average interest rate of
6.11%. This credit line is primarily used to finance assets which are not
included in the Company's asset securitization program.
The Company's commercial finance 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, 1996, the
Company had approximately 223 commercial finance loans outstanding in 36 states.
Approximately 35% of total commercial finance loans outstanding were made to
companies based in California, and no other state accounted for more than 10% of
total commercial finance loans outstanding.
Commercial finance loans are asset-based revolving loans which 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. The Company seeks to protect itself against
this risk through a comprehensive system of collateral monitoring and control.
The Company'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 the Company's loans that have
been liquidated have been fully repaid, as the Company attempts to work closely
with the borrower through the liquidation to ensure repayment of the loan. The
Company seeks to maintain conservative collateral valuations and perfection of
security interests.
The Company primarily competes with commercial finance companies and banks,
most of whom are larger and have greater financial resources than the Company's
commercial finance operation. 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, the Company has experienced decreasing yields on its
commercial finance loans.
The commercial finance operation also finances property and casualty
insurance premiums. This premium finance loan portfolio is collateralized by the
unearned premiums of the underlying insurance policies. Revenue and operating
income from this subsidiary were not significant in 1996, 1995 or 1994.
14
16
Life Insurance
Prior to January 1, 1996, the Company offered life insurance products,
including annuities, credit life and disability insurance and term life
insurance for consumers, through a subsidiary. 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 have collectively resulted
in the sale of substantially all of the Company's life insurance operations. The
Company continues to remain primarily obligated for approximately $193 million
of account value of annuities which, at December 31, 1996, have been fully
coinsured with Employers Reassurance Corporation. The effect on operations from
these agreements was not material, and revenue and operating income from this
subsidiary were not significant in 1996, 1995 or 1994.
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 discontinued operations' assets at December 31, 1996 consisted of $200
million in cash and investment grade fixed income securities, reinsurance
recoverables of $58 million and other assets totaling $7 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 N 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, performance and
maturities.
REGULATION
Insurance Regulation
The Company's workers' compensation insurance operations are concentrated
in California and Illinois, with additional writings in 11 other states.
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.
15
17
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 premium 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 premium rates, companies in Illinois generally
follow such rates. However, insurance companies in California have, since the
adoption of an open rating system, generally set their premium rates below such
advisory premium 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, adopt an open rating
system through the repeal of the minimum rate law effective January 1, 1995. The
repeal of the minimum rate law on January 1, 1995 resulted in lower premiums and
lower profitability in the Company's California workers' compensation insurance
business due to increased price competition. The Company believes that its
acquisition of Casualty, with policies written primarily outside of California,
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 insurance 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 is due primarily to the
increased competition in the California market which resulted from the repeal of
the minimum rate law, effective January 1, 1995. The 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
16
18
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 property and casualty subsidiaries during 1997
without prior regulatory approval is approximately $62.6 million. In addition,
insurance regulations require that the Department of Insurance be given 15 days
advance notice of any dividend payment.
Other Regulations. The NAIC adopted a formula to calculate risk based
capital ("RBC") of property and casualty insurance companies for inclusion in
annual statements. The purpose of the RBC model is to help state regulatory
authorities monitor the capital adequacy of property and casualty insurance
companies by measuring several major areas of risk facing property and casualty
insurers including underwriting, credit and investment risks. Companies having
less statutory surplus than the RBC model calculates will be required to
adequately address these risk factors and will be subject to varying degrees of
regulatory intervention, depending on the level of capital inadequacy. As of
December 31, 1996 the Company's insurance subsidiaries engaged in continuing
operations exceed all RBC levels requiring any regulatory intervention.
Thrift and Loan Regulation
The Company's thrift 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. None of the Company's subsidiaries which
comprise the real estate lending operation are 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 the real
estate lending subsidiaries. Such guidelines include (i) general regulatory and
enforcement authority of the DOC and the FDIC over transactions and dealings
between Fremont General and the thrift, (ii) specific limitations regarding
ownership of the capital stock of the parent company of any thrift and loan
company, and (iii) specific limitations regarding the payment of dividends from
the thrift as discussed below. The thrift is examined on a regular basis by both
agencies.
Federal and state regulations prescribe certain minimum capital
requirements and, while the thrift is currently in compliance with such
requirements, the Company could in the future be required to make additional
investments in the thrift 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 the thrift. The Company does not
believe that the restrictions on the thrift's ability to pay dividends imposed
by federal or state law will adversely affect the ability of Fremont General to
meet its obligations. Future changes in government regulation and policy could
adversely affect the thrift and loan industry, including the Company's thrift.
17
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The FDIC and DOC conducted an examination of the thrift as of March 31,
1996. The examinations resulted in the FDIC terminating in August 1996 a
Memorandum of Understanding ("the MOU") which the FDIC had required the thrift
to enter into in January 1995. The MOU had required the thrift to operate under
certain conditions imposed by the FDIC. The thrift was in substantial compliance
with all such conditions which were confirmed by the FDIC in their March 31,
1996 examination and which led to the termination of the MOU.
California Law. The thrift and loan business conducted by the Company's
thrift 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, the thrift is
permitted to make secured and unsecured consumer and non-consumer loans. The
maximum term for repayment of loans made by thrift and loan companies 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.
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, 1996, the thrift 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. The Company's thrift
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. The Company's
thrift currently has an authorized ratio of deposits to such capital of 17 to 1.
Federal Law. The thrift's deposits are insured by the FDIC to the full
extent permitted by law. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and
18
20
generally supervises the operations of institutions to which it provides deposit
insurance. The Company's thrift is subject to the rules and regulations of the
FDIC to the same extent as other financial institutions which are insured by
that entity. The approval of the FDIC is required prior to any merger,
consolidation or change in control or the establishment or relocation of any
branch office of the thrift. This supervision and regulation is intended
primarily for the protection of the insured deposit funds. Prior written notice
to the FDIC is required to close a branch office.
The thrift is subject to federal risk-based capital adequacy guidelines
which provide a measure of capital adequacy and are intended to reflect the
degree of risk associated with both on- and off-balance sheet items, including
residential real estate loans sold with recourse, legally binding loan
commitments and standby letters of credit. A financial institution's risk-based
capital ratio is calculated by dividing its qualifying capital by its
risk-weighted assets. Financial institutions are generally expected to meet a
minimum ratio of qualifying total 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, 1995, the Tier 2 capital of the
thrift consisted of approximately $11.9 million of allowance for possible loan
losses. As of December 31, 1996, the thrift's allowance for possible loan losses
for Tier 2 capital increased to $13.8 million. (See "Financial Services -- Real
Estate Lending.") The following table presents the thrift's risk-based capital
position at the dates indicated:
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- --------------------------
PERCENT OF PERCENT OF
RISK-WEIGHTED RISK-WEIGHTED
AMOUNT ASSETS AMOUNT ASSETS
---------- ------------- -------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 capital........................... $ 104,521 9.52% $ 89,374 9.46%
Minimum requirement...................... 43,898 4.00 37,782 4.00
---------- ------ -------- ------
Excess................................. $ 60,623 5.52% $ 51,592 5.46%
========== ====== ======== ======
Total capital............................ $ 118,320 10.78% $101,248 10.72%
Minimum requirement...................... 87,796 8.00 75,564 8.00
---------- ------ -------- ------
Excess................................. $ 30,524 2.78% $ 25,684 2.72%
========== ====== ======== ======
Risk-weighted assets..................... $1,097,445 $944,553
========== ========
The FDIC has adopted a 3% minimum leverage ratio which is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions continue to maintain a minimum level of core capital. A minimum
leverage ratio of 3% is required for institutions which have been determined to
be the highest of five categories used by regulators to rate financial
institutions. All other institutions (including the Company's thrift) will
likely be required to maintain leverage ratios of at least 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
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21
presents the thrift's leverage ratio (the ratio of Tier 1 capital to the
quarterly average total assets) at the dates indicated:
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- --------------------------
PERCENT OF PERCENT OF
RISK-WEIGHTED RISK-WEIGHTED
AMOUNT ASSETS AMOUNT ASSETS
---------- ------------- -------- -------------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Tier 1 capital........................... $ 104,521 8.55% $ 89,374 9.02%
Minimum requirement...................... 36,683 3.00 29,735 3.00
---------- ------ -------- ---- --
Excess................................. $ 67,838 5.55% $ 59,639 6.02%
========== ====== ======== ======
Risk-weighted assets..................... $1,222,751 $991,163
========== ========
The FDIC has designated the Company's thrift as a "well-capitalized"
institution under the regulations promulgated under the Federal Deposit
Insurance Corporation Improvement Act of 1991. A "well-capitalized" institution
has a total risk-based capital ratio of at least 10%, has a Tier 1 risk-based
capital ratio 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.
As a "well-capitalized" institution, the thrift's annual FDIC insurance
premiums were 26 cents per $100 of eligible domestic deposits in 1995 for the
period January 1, 1995 through June 31, 1995 and then significantly decreased to
7 cents for the period July 1, 1995 through December 31, 1995. In 1996, this
annual insurance premium rate decreased to 3 cents for the period January 1,
1996 through December 31, 1996. This rate has been further decreased to 1.3
cents effective for the period January 1, 1997 through June 30, 1997. The
insurance premium payable is subject to semi-annual adjustment. The FDIC, by the
first day of the month preceding each semi-annual period, is required to notify
each insured institution of its assessment risk-classification upon which the
insurance premium assessment for the following period will be based. The FDIC
has the authority to assess to all insured institutions collectively, additional
premiums to cover losses and expenses associated with insuring deposits
maintained at financial institutions and for other purposes it deems necessary.
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 the Company's thrift and other factors, such regulators could assert that the
payment of dividends in some circumstances might constitute unsafe or unsound
practices and could prohibit payment of dividends even though technically
permissible.
The Company's thrift is also subject to federal consumer protection laws,
including the Truth in Savings Act, the Truth in Lending Act, the Community
Reinvestment Act and the Real Estate Settlement Procedures Act.
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Commercial Finance
The Company's commercial finance subsidiary is licensed by 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, 1996, the Company had 1,815 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 proceedings, 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.
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 cash dividends declared on the Company's Common Stock during each
quarter presented.
HIGH LOW DIVIDENDS DECLARED
---- ---- ------------------
1996
1st Quarter............................... 261/4 225/64 $ 0.15
2nd Quarter............................... 251/4 215/8 0.15
3rd Quarter............................... 295/8 211/2 0.15
4th Quarter............................... 311/2 281/4 0.15
-----
Total......................... $ 0.60
=====
1995
1st Quarter............................... 145/32 113/4 $ 0.12
2nd Quarter............................... 1713/32 117/16 0.13
3rd Quarter............................... 195/32 16 0.13
4th Quarter............................... 2427/32 1721/32 0.13
-----
Total......................... $ 0.51
=====
On December 31, 1996, the closing sale price of the Company's Common Stock
on the NYSE was $31.00 per share. There were 1,568 stockholders of record as of
December 31, 1996.
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,
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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 regulation under California law. (See Note K to
Consolidated Financial Statements.)
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995(1) 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS AND PER SHARE DATA)
INCOME STATEMENT DATA:
Property and casualty premiums
earned............................. $ 486,860 $ 606,917 $ 433,584 $ 455,765 $ 411,956
Net investment income................ 123,531 119,523 76,821 77,198 70,820
Loan interest income................. 163,765 162,992 113,382 87,244 73,310
Realized investment gains (losses)... (1,658) 1 (315) 2,165 16,208
Other revenue........................ 23,306 34,381 29,676 29,033 26,399
--------- --------- --------- --------- ---------
Total revenues....................... $ 795,804 $ 923,814 $ 653,148 $ 651,405 $ 598,693
========= ========= ========= ========= =========
Property and casualty income......... $ 117,593 $ 83,092 $ 61,265 $ 52,092 $ 45,187
Financial services income............ 36,589 35,737 28,014 21,456 14,878
Other interest and corporate
expense............................ (25,873) (18,502) (7,708) (9,200) (11,484)
--------- --------- --------- --------- ---------
Income before taxes and cumulative
effect of accounting change........ 128,309 100,327 81,571 64,348 48,581
Income tax expense................... (41,021) (32,305) (25,759) (21,638) (13,381)
Cumulative effect of accounting
change for income taxes............ -- -- -- -- 43,509
--------- --------- --------- --------- ---------
Net income........................... $ 87,288 $ 68,022 $ 55,812 $ 42,710 $ 78,709
========= ========= ========= ========= =========
GAAP RATIOS FOR PROPERTY AND CASUALTY
SUBSIDIARIES
Loss ratio........................... 68.9% 76.0% 63.1% 70.0% 80.4%
Expense ratio........................ 25.9% 24.5% 23.4% 21.3% 22.5%
Policyholder dividends ratio......... 0.0% 0.0% 11.5% 9.9% 2.5%
--------- --------- --------- --------- ---------
Combined ratio....................... 94.8% 100.5% 98.0% 101.2% 105.4%
========= ========= ========= ========= =========
PER SHARE DATA:
Cash dividends declared.............. $ 0.60 $ 0.51 $ 0.45 $ 0.44 $ 0.39
Stockholders' equity(3):
Including FASB 115 for 1994 -
1996............................. 19.90 19.62 13.82 N/A N/A
Excluding FASB 115 for 1994 -
1996............................. 19.81 18.76 16.40 14.55 13.39
Income before cumulative effect of
accounting change:
Primary............................ 3.26 2.61 2.16 1.85 1.73
Fully diluted...................... 2.73 2.17 1.82 1.65 1.53
Net income:
Primary............................ 3.26 2.61 2.16 1.85 3.84
Fully diluted...................... 2.73 2.17 1.82 1.65 3.29
WEIGHTED AVERAGE SHARES USED TO
CALCULATE PER SHARE DATA:
Primary.............................. 26,762 26,079 25,823 23,039 20,498
Fully diluted........................ 33,630 33,343 33,034 28,243 24,734
BALANCE SHEET DATA:
Total assets......................... $4,307,512 $4,477,399 $3,134,390 $2,669,290 $2,070,533
Fixed income and other investments... 1,484,310 1,937,890 888,918 1,055,289 782,542
Loans receivable..................... 1,688,040 1,499,043 1,440,774 846,443 689,443
Claims and policy liabilities........ 1,579,325 1,971,719 1,012,704 1,007,054 812,,081
Short-term debt...................... 16,896 72,191 176,325 78,087 208,013
Long-term debt....................... 636,456 693,276 468,390 451,581 100,572
Trust Originated Preferred
Securities(SM)(2).................. 100,000 -- -- -- --
Stockholders' equity(3):
Including FASB 115 for 1994 -
1996............................. 559,117 498,090 351,013 N/A N/A
Excluding FASB 115 for 1994 -
1996............................. 556,488 476,491 416,378 369,369 271,710
- ---------------
(1) The Company acquired Casualty Insurance Company on February 22, 1995.
(2) Company-obligated mandatorily redeemable preferred securities of subsidiary
Trust holding solely Company junior subordinated debentures.
(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.
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ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains certain forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of certain factors including those set forth elsewhere in this Form 10-K.
GENERAL
Fremont General Corporation is engaged domestically in select insurance and
financial services businesses. Fremont General's insurance business includes one
of the largest underwriters of workers' compensation insurance in the nation.
The Company also provides medical malpractice insurance. Fremont General's
financial services business includes commercial real estate lending, residential
real estate lending, commercial finance and premium financing. The Company's
total assets as of December 31, 1996 were $4.3 billion, with 1996 pre-tax
earnings of $128 million. 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's stock is traded on the New York Stock Exchange under the symbol "FMT"
(NYSE:FMT).
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. 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 & Indemnity Company of California
("WCIC") from the Buckeye Union Insurance Company. Casualty underwrites workers'
compensation insurance primarily in Illinois and several other mid-western
states. 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 and
approximately 63% of the Company's 1996 revenues from workers' compensation
insurance premiums were generated in the mid-west region, with the remaining 37%
emanating from the west region, primarily in California. The Company believes
this geographic diversity mitigates potential fluctuations in earnings from
cyclical downturns in various regional economies. (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 resulted in lower premiums and lower
profitability on the Company's California workers' compensation insurance
policies in 1995 and 1996 due to increased price competition. (See "Results of
Operations -- Property and Casualty Insurance Operations -- Premiums.") The
Company's acquisition of Casualty, with policies written primarily outside of
California, 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 continues to impact workers' compensation companies due in part to
overall average decreases in advisory premium rates of 13.6% and 10.0% which
became effective January 1, 1996 and 1997, respectively. Although insurance
companies are not required to adopt such advisory premium rates, companies in
Illinois generally follow such rates. (See "Results of Operations -- Property
and Casualty Insurance Operations -- Workers' Compensation Regulation.")
In an effort to provide a clearer understanding of the Company's financial
services business segment, the Company has consolidated the real estate lending
operations of Fremont Investment & Loan, a California thrift and loan, and the
commercial finance operations of Fremont Financial Corporation, under a newly
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formed company, Fremont General Credit Corporation ("FGCC"). At December 31,
1996, FGCC had assets of approximately $2 billion, and reported pre-tax income
of $36.6 million.
The Company's real estate lending operations, which began in 1990 through
the acquisition of a California thrift and loan, now serves more than 28,000
customers through 11 branch offices. 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
million 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 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 $1.24 billion at the end of 1996, 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 commercial finance operation of FGCC provides working capital loans,
primarily secured by accounts receivable and inventory, to small and middle
market companies on a nationwide basis. Additionally, insurance premium
financing is provided and is collateralized by security interests in return
premiums. The total commercial finance loan portfolio grew from $189 million at
December 31, 1991 to $612 million at December 31, 1996. This growth has been
achieved primarily through development of the 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, FGCC has experienced decreasing yields on its
commercial finance loans.
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 N of Notes to
Consolidated Financial Statements.)
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RESULTS OF OPERATIONS
By providing diverse insurance and financial services to small and
medium-sized businesses, the Company has achieved growth in net income during
the three years ended December 31, 1996. Higher revenues and net income were
also achieved through the acquisition of Casualty. The following table presents
information for each of the three years in the period ended December 31, 1996
with respect to the Company's core business segments.
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
Revenues:
Property and casualty................................. $596,841 $708,187 $495,712
Financial services.................................... 197,601 214,975 154,398
Corporate............................................. 1,362 652 3,038
-------- -------- --------
Total............................................ $795,804 $923,814 $653,148
======== ======== ========
Income (Loss) Before Taxes:
Property and casualty................................. $117,593 $ 83,092 $ 61,265
Financial services.................................... 36,589 35,737 28,014
Corporate............................................. (25,873) (18,502) (7,708)
-------- -------- --------
Total............................................ $128,309 $100,327 $ 81,571
======== ======== ========
The Company generated revenues of $796 million for 1996, as compared to
revenues of $924 million and $653 million for 1995 and 1994, respectively.
Revenues were lower in 1996 as compared to 1995, due principally to lower
workers' compensation insurance premiums and lower life insurance revenues in
the financial services segment. The lower workers' compensation insurance
premiums are due primarily to lower premiums earned in California and, to a
lesser extent, lower premiums earned in Illinois. (See "Property and Casualty
Insurance Operations -- Premiums.") The lower life insurance revenues in the
financial services segment are due to certain reinsurance and assumption
agreements with a reinsurer which became effective December 31, 1995 and January
1, 1996 and resulted in the sale of substantially all of the Company's life
insurance operations. (See "Financial Services.") 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. Realized investment gains (losses) were $(1,658,000), $1,000 and
$(315,000) for 1996, 1995 and 1994, respectively.
The Company had net income of $87.3 million or $3.26 per share for 1996, as
compared to $68.0 million or $2.61 per share and $55.8 million or $2.16 per
share for 1995 and 1994, respectively. Income before taxes for 1996 was $128.3
million as compared to $100.3 million and $81.6 million for 1995 and 1994,
respectively.
Workers' compensation insurance operations posted income before taxes of
$120.1 million for 1996, as compared to $85.0 million for 1995 and $62.2 million
for 1994. The increase in income before taxes of 41% in 1996 as compared to 1995
is due predominately to lower claim frequency and the acquisition of Casualty,
offset partially by lower income on the Company's California business. The 37%
increase in income before taxes in 1995 as compared to 1994 is due primarily to
the acquisition of Casualty, offset partially by lower income on the Company's
California business. The combined ratio for 1996 was 94.4% compared to 100.4%
and 97.6% for 1995 and 1994, respectively.
Also included within the property and casualty business segment are
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 Compensation Insurance Group, ("FCIG", formerly Fremont
Insurance Group). Medical malpractice revenues were $31.6 million for 1996, as
compared to $34.3 million and $33.0 million for 1995 and 1994, respectively.
Income before taxes for the medical malpractice business was $3.8 million, $5.2
million and
25
27
$6.6 million for 1996, 1995 and 1994, respectively. The decrease in income
before taxes in 1996 as compared to 1995 is due primarily to lower premiums
earned. The decrease in income before taxes in 1995, as compared to 1994, is due
primarily to an increase in the frequency and severity of reported claims.
Expenses of FCIG include interest expense on debt and other obligations of $5.9
million, $6.7 million and $5.5 million, respectively, for 1996, 1995 and 1994,
and overhead expenses of $0.7 million, $2.2 million and $3.1 million for the
corresponding periods.
The financial services business segment posted increases of 2% and 28% in
income before taxes for 1996 and 1995, respectively. Although income before
taxes was relatively flat in 1996 as compared to 1995, the results in 1996 were
negatively impacted by the establishment of a specific loan loss associated with
one loan in the commercial finance loan portfolio. Also impacting the financial
services segment in 1996 is the reduction in life insurance operations resulting
from certain reinsurance and assumption agreements entered into between the
Company and a reinsurer which became effective December 31, 1995 and January 1,
1996. These transactions essentially resulted in the sale of the life insurance
operations. (See "Financial Services.") The increase in income before taxes of
28% in 1995 is consistent with the increase in financial services revenues and
is due primarily to the significant growth in the average loan portfolio in 1995
to $1.5 billion from $1.1 billion in 1994. The average loan portfolio further
grew to $1.6 billion in 1996. This segment, which consists principally of real
estate lending, commercial finance and premium finance, recorded income before
taxes of $36.6 million, $35.7 million and $28.0 million for 1996, 1995 and 1994,
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 $25.9
million, $18.5 million and $7.7 million for 1996, 1995 and 1994, respectively.
The increase in the corporate loss before taxes in 1996 as compared to 1995 was
due principally to increased interest expense and increased administrative
expenses. The increase in interest expense is mainly due to additional debt
incurred in the acquisition of Casualty, as well as to accrued dividends in
connection with a public offering on March 1, 1996 of $100 million of 9% Trust
Originated Preferred Securities(SM) (the "Preferred Securities") sold by a
consolidated wholly-owned subsidiary of the Company. (See "Liquidity and Capital
Resources.") The accrued dividends on the Preferred Securities have been
classified in the Consolidated Statements of Income as interest expense. (See
Note J of Notes to Consolidated Financial Statements.) 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.
Income tax expense of $41.0 million, $32.3 million and $25.8 million for
1996, 1995 and 1994, respectively, represents an effective tax rate of 32% each
year on pretax income of $128.3 million, $100.3 million and $81.6 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,
----------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
Revenues................................................... $596,841 $708,187 $495,712
Expenses................................................... 479,248 625,095 434,447
-------- -------- --------
Income Before Taxes........................................ $117,593 $ 83,092 $ 61,265
======== ======== ========
Revenues from the property and casualty insurance operations consist
primarily of workers' compensation insurance premiums earned, medical
malpractice premiums earned and net investment income. Expenses
26
28
consist primarily of loss and loss adjustment expenses, policy acquisition
costs, other operating costs and expenses and, for the year ended December 31,
1994, dividends to policyholders.
Premiums. Premiums earned from the Company's workers' compensation
insurance operations were $457.2 million for 1996, as compared to $575.0 million
and $401.5 million for 1995 and 1994, respectively. Premiums were significantly
lower in 1996 due primarily to lower premiums earned in California and to a
lesser extent lower premiums earned in Illinois. Premiums were significantly
higher in 1995 as compared to 1994, due primarily to the acquisition of
Casualty, partially offset by lower premiums earned in California. For the year
ended December 31, 1996, the Company's workers' compensation insurance premiums
earned in its western region, consisting primarily of California, accounted for
$171 million, or 37% of the Company's total workers' compensation insurance
premiums earned for such period, representing decreases of $121 million and $230
million from west region premiums earned in 1995 and 1994, respectively. These
decreases are 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. Additionally, an
increase in 1995 in non-renewing policies also contributed to the lower premium
volume in California. The increase in non-renewing policies occurs as a result
of certain premium prices falling below required minimum pricing pursuant to the
Company's underwriting standards. For the year ended December 31, 1996, the
Company's workers' compensation insurance premiums earned in its mid-western
region, consisting primarily of Illinois, accounted for $286 million, or 63% of
the Company's total workers' compensation insurance premiums earned. Price
competition in Illinois has impacted the Company's results of operations and
will continue to affect such results, due in part to overall average decreases
in advisory premium rates of 13.6% and 10.0% that became effective January 1,
1996 and 1997, respectively, and which workers' compensation insurance companies
in Illinois tend to follow.
Net Investment Income. Net investment income within the property and
casualty insurance operations was $111.6 million, $101.3 million and $62.2
million in 1996, 1995 and 1994, respectively. Significantly higher invested
assets, due primarily to the acquisition of Casualty, resulted in increased
investment income in 1996 and 1995 as compared to 1994. (See "Item 1.
Business -- Investment Portfolio.")
Loss and Loss Adjustment Expense. Workers' compensation loss and loss
adjustment expenses ("LAE") were $312.2 million, $436.7 million and $249.4
million in 1996, 1995 and 1994, respectively. In addition, the ratio of these
losses and LAE to workers' compensation insurance premiums earned was 68.3%,
75.9% and 62.1% in 1996, 1995 and 1994, respectively. The decrease in the dollar
amount of incurred loss and LAE in 1996 as compared to 1995 is due principally
to lower claim frequency and severity in the Company's mid-west region and a
lower level of incurred losses and LAE in the Company's west region resulting
from lower insurance premiums earned on California policies which resulted from
increased competition. (See "Premiums.") 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. 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 beginning in
1995. The dividend elimination occurred as substantially all of the workers'
compensation policies written beginning in 1995 were non-participating. This
type of policy is not eligible for dividend consideration. (See "Dividends to
Policyholders" and "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.
27
29
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 25.9%, 24.5% and 23.4% in
1996, 1995 and 1994, respectively. The increase in this ratio in 1996, as
compared to 1995, was due primarily to higher operating costs and expenses,
partially offset by lower agents' commission costs. The increase in this ratio
in 1995, as compared to 1994, was due primarily to higher agents' commission
costs.
Dividends to Policyholders. In 1996 and 1995 there were no dividends
accrued. This is compared to $49.7 million accrued in 1994. The ratio of
dividends accrued to workers' compensation insurance premiums earned therefore
decreased to 0% in 1996 and 1995 from 12.4% in 1994. 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.") 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 premium 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 premium rates, companies in Illinois generally
follow such rates. This characteristic has resulted in price competition in
Illinois, where overall average decreases in advisory premium rates of 13.6% and
10.0% became effective January 1, 1996 and 1997, respectively. However,
insurance companies in California have, since the adoption of an open rating
system, generally set their premium rates below such advisory premium 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, repeal the minimum
rate law effective January 1, 1995. This repeal resulted in lower premiums and
lower profitability in the Company's California workers' compensation insurance
business due
28
30
to increased price competition. The Company's acquisition of Casualty, with
policies written primarily outside of California, 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.")
Financial Services
The financial services operations of FGCC are principally engaged in
commercial and residential real estate lending, commercial finance and premium
financing. The Company also has small life insurance operations included in this
segment which was substantially sold in 1996. 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,
----------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
Revenues................................................... $197,601 $214,975 $154,398
Expenses................................................... 161,012 179,238 126,384
-------- -------- --------
Income Before Taxes........................................ $ 36,589 $ 35,737 $ 28,014
======== ======== ========
Revenues decreased 8% in 1996, due primarily to lower life insurance
revenues. These lower life insurance revenues resulted from certain reinsurance
and assumption agreements which the Company entered into on December 31, 1995
and January 1, 1996, primarily with one reinsurer, whereby assets and
liabilities related to certain life and annuity insurance policies, primarily
universal life and investment-type contracts and credit life and accident and
health, were ceded to the reinsurer. The reinsurance agreements are part of
several other agreements which have collectively resulted in a substantial
reduction in the Company's life insurance operations. The effect on income
before taxes and net income from these agreements was not material. (See Note F
of Notes to Consolidated Financial Statements.) Revenues increased 39% in 1995,
due primarily to greater loan interest and fee revenue attributable to the
significant growth in the average loan portfolios of the real estate lending and
commercial finance operations to $1.5 billion in 1995 from $1.1 billion in 1994.
The average loan portfolio further grew to $1.6 billion in 1996.
Income before taxes in the financial services operations was $36.6 million,
$35.7 million and $28.0 million for 1996, 1995 and 1994, respectively. Income
before taxes was relatively flat in the financial services segment for 1996 as
compared to 1995. The Company realized higher income before taxes in the real
estate lending operation as lower loan loss experience resulted in a lower
provision for loan losses. This was offset substantially by lower income in the
commercial finance operation due primarily to a specific loan loss associated
with one loan in the commercial finance loan portfolio. Additionally, lower
income was earned in the life insurance operation due to certain reinsurance
agreements which became effective on December 31, 1995 and January 1, 1996 and
which resulted in a substantial reduction in the Company's life insurance
operations in 1996. The 28% increase in income before taxes in 1995 as compared
to 1994 is due primarily to the significant growth in the average loan
portfolios, offset partially by increases in the provision for loan losses and
other expenses. (See "Item 1. Business -- Financial Services Operations.")
29
31
The following table identifies the interest income, interest expense,
average interest-bearing assets and liabilities, and interest margins for the
Company's financial services operations:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ ------------------------------ ------------------------------
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, premium
finance and other loans... $ 659,517 $ 72,024 10.92% $ 619,431 $ 73,376 11.85% $ 483,778 $ 52,128 10.78%
Thrift and loan:
Cash equivalents.......... 142,533 7,431 5.21 105,470 5,883 5.58 56,014 2,282 4.07
Investments............... 33,559 1,902 5.67 1,053 33 3.13 4,503 450 9.99
Commercial real estate
loans................... 749,912 72,732 9.70 683,331 67,952 9.94 452,950 43,582 9.62
Residential real estate
loans................... 209,802 20,151 9.60 133,761 12,843 9.60 67,053 8,293 12.37
Other thrift loans........ 528 63 11.93 8,110 1,056 13.02 46,875 6,183 13.19
---------- -------- ---------- -------- ---------- --------
Total interest bearing
assets.................... $1,795,851 $174,303 9.71 $1,551,156 $161,143 10.39 $1,111,173 $112,918 10.16
========== ======== ========== ======== ========== ========
Interest bearing liabilities:
Savings deposits............ $ 247,648 $ 12,268 4.95% $ 136,588 $ 7,279 5.33% $ 81,475 $ 2,940 3.61%
Time deposits............... 755,160 43,351 5.74 664,397 40,072 6.03 464,960 23,928 5.15
Commercial paper and
other..................... 3,353 189 5.64 15,873 1,189 7.49 14,332 820 5.72
Securitization obligation... 295,827 18,035 6.10 321,667 21,200 6.59 300,094 14,653 4.88
Debt with banks............. 243,292 12,864 5.29 174,816 12,308 7.04 80,770 4,921 6.09
Debt from affiliates........ 57,174 5,637 9.86 49,369 2,388 4.84 28,499 2,205 7.74
---------- -------- ---------- -------- ---------- --------
Total interest bearing
liabilities............... $1,602,454 $ 92,344 5.76 $1,362,710 $ 84,436 6.20 $ 970,130 $ 49,467 5.10
========== ======== ========== ======== ========== ========
Net interest income........... $ 81,959 $ 76,707 $ 63,451
======== ======== ========
Net yield..................... 4.56% 4.95% 5.71%
- ---------------
(1) Average loan balances include non-accrual loan balances.
The margin between the Company's interest income and cost of funds
decreased in 1996 as compared to 1995, due primarily to an increase in lower
yielding cash equivalents in the real estate lending operation and a decrease in
net margins in the commercial finance operation resulting from an increase in
the credit quality of the commercial loan portfolio, as well as to increased
competition. These conditions affecting the commercial finance operation also
existed in 1995 which resulted in net yields decreasing in 1995 as compared to
1994. Additionally, net yields decreased in 1995 due to changes in the mix of
loans 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.
Interest rate sensitivity data for the Company's financial services
operations as of December 31, 1996 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
30
32
degree earnings will be sensitive to interest rate changes. The Company attempts
to match interest rate sensitive assets and liabilities to minimize the effect
of fluctuations in interest rates.
REPRICING PERIODS
--------------------------------------------------------------------
WITHIN 0-3 WITHIN 4-12 WITHIN OVER 5
MONTHS MONTHS 1-5 YEARS YEARS TOTAL
---------- ----------- --------- -------- ----------
(THOUSANDS OF DOLLARS)
Interest sensitive assets:
Commercial finance, premium
finance and other loans.... $ 506,046 $ 41,671 $ -- $ 81,253 $ 628,970
Thrift and loan:
Cash equivalents........... 78,376 -- -- -- 78,376
Investments................ 43,660 -- -- -- 43,660
Commercial real estate
loans.................... 389,631 331,046 128,271 6,327 855,275
Residential real estate
loans.................... 57,639 77,640 125,435 6,590 267,304
Other thrift loans......... 62 125 118 -- 305
---------- --------- -------- -------- ----------
Total interest
sensitive assets.... $1,075,414 $ 450,482 $ 253,824 $ 94,170 $1,873,890
========== ========= ======== ======== ==========
Interest sensitive liabilities:
Savings deposits.............. $ 221,678 $ -- $ -- $ -- $ 221,678
Time deposits................. 203,428 572,625 116,578 43 892,674
Commercial paper and other.... 14,929 -- -- -- 14,929
Securitization obligation..... 265,000 -- -- -- 265,000
Debt with banks............... 223,000 -- -- -- 223,000
Debt from affiliates.......... 49,700 -- -- -- 49,700
---------- --------- -------- -------- ----------
Total interest
sensitive
liabilities......... $ 977,735 $ 572,625 $ 116,578 $ 43 $1,666,981
========== ========= ======== ======== ==========
Incremental interest rate
sensitivity gap............... $ 97,679 $ (122,143) $ 137,246 $ 94,127 $ 206,909
========== ========= ======== ======== ==========
Cumulative gap.................. $ 97,679 $ (24,464) $ 112,782 $206,909
========== ========= ======== ========
Loans Receivable and Reserve Activity. The following table shows loans
receivable in the various financing categories and the percentages of the total
represented by each category:
DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
% OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- -------- ---------- -------- ---------- --------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Accounts receivable and
inventory loans:
Commercial finance...... $ 385,734 22% $ 415,038 27% $ 409,580 28%
Term loans:
Thrift and loan......... 1,113,950 65 888,952 58 807,527 55
Commercial finance,
premium finance and
other loans.......... 226,103 13 226,834 15 251,073 17
---------- --- ---------- --- ---------- ---
Total term loans..... 1,340,053 78 1,115,786 73 1,058,600 72
---------- --- ---------- --- ---------- ---
Total loans.......... 1,725,787 100 1,530,824 100 1,468,180 100
Less allowance for
possible loan losses.... 37,747 2 31,781 2 27,406 2
---------- --- ---------- --- ---------- ---
Loans receivable........ $1,688,040 98% $1,499,043 98% $1,440,774 98%
========== === ========== === ========== ===
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33
The following table illustrates the maturities of the Company's loans
receivable:
MATURITIES AT DECEMBER 31, 1996
-------------------------------------------------
1 TO 24 25-60 OVER 60
MONTHS MONTHS MONTHS TOTAL
-------- -------- -------- ----------
(THOUSANDS OF DOLLARS)
Accounts receivable and inventory
loans -- variable rate....................... $385,734 $ -- $ -- $ 385,734
Term loans -- variable rate.................... 176,883 441,432 520,101 1,138,416
Term loans -- fixed rate....................... 96,382 64,662 40,593 201,637
-------- -------- -------- ----------
Total........................................ $658,999 $506,094 $560,694 $1,725,787
======== ======== ======== ==========
The Company monitors the relationship of fixed and variable rate loans and
interest bearing liabilities in order to minimize interest rate risk.
32
34
Adverse economic developments can negatively affect the Company's financial
services 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.
The following table describes the asset classifications, loss experience
and reserve reconciliation of the financial services operations as of or for the
periods ended as shown below:
DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
Non-accrual loans...................................... $ 19,785 $ 33,467 $ 21,834
Accrual loans 90 days past due......................... 1,355 3,025 1,711
Real estate owned ("REO").............................. 10,016 4,941 17,467
---------- ---------- ----------
Total non-performing assets............................ $ 31,156 $ 41,433 $ 41,012
========== ========== ==========
Beginning allowance for possible loan losses........... $ 31,781 $ 27,406 $ 25,222
Provision for loan losses.............................. 13,885 14,575 11,980
Reserves established with portfolio acquisitions....... 1,830 -- 3,605
Charge-offs:
Commercial finance, premium finance and other
loans............................................. 6,180 2,421 4,265
Thrift and loan:
Commercial real estate............................ 4,244 9,248 4,833
Residential real estate loans..................... 624 1,012 2,685
Other thrift loans................................ 95 480 2,471
---------- ---------- ----------
Total charge-offs.................................... 11,143 13,161 14,254
---------- ---------- ----------
Recoveries:
Commercial finance, premium finance and other
loans............................................. 41 1,034 207
Thrift and loan:
Commercial real estate............................ 862 37 10
Residential real estate loans..................... 186 1,659 265
Other thrift loans................................ 305 231 371
---------- ---------- ----------
Total recoveries..................................... 1,394 2,961 853
---------- ---------- ----------
Net charge-offs........................................ 9,749 10,200 13,401
---------- ---------- ----------
Ending allowance for possible loan losses.............. $ 37,747 $ 31,781 $ 27,406
========== ========== ==========
Allocation of allowance for possible loan losses:
Commercial finance, premium finance and other
loans............................................. $ 12,988 $ 14,283 $ 13,015
Thrift and loan...................................... 24,759 17,498 14,391
---------- ---------- ----------
Total allowance for possible loan losses............. $ 37,747 $ 31,781 $ 27,406
========== ========== ==========
Total loans receivable................................. $1,725,787 $1,530,824 $1,468,180
Average total loans receivable......................... 1,594,918 1,505,779 1,082,622
Net charge-offs to average total loans receivable...... 0.61% 0.68% 1.24%
Non-performing assets to total loans receivable........ 1.81% 2.71% 2.79%
Allowance for possible loan losses to total loans
receivable........................................... 2.19% 2.08% 1.87%
Allowance for possible loan losses to non-performing
assets............................................... 121.15% 76.70% 66.82%
Allowance for possible loan losses to non-accrual loans
and accrual loans 90 days past due................... 178.56% 87.09% 116.40%
Non-performing assets decreased to $31.2 million at December 31, 1996 from
$41.4 million at December 31, 1995. This decrease is due primarily to decreases
in non-accrual loans in the real estate lending and commercial finance
operations, offset partially by an increase in REO in the real estate lending
operation. The decrease in non-accrual loans in the commercial finance lending
operation is primarily due to one loan in the commercial finance portfolio
classified as non-accrual at December 31, 1995 and subsequently charged-off
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in 1996. Non-performing assets remained relatively stable at December 31, 1995
as compared to December 31, 1994.
The lower provision for loan losses in 1996 as compared to 1995 is due
primarily to improved loan loss experience in the real estate lending operation,
offset partially by an additional specific loan loss in the commercial finance
operation associated with one loan in the commercial finance portfolio.
Substantially all of the charge-offs in the commercial finance operation in 1996
were related to this loan. The real estate lending operation has benefited from
improved loan loss experience, as evidenced by the significant decrease in
charge-offs in 1996 as compared to 1995. Overall, total charge-offs have
decreased over the three years ended December 31, 1996 and these reductions
occurred during a period in which loans receivable increased.
The higher provision for loan losses in 1995 as compared to 1994 is
consistent with the significant overall growth in the average total 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.
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 the Company's thrift and 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 of $4.0 million and $33.2 million at
December 31, 1996 and 1995, respectively.
The Company's thrift and loan subsidiary, which is principally engaged in
real estate lending, finances its lending activities primarily through customer
deposits, which have grown from $926 million at December 31, 1995 to $1.114
billion at December 31, 1996. In January 1995, this thrift and 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, 1996, $231
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 in 1993 to provide a stable and cost effective source of
funds to facilitate the expansion of this business. As of December 31, 1996, an
aggregate $235 million of senior series and a $30 million subordinated series of
asset-backed certificates were outstanding. The interest rate on the
certificates, set monthly, ranged from LIBOR plus 0.34% to LIBOR plus 0.95% at
December 31, 1996. The securities issued in this program have a scheduled
maturity of three to five years, but could mature earlier depending on
fluctuations in the outstanding balances of loans in the portfolio and other
factors. As of December 31, 1996, up to $365 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 of the senior series certificates ("Series C") were
issued. The proceeds were used, in conjunction with existing cash, to retire
$200 million in Series A certificates, which were outstanding as of December 31,
1995. The $30 million subordinated certificates were issued by the Company in
April 1995 via a private placement. 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 approximately $15 million
outstanding under it as of December 31, 1996. The commercial finance operation's
unsecured revolving line of credit is with a syndicated bank group that
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presently permits borrowings of up to $400 million, which includes a revolving
credit facility of $300 million expiring August 1998 and a term loan of $100
million maturing 2001. The balance outstanding at December 31, 1996 of the
revolving credit facility and the term loan was $123 million and $100 million,
respectively, with a weighted average interest rate of 6.11%. This credit line
is primarily used to finance assets which are not included in the Company's
asset securitization program.
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 1996, stockholders' dividends totaling $15.0 million were paid.
Stockholders' dividends declared aggregated $15.8 million, $13.1 million and
$11.5 million during 1996, 1995 and 1994, 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, 1996 without prior regulatory approval is
approximately $62.6 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 $10 million was outstanding as
of December 31, 1996. 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
that commenced on April 1, 1996 and is secured by certain shares held by the
ESOP. The balance outstanding at December 31, 1996 was $11.7 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 average rate at December 31, 1996 was
6.51%.
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 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 proceeds
from the sale of the Junior Subordinated Debentures were used to repay
approximately $50 million in revolving bank line of credit indebtedness, with
the remainder used for general corporate purposes. 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 $301,245,000
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.
Net cash provided by (used in) operating activities of continuing
operations was $(96.0) million, $39.5 million and $68.0 million for the years
ended December 31, 1996, 1995 and 1994, respectively. Net cash
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37
provided by (used in) operating activities decreased in 1996 as compared to 1995
due primarily to a decrease in claims and policy liabilities, a lower
amortization of policy acquisition costs, higher discount amortization on fixed
maturity investments, and a decrease in other liabilities due primarily to the
settlement of accrued operating costs. These conditions were partially offset by
higher net income, lower policy acquisition costs deferred, higher depreciation
and amortization, and an increase in the change in accrued investment income.
The decrease in claims and policy liabilities, the lower amortization of policy
acquisition costs, and the lower policy acquisition costs deferred resulted
primarily from lower premium volume in the Company's workers' compensation
insurance business. The higher discount amortization on fixed maturity
investments is due mainly to an acceleration of discount amortization on certain
mortgage-backed securities during 1996. The higher depreciation and amortization
in 1996 is due primarily to amortization on certain deferred stock-based
compensation programs awarded in 1996. (See Note L of Notes to Consolidated
Financial Statements.) The significant increase in the change in accrued
investment income in 1996 as compared to 1995 is due primarily to the 1995
acquisition of Casualty which resulted in a significant increase in the accrual
of investment income for 1995 and thereby negatively impacted net cash provided
by operating activities in 1995. Net cash provided by (used in) operating
activities decreased in 1995 over 1994 due primarily to the following items: (i)
a smaller net decrease in agents' balances and reinsurance recoverables; (ii)
the previously mentioned 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 Note F 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 (used in) investing activities increased to $229.8
million in 1996 from $(514.0) million and $(551.1) million for 1995 and 1994,
respectively. The increase in net cash provided by (used in) investing
activities in 1996 as compared to 1995 is due principally to a decrease in
investment purchases, net of sales, maturities, and calls; the February 1995
purchase of Casualty for a net cash disbursement of $255.8 million; and an
increase in receipts from repayments of loans. These conditions were partially
offset by an increase in loan originations. The significant decrease in
short-term and other investments of $376.0 million and the significant level of
securities purchased in 1995, was due primarily to the effects of investing the
acquired short-term investment portfolio of Casualty into long-term securities.
Net cash provided by (used in) investing activities increased 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 provided by (used in) financing activities was $(118.0) million,
$483.0 million and $485.6 million for 1996, 1995 and 1994, respectively. Net
cash provided by (used in) financing activities decreased in 1996 as compared to
1995, due primarily to lower long-term debt proceeds, net of repayments; the
payment in 1996 of $363.4 million in settlement of certain reinsurance and
assumption agreements within the life insurance operation which became effective
January 1, 1996 between the Company and a reinsurer (see "Financial Services");
a decrease in annuity contract receipts, net of contract withdrawals; and an
increase in deferred compensation plans. These conditions were partially offset
by a decrease in the repayments of short-term debt, net of proceeds, an increase
in thrift deposits and the impact of the proceeds from the sale of 9% Trust
Originated Preferred Securities(SM) on March 1, 1996 in a public offering by the
Trust. The lower long-term debt proceeds and the decrease in repayments of
short-term debt is due primarily to a reclassification in 1995 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. The increase in repayments
of long-term debt in 1996 is due principally to the repayment of $50 million in
revolving bank line of credit indebtedness, which was paid out of the proceeds
of the Company's sale of 9% Junior Subordinated Debentures in March 1996. The
increase in deferred
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compensation plans is due primarily to the repurchase by the Company of its
Common Stock in the first quarter of 1996 pursuant to certain deferred
compensation programs. Net cash provided by financing activities decreased
modestly in 1995 as compared to 1994, due mainly 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, net of contract withdrawals.
The amortized cost of the Company's invested assets were $1.48 billion,
$1.91 billion, and $.99 billion at December 31, 1996, 1995 and 1994,
respectively. The approximate $430 million decrease in 1996 is due principally
to the $363.4 million settlement of certain reinsurance and assumption
agreements within the life insurance operation which became effective January 1,
1996 (see "Financial Services"); $96.0 million in cash flow used in operating
activities; $202.9 million in loan originations, net of loan repayments; $89.2
million in repayments of short-term and long-term debt, net of debt proceeds;
and $28.2 million used to fund certain deferred compensation plans. These
conditions were partially offset by $100 million in proceeds from the public
offering on March 1, 1996 of 9% Trust Originated Preferred Securities(SM) by a
subsidiary of the Company, $188.0 million in net thrift and loan deposit
increases and $88.4 million in annuity contract receipts, net of withdrawals.
Contributing to the 1995 $.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. 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." (See Note C
of Notes to Consolidated Financial Statements.)
The Company's property and casualty premium to surplus ratio for the year
ended December 31, 1996 was 1.2 to 1, which is within industry guidelines. The
FDIC has established certain capital and liquidity standards for its member
institutions, and the Company's thrift and loan subsidiary was in compliance
with these standards as of December 31, 1996. (See "Item 1.
Business -- Regulation -- Thrift and Loan Regulation.") In August 1994 an
additional $23 million was contributed to the capital of this subsidiary 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.
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 adopted FASB
121 in the first quarter of 1996 and the effect of adoption was not 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;
however, for 1996, the pro forma effect was not material.
In February 1997, the FASB issued Statement No. 128 ("FASB 128"), "Earnings
Per Share and Disclosure of Information about Capital Structure" which is
effective for periods ending after December 15, 1997. Under FASB 128, primary
earnings per share, which currently includes the dilutive effect of stock
options, will be replaced by basic earnings per share, which excludes the
dilutive effect of stock options. Fully diluted shares would not change
significantly but would be renamed diluted earnings per share. All previously
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recorded earnings per share amounts will be required to be restated to conform
to the new standard. The Company has not determined the earnings per share
impact of adopting the new standard.
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.
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 "Compliance with Section 16(a) of the
Securities and Exchange Act of 1934" in the Company's Proxy Statement for the
1997 Annual Meeting of Stockholders is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the subheadings "Election of Directors,
"Compensation of Directors," "Executive Officers 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-F"
in the Company's Proxy Statement for the 1997 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 1997 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 1997 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) and (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. (Filed as Exhibit No.
3.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
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. 4.4 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. (Filed as Exhibit No. 4.3 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007, and incorporated herein by reference.)
4.4 Declaration of Trust among the Registrant, the Regular Trustees and The Chase
Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee. (Filed
as Exhibit No. 4.4 to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1995, Commission File Number 1-8007, and incorporated herein by
reference.)
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. (Filed as Exhibit No. 4.5 to Annual Report
on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number
1-8007, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
4.6 Preferred Securities Guarantee Agreement between the Registrant and The Chase
Manhattan Bank, N.A., a national banking association, as Preferred Guarantee
Trustee. (Filed as Exhibit No. 4.6 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number 1-8007, and incorporated
herein by reference.)
4.7 Common Securities Guarantee Agreement by the Registrant. (Filed as Exhibit No. 4.7
to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
4.8 Form of Preferred Securities. (Included in Exhibit 4.5). (Filed as Exhibit No. 4.8
to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
4.9 Form of 9% Junior Subordinated Debenture. (Included in Exhibit 4.3). (Filed as
Exhibit No. 4.9 to Annual Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)
10.1 Fremont General Corporation Employee Stock Ownership Plan as amended. (Filed as
Exhibit No. 10.1 to Annual Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)
10.2 Amended and Restated Trust Agreement for Fremont General Corporation Employee
Stock Ownership Plan. (Filed as Exhibit No. 10.2 to Annual Report on Form 10-K,
for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
10.3 Fremont General Corporation and Affiliated Companies Investment Incentive Program
as amended. (Filed as Exhibit No. 10.3 to Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
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. (Filed as Exhibit
No. 10.4 to Annual Report on Form 10-K, for the fiscal year ended December 31,
1995, Commission File Number 1-8007, and incorporated herein by reference.)
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. (Filed as Exhibit No. 10.5 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007, and incorporated herein by reference.)
10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the Senior
Supplemental Retirement Plan of the Company, as amended. (Filed as Exhibit No.
10.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
10.7 Senior Supplemental Retirement Plan, as amended. (Filed as Exhibit No. 10.7 to
Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
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
Number 1-8007, and incorporated herein by reference.)
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EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
10.8(b) Amendment to Excess Benefit Plan of the Company. (Filed as Exhibit No. 10.8 to
Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
10.8(c) Trust Agreement for Excess Benefit Plan. (Filed as Exhibit No. 10.8 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File
Number 1-8007, and incorporated herein by reference.)
10.9 Amended Non-Qualified Stock Option Plan of 1989 of the Company and related
agreements.
10.10(a) Long-Term Incentive Compensation Plan of the Company -- Senior Executive Plan.
(Filed as Exhibit No. 10.10(a) on Form 10-Q for the period ended September 30,
1996, Commission File Number 1-8007, and incorporated herein by reference.)
10.10(b) Long-Term Incentive Compensation Plan of the Company (Filed as Exhibit No.
10.10(b) on Form 10-Q for the period ended September 30, 1996, Commission File
Number 1-8007, and incorporated herein by reference.)
10.11 1995 Restricted Stock Award Plan as amended and forms of agreement thereunder.
(Filed as Exhibit No. 4.1 to Registration Statement on Form S-8/S-3 File No.
333-17525 which was filed on December 10, 1996, and incorporated herein by
reference.)
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. (Filed as Exhibit No. 10.12 to Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.)
10.13(a) 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.)
10.13(b) First Amendment to Employment Agreement between the Company and James A. McIntyre.
10.14(a) Employment Agreement between the Company and Louis J. Rampino. (Filed as Exhibit
No. 10.14 to Annual Report on Form 10-K, for the fiscal year ended December 31,
1995, Commission File Number 1-8007, and incorporated herein by reference.)
10.14(b) Employment Agreement between the Company and Wayne R. Bailey. (Filed as Exhibit
No. 10.14 to Annual Report on Form 10-K, for the fiscal year ended December 31,
1995, Commission File Number 1-8007, and incorporated herein by reference.)
10.15 Management Continuity Agreement between the Company and Raymond G. Meyers. (Filed
as Exhibit No. 10.15 to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1995, Commission File Number 1-8007, and incorporated herein by
reference.)
10.16 1996 Management Incentive Compensation Plan of the Company. (Filed as Exhibit No.
10.16 to Quarterly Report on Form 10-Q, for the period ended March 31, 1996,
Commission File Number 1-8007, and incorporated herein by reference.)
10.17 Continuing Compensation Plan for Retired Directors. (Filed as Exhibit No. 10.17 to
Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
10.18 Non-Employee Directors' Deferred Compensation Plan. (Filed as Exhibit No. 10.18 to
Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
10.19(a) Amended and Restated Agreement among Fremont General Corporation, Various Lending
Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as Exhibit No.
(10)(xiii) to Quarterly Report on Form 10-Q for the period ended September 30,
1995, Commission File Number 1-08007, and incorporated herein by reference.)
41
43
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
10.19(b) Amendment to Credit Agreement. (Filed as Exhibit No. 10.19(b) to Annual Report on
Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number
1-8007, and incorporated herein by reference.)
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. (Filed as Exhibit No.
10.20 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by reference.)
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,
1996.
42
44
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
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, 1996 and 1995...................... 45
Consolidated Statements of Income for the years ended December 31, 1996, 1995 and
1994........................................................................... 46
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994....................................................................... 47
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1996, 1995 and 1994............................................... 48
Notes to Consolidated Financial Statements........................................ 49
Schedules:
II -- Condensed Financial Information of Registrant.............................. 71
III -- Supplementary Insurance Information........................................ 75
IV -- Reinsurance................................................................ 76
V -- Valuation and Qualifying Accounts........................................... 77
VI -- Supplemental Information Concerning Property/Casualty Insurance
Operations..................................................................... 78
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Fremont
General Corporation and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1996, 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, 1997
44
46
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
-------------------------
1996 1995
---------- ----------
(THOUSANDS OF DOLLARS)
Securities available for sale at fair value:
Fixed maturity investments
(cost: 1996 -- $1,004,248; 1995 -- $1,255,434)................. $1,005,147 $1,296,550
Non-redeemable preferred stock
(cost: 1996 -- $351,812; 1995 -- $285,337)..................... 354,958 277,451
---------- ----------
Total securities available for sale....................... 1,360,105 1,574,001
Loans receivable.................................................... 1,688,040 1,499,043
Short-term investments.............................................. 118,582 362,163
Other investments................................................... 5,623 1,726
---------- ----------
TOTAL INVESTMENTS AND LOANS............................... 3,172,350 3,436,933
Cash................................................................ 55,378 39,559
Accrued investment income........................................... 26,794 30,396
Premiums receivable and agents' balances............................ 99,404 107,973
Reinsurance recoverable on paid losses.............................. 13,173 9,422
Reinsurance recoverable on unpaid losses............................ 438,459 289,461
Deferred policy acquisition costs................................... 25,551 76,638
Costs in excess of net assets acquired.............................. 67,287 70,656
Deferred income taxes............................................... 64,035 78,619
Other assets........................................................ 79,881 75,240
Assets held for discontinued operations............................. 265,200 262,502
---------- ----------
TOTAL ASSETS.............................................. $4,307,512 $4,477,399
========== ==========
LIABILITIES
Claims and policy liabilities:
Losses and loss adjustment expenses............................... $1,256,345 $1,455,692
Life insurance benefits and liabilities........................... 202,465 374,724
Unearned premiums................................................. 87,422 100,481
Dividends to policyholders........................................ 33,093 40,822
---------- ----------
TOTAL CLAIMS AND POLICY LIABILITIES....................... 1,579,325 1,971,719
Reinsurance premiums payable and funds withheld..................... 4,106 5,452
Other liabilities................................................... 65,574 81,371
Thrift deposits..................................................... 1,114,352 926,312
Short-term debt..................................................... 16,896 72,191
Long-term debt...................................................... 636,456 693,276
Liabilities of discontinued operations.............................. 231,686 228,988
---------- ----------
TOTAL LIABILITIES......................................... 3,648,395 3,979,309
Commitments and contingencies
Company-obligated mandatorily redeemable preferred securities of
subsidiary Trust holding solely Company junior subordinated
debentures........................................................ 100,000 --
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share -- Authorized: 49,500,000
shares; Issued and outstanding: (1996 -- 28,093,000 and
1995 -- 25,393,000)............................................... 28,093 25,393
Additional paid-in capital.......................................... 168,452 110,103
Retained earnings................................................... 419,136 347,607
Deferred compensation............................................... (59,193) (6,612)
Net unrealized gain on investments, net of deferred taxes........... 2,629 21,599
---------- ----------
TOTAL STOCKHOLDERS' EQUITY................................ 559,117 498,090
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $4,307,512 $4,477,399
========== ==========
See notes to consolidated financial statements.
45
47
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS, EXCEPT PER
SHARE DATA)
REVENUES
Property and casualty premiums earned...................... $486,860 $606,917 $433,584
Net investment income...................................... 123,531 119,523 76,821
Loan interest.............................................. 163,765 162,992 113,382
Realized investment gains (losses)......................... (1,658) 1 (315)
Other revenue.............................................. 23,306 34,381 29,676
-------- -------- --------
Total Revenues................................... 795,804 923,814 653,148
EXPENSES
Losses and loss adjustment expenses........................ 335,407 461,333 273,599
Policy acquisition costs................................... 96,177 126,099 86,990
Provision for loan losses.................................. 13,885 14,575 11,980
Other operating costs and expenses......................... 107,260 120,963 90,078
Dividends to policyholders................................. -- -- 49,654
Interest expense........................................... 114,766 100,517 59,276
-------- -------- --------
Total Expenses................................... 667,495 823,487 571,577
-------- -------- --------
Income before taxes........................................ 128,309 100,327 81,571
Income tax expense......................................... 41,021 32,305 25,759
-------- -------- --------
NET INCOME....................................... $ 87,288 $ 68,022 $ 55,812
======== ======== ========
PER SHARE DATA:
Net Income:
Primary.................................................. $ 3.26 $ 2.61 $ 2.16
Fully diluted............................................ 2.73 2.17 1.82
See notes to consolidated financial statements.
46
48
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994
----------- ----------- ----------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income.................................................... $ 87,288 $ 68,022 $ 55,812
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................. 4,043 7,495 32,411
Change in accrued investment income...................... 3,602 (21,186) 5,349
Change in claims and policy liabilities.................. (211,482) (72,824) (43,741)
Amortization of policy acquisition costs................. 96,177 126,099 86,990
Policy acquisition costs deferred........................ (93,478) (148,365) (91,048)
Provision for deferred income taxes...................... 24,798 22,810 (4,391)
Provision for loan losses................................ 13,885 14,575 11,980
Depreciation and amortization............................ 26,592 20,334 15,709
Net amortization on fixed maturity investments........... (21,976) (1,793) 1,001
Realized investment (gains) losses....................... 1,658 (1) 315
Change in other assets and liabilities................... (27,116) 24,323 (2,338)
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES........................................ (96,009) 39,489 68,049
INVESTING ACTIVITIES
Securities available for sale:
Purchases of securities..................................... (1,527,408) (2,773,842) (975,495)
Sales of securities......................................... 1,679,631 2,000,772 1,302,486
Securities matured or called................................ 52,806 101,957 61,752
Securities held to maturity:
Purchases of securities..................................... -- (117,660) (206,416)
Sales of securities......................................... -- -- --
Securities matured or called................................ -- 5,464 --
Decrease (increase) in short-term and other investment........ 239,684 615,705 (116,668)
Loan originations and bulk purchases funded................... (644,193) (458,801) (727,715)
Receipts from repayments of loans............................. 441,311 377,768 121,404
Acquisition of Casualty Insurance Company, less cash
acquired.................................................... -- (255,803) --
Purchases of property and equipment........................... (12,035) (9,527) (10,402)
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES........................................ 229,796 (513,967) (551,054)
FINANCING ACTIVITIES
Proceeds from short-term debt................................. 14,929 30,134 140,813
Repayments of short-term debt................................. (72,191) (199,268) (46,646)
Proceeds from long-term debt.................................. 79,058 325,000 26,000
Repayments of long-term debt.................................. (111,004) (42,808) (12,500)
Net increase in thrift deposits............................... 188,040 179,335 334,661
Annuity contract receipts..................................... 132,550 217,648 57,929
Annuity contract withdrawals.................................. (44,184) (18,874) (5,952)
Settlement under life insurance reinsurance agreements........ (363,415) -- --
Proceeds from sale of Preferred Securities.................... 100,000 -- --
Dividends paid................................................ (15,016) (12,618) (11,344)
Stock options exercised....................................... 1,428 80 22
Purchase of fractional shares................................. -- (25) --
Decrease (increase) in deferred compensation plans............ (28,163) 4,375 2,647
---------- ---------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................................ (117,968) 482,979 485,630
---------- ---------- ---------
INCREASE IN CASH.............................................. 15,819 8,501 2,625
Cash at beginning of year................................... 39,559 31,058 28,433
---------- ---------- ---------
CASH AT END OF YEAR........................................... $ 55,378 $ 39,559 $ 31,058
========== ========== =========
See notes to consolidated financial statements.
47
49
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NET
ADDITIONAL UNREALIZED
COMMON PAID-IN RETAINED DEFERRED GAIN (LOSS) ON
STOCK CAPITAL EARNINGS COMPENSATION INVESTMENTS TOTAL
------- ---------- -------- ------------ -------------- --------
(THOUSANDS OF DOLLARS)
Balance at January 1, 1994.............. $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) -- -- -- --
Stock options exercised............... 3 77 -- -- -- 80
ESOP shares allocated................. -- -- -- 4,375 -- 4,375
Other adjustments..................... -- 728 (12) -- -- 716
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
Net income for 1996................... -- -- 87,288 -- -- 87,288
Cash dividends to stockholders........ -- -- (15,759) -- -- (15,759)
Conversion of LYONs................... 1,399 29,127 -- -- -- 30,526
Stock options exercised............... 57 (1,654) -- 3,025 -- 1,428
Shares issued or acquired for employee
benefit plans...................... 1,244 31,291 -- (64,918) -- (32,383)
Amortization of restricted stock...... -- -- -- 5,277 -- 5,277
ESOP shares allocated less additional
shares purchased................... -- 9 -- 4,210 -- 4,219
Other adjustments..................... -- (424) -- (175) -- (599)
Net change in unrealized gain (loss)
on investments, net of deferred
taxes.............................. -- -- -- -- (18,970) (18,970)
------- -------- -------- -------- ------ --------
Balance at December 31, 1996............ $28,093 $ 168,452 $419,136 $(59,193) $ 2,629 $559,117
======= ======== ======== ======== ====== ========
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 is engaged domestically in select insurance and
financial services businesses. Fremont General's insurance business includes one
of the largest underwriters of workers' compensation insurance in the nation.
The Company also provides medical malpractice insurance. Fremont General's
financial services business includes commercial real estate lending, residential
real estate lending, commercial finance and premium financing. Workers'
compensation insurance has accounted for over 90% of property and casualty
premiums earned. Workers' compensation premiums are divided between the western
region, primarily California (1996 - 37%; 1995 - 51%), and the mid-west region,
primarily Illinois (1996 - 63%; 1995 - 49%). Prior to 1995, substantially all of
the premium revenue was derived from the California market. Real estate lending
represents over 56% of loan interest revenues (1995 - 50%; 1994 - 51%) and
represents both commercial and residential lending secured by real estate
located primarily in California. Commercial finance accounts for substantially
all of the remaining loan interest revenues (1995 - 44%; 1994 - 44%) and
represents asset-based loans to middle market companies nationwide (35% 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 N for the accounting treatment of discontinued
operations.)
Use of Estimates: The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Investments: Fixed maturity investments represent bonds and redeemable
preferred stocks that mature more than one year after the purchase date.
Non-redeemable preferred stocks are equity securities, the majority of which do
not include adjustable dividend yield provisions. 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 primarily 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, allowances for credit losses have been 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 allowances
for credit losses on these loans were 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 $7,401,000 and $9,630,000 at December 31, 1996 and 1995, 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, 1996 is $90,148,000 of workers'
compensation accident and health permanent disability and death reserves which
have been discounted at 5%. These reserves arose from the acquisition in 1995 of
Casualty Insurance Company ("Casualty"). (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 investmenttype products represent the premiums received
plus accumulated interest, less mortality and other administrative charges under
the contracts and before applicable surrender charges. Policy benefits and
claims that are charged to expense include benefit claims incurred in excess of
related policy account balances. (See Note F.)
50
52
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
prior to the transactions described in Note F, have been deferred. These life
and annuity deferred acquisition costs were amortized over anticipated gross
margins for such contracts prior to their reinsurance. As a result of the
transactions described in Note F, substantially all acquisition costs on life
insurance and annuity contracts have been eliminated.
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 of investment certificates at the
Company's California thrift and loan subsidiary. Such balances are credited with
interest at rates ranging from 2.96% to 8.81% at December 31, 1996. The
estimated fair value of the thrift deposits was $1,115,443,000 at December 31,
1996.
Intangibles: The excess of the costs of acquisitions over net assets
acquired (net of accumulated amortization: 1996 - $20,882,000 ; 1995 -
$17,513,000) 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: 1996 - $697,000; 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: 1996 - 26,762,000; 1995 - 26,079,000 and 1994 -
25,823,000. Common stock options granted to certain key members of management
are considered common stock equivalents for the computation of primary earnings
per share. The pro forma dilutive effect on primary earnings per share of
conversions of debt to common stock during 1996, adjusted to give effect of such
conversions at the beginning of the period, was not material.
For the computation of fully-diluted earnings per share, common stock
options (see Note K) and convertible securities (see Note I) had a dilutive
effect of $0.53, $0.44 and $0.34 per share for 1996, 1995 and 1994,
respectively. Fully-diluted earnings per share were computed based on
33,630,000, 33,343,000 and 33,034,000 weighted average number of shares
outstanding for 1996, 1995 and 1994, 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, real estate 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
geographic regions. 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 31, 1996, Employers Reassurance Corporation was the only
reinsurer that accounted for more than 10% of total reinsurance recoverables
while Continental Insurance Company and General Reinsurance Corporation were the
only reinsurers that accounted for more than 10% of total property and casualty
reinsurance recoverables. The remaining reinsurance recoverables were spread
over 159 reinsurers.
Fair Values of Financial Instruments: The Company uses various methods and
assumptions in estimating its fair value disclosures for financial instruments.
For fixed maturity investments and preferred
51
53
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, real estate loans
and other fixed rate loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for similar accounts or loans to
borrowers with similar credit ratings.
For short-term debt, the carrying amount of the Company's borrowings
approximates fair value. The fair value of the Company's long-term debt and
Preferred Securities 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, 1996 are summarized in the following table:
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
---------- ----------
(THOUSANDS OF DOLLARS)
ASSETS
Fixed maturity investments (Note C)............... $1,005,147 $1,005,147
Non-redeemable preferred stock (Note C)........... 354,958 354,958
Loans receivable (Note D)......................... 1,688,040 1,705,360
LIABILITIES
Thrift deposits (Note A).......................... 1,114,352 1,115,443
Short-term debt (Note H).......................... 16,896 16,896
Long-term debt (Note I)........................... 636,456 680,944
Company-obligated manditorily redeemable preferred
securities of subsidiary Trust holding solely
Company junior subordinated deventures (Notes
J).............................................. 100,000 101,000
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 adopted FASB 121 in the first quarter of
1996; however, the effect of adoption was not 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;
however, for 1996, the pro forma effect was not material.
52
54
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In February 1997, the FASB issued Statement No. 128 ("FASB 128"), "Earnings
Per Share and Disclosure of Information about Capital Structure" which is
effective for periods ending after December 15, 1997. Under FASB 128, primary
earnings per share, which currently includes the dilutive effect of stock
options, will be replaced by basic earnings per share, which excludes the
dilutive effect of stock options. Fully diluted shares would not change
significantly but would be renamed diluted earnings per share. All previously
recorded earnings per share amounts will be required to be restated to conform
to the new standard. The Company has not determined the earnings per share
impact of adopting the new standard.
Reclassifications: Certain 1995 and 1994 amounts have been reclassified to
conform to the 1996 presentation.
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, underwrites workers' compensation
insurance primarily in Illinois. Casualty is currently the largest underwriter
of workers' compensation insurance in Illinois and is licensed in six states.
The following schedule summarizes certain pro forma 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
COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Available for sale:
At December 31, 1996
United States Treasury securities and
obligations of other US government agencies
and corporations............................ $ 70,039 $ 6,621 $ 346 $ 76,314
Mortgage-backed securities.................... 324,011 2,202 17,985 308,228
Corporate securities
Banks....................................... 35,000 193 38 35,155
Financial................................... 115,382 3,416 355 118,443
Transportation.............................. 27,163 396 -- 27,559
Utilities................................... 10,939 234 -- 11,173
Industrial.................................. 421,714 8,958 2,397 428,275
----------- -------- -------- -----------
Total.................................... 1,004,248 22,020 21,121 1,005,147
Non-redeemable preferred stock................ 351,812 7,477 4,331 354,958
----------- -------- -------- -----------
Total.................................... $1,356,060 $ 29,497 $ 25,452 $1,360,105
=========== ======== ======== ===========
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
=========== ======== ======== ===========
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, 1996
by contractual maturity, are summarized in the following table:
AMORTIZED
COST FAIR VALUE
---------- ----------
(THOUSANDS OF DOLLARS)
Available for sale:
Over 1 year through 5 years......................... $ 77,192 $ 78,018
Over 5 years through 10 years....................... 346,217 354,346
Over 10 years....................................... 256,828 264,555
Mortgage-backed securities.......................... 324,011 308,228
----------- -----------
Totals...................................... $1,004,248 $1,005,147
=========== ===========
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,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Proceeds from sales.................... $1,679,631 $2,000,772 $1,302,486
Gross realized gains................... 10,012 20,923 13,987
Gross realized losses.................. 11,670 20,922 14,302
Investment income by major category of investments is summarized in the
following table:
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Fixed maturities....................... $ 85,352 $ 75,581 $ 48,677
Non-redeemable preferred stock......... 25,545 25,661 19,407
Short-term............................. 14,646 19,354 9,520
Other.................................. 147 109 206
--------- --------- --------
125,690 120,705 77,810
Investment expenses.................... 2,159 1,182 989
--------- --------- --------
Net investment income........ $ 123,531 $ 119,523 $ 76,821
========= ========= ========
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, 1996,
all investments held by the Company are current as to principal and interest,
with no investment in default. Included in investments is $20,196,000 of fixed
maturity investments and $37,971,000 of non-redeemable preferred stock of Chase
Manhattan Corporation that in total exceeds 10% of stockholders' equity at
56
58
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 1996. 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, 1996 is summarized in the following table:
AAA (including US government obligations)...... 29%
AA............................................. 5
A.............................................. 31
BBB............................................ 34
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 $841,093,000
at December 31, 1996 were on deposit with regulatory authorities in compliance
with legal requirements related to the insurance operations.
The Company currently holds no derivative financial instruments.
NOTE D -- LOANS RECEIVABLE
Loans receivable consist of commercial and residential real estate loans,
commercial finance loans and insurance premium notes receivable. Commercial and
residential real estate loans are secured by real property. Commercial finance
loans are asset-based loans that are secured by the borrowers' eligible trade
accounts receivable, inventories, equipment and real estate. Insurance premium
notes receivable are collateralized by security interests in return premiums.
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 possible loan losses of $24,759,000 and
$17,498,000 at December 31, 1996, and 1995, respectively. Included in loans
receivable are real estate loans which have been placed on non-accrual status
totaling $17,439,000 and $23,544,000 at December 31, 1996 and 1995,
respectively. Real estate acquired in foreclosure, which is classified under
other assets, totaled $10,016,000 and $4,942,000 at December 31, 1996 and 1995,
respectively, and is recorded at the lower of the carrying value of the loan or
the estimated fair value less disposal costs.
Commercial finance loans are stated at the unpaid balance of cash advanced
net of allowance for possible loan losses of $11,933,000 and $12,554,000 at
December 31, 1996 and 1995, respectively. The amount of cash advanced under
these loans is based on stated percentages of the borrowers' eligible
collateral. 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 $2,346,000 and $9,344,000 at December 31,
1996 and 1995, respectively. The 1996 balance consists of three loans. The 1995
balance consists of three loans, including one with a balance of $8,881,000.
57
59
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Commercial finance loans are shown net of participation by other financial
institutions. There were no participations by other financial institutions at
December 31, 1996 and $8,119,000 at December 31, 1995. The participation
agreements are generally made for a fixed percentage of the commercial loan
balance and are made without recourse to the Company.
Insurance premium notes receivable mature within one year and are net of
allowances for possible loan losses of $1,055,000 and $1,024,000 at December 31,
1996 and 1995, 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,
----------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
Balance, beginning of year................. $ 31,781 $ 27,406 $ 25,222
Provision for loan losses.................. 13,885 14,575 11,980
Recoveries................................. 1,394 2,961 853
Charge-offs................................ (11,143) (13,161) (14,254)
Reserves established with portfolio
acquisitions............................. 1,830 -- 3,605
-------- -------- --------
Balance, end of year....................... $ 37,747 $ 31,781 $ 27,406
======== ======== ========
At December 31, 1996, the recorded investment in loans that are considered
to be impaired under FASB 114 was $22,534,000, of which $19,785,000 were on a
non-accrual basis. The Company's policy is to consider a loan impaired when,
based on current information and events, it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of the loan
agreement. Evaluation of a loan's collectibility is based on the present value
of expected cash flows or the fair value of the collateral, if the loan is
collateral dependent. As a result of charge-offs, these impaired loans do not
necessarily have a related specific reserve for credit losses allocated to them.
However, $19,712,000 of loans considered impaired do have an allowance that
totaled $2,195,000. The average net investment in impaired loans was $26,833,000
and $31,325,000 for 1996 and 1995, respectively. Interest income of $463,000 has
been recognized on the cash basis of accounting on loans classified as impaired
during the year ended December 31, 1996.
The carrying amounts at December 31, 1996 and 1995 and estimated fair
values at December 31, 1996 of loans receivable are summarized in the following
table:
1996 1995
------------------------- ----------
CARRYING ESTIMATED CARRYING
AMOUNT FAIR VALUE AMOUNT
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Real estate loans...................... $1,122,578 $1,139,898 $ 980,283
Commercial finance, premium finance and
other loans.......................... 618,503 618,503 578,589
---------- ---------- ----------
1,741,081 1,758,401 1,558,872
Purchase discount and deferred fees.... (15,294) (15,294) (28,048)
Allowance for possible loan losses..... (37,747) (37,747) (31,781)
---------- ---------- ----------
Loans receivable....................... $1,688,040 $1,705,360 $1,499,043
========= ========= =========
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,
---------------------------------------
1996 1995 1994
---------- ---------- ---------
(THOUSANDS OF DOLLARS)
Reserves for losses and LAE, net of
reinsurance recoverable, at beginning
of year.............................. $1,185,706 $ 610,510 $ 644,190
Incurred losses and LAE:
Provision for insured events of the
current year, net of
reinsurance....................... 334,657 459,951 290,833
Increase (decrease) in provision for
insured events of prior years, net
of reinsurance.................... 750 1,382 (17,234)
---------- ---------- ---------
Total incurred losses and
LAE........................ 335,407 461,333 273,599
Payments:
Losses and LAE, net of reinsurance,
attributable to insured events of:
Current year.................... (108,247) (132,358) (70,505)
Prior years..................... (401,980) (358,423) (236,774)
---------- ---------- ---------
Total payments............... (510,227) (490,781) (307,279)
---------- ---------- ---------
Subtotal................... 1,010,886 581,062 610,510
Liability for losses and LAE for
Casualty Insurance Company acquired
during the year...................... -- 604,644 --
---------- ---------- ---------
Reserves for losses and LAE, net of
reinsurance recoverable, at end of
year................................. 1,010,886 1,185,706 610,510
Reinsurance recoverable for losses and
LAE, at end of year.................. 245,459 269,986 136,151
---------- ---------- ---------
Reserves for losses and LAE, gross of
reinsurance recoverable, at end of
year................................. $1,256,345 $1,455,692 $ 746,661
========= ========= =========
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,
-------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
(THOUSANDS OF DOLLARS)
Direct................... $462,881 $470,111 $564,675 $580,442 $431,500 $438,482
Assumed.................. 18,839 25,075 41,613 55,572 4,264 4,224
Ceded.................... 7,536 8,326 22,498 29,097 9,332 9,122
-------- -------- -------- -------- -------- --------
Net property and casualty
premiums............... $474,184 $486,860 $583,790 $606,917 $426,432 $433,584
======== ======== ======== ======== ======== ========
The effect of ceded reinsurance on losses and loss adjustment expenses was
a decrease in expenses of $13,617,000, $19,651,000 and $7,456,000 for the three
years ended December 31, 1996, 1995 and 1994, respectively.
The Company entered into reinsurance and assumption agreements with a
reinsurer whereby substantially all of the Company's universal life insurance
and annuity business was ceded to the reinsurer effective December 31, 1995, and
all the annuity business was ceded to the reinsurer effective January 1, 1996.
As a result of these agreements, substantially all of the Company's life
insurance operations have been disposed of with no significant gain or loss
recorded. Included in life insurance benefits and liabilities and reinsurance
recoverable on unpaid losses in the accompanying balance sheet is approximately
$193,000,000 related to one of the reinsurance contracts that continues to be on
a coinsurance basis.
NOTE G -- INCOME TAXES
The major components of income tax expense (benefit) are summarized in the
following table:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
Federal income tax
Current..................................... $13,233 $ 6,964 $30,132
Deferred.................................... 24,798 22,810 (4,391)
------- ------- -------
38,031 29,774 25,741
State income tax.............................. 2,990 2,531 18
------- ------- -------
Total income tax provision.................. $41,021 $32,305 $25,759
======= ======= =======
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,
-------------------------------
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
Federal income tax at 35%..................... $44,908 $35,114 $28,550
Effects of:
Dividends received deduction................ (6,238) (5,678) (3,865)
Dividends in Employee Stock Ownership Plan
shares................................... (357) (432) (455)
Amortization of costs in excess of net
assets acquired.......................... 1,269 839 366
Other....................................... (1,551) (69) 1,145
------- ------- -------
Federal income tax provision.................. $38,031 $29,774 $25,741
======= ======= =======
Net payments made for federal and state income taxes were $778,000,
$13,429,000, and $18,471,000 for 1996, 1995 and 1994, respectively.
The deferred income tax balance includes the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and for income tax purposes. The components of the Company's
deferred tax assets as of December 31, 1996 and 1995 are summarized in the
following table:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
Discount on liabilities for losses and loss adjustment
expenses............................................. $ 57,915 $ 68,619
Allowance for possible loan losses and other doubtful
accounts............................................. 14,578 12,507
Dividends to policyholders............................. 11,578 14,288
Unearned premiums...................................... 8,009 12,316
Accrued expenses....................................... 4,535 4,660
Life insurance benefits and liabilities................ 117 13,432
-------- --------
Deferred income tax asset amounts............ 96,732 125,822
Earned but unbilled premiums........................... (9,057) (3,698)
Deferred policy acquisition costs...................... (8,937) (26,814)
Deferred loan origination costs........................ (5,230) (3,832)
Accrual of market discount............................. (3,463) (1,427)
Net unrealized gain on investments..................... (1,416) (11,630)
Other, net............................................. (4,594) 198
-------- --------
Deferred income tax liability amounts........ (32,697) (47,203)
-------- --------
Net deferred income tax asset...... $ 64,035 $ 78,619
======== ========
The Company's principal deferred tax assets arise due to the discounting of
liabilities for losses and loss adjustment expenses ("loss reserves") which
delays a portion of the loss reserve deduction for income tax purposes, the
provision for doubtful loan accounts, the accrual of dividends to policyholders,
a portion of the unearned premiums, certain accrued expenses and, in 1995 and
prior years, certain life insurance benefits and liabilities. 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
61
63
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. During 1996, substantially all of the
deferred tax asset relating to the discounting of life insurance benefits and
liabilities was realized as a result of certain reinsurance agreements which
became effective January 1, 1996. (See Note F.) The recognition of the future
tax benefits relating to the allowance for possible loan losses will be realized
through future interest income earned on the related loans receivable. With
respect to the accrual of policyholders' dividends and unearned premiums, 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.
NOTE H -- SHORT-TERM DEBT
Short-term debt is summarized in the following table:
DECEMBER 31,
--------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
Asset backed $150,000,000 commercial paper facility of a
subsidiary, maturity dates through January 8, 1997
(weighted average interest rate, 1996 - 5.67%)......... $ 14,929 $ --
Commercial paper issued by a subsidiary (weighted average
interest rate, 1995 - 7.13%)........................... -- 7,191
Current portion of long-term debt........................ 1,967 65,000
------- -------
$ 16,896 $ 72,191
======= =======
At December 31, 1996, the thrift and loan subsidiary had a borrowing
capacity with the Federal Home Loan Bank of San Francisco in excess of $231
million of which there were no outstanding advances. This subsidiary has pledged
certain loans to secure any future borrowings which are available at varying
rates and terms. The commercial finance subsidiary has lines of credit totaling
$15,000,000 that expire September 30, 1997. Interest is based on the prime
lending rate. At December 31, 1996, there were no outstanding advances under
these lines of credit.
62
64
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I -- LONG-TERM DEBT
Long-term debt is summarized in the following table:
DECEMBER 31,
----------------------
1996 1995
--------- ---------
(THOUSANDS OF DOLLARS)
Fremont General Corporation:
Liquid Yield Option Notes due 2013, less discount
(1996 - $172,517; 1995 - $222,115)................ $ 128,728 $ 151,635
$200 million Revolving Credit Facility............... 10,000 85,000
Note Payable due 2002................................ 11,674 6,620
Subsidiaries:
Variable Rate Asset Backed Certificates.............. 265,000 330,000
$400 million Bank Line of Credit..................... 223,000 185,000
Other Notes Payable, interest rate - 7.25%........... 21 21
-------- --------
638,423 758,276
Less current portion................................. 1,967 65,000
-------- --------
$ 636,456 $ 693,276
======== ========
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, 1996 on the outstanding
balance of $10,000,000 was 5.94%. 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 1996 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 L) from a bank due in seven equal annual
installments commencing on April 1, 1996. 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 due 2002 is secured by certain shares of the
ESOP and the interest and principal payments are guaranteed by the Company.
Interest is based on, at the Company's option, the bank's prime lending rate,
LIBOR plus 1%, or an applicable certificate of deposit rate. The average rate at
December 31, 1996 was 6.51%.
In 1993 the Company sold in a public offering an aggregate $373,750,000
principal amount at maturity of Liquid Yield Option Notes due October 12, 2013
(Zero Coupon-Subordinated) (the "LYONs") at an issue price of $372.42 for a
total net proceeds to the Company of approximately $135,000,000. The yield to
maturity is 5% with no periodic payments of interest. Each LYON is convertible
into 19.287 shares of the Company's Common Stock and is non-callable for five
years. During 1996, holders converted an aggregate principal amount of
$72,505,000 of LYONs into 1,398,000 shares of the Company's Common Stock.
The Variable Rate Asset Backed Certificates reflect the sale of
certificates pursuant to the asset securitization program established by the
commercial finance subsidiary of the Company in 1993. As of December 31, 1996,
an aggregate $235 million of senior series and a $30 million subordinated series
of asset-backed certificates were outstanding. The interest rate on the
certificates, set monthly, ranged from LIBOR plus 0.34% to LIBOR plus 0.95% at
December 31, 1996. The securities issued in this program have a
63
65
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
scheduled maturity of three to five years but could mature earlier depending on
fluctuations in the outstanding balances of loans in the portfolio and other
factors.
This subsidiary also has an agreement for a committed bank line of credit
totaling $400 million. The total commitment includes a revolving credit facility
of $300 million expiring August 1998 and a term loan of $100 million maturing
June 2001. The balance outstanding at December 31, 1996 of the revolving credit
facility and the term loan was $123 million and $100 million, respectively, with
a weighted average interest rate of 6.11%.
The carrying amounts and the estimated fair values of long-term borrowings
at December 31, 1996 are summarized in the following table:
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(THOUSANDS OF DOLLARS)
LYONs.................................................. $128,728 $ 173,216
Variable Rate Asset Backed Certificates................ 265,000 265,000
$200 million Revolving Credit Facility................. 10,000 10,000
$400 million Bank Line of Credit....................... 223,000 223,000
Note Payable due 2002.................................. 11,674 11,674
Other Notes Payable.................................... 21 21
-------- --------
Total long-term borrowings................... $638,423 $ 682,911
======== ========
The aggregate amount of maturities on long-term debt and sinking fund
requirements are summarized in the following table (thousands of dollars):
1997.................................... $ 1,967
1998.................................... 138,696
1999.................................... 28,696
2000.................................... 207,746
2001.................................... 30,645
Thereafter................................ 230,673
--------
$ 638,423
========
Total interest payments on all debt were $101,515,000, $91,278,000, and
$49,294,000 in 1996, 1995 and 1994, respectively.
NOTE J -- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY JUNIOR SUBORDINATED DEBENTURES
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
$301,245,000 aggregate principal amount at maturity of Liquid Yield Option Notes
due 2013, and subordinate and junior to all senior
64
66
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 to the extent that the Trust
has funds available to make such payments. Trust distributions of $7,375,000 in
1996 were included in interest expense. The Company has provided for back-up
undertakings that, considered together, constitute a full and unconditional
guarantee by the Company of the Trust's obligations under the Preferred
Securities.
NOTE K -- STOCKHOLDERS' EQUITY AND RESTRICTIONS
During 1996, the Company issued 1,301,000 common shares with a fair value
of approximately $33 million to fund stock-based compensation programs. (See
Note L.)
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.
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, 1996, 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 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. Grantees vest at the rate of 25% per
year beginning on the first anniversary of the grant and expire after ten years.
The stock option activity is summarized in the following table:
NUMBER OF SHARES OPTION PRICES
---------------- -------------------
Outstanding at January 1, 1994.............. 1,433,612 $ 5.05 - $15.00
Granted................................... 367,541 14.32 - 14.62
Exercised................................. (1,545) 8.89
---------
Outstanding at December 31, 1994............ 1,799,608 5.05 - 15.00
Granted................................... 30,940 15.68
Exercised................................. (19,489) 8.89 - 13.43
Forfeited................................. (11,015) 10.81 - 15.00
---------
Outstanding at December 31, 1995............ 1,800,044 5.05 - 15.68
Exercised................................. (170,218) 5.05 - 14.62
Forfeited................................. (39,353) 8.89 - 15.68
---------
Outstanding at December 31, 1996............ 1,590,473 5.05 - 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 $62,601,000. No dividends are currently available from
the thrift and loan subsidiary.
65
67
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Net income and stockholders' equity of domestic insurance subsidiaries, as
filed with regulatory authorities on the basis of statutory accounting
practices, are summarized in the following table:
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
Statutory net income for the year.......... $122,988 $104,032 $ 48,220
Statutory stockholder's equity at year
end...................................... 438,203 321,148 250,633
NOTE L -- EMPLOYEE BENEFIT PLANS
The Company sponsors a 401(k) Plan and a leveraged Employee Stock Ownership
Plan ("ESOP"), both of which cover substantially all employees with at least one
year of service. Contribution expense for these plans amounted to $6,005,000,
$11,015,000, and $8,464,000 for 1996, 1995 and 1994, respectively, of which
$3,115,000, $8,656,000 and $5,961,000 related to the ESOP. Cash contributions to
the ESOP, which relate to 1996, 1995 and 1994, were $3,090,000, $3,000,000 and
$4,375,000, respectively. The contributions, which are generally discretionary,
are based on total compensation of the participants.
Shares pledged as collateral under a loan made to the ESOP by a bank (see
Note I) are reported as deferred compensation in the consolidated balance sheet.
The annual contributions made by the Company to the ESOP are used to repay the
loan. As the debt is repaid, shares are released from collateral and are
allocated to participants based on total compensation. Dividends received by the
ESOP on its pledged shares, amounting to $391,000, $374,000 and $545,000 in
1996, 1995 and 1994, respectively, were additionally used to service these
loans. Interest expense was $392,000, $196,000 and $34,000 for 1996, 1995 and
1994, respectively.
In May of 1996, an additional 341,000 shares of the Company's Common Stock
were acquired by the ESOP. Of the 2,880,000 total shares of Company stock owned
by the ESOP at December 31, 1996, 2,142,000 shares are allocated to participants
and 738,000 shares are not allocated to participants and are considered
unearned. Unearned shares acquired prior to January 1, 1993 (397,000 shares as
of December 31, 1996) continue to be accounted for in accordance with the
historical cost approach (AICPA Statement of Opinion 76-3). Unearned shares
acquired subsequent to December 31, 1992 (341,000 shares as of December 31,
1996) are accounted for in accordance with the current fair value approach
(AICPA Statement of Position 93-6) and are not considered outstanding for
earnings per share purposes. At December 31, 1996, the fair value of the
unearned shares accounted for under the current fair value approach was
$10,574,000.
During 1996, the Company adopted a Restricted Stock Award Plan ("RSAP") for
certain management level employees. During 1996, the Company purchased an
aggregate of 824,000 shares at an aggregate cost of approximately $20 million
and issued 1,244,000 shares with a fair value at the date of award of
approximately $33 million to fund this plan. Amounts awarded under the RSAP are
amortized over 10 years. Amortization expense for the RSAP amounted to
$5,277,000 for 1996. Unamortized amounts are reported as deferred compensation
in the consolidated balance sheet.
NOTE M -- COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a number of legal actions arising primarily
from claims made under insurance policies or in connection with previous
reinsurance agreements. Those actions have been considered in establishing the
Company's liabilities. Management and its legal counsel are of the opinion that
the settlement of those actions will not have a material effect on the Company's
financial position or results of operations.
An insurance subsidiary of the Company outsourced its data processing
operation to Electronic Data Systems in 1992. Under terms of the contract, this
subsidiary will pay a minimum $7,500,000 per year for a period of ten years,
until 2002.
66
68
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total rental expense for 1996, 1995 and 1994, was $11,120,000, $14,909,000,
and $9,115,000, 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):
1997....................................... $15,480
1998....................................... 13,761
1999....................................... 12,155
2000....................................... 9,600
2001....................................... 3,796
Thereafter................................. 4,452
-------
$59,244
=======
NOTE N -- DISCONTINUED OPERATIONS
The Company discontinued all of its assumed reinsurance operations, as well
as certain other insurance operations, during the period 1986 to 1991. 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 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.
67
69
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A statement of financial condition of the discontinued operations is
summarized in the following table:
DECEMBER 31,
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
Assets
Cash and invested assets, at amortized cost.......... $200,070 $190,777
Reinsurance recoverables............................. 57,908 54,448
Federal income taxes recoverable..................... 2,964 6,125
Other assets......................................... 4,258 11,152
-------- --------
Total........................................ $265,200 $262,502
======== ========
Liabilities
Reserves for loss and loss adjustment expenses....... $170,534 $162,219
Deferred income taxes................................ 48,655 41,810
Reinsurance payable and funds withheld............... 5,872 21,713
Other liabilities.................................... 6,625 3,246
-------- --------
Total........................................ $231,686 $228,988
======== ========
The amortized cost and fair value of cash and invested assets of the
discontinued operations as of December 31, 1996 are summarized in the following
table:
AMORTIZED COST FAIR VALUE
-------------- ----------
(THOUSANDS OF DOLLARS)
Fixed maturities................................... $ 57,445 $ 56,111
Non-redeemable preferred stock..................... 119,213 119,489
Cash and other invested assets..................... 23,412 23,412
-------------- ----------
Cash and invested assets................. $200,070 $ 199,012
=========== ========
The average maturity of the fixed income portfolio was 4.27 years at
December 31, 1996. The quality mix of the fixed maturity portfolio as of
December 31, 1996 is summarized in the following table:
AAA (including US government obligations)...... 7%
AA............................................. 5
A.............................................. 9
BBB............................................ 36
BB............................................. 43
---
100%
===
At December 31, 1996, 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 O -- OPERATIONS BY INDUSTRY SEGMENT
The following data for the years ended December 31, 1996, 1995 and 1994
provide certain information necessary for industry segment disclosure.
YEAR ENDED DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
REVENUES
Property and casualty.................. $ 596,841 $ 708,187 $ 495,712
Financial services..................... 197,601 214,975 154,398
Corporate.............................. 1,362 652 3,038
---------- ---------- ----------
795,804 923,814 653,148
========= ========= =========
INCOME (LOSS) BEFORE INCOME TAXES
Property and casualty.................. $ 117,593 $ 83,092 $ 61,265
Financial services..................... 36,589 35,737 28,014
Corporate.............................. (25,873) (18,502) (7,708)
---------- ---------- ----------
$ 128,309 $ 100,327 $ 81,571
========= ========= =========
AMORTIZATION AND DEPRECIATION EXPENSE
Property and casualty.................. $ 9,680 $ 8,677 $ 5,185
Financial services..................... 4,772 3,032 2,442
Corporate.............................. 12,140 8,625 8,082
---------- ---------- ----------
$ 26,592 $ 20,334 $ 15,709
========= ========= =========
CAPITAL EXPENDITURES
Property and casualty.................. $ 7,232 $ 7,404 $ 5,642
Financial services..................... 2,813 1,931 4,107
Corporate.............................. 1,990 192 653
---------- ---------- ----------
$ 12,035 $ 9,527 $ 10,402
========= ========= =========
DECEMBER 31,
----------------------------------------
1996 1995 1994
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
IDENTIFIABLE ASSETS
Property and casualty*................. $1,890,695 $2,055,511 $1,096,781
Financial services..................... 2,122,077 2,131,412 1,678,039
Corporate.............................. 29,540 27,974 22,757
---------- ---------- ----------
$4,042,312 $4,214,897 $2,797,577
========= ========= =========
- ---------------
* Assets held for discontinued operations are excluded from the above table.
69
71
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE P -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------- -------- ------------- ------------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
1996
Revenues.......................................... $ 203,633 $199,708 $ 197,386 $195,077
Net income........................................ 18,517 22,426 22,939 23,406
Net income per share.............................. 0.72 0.85 0.85 0.83
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
Net income and net income per share increased after the quarter ended March
31, 1996 due primarily to lower incurred losses in the workers' compensation
segment resulting from lower claim frequency. Net income and net income per
share increased after the quarter ended March 31, 1995 due primarily to the
acquisition of Casualty Insurance Company which was completed on February 22,
1995. (See Note B.)
70
72
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
ASSETS
DECEMBER 31,
---------------------
1996 1995
-------- --------
(THOUSANDS OF
DOLLARS)
Cash................................................................... $ 1,678 $ 304
Notes receivable from subsidiaries*.................................... 80,218 85,310
Investment in subsidiaries*............................................ 724,524 660,663
Short-term investments................................................. 6,084 8,554
Excess of cost of acquisition of subsidiaries over net assets
acquired............................................................. 7,549 7,876
Other receivables from subsidiaries*................................... 5,459 4,033
Deferred income taxes.................................................. 64,035 78,619
Other assets........................................................... 18,491 27,222
--------- ---------
TOTAL ASSETS................................................. $908,038 $872,581
========= =========
LIABILITIES
Accrued expenses and other liabilities................................. $ 13,026 $ 14,318
Amounts due to subsidiaries*........................................... 79,435 110,793
Amounts due to run-off subsidiaries*................................... 2,965 6,125
Notes payable to subsidiary*........................................... 103,093 --
Current portion of long-term debt...................................... 1,946 --
Long-term debt......................................................... 148,456 243,255
--------- ---------
TOTAL LIABILITIES............................................ 348,921 374,491
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: 49,500,000 Issued and
outstanding: (1996 -- 28,093,000 and 1995 -- 25,393,000)............. 28,093 25,393
Additional paid-in capital............................................. 168,452 110,103
Retained earnings...................................................... 419,136 347,607
Deferred compensation.................................................. (59,193) (6,612)
Net unrealized gain on investments, net of deferred taxes.............. 2,629 21,599
--------- ---------
TOTAL STOCKHOLDERS' EQUITY................................... 559,117 498,090
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $908,038 $872,581
========= =========
- ---------------
* Eliminated in consolidation
See notes to condensed financial statements.
71
73
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
INCOME
Interest income from subsidiaries*......................... $ 5,841 $ 4,170 $ 3,623
Dividends from consolidated subsidiaries*.................. 4,228 6,051 3,407
Net investment income...................................... 1,357 648 3,014
Realized investment losses................................. (2) -- --
Other income*.............................................. 8,997 8,518 5,508
-------- -------- --------
TOTAL INCOME..................................... 20,421 19,387 15,552
EXPENSES
Interest expense........................................... 12,151 13,282 8,163
Interest expense on notes payable to subsidiary*........... 7,603 -- --
General and administrative................................. 22,868 18,883 12,018
-------- -------- --------
TOTAL EXPENSES................................... 42,622 32,165 20,181
-------- -------- --------
(22,201) (12,778) (4,629)
Income tax benefit......................................... (12,213) (1,632) (3,351)
-------- -------- --------
Loss before equity in undistributed income of subsidiary
companies................................................ (9,988) (11,146) (1,278)
Equity in undistributed income of subsidiary companies..... 97,276 79,168 57,090
-------- -------- --------
NET INCOME....................................... $ 87,288 $ 68,022 $ 55,812
======== ======== ========
- ---------------
* Eliminated in consolidation
See notes to condensed financial statements.
72
74
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- -------- --------
(THOUSANDS OF DOLLARS)
OPERATING ACTIVITIES
Net income................................................ $ 87,288 $ 68,022 $ 55,812
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in undistributed income from continuing
operations of subsidiaries......................... (97,276) (79,168) (57,090)
Change in accrued investment income.................. 2 (1) 216
Change in amounts due to or from subsidiaries........ (42,999) 6,676 102
Provision for (reduction in) deferred income taxes... 24,798 22,810 (4,391)
Depreciation and amortization........................ 12,145 8,612 8,082
Realized investment gains............................ 2 -- --
Change in other assets and liabilities............... 6,999 (9,002) 6,022
--------- -------- --------
NET CASH PROVIDED BY (USED IN) CONTINUING
OPERATIONS.................................... (9,041) 17,949 8,753
Effect of discontinued operations....................... (3,161) 363 (9,573)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES.................................... (12,202) 18,312 (820)
INVESTING ACTIVITIES
Purchases of fixed maturity investments................. (6,315) (4,988) (46,712)
Sales of fixed maturity investments..................... 6,310 -- 92,003
Fixed maturity investments matured or called............ -- 5,000 11,600
Decrease (increase) in short-term and other
investments.......................................... 2,469 (1,149) 7,928
Net decrease (increase) in credit lines with
subsidiaries......................................... 5,092 6,094 (57,652)
Purchase of and additional investments in
subsidiaries......................................... (5,093) (81,000) (23,000)
Purchases of property and equipment..................... (1,991) (192) (653)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES.................................... 472 (76,235) (16,486)
FINANCING ACTIVITIES
Repayment of short-term debt............................ -- (1,571) --
Proceeds from long-term debt............................ 41,058 110,000 26,000
Repayment of long-term debt............................. (111,004) (42,808) --
Proceeds from notes due to subsidiary................... 103,093 -- --
Dividends paid.......................................... (15,016) (12,618) (11,344)
Stock options exercised................................. 1,428 80 22
Purchase of fractional shares........................... -- (25) --
Decrease (increase) in deferred compensation plans...... (6,455) 4,375 2,647
--------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 13,104 57,433 17,325
--------- -------- --------
INCREASE (DECREASE) IN CASH..................... 1,374 (490) 19
Cash at beginning of year............................... 304 794 775
--------- -------- --------
CASH AT END OF YEAR............................. $ 1,678 $ 304 $ 794
========= ======== ========
See notes to condensed financial statements.
73
75
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
In the parent company financial statements, the parent's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since date of acquisition. Parent company financial statements
should be read in conjunction with the Company's consolidated financial
statements.
74
76
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31,
---------------------------------------------------------
COLUMN C
----------
RESERVES
COLUMN B FOR
----------- CLAIMS,
DEFERRED BENEFITS COLUMN D COLUMN E
COLUMN A POLICY AND -------- -------------
- ------------------------ ACQUISITION SETTLEMENT UNEARNED DIVIDENDS TO
SEGMENT COSTS EXPENSES PREMIUMS POLICYHOLDERS
- ------------------------ ----------- ---------- -------- -------------
(THOUSANDS OF DOLLARS)
1996
Life insurance........ $ 550 $ 202,465 $ -- $ --
Property and
casualty............ 25,001 1,256,345 87,422 33,093
-------- -------- -------- --------
$25,551 $1,458,810 $87,422 $33,093
======== ======== ======== ========
1995
Life insurance........ $48,938 $ 374,724 $ -- $ --
Property and
casualty............ 27,700 1,455,692 100,481 40,822
-------- -------- -------- --------
$76,638 $1,830,416 $100,481 $40,822
======== ======== ======== ========
1994
Life insurance........ $42,156 $ 172,425 $ -- $ --
Property and
casualty............ 17,130 746,661 47,551 46,067
-------- -------- -------- --------
$59,286 $ 919,086 $47,551 $46,067
======== ======== ======== ========
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
COLUMN H COLUMN I
--------- ------------
COLUMN G CLAIMS, AMORTIZATION COLUMN J COLUMN K
COLUMN F ---------- BENEFITS OF DEFERRED -------- --------
COLUMN A -------- NET AND POLICY OTHER NET
- ------------------------ PREMIUM INVESTMENT SETTLEMEN ACQUISITION OPERATING PREMIUMS
SEGMENT REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
- ------------------------ -------- ---------- --------- ------------ -------- --------
1996
Life insurance........ $ 55 $ 2,989 $ -- $ -- $ 1,971 $ N/A
Property and
casualty............ 486,860 111,637 335,407 96,177 26,555 474,184
-------- -------- -------- -------- -------- --------
$486,915 $114,626 $335,407 $ 96,177 $28,526 $474,184
======== ======== ======== ======== ======== ========
1995
Life insurance........ $14,469 $ 19,457 $ 19,928 $ 7,716 $ 4,412 $ N/A
Property and
casualty............ 606,917 101,270 461,333 118,383 26,895 583,790
-------- -------- -------- -------- -------- --------
$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
Property and
casualty............ 433,584 62,169 273,599 80,321 19,766 426,432
-------- -------- -------- -------- -------- --------
$448,273 $ 72,764 $286,601 $ 86,990 $23,219 $426,432
======== ======== ======== ======== ======== ========
75
77
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------------- ----------- --------- --------- ----------- ----------
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
----------- --------- --------- ----------- ----------
(THOUSANDS OF DOLLARS, EXCEPT PERCENTS)
YEAR ENDED DECEMBER 31, 1996
Life insurance in force*................. $ 324,368 $257,552 $ -- $ 66,816 0%
=========== ======== ======== ===========
Premium Revenue
Life insurance......................... $ 263 $ 208 $ -- $ 55 0%
Property and casualty.................. 469,912 8,326 25,274 486,860 5%
----------- -------- -------- -----------
$ 470,175 $ 8,534 $ 25,274 $ 486,915
=========== ======== ======== ===========
YEAR ENDED DECEMBER 31, 1995
Life insurance in force*................. $ 1,513,199 $822,309 $ 8,742 $ 699,632 1%
=========== ======== ======== ===========
Premium Revenue
Life insurance......................... $ 15,166 $ 2,333 $ 1,636 $ 14,469 11%
Property and casualty.................. 579,845 29,097 56,169 606,917 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......................... $ 11,990 $ (1,114) $ 1,585 $ 14,689 11%
Property and casualty.................. 442,706 9,122 -- 433,584 0%
----------- -------- -------- -----------
$ 454,696 $ 8,008 $ 1,585 $ 448,273
=========== ======== ======== ===========
- ---------------
* Balance at end of year.
Intercompany transactions have been eliminated.
76
78
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN C
-----------------------------
COLUMN A COLUMN B COLUMN D COLUMN E
- --------------------------------- ---------- ADDITIONS ---------- ----------
-----------------------------
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, 1996
Deducted from asset accounts:
Allowance for possible loan
losses...................... $ 31,781 $ 13,885 $1,830(1) $ 9,749(2) $ 37,747
Premiums receivable and agents'
balances and reinsurance
recoverable................. 11,147 -- -- 3,746(2) 7,401
------- ------- ------ ------- -------
Totals................. $ 42,928 $ 13,885 $1,830 $ 13,495 $ 45,148
======= ======= ====== ======= =======
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
======= ======= ====== ======= =======
- ---------------
(1) Reserves established with company and portfolio acquisitions.
(2) Uncollectible accounts written off, net of recoveries and reclassifications.
77
79
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
DECEMBER 31,
----------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------- ----------- ---------- -------- --------
RESERVES
FOR UNPAID DISCOUNT
DEFERRED CLAIMS IF ANY
AFFILIATION POLICY AND CLAIM DEDUCTED
WITH ACQUISITION ADJUSTMENT IN UNEARNED
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS
- ----------- ----------- ---------- -------- --------
(THOUSANDS OF DOLLARS)
Fremont Compensation Insurance
Group and Consolidated
Subsidiaries
1996..... $25,001 $1,256,345 $22,658 $87,422
1995..... $27,700 $1,455,692 $23,126 $100,481
1994..... $17,130 $ 746,661 $ -- $47,551
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ----------- -------- ---------- ------------------- ------------ ---------- --------
CLAIMS AND CLAIM
ADJUSTMENT
EXPENSES INCURRED AMORTIZATION
RELATED TO OF PAID
------------------- DEFERRED CLAIMS
AFFILIATION NET (1) (2) POLICY AND CLAIM NET
WITH EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT PREMIUMS INCOME YEAR YEARS COSTS EXPENSES WRITTEN
- ----------- -------- ---------- -------- -------- ------------ ---------- --------
(THOUSANDS OF DOLLARS)
Fremont Compensation Insurance
Group and Consolidated
Subsidiaries
1996..... $486,860 $111,637 $334,657 $ 750 $ 96,177 $510,227 $474,184
1995..... $606,917 $101,270 $459,951 $ 1,382 $118,383 $490,781 $583,790
1994..... $433,584 $ 62,169 $290,833 $(17,234) $ 80,321 $307,279 $426,432
78
80
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 day 28th of
March 1997.
FREMONT GENERAL CORPORATION
By: /s/ JOHN A. DONALDSON
-------------------------------------
Title: Senior Vice President,
Controller and
Chief Accounting Officer
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ---------------
/s/ JAMES A. MCINTYRE Chairman of the Board and Chief March 28, 1997
- --------------------------------------------- Executive Officer (Principal
James A. McIntyre Executive Officer)
/s/ LOUIS J. RAMPINO President, Chief Operating March 28, 1997
- --------------------------------------------- Officer and Director
Louis J. Rampino
/s/ WAYNE R. BAILEY Executive Vice President, March 28, 1997
- --------------------------------------------- Treasurer, Chief Financial
Wayne R. Bailey Officer and Director (Principal
Financial Officer)
/s/ JOHN A. DONALDSON Senior Vice President, March 28, 1997
- --------------------------------------------- Controller and Chief Accounting
John A. Donaldson Officer (Principal Accounting
Officer)
/s/ HOUSTON I. FLOURNOY Director March 28, 1997
- ---------------------------------------------
Houston I. Flournoy
/s/ C. DOUGLAS KRANWINKLE Director March 28, 1997
- ---------------------------------------------
C. Douglas Kranwinkle
/s/ DAVID W. MORRISROE Director March 28, 1997
- ---------------------------------------------
David W. Morrisroe
/s/ DICKINSON C. ROSS Director March 28, 1997
- ---------------------------------------------
Dickinson C. Ross
79
81
EXHIBIT INDEX
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. (Filed as
Exhibit No. 3.3 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
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. 4.4 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. (Filed as
Exhibit No. 4.3 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
4.4 Declaration of Trust among the Registrant, the Regular Trustees and The
Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware
trustee. (Filed as Exhibit No. 4.4 to Annual Report on Form 10-K, for
the fiscal year ended December 31, 1995, Commission File Number 1-8007,
and incorporated herein by reference.).................................
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. (Filed as
Exhibit No. 4.5 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
82
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- -------------
4.6 Preferred Securities Guarantee Agreement between the Registrant and The
Chase Manhattan Bank, N.A., a national banking association, as
Preferred Guarantee Trustee. (Filed as Exhibit No. 4.6 to Annual Report
on Form 10-K, for the fiscal year ended December 31, 1995, Commission
File Number 1-8007, and incorporated herein by reference.).............
4.7 Common Securities Guarantee Agreement by the Registrant. (Filed as
Exhibit No. 4.7 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
4.8 Form of Preferred Securities. (Included in Exhibit 4.5). (Filed as
Exhibit No. 4.8 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
4.9 Form of 9% Junior Subordinated Debenture. (Included in Exhibit 4.3).
(Filed as Exhibit No. 4.9 to Annual Report on Form 10-K, for the fiscal
year ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
10.1 Fremont General Corporation Employee Stock Ownership Plan as amended.
(Filed as Exhibit No. 10.1 to Annual Report on Form 10-K, for the
fiscal year ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
10.2 Amended and Restated Trust Agreement for Fremont General Corporation
Employee Stock Ownership Plan. (Filed as Exhibit No. 10.2 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
10.3 Fremont General Corporation and Affiliated Companies Investment
Incentive Program as amended. (Filed as Exhibit No. 10.3 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
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. (Filed
as Exhibit No. 10.4 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
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. (Filed as Exhibit No. 10.5
to Annual Report on Form 10-K, for the fiscal year ended December 31,
1995, Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the
Senior Supplemental Retirement Plan of the Company, as amended. (Filed
as Exhibit No. 10.6 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
83
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- -------------
10.7 Senior Supplemental Retirement Plan, as amended. (Filed as Exhibit No.
10.7 to Annual Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
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 Number 1-8007, and incorporated herein by
reference.)............................................................
10.8 (b) Amendment to Excess Benefit Plan of the Company. (Filed as Exhibit No.
10.8 to Annual Report on Form 10-K, for the fiscal year ended December
31, 1995, Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
10.8 (c) Trust Agreement for Excess Benefit Plan. (Filed as Exhibit No. 10.8 to
Annual Report on Form 10-K, for the fiscal year ended December 31,
1995, Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
10.9 Amended Non-Qualified Stock Option Plan of 1989 of the Company and
related agreements.....................................................
10.10(a) Long-Term Incentive Compensation Plan of the Company -- Senior
Executive Plan. (Filed as Exhibit No. 10.10(a) on Form 10-Q for the
period ended September 30, 1996, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
10.10(b) Long-Term Incentive Compensation Plan of the Company (Filed as Exhibit
No. 10.10(b) on Form 10-Q for the period ended September 30, 1996,
Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
10.11 1995 Restricted Stock Award Plan as amended and forms of agreement
thereunder. (Filed as Exhibit No. 4.1 to Registration Statement on Form
S-8/S-3 File No. 333-17525 which was filed on December 10, 1996, and
incorporated herein by reference.).....................................
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. (Filed as Exhibit No. 10.12 to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
10.13(a) 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.)..................................................
10.13(b) First Amendment to Employment Agreement between the Company and James
A. McIntyre............................................................
10.14(a) Employment Agreement between the Company and Louis J. Rampino. (Filed
as Exhibit No. 10.14 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
10.14(b) Employment Agreement between the Company and Wayne R. Bailey. (Filed as
Exhibit No. 10.14 to Annual Report on Form 10-K, for the fiscal year
ended December 31, 1995, Commission File Number 1-8007, and
incorporated herein by reference.).....................................
10.15 Management Continuity Agreement between the Company and Raymond G.
Meyers. (Filed as Exhibit No. 10.15 to Annual Report on Form 10-K, for
the fiscal year ended December 31, 1995, Commission File Number 1-8007,
and incorporated herein by reference.).................................
84
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- -------------
10.16 1996 Management Incentive Compensation Plan of the Company. (Filed as
Exhibit No. 10.16 to Quarterly Report on Form 10-Q, for the period
ended March 31, 1996, Commission File Number 1-8007, and incorporated
herein by reference.)..................................................
10.17 Continuing Compensation Plan for Retired Directors. (Filed as Exhibit
No. 10.17 to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1995, Commission File Number 1-8007, and incorporated
herein by reference.)..................................................
10.18 Non-Employee Directors' Deferred Compensation Plan. (Filed as Exhibit
No. 10.18 to Annual Report on Form 10-K, for the fiscal year ended
December 31, 1995, Commission File Number 1-8007, and incorporated
herein by reference.)..................................................
10.19(a) Amended and Restated Agreement among Fremont General Corporation,
Various Lending Institutions and the Chase Manhattan Bank, N.A., As
Agent. (Filed as Exhibit No. (10)(xiii) to Quarterly Report on Form
10-Q for the period ended September 30, 1995, Commission File Number
1-08007, and incorporated herein by reference.)........................
10.19(b) Amendment to Credit Agreement. (Filed as Exhibit No. 10.19(b) to Annual
Report on Form 10-K, for the fiscal year ended December 31, 1995,
Commission File Number 1-8007, and incorporated herein by
reference.)............................................................
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. (Filed as Exhibit No. 10.20 to Annual Report on Form 10-K, for
the fiscal year ended December 31, 1995. Commission File Number 1-8007,
and incorporated herein by reference.).................................
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
(b) REPORT ON FORM 8-K. None filed during the quarter ended December 31,
1996.