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FORM 10-K/A
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AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
COMMISSION FILE NUMBER 1-8007
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FREMONT GENERAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
NEVADA 95-2815260
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2020 SANTA MONICA BOULEVARD,
SANTA MONICA, CALIFORNIA 90404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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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)
(TITLE OF EACH CLASS)
NEW YORK STOCK EXCHANGE
(NAME OF EACH EXCHANGE ON WHICH REGISTERED)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 22, 1995:
COMMON STOCK, $1.00 PAR VALUE-$216,224,000
The number of shares outstanding of each of the issuer's classes of common
stock as of March 22, 1995:
COMMON STOCK, $1.00 PAR VALUE-15,388,000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the proxy statement for the 1995 annual meeting of stockholders are
incorporated by reference into Part III of this report.
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ITEM 1. BUSINESS
GENERAL
Fremont General is a diversified financial services holding company,
which through its subsidiaries, wrote $380 million of workers' compensation
insurance premiums in California in 1994. The Company also has a growing
financial services business primarily consisting of asset-based lending through
its commercial finance subsidiary and commercial and residential real estate
lending through its thrift and loan subsidiary. In addition, the Company
offers other insurance products, including medical malpractice insurance. For
the year ended December 31, 1994, the Company had workers' compensation
insurance premiums earned of $401 million and had total revenues of $653
million. The Company's assets exceeded $3 billion at the end of 1994.
After reorganizing its senior management in 1989, Fremont General
restructured its operations and concentrated on improving the operating
performance and financial strength of its businesses while expanding its
operations through acquisitions and internal growth. The Company has become
more selective in the business it originates and has increasingly focused on
higher quality underwriting and lending opportunities that provide good
margins. In recent years, the California economy has been adversely affected
by an economic recession which has caused a reduction in employment levels and
real estate values. In spite of this difficult economic environment, the
Company has achieved an improvement in operating results and financial strength
over the five years ended December 31, 1994. During this period, the Company's
income before taxes grew at a 20% compound annual rate, and book value per
share increased from $13.55 to $22.81.
The Company recently expanded its workers' compensation operations
through the acquisition on February 22, 1995 of Casualty Insurance Company
("Casualty") and its wholly-owned subsidiary Workers' Compensation and
Indemnity Company ("WCIC") from the Buckeye Union Insurance Company
("Buckeye"). Buckeye is a subsidiary of The Continental Corporation, a
publicly held underwriter of property and casualty insurance. Casualty
underwrites workers' compensation insurance in several mid-western states,
primarily in Illinois, and WCIC underwrites a modest amount in California.
Casualty currently is a leader in the Illinois workers' compensation market and
the Company believes this acquisition will provide the Company with a
significant presence in the mid-west region.
Fremont General's strategy is to develop profitable businesses by
providing diverse financial services to small and medium-sized businesses. By
engaging in a variety of businesses, the Company believes that it can better
achieve stability in its operating results, and it has done so over the past
several years. Inherent in this strategy is the Company's belief that
opportunities are often created by business and regulatory challenges that
cause competitors to withdraw from a market. In the early 1990's, problems
such as the incidence of fraudulent claims significantly impacted the workers'
compensation insurance industry and resulted in a reduction by many workers'
compensation carriers in their role in the Southern California market.
However, the Company remained committed to the Southern California market and
has sought solutions to these problems, such as the institution of its "zero
tolerance" program which promotes the aggressive prosecution of workers'
compensation fraud. Similarly the withdrawal of many financial institutions,
due in part to regulatory pressures such as increased capital requirements,
from the business of financing small to medium sized businesses and making
commercial real estate loans enhanced opportunities for the Company's
commercial finance and thrift and loan subsidiaries. The Company has been able
to take advantage of these opportunities because it had sufficient capital to
support the expansion of its operations. The Company has adhered to rigorous
underwriting policies requiring conservative over-collateralization and careful
review of the property and borrower. See "--Insurance Operations" and
"--Financial Services Operations."
Management believes that ownership of the Company's Common Stock by
employees has been an important element in the Company's success by enabling
the Company to attract and retain the best available personnel for positions of
substantial responsibility and to provide additional incentive and motivation
to such individuals to promote the success of the Company. As of December 31,
1994, officers and directors of the Company, their families and the Company's
ESOP beneficially owned approximately 29% of the Company's outstanding Common
Stock.
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INSURANCE OPERATIONS
Workers' Compensation Insurance
Fremont Compensation Insurance Company ("Fremont Compensation") offers
workers' compensation insurance almost entirely in California, the largest
market in the United States. During 1993 (the latest year for which
information is available), the Company was the fourth largest private workers'
compensation insurance company in California, with approximately 5% of the $9.0
billion California workers' compensation insurance market. In 1994, Fremont
Compensation's California workers' compensation insurance premiums were evenly
distributed between Northern and Southern California. In 1995, the Company
believes that its previously described acquisition of Casualty Insurance
Company will result in workers' compensation insurance premiums being evenly
distributed between California and the mid-west region, primarily Illinois.
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 out of fifteen ratings which range from "A++" (Superior) to "F"
(In Liquidation). In 1994, income before taxes from workers' compensation
insurance operations was $62 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 capped at $16,000, and no
dollar limitation is set forth for medical benefits.
In the past several years, the California market has been impacted by
recessionary economic conditions and incidences of fraudulent workers'
compensation claims. In 1992, the Company instituted its "zero tolerance"
program, which promotes the aggressive prosecution of workers' compensation
fraud. As part of this program, the Company established an in-house fraud
investigation unit which actively pursues cases of fraud and works closely with
local prosecutors. The Company also funded an advertising campaign to inform
the public that workers' compensation fraud will not be tolerated by the
Company. The Company believes that this program reduced the frequency and
severity of claims made against the Company, particularly in such fraud-prone
categories as post-employment job stress. Frequency of claims declined 2% and
15% during the twelve months ended December 31, 1994 and 1993, respectively, as
compared to the previous year.
The Company recently improved its data processing capabilities. In
1992, the Company entered into an agreement with Electronic Data Systems
("EDS") to provide data processing services and management information services
to the Company's workers' compensation insurance operations. This agreement
has a term of ten years. The Company expects that its relationship with EDS
will enable it to create a more sophisticated information management system.
The Company believes that such a system, together with internal operational
changes, has helped to control costs, allowed easier access to data, improved
response times and enhanced data integrity. This new operational system has
also enhanced its disaster recovery capability.
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. Prior to January 1, 1995, under the California minimum
rate law, the California Department of Insurance has set standard statewide
premium rates, known as manual rates, for each of approximately 450 employment
classifications. These rates are subject to experience modification factors
based on each employer's own loss experience over a specified period. The
manual rates, as modified by these experience factors, are the minimum rates
which must be charged, although insurers may charge higher than the minimum
rates if they wish. Manual rates and the levels of benefit payments are
changed from time to time to reflect industry experience. However, in July
1993, the California legislature enacted legislation to reform the workers'
compensation system and to, among other things, (i) reduce workers'
compensation manual premium rates by 7% effective July 16, 1993 and (ii) repeal
the minimum rate law effective January 1, 1995. In place of the minimum rate
law, workers' compensation insurance companies will be provided with advisory
rates by classification, and each insurance company will determine its own
premium rates based in part upon its operating costs and loss costs. The
premium rates determined by an insurer will be subject to limited review by the
Department of Insurance. Insurers will be permitted to use any rate within 30
days after filing it with the Insurance Commissioner unless the rate is
disapproved by the Insurance Commissioner. See "--Regulation." Since the July
1993 legislation, premiums were further impacted in 1994 by additional
reductions in manual premium rates of 12.7% on new and renewal business that
became effective January 1, 1994,
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and a further 16% on all business incepting on or after January 1, 1994 that
became effective October 1, 1994. These reductions were required by order of
the California Insurance Commissioner.
Underwriting and Loss Control. Prior to insuring a workers'
compensation account, the Company's underwriting department reviews the
employer's prior loss experience, safety record, credit history, operations,
geographic location and employment classifications. The Company generally
avoids industries and businesses involving hazardous conditions or high
exposure to multiple injuries resulting from a single occurrence. The Company
targets accounts that appear to have a strong work ethic among employees,
long-term employees, and a genuine interest in the adoption of and adherence to
loss control standards.
The loss control department participates in the initial underwriting
process and provides continuing services while the policy is in force. In the
initial underwriting phase, a Company loss control consultant will generally
survey the employer's operations, review the employer's prior loss patterns and
assess the extent to which such losses may be prevented. The loss control
consultant will also meet with the employer's management to assess the extent
to which management is committed to safety in the workplace. After the policy
is issued, the loss control department provides continuing assistance to the
employer in developing and maintaining safety programs and procedures, reviews
periodic loss reports, attempts to identify weaknesses in the employer's loss
control procedures and assists the employer in correcting these weaknesses.
Policyholders' Dividends. The majority of the Company's workers'
compensation insurance has been written on participating policies, which allow
the insurer to declare and pay dividends to a policyholder after the expiration
of the policy, based upon the policyholder's loss experience, the Company's
overall loss experience and competitive conditions. In the past, California's
workers' compensation insurers charged minimum rates for premiums and generally
used policyholder dividends as a means of competitive pricing. Although
insurers were prohibited by law from making promises to policyholders regarding
future payment of dividends, insurers informed policyholders of the amount of
dividends that had been paid historically. The determination of the amount of
the dividend is generally made 15 to 18 months after policy expiration, and
such payments require approval by the insurer's board of directors. Therefore,
the Company's loss ratio for the current period may be significantly different
than the loss ratio for the period that was currently under dividend
consideration. In the future, the Company believes that the majority of the
Company's California workers' compensation insurance will be written on a
non-participating basis. This change in policy-type is anticipated as a result
of the increased competition which has resulted from the repeal, effective
January 1, 1995, of the minimum rate law in California.
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. These
cost-containment efforts have reduced paid litigation expenses by 19% from
1993 to 1994.
The Company provides rehabilitation programs for insured employees and
medical cost containment programs. The Company monitors medical care bills to
determine if they are reasonable, audits hospital bills, reviews hospital
utilization and becomes involved in the selection of treatment facilities.
The Company maintains claims processing offices in San Francisco,
Glendale, Orange, Fresno and San Diego. The Company also has an office in
Phoenix that processes claims for insureds in Arizona.
Competition. Prior to January 1, 1995, minimum premium rates were
prescribed for workers' compensation insurance in California by the Department
of Insurance, and competition for underwriting such insurance in California had
been based principally upon an insurance carrier's financial strength and
history of paying policyholders' dividends. Secondary considerations included
loss control and claims administration, the ability to respond promptly to
agents and brokers, and commission schedules for agents and brokers. The repeal
of the minimum rate law effective January 1, 1995 has resulted in increased
price competition. See "-- Regulation." Although the Company is one of the
largest writers of workers' compensation insurance in California, certain of
the Company's competitors are larger and have greater resources than the
Company. The Company believes that it has been able to compete more
effectively in the California workers' compensation insurance market as a
result of its financial strength and long-term uninterrupted presence in that
market. The largest underwriter of workers' compensation insurance in
California is the State Compensation Insurance Fund, which provides
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employers with an alternative source of workers' compensation insurance and in
1993 (the latest year for which information is available) accounted for
approximately 19% of the market. In addition, many employers are self-insured.
Marketing. The Company markets its workers' compensation insurance
products through more than 600 non-exclusive independent insurance agents and
brokers, many of whom have been associated with the Company for more than 15
years. During 1994, the ten largest agents accounted for approximately 20% of
the Company's workers compensation insurance premiums written, and no single
agent or broker accounted for more than 4% of premiums written.
Medical Malpractice Insurance
The Company's medical malpractice insurance operation, Physicians and
Surgeons, writes primarily standard professional liability insurance in
California. Fremont Indemnity Company, of which Physicians and Surgeons is a
division, is currently rated "B++" (Very Good) by A.M. Best. Physicians and
Surgeons offers coverage for individual medical doctors, anesthesiologists,
podiatrists, as well as medical groups, community clinics, laboratories and
miscellaneous medical clinics. As of December 31, 1994, the Company had
approximately 2,100 medical malpractice insurance policies in force.
Physicians and Surgeons markets its policies exclusively through approximately
300 non-exclusive independent insurance agents and brokers. The Company's
medical malpractice insurance business has been consistently profitable since
the Company acquired it in 1985, and income before taxes was $6.6 million in
1994.
The medical malpractice insurance unit underwrites risks exclusively
on a "claims made" basis. 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. The Company also offers
"tail" coverage for claims reported after the expiration of the policy for
occurrences arising during the coverage period. The price of the "tail"
coverage is determined by the insurer after the policy has expired and the
insured makes an election to obtain "tail" coverage.
Medical malpractice insurance has historically been a volatile line of
insurance. The Company seeks to reduce its underwriting exposure by employing
strict underwriting standards based in part on the risks associated with the
type of medical specialty, length of practice, loss history, educational
background as well as other factors.
The California Medical Injury Compensation Reform Act, adopted in
1975, currently provides for limitation of damages for pain and suffering of
$250,000, limitations of fees for plaintiffs' attorneys by a specified formula,
periodic payment of medical malpractice judgments, and the introduction of
evidence of collateral source benefits payable to the injured plaintiff. The
Company believes that this legislation, which was upheld by the courts in the
mid-1980s, has brought stability to the medical malpractice insurance
marketplace in California by increasing the ability of insurers to assess the
risks involved in underwriting this line of business. Legislation has been
periodically introduced in the California Legislature to modify the terms of
this act, including bills to increase the limitation on damages for pain and
suffering. No predictions can be made as to whether any of these legislative
proposals will be adopted.
Significant attention has recently been focused on reforming the
health care system in the United States. A broad range of health care reform
measures have been suggested, and public discussion of such measures will
likely continue in the future. Certain proposals suggest spending limits,
price controls, limitations on increases in insurance premiums, limiting the
financial impact of tort claims against doctors and hospitals and restructuring
the health care insurance system. The Company cannot predict which, if any,
reform proposals will be adopted, when they may be adopted or what impact they
may have on the Company. While some of these proposals could be beneficial to
the Company, the adoption of others could have a material adverse effect on the
Company's operations.
The Company believes that the principal competitive factors affecting
the medical malpractice insurance business are, in general, the financial
strength of the insurer, pricing, availability of coverage desired by customers
and quality of service, including claims administration. The Company's
principal competitors are mutual insurance companies owned by their health-care
provider insureds.
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.
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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 treaties cover claims and losses above $1 million, up to a maximum
of $5 million. Although reinsurance makes the assuming reinsurer liable to the
insurer to the extent of the reinsurance ceded, it does not legally discharge
an insurer from its primary liability for the full amount of the policy
liability. All of the foregoing reinsurance is with non-affiliated reinsurers.
The Company believes that the terms of its reinsurance contracts are consistent
with industry practice and, based on its review of the reinsurers' financial
statements and reputations in the reinsurance marketplace, that its reinsurers
are financially sound. The Company encounters disputes from time to time with
its reinsurers, which, if not settled, are typically resolved in arbitration.
The Company's treaties are generally for annual terms. The Company
has maintained reinsurance treaties with many of these same reinsurers for a
number of years and believes that suitable alternative reinsurance treaties are
readily obtainable at the present time. In general, the reinsurance agreements
are of the treaty variety and cover all underwritten risks of types specified
in the treaties. The Company also from time to time purchases facultative
reinsurance, which covers specific liabilities underwritten. As of December
1994, General Reinsurance Corporation and Employers Insurance of Wausau, a
Mutual Company, were the only reinsurers that accounted for more than 10% of
total amounts recoverable from all reinsurers on paid and unpaid losses.
Operating Data
Set forth below is certain information pertaining to the Company's
workers' compensation and medical malpractice businesses as determined in
accordance with GAAP for the years indicated. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" for a
discussion of certain of this information.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992 1991 1990
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(Thousands of dollars, except percents)
<S> <C> <C> <C> <C> <C>
Workers' Compensation
Net premiums earned $401,455 $426,793 $378,468 $371,981 $381,050
Net investment income and other (1) 52,747 56,733 67,458 62,370 54,499
Underwriting profit (loss) 9,452 (6,958) (25,659) (21,132) (14,773)
Net Income before taxes 62,199 49,775 41,799 41,238 39,726
Loss Ratio 62.1% 70.4% 82.2% 70.9% 72.4%
Expense ratio 23.1% 20.6% 21.8% 25.0% 24.1%
Policyholders' dividend ratio 12.4% 10.6% 2.8% 9.8% 7.4%
-------- -------- -------- -------- --------
Total combined ratio 97.6% 101.6% 106.8% 105.7% 103.9%
Medical Malpractice
Net premiums earned $ 28,554 $ 25,055 $ 29,050 $ 36,701 $ 26,801
Net investment income and other (1) 4,700 4,655 5,056 4,799 7,883
Underwriting profit 1,883 5,560 6,466 9,896 2,379
Net income before taxes 6,583 10,215 11,522 14,695 10,262
Loss ratio 74.4% 56.5% 56.7% 59.4% 67.5%
Expense ratio 19.0% 21.3% 21.0% 13.6% 23.6%
-------- -------- -------- -------- --------
Total combined ratio 93.4% 77.8% 77.7% 73.0% 91.1%
</TABLE>
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(1) Includes net realized investment gains and interest expense.
Statutory Combined Ratio. The following table reflects the combined
ratios of the Company's insurance subsidiaries determined in accordance with
statutory accounting practices, together with the property and casualty
industry-wide combined ratios after policyholders' dividends, as compiled by
A.M. Best for the years indicated.
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<TABLE>
<CAPTION>
Year Ended December 31,
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1994 1993 1992 1991 1990
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Workers' compensation:
Company 98.5% 98.8% 110.4% 104.8% 105.2%
Industry (1) 99.0% 109.1% 121.5% 122.6% 117.4%
Medical malpractice:
Company 94.8% 76.1% 80.2% 92.7% 80.2%
Industry (1) 115.5% 108.1% 127.9% 103.7% 105.8%
</TABLE>
(1) Nationwide statutory combined ratio information for the workers'
compensation insurance industry and the medical malpractice insurance
industry for 1990 through 1993 is from A.M. Best's Aggregates &
Averages, Property-Casualty (1991 through 1994 editions). Industry
statutory combined ratio information for 1994 is an estimate by A.M.
Best.
The differences between the GAAP and statutory combined ratios for
medical malpractice insurance for 1990 and 1991 principally reflect the
deferral under GAAP of certain premiums during 1990 by reason of California
Proposition 103, which were recognized under GAAP in 1991. Under SAP
accounting, the revenue deferral and subsequent recognition are not reflected.
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
premiums written during the period to policyholders' surplus on a statutory
basis at the end of the period, for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
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1994 1993 1992 1991 1990
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(Thousands of dollars, except ratios)
<S> <C> <C> <C> <C> <C>
Net premiums written during the year $425,631 $454,867 $414,218 $404,701 $417,557
Policyholders' surplus at end of year 235,294 221,857 162,714 158,512 161,807
Ratio 1.8x 2.1x 2.5x 2.6x 2.6x
</TABLE>
Loss and Loss Adjustment Expense Reserves
In many cases, significant periods of time, ranging up to several
years or more, may elapse between the occurrence of an insured loss, the
reporting of the loss to the insurer, and the insurer's payment of that loss.
To recognize liabilities for future unpaid losses, insurers establish reserves,
which are balance sheet liabilities, representing estimates of future amounts
needed to pay claims with respect to insured events that have occurred.
Reserves are also established for loss adjustment expense reserves ("LAE")
representing the estimated expenses of settling claims, including legal and
other fees, and general expenses of administering the claims adjustment
process.
Reserves for losses and LAE are based not only on historical
experience but also on management's judgment of the effects of matters such as
future economic and social forces likely to impact the insurer's experience
with the type of risk involved, circumstances surrounding individual claims,
and trends that may affect the probable number and nature of claims arising
from losses not yet reported. Consequently, loss reserves are inherently
subject to a number of highly variable circumstances.
Reserves for losses and LAE are revalued periodically using a variety
of actuarial and statistical techniques for producing current estimates of
expected claim costs. Claim frequency and severity and other economic and
social factors are considered in the reevaluation process. A provision for
inflation in the calculation of estimated future claim costs is implicit since
reliance is placed on both actual historical data, which reflect past
inflation, and on other factors which are judged to be
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appropriate modifiers of past experience. Adjustments to liabilities are
reflected in operating results for the periods to which they are made.
Reconciliation of Loss and Loss Adjustment Expense Reserves. The
following table shows in accordance with GAAP the reconciliation of the
estimated liability for losses and LAE for the Company's insurance subsidiaries
(excluding discontinued operations) and the effect on income for each of the
three years indicated.
Reconciliation of Reserves for Losses and LAE
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
--------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
Reserve for losses and LAE, net of reinsurance
recoverable, at beginning of year $ 644,190 $ 633,394 $ 627,103
Incurred losses and LAE:
Provision for insured events of the current year,
net of reinsurance 290,833 323,279 290,199
Increase (decrease) in provision for insured
events of prior years, net of reinsurance (17,234)(1) (4,126) 41,004(1)
--------- --------- ---------
Total incurred losses and LAE, net of reinsurance 273,599 319,153 331,203
Payments, net of reinsurance:
Losses and LAE attributable to insured events of:
Current years (70,505) (67,805) (67,321)
Prior years (236,774) (240,552) (257,591)
--------- --------- ---------
Reserve for losses and LAE, net of related reinsurance
recoverable, at beginning of year $ 610,510 $ 644,190 $ 633,394
========= ========= =========
Reinsurance recoverable on unpaid losses, at end of year
(following the adoption of FASB 113 in 1993) 136,151 138,737
--------- ---------
Reserve for losses and LAE, gross of reinsurance
recoverable, at end of year $ 746,661 $ 782,927
========= =========
</TABLE>
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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 and
the 1992 reserve strengthening.
(2) Statutory reserves were not materially different than GAAP reserves at
the end of 1992 and were the same as GAAP reserves at the end of 1993
and 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,
1994. 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
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cumulative data on re-estimated liabilities for the year and all prior years
making up those calendar year-end liabilities. The effect on income of the
charge (credit) during the current period (i.e., the difference between the
estimated liability at December 31 and the liability estimated one year later)
is shown in the table above for each of three most recent years as "Increase
(decrease) in provision for insured events of prior years."
Changes in Historical Reserves for Losses and LAE for the Last Ten Years
GAAP Basis as of December 31, 1994
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
--------------------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for Losses
and LAE, net of
reinsurance
recoverable $292,442 $382,066 $384,923 $390,799 $406,823 $647,559 $652,284 $627,103 $633,394 $644,190 $610,510
Net reserve re-esti-
mated as of:
One year later 318,878 409,681 413,549 402,902 396,091 636,039 624,953 668,107 629,268 626,956 --
Two years later 321,630 406,550 410,654 389,973 377,080 607,253 647,959 660,729 615,747
Three years later 317,201 390,847 403,767 374,330 356,961 607,492 638,879 651,482
Four years later 308,380 392,108 394,868 361,209 350,736 599,052 627,194
Five years later 311,599 385,919 384,891 358,645 375,550 593,527
Six years later 310,204 385,247 385,732 369,320 373,514
Seven years later 313,478 382,482 391,036 371,863
Eight years later 307,639 385,334 394,790
Nine years later 310,163 388,250
Ten years later 312,630
Net cumulative redundancy
(deficiency) (20,188) (6,184) (9,867) 18,936 33,309 54,032 25,090 (24,379) 17,647 17,234 --
Cumulative amount of
reserve paid, net of
reserve recoveries,
through:
One year later 101,768 134,969 136,523 128,565 125,563 226,101 245,777 257,591 240,552 236,774 --
Two years later 178,608 226,952 228,926 213,323 211,529 374,876 403,105 419,638 402,048
Three years later 227,466 282,748 286,155 266,605 263,229 461,366 495,707 521,729
Four years later 254,652 317,928 320,729 298,956 291,817 514,890 550,404
Five years later 271,230 339,771 342,673 316,483 320,511 547,535
Six years later 281,817 352,179 354,069 333,461 339,998
Seven years later 288,294 359,469 365,410 346,547
Eight years later 292,754 367,029 375,384
Nine years later 297,910 373,853
Ten years later 302,746
Net reserve--December 31, $644,190 $610,510
Reinsurance recoverable 138,737 136,151
-------- --------
Gross reserve--December 31, $782,927 $746,661
======== ========
Net re-estimated reserve $626,956
Re-estimated reinsurance
recoverable 140,021
--------
Gross re-estimated reserve $766,977
========
Gross cumulative redundancy $ 15,950
========
</TABLE>
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 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' 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. There can be no assurance
that future loss development will not require reserves for prior periods to be
increased, which would adversely impact earnings in future periods.
In 1994, the Company decreased its losses and LAE reserves for 1993
and prior accident years by $17 million. This reserve decrease has been
partially offset by an increase in the liability for dividends to
policyholders. Further, the reduction in reserves represents the recognition
of a continued decrease in the frequency and severity of reported claims on
8
<PAGE> 10
1993 and prior accident years. In 1992, the Company increased its losses and
LAE reserves for 1991 and prior accident years by $41 million. This increase
reflects primarily unexpected changes in frequency and severity of workers'
compensation claims incurred for 1991 and 1990 accident years. In 1993, losses
and LAE development on 1992 and prior accident years stabilized, evidenced by
the relatively modest decrease of $4.1 million in loss reserves. The Company
is not able to determine with certainty the specific cause or causes of
increases and decreases in claims experience that led to these changes in
reserves but has reached its own conclusion based on a review of its internal
data base and a subjective evaluation of external factors. The following is a
summary of the principal considerations that the Company evaluated in
determining workers' compensation insurance reserve adjustments during 1994,
1993 and 1992.
External Factors and Company Analysis. A number of external factors
affected the Company's reserving procedures and loss ratios during 1994, 1993
and 1992, including the recent economic recession in California (including
unemployment rates), increases in the occurrence and magnitude of
post-employment stress claims submitted to the Company, including many
fraudulent claims driven primarily by forensic doctors operating so-called
"medical mills," and the liberal construction of the workers' compensation laws
in favor of the injured worker, which encouraged the settlement of all claims,
without regard to the merit of such claims. Finally, the enactment in 1992 of
additional anti-fraud legislation in California has favorably impacted the
Company's reserving procedures and loss ratios in both 1993 and 1994.
Contributing to the Company's decision to increase losses and LAE
reserves by $41 million in 1992 on 1991 and prior accident years were certain
external factors impacting the workers' compensation industry in the late
1980's and early 1990's. In 1989, the California legislature approved a major
workers' compensation reform bill which attempted, in part, to control the cost
of medical-legal evaluations by limiting reimbursements for medical and legal
costs associated with the filing of a claim by a worker ("Medical-Legal
Expenses") to one evaluation per medical specialty. However, this portion of
the 1989 legislation unexpectedly subjected the system to exploitation by
encouraging the use of multiple specialty evaluations per claim, generating
thousands of dollars in Medical-Legal Expenses, usually before the employer or
the insurance carrier was aware that a claim existed. In retrospect, it became
clear in 1992 to the industry that this legislation had opened unexplored
avenues for abuse. Unscrupulous doctors and lawyers and dishonest employees
were presented with an opportunity to make significant profit by filing
fraudulent workers' compensation claims, substantiated by thousands of dollars
worth of bills for Medical-Legal Expenses. Unfortunately, these fraudulent
activities were continued without widespread detection by the workers'
compensation industry for some time.
Another part of the 1989 workers' compensation reform legislation
established time frames within which insurers were required to respond to
workers who filed injury claims and forensic doctors who evaluated such workers
and provided for the levy of significant penalties against insurers who failed
to respond within the specified time periods.
The California recessionary economy and the increasing level of
unemployment during late 1990 and 1991 also contributed to the problems being
experienced by workers' compensation insurers during such years.
In late 1991 and to a greater degree in 1992, the industry also became
aware of the presence of "medical mills", which generated bills and specialty
evaluation fees related to fraudulent workers' compensation insurance claims.
In retrospect, the Company believes the existence of these medical mills
contributed to the unexpected increase in claim frequency in 1990 and 1991.
Further, the Company believes the decline in claim frequency and severity,
primarily in Southern California, which began in mid-1992 is primarily due to
the anti-fraud legislation enacted by the California legislature in 1992 and
the anti-fraud campaigns thereafter undertaken by the Company and other members
of the workers' compensation industry.
While all of the above described external factors may be analyzed in
hindsight in 1994, this information had become available to the Company only
gradually, over the period from 1989 to 1994. In mid 1992, the Company
reevaluated the information then available with respect to its claims base and
external factors and decided to increase reserves for accident years 1990 and
1991. Among the factors considered were the increasing California unemployment
rate in the first and second quarter of 1992, the continued deterioration of
the California economy at that time, the Company's claim experience and loss
development history and additional statistical evidence of the prevalence of
workers' compensation fraud. Claims remained high during the first half of
1992, although not as high as the end of 1991.
In the last half of 1992, the Company also became more aware of the
prevalence of post-employment stress claims and began to track these claims in
its own data base. Since the Company saw no improvements in the earlier trends
it had recognized for accident years 1990 and 1991, it reserved additional
amounts in 1992 for these years. Also in the last half of 1992, the number of
claims began to decline, and, in particular, the Company experienced a
pronounced decrease in the
9
<PAGE> 11
number of claims attributable to the 1992 accident year. This decrease in claim
frequency and severity has continued through 1994 on 1993 and prior accident
years and is the primary reason for the Company's decision to decrease losses
and LAE reserves by $17 million in 1994.
The Company's loss reserve adjustments during 1992 mirrored those of
the California workers' compensation industry in general as private workers'
compensation insurance carriers in California substantially increased loss
reserves 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.
INVESTMENT PORTFOLIO
The Company manages its investments internally. The following
portfolio information reflects the Company's continuing operations. See
"--Discontinued Operations."
The following table reflects the amortized cost and fair value of
fixed maturity investments and equity securities by major category as well as
by cash and short-term investments on the dates indicated.
10
<PAGE> 12
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
-------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Held to maturity:
United States Treasury securities and
obligations of other US government
agencies and corporations $ 53,695 $ 51,407 $ 38,320 $ 40,132
Redeemable preferred stock -- -- 23,959 23,420
Mortgage-backed securities 152,721 147,696 -- --
Corporate securities
Utilities -- -- 90,871 98,375
Banks -- -- 14,030 13,650
Financial -- -- 39,074 41,822
Industrial -- -- 80,008 88,044
Other -- -- 5,000 5,123
-------- -------- -------- --------
Total $206,416 $199,103 $291,262 $310,566
======== ======== ======== ========
Available for sale:
United States Treasury securities and
obligations of other US government
agencies and corporations $ 53,045 $ 45,152 $ -- $ --
Redeemable preferred stock 4,249 3,491 -- --
Mortgage-backed securities 189,551 130,675 227,901 231,196
Corporate securities
Utilities -- -- 27,962 29,315
Banks 24,744 20,125 43,934 45,480
Financial 10,000 8,225 103,475 111,002
Industrial 30,112 27,774 107,190 113,001
Foreign -- -- 36,901 41,136
Transportation -- -- 9,978 10,713
Other -- -- 9,035 9,125
-------- -------- -------- --------
Total 311,701 235,442 566,376 590,968
Non-redeemable preferred stock 213,935 189,632 56,891 56,891
-------- -------- -------- --------
Total $525,636 $425,074 $623,267 $647,859
======== ======== ======== ========
Short-term investments $255,751 $255,751 $138,835 $138,835
Cash 31,058 31,058 28,433 28,433
</TABLE>
As of December 31, 1994, all of the securities in the portfolio were
rated investment grade. Using Standard and Poor's, Moody's and Fitch's rating
services, 85% were rated "A" or higher, 14% were rated BBB and 1% were rated
BB. As of December 31, 1994, these investment securities had an approximate
fair value of $624 million, which was below amortized cost by approximately
$101 million. The Company does not currently plan or intend to invest in
securities rated below investment grade.
11
<PAGE> 13
The following table reflects the average cash and investment assets of
the Company and its subsidiaries for the periods indicated.
<TABLE>
<CAPTION>
1994 1993 1992
------------ ---------- ----------
(Thousands of dollars, except percents)
<S> <C> <C> <C>
Average cash and investment assets
Cash $ 29,693 $ 33,700 $ 30,848
Investment assets 1,060,001 925,794 795,194
---------- -------- --------
Total $1,089,694 $959,494 $826,042
========== ======== ========
Percent earned on (excluding realized gains and losses):
Cash and investment assets 6.99% 7.83% 8.18%
Investment assets only 7.19% 8.11% 8.49%
Percent earned on (including realized gains and losses):
Cash and investment assets 6.97% 8.05% 10.06%
Investment assets only 7.16% 8.34% 10.43%
</TABLE>
The Company's general investment philosophy is to hold fixed income
securities for long term investment. As a result of changing accounting and
industry practice and management's evaluation of the investment portfolio, the
Company has segregated its portfolio into investments held to maturity and
those that would be available for sale in response to changing market
conditions, liquidity requirements, interest rate movements and other
investment factors. At December 31, 1994 and 1993, Company held securities
having an amortized cost of $526 million and $623 million, respectively, as
available for sale. See Notes A and B of Notes to Consolidated Financial
Statements.
The following table sets forth maturities in the marketable securities
and short-term investment portfolio at December 31, 1994:
<TABLE>
<CAPTION>
Amortized
Cost Percentage
--------- ----------
(Thousands of dollars, except percents)
<S> <C> <C>
Held to maturity:
One year or less $255,751 55%
Over 1 year through 5 years -- --
Over 5 years through 10 years -- --
Over 10 years 53,695 12
Mortgage-backed securities 152,721 33
-------- ---
Totals $462,167 100%
======== ===
Available for sale:
One year or less $15,092 5%
Over 1 year through 5 years 69,011 22
Over 5 years through 10 years 34,361 11
Over 10 years 3,686 1
Mortgage-backed securities 189,551 61
-------- ---
Totals $311,701 100%
======== ===
</TABLE>
12
<PAGE> 14
Using Standard and Poor's, Moody's and Fitch's rating services, the following
table sets forth the quality mix of the Company's investment portfolio at
December 31, 1994:
<TABLE>
<CAPTION>
Percentage
--------------------------------------------
Held to Available
Maturity for Sale Total
---------- --------- -----
<S> <C> <C> <C>
AAA (Including US government obligations) 100% 39% 55%
AA -- 2 1
A -- 39 29
BBB -- 19 14
BB -- 1 1
--- --- ---
Total 100% 100% 100%
=== === ===
</TABLE>
FINANCIAL SERVICES OPERATIONS
Commercial Finance/Asset-Based Lending
The Company's commercial finance subsidiary, Fremont Financial, makes
asset-based loans, to small and medium-sized businesses, that are primarily
secured by accounts receivable and inventory. Fremont Financial's total loan
portfolio has grown from $164 million at December 31, 1990 to $557 million at
December 31, 1994. This growth has been achieved partly through development of
Fremont Financial's customer base and partly through purchases of loans
originated by others. In 1994, income before taxes from asset-based lending
was $16.9 million.
Commercial finance loans made by Fremont Financial are primarily on a
revolving short-term basis (generally two or three years) and secured by assets
which primarily include accounts receivable, inventory, machinery and equipment
and, to a lesser extent, real estate and other types of collateral. In
addition, Fremont Financial also makes term loans secured primarily by
equipment and real estate. The term loans 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
years; however, certain term loans are "balloon loans" that amortize over a
longer period and therefore do not amortize fully before their respective
maturities. Commercial loans also include secured loans originated and
serviced by other asset-based lenders and participated in by Fremont Financial.
As of December 31, 1994, the average outstanding commercial loan balance was
$2.4 million. Loans outstanding to a single borrower generally range in size
from $500,000 to $10,000,000.
The major avenue of growth for Fremont Financial remains the
establishment of new lending relationships. The Company has a national presence
with regional offices in Santa Monica, Chicago, New York and Atlanta. To
provide a stable source of funds to facilitate the continued expansion of its
asset-based lending business, the Company, in 1993, established the Fremont
Small Business Loan Master Trust ("Fremont Trust") for the purpose of
securitizing the greater part of its commercial finance loan portfolio. The
Fremont Trust is a master trust that can issue multiple series of asset-backed
certificates which represent undivided interests in the Fremont Trust's assets
(primarily commercial finance loans) and Fremont Financial will continue to
service the loans thereunder. In 1993, two series of fixed-principal
certificates were issued on a public offering basis and totaled $300 million in
principal as of December 31, 1994. The proceeds from the initial issuance of
certificates were used by Fremont Financial to pay down outstanding debt on its
bank line of credit. Subsequent issuances are used to fund the growth in the
commercial finance loan portfolio. The securities issued in this program have
a scheduled maturity of three to four years, respectively, but could mature
earlier depending on fluctuations in the outstanding balances of loans in the
portfolio and other factors. As of December 31, 1994, up to $500 million in
additional publicly offered asset-backed certificates may be issued pursuant to
a shelf registration statement to fund future growth in the commercial finance
loan portfolio. In addition to the Fremont Trust, Fremont Financial has an
unsecured revolving line of credit with a syndicated bank group that presently
permits borrowings of up to $180 million, of which $156 million was outstanding
as of December 31, 1994. This credit line is primarily used to finance assets
which are not included in the Fremont Trust. This credit line expires August
31, 1995 and is renewable annually.
13
<PAGE> 15
The Company's customer base consists primarily of small to
medium-sized manufacturers and distributors which generally require financing
for working capital and debt restructuring. At December 31, 1994, the Company
had approximately 225 loans outstanding in 37 states. Approximately 35% of
total loans outstanding were made to companies based in California, and no
other state accounted for more than 10% of total loans outstanding.
Asset-based revolving loans permit a company to borrow from the lender
at any time during the term of the loan agreement, up to the lesser of a
maximum amount set forth in the loan agreement or a percentage of the value of
the collateral (generally not in excess of 80%) which primarily secures such
loans. Under an asset-based lending agreement, the borrower retains the credit
and collection risk with respect to the collateral in which the lender takes a
security interest. Cash collections are received as often as daily by or on
behalf of the borrower after the loan is initially made. These collections are
paid to the lender to reduce the loan balance.
While consideration is given to the net worth and profitability of a
client, asset-based loans are generally extended to borrowers who do not have
bank sources of credit readily available and are based on the estimated
liquidation value of the collateral pledged to secure the loan. The largest
percentage of realized losses has resulted from fraud or collateral
misrepresentations by the borrower. Fremont Financial seeks to protect itself
against this risk through a comprehensive system of collateral monitoring and
control. Fremont Financial's auditors perform auditing procedures of a
borrower's books and records and physically inspects the collateral prior to
approval and funding, as well as approximately every 90 days during the term of
the loan. General economic conditions beyond the Company's control can and do
impact the ability of borrowers to repay loans and also the value of the assets
collateralizing such loans.
Over the past three years, the majority of Fremont Financial's loans
that have been liquidated have been fully repaid, as Fremont Financial attempts
to work closely with the borrower through the liquidation to ensure repayment
of the loan. Fremont Financial seeks to maintain conservative collateral
valuations and perfection of security interests.
Fremont Financial primarily competes with other asset-based lenders
and regional banks, most of whom are larger and have greater financial
resources than Fremont Financial. The principal competitive factors are the
rates and terms upon which financing is provided and customer service.
Thrift and Loan
In 1990, the Company acquired Investors Bancor, a holding company for
Fremont Investment & Loan (formerly Investors Thrift), a California thrift and
loan from Tomar Financial Corporation for approximately $6.7 million. Fremont
Investment & Loan ("Fremont I & L") serves more than 27,000 customers through
its 11 branches, and its deposits are insured by the FDIC. Fremont I & L
specializes primarily in commercial and residential real estate lending. As a
result of the recent downturn in the California economy, many other lenders
curtailed their originations of small commercial real estate loans, which
provided an enhanced market opportunity for the Company. Income before taxes
from the thrift and loan operations has increased significantly from a
break-even level in 1990 to $9.2 million in 1994. Pre-tax return on average
assets increased to 1.43% in 1994 from 0.40% in 1990. Assets of the thrift and
loan operations have grown from $243 million at the end of 1990 to $887 million
at the end of 1994, due to increased loan originations and to the purchase of
loans from other financial institutions. Fremont I & L funds its lending
activities through its deposits and capital. Deposits consists of full-paid
investment certificates (which are similar to certificates of deposit) and
installment investment certificates (which are similar to passbook accounts and
money market accounts). Deposits totaled $747 million at December 1994.
The adverse economic environment in California, has adversely affected
the commercial and residential real estate lending industry by impacting
borrowers' abilities to service their debts and by reducing the value of real
estate collateral. Because of the Company's lending policies, which require
conservative loan-to-value ratios and careful review of the value of the
property and the borrower, the Company's thrift and loan operations have not
been materially adversely affected by these adverse economic conditions and
have benefited from the reduced competition that has resulted from these
conditions. However, there can be no assurance that adverse conditions will
not impact the Company's thrift and loan operations in the future.
Loan Origination. Fremont I & L originates loans through its own loan
agents and through independent loan brokers. In 1994, Fremont I & L purchased
an aggregate of $366 million in California real estate loans from third
parties, primarily financial institutions. Acquisition costs of purchased loan
portfolios are significantly lower than if loans were
14
<PAGE> 16
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 investment value analysis of the underlying collateral at
the time each loan is purchased and applies strict underwriting guidelines that
include conservative loan-to-value ratios.
Fremont I & L has primarily focused on the origination of commercial
real estate loans secured by first trust deeds on developed properties in
California. The real estate securing these loans include a wide variety of
property types, such as small office buildings, small shopping centers,
owner-user office/warehouses and retail properties. Fremont I & L does not
originate commercial real estate construction and development loans. The
majority of the commercial real estate loans are adjustable rate loans and are
generally under $5 million. As of December 31, 1994, the average loan size was
$772,000 and the approximate average loan-to-value ratio was 60%, using
appraised values at the time of loan origination and current balances
outstanding. The total amount of commercial real estate loans outstanding on
December 31, 1994 was $687 million or 83% 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, 1994, Fremont I & L had
thirty-one non-accrual commercial real estate loans totaling approximately
$21.2 million and real estate owned of approximately $17.4 million.
Fremont I & L also originates loans secured by single-family
residences. At December 31, 1994, single family residential real estate
secured loans, including home equity loans, represented $104 million, or 13%,
of the Fremont I & L's loan portfolio. Approximately half of these loans are
secured by first trust deeds and the remaining balance are secured by second
mortgages. These loans have maturities of two to thirty years and are approved
in accordance with lending policies approved by Fremont I & L's Board of
Directors which includes standards covering, among other things, collateral
value, loan to value and debt service capacity. At December 31, 1994, the
average single-family loan amount was $31,000, and the approximate average
loan-to-value ratio was 82%, using appraised values at the time of loan
origination and current balances outstanding.
The portfolio of Fremont I & L's loans receivable as of the dates
indicated are summarized in the following table by type of primary collateral.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Commercial real estate loans $687,198 $302,202 $203,576 $ 99,437 $ 64,456
Consumer real estate loans 103,532 64,608 105,040 65,624 54,987
Contract loans 32,990 52,214 57,572 76,287 75,729
Installment loans 3,191 5,638 7,988 10,409 13,563
Finance leases 114 794 3,395 7,698 12,875
-------- -------- -------- -------- --------
Loans receivable before deferred fees and costs 827,025 425,456 377,571 259,455 221,610
Purchase discount and deferred fees and costs (19,498) (24) (2,052) 2,566 2,389
-------- -------- -------- -------- --------
Total loans receivable, purchase
discount and deferred fees
and costs 807,527 425,432 375,519 262,021 223,999
Less allowance for possible loan losses (14,391) (11,880) (7,308) (4,681) (3,774)
-------- -------- -------- -------- --------
Loans receivable, net $793,136 $413,552 $368,211 $257,340 $220,225
======== ======== ======== ======== ========
</TABLE>
- --------------
The growth in the commercial and consumer real estate loans over the
five years ended December 31, 1994 is consistent with the Company's strategy to
pursue growth of the commercial real estate and residential real estate loan
portfolios, primarily through the origination of new loans. Fremont I&L also
purchases loan portfolios that meet its underwriting guidelines applied to
origination of new loans. Fremont I&L anticipated stabilization of the
previously declining California real estate markets, and loans originated or
purchased in 1993 and 1994 continue to perform with no significant loss
experience.
In 1994, Fremont I&L purchased approximately $366,583,000 principal
amount of seasoned commercial real estate loans for approximately $331,320,000
which accounted for a substantial portion of the commercial real estate loan
growth for the year. All loans were current with their respective mortgage
notes at the time of purchase, and a substantial purchase discount was
calculated to adjust for the values of the underlying collateral based upon
Fremont I&L's valuations at the date of purchase.
Funding Sources. Fremont I & L obtains funds from depositors by
offering full-paid investment certificates and installment investment
certificates insured by the FDIC to the legal maximum through its 11 branches
in California. Fremont I & L has typically offered higher interest rates to
its depositors than do most full service financial institutions. At the same
time, it has minimized the cost of maintaining these accounts by not offering
transaction accounts or services such as checking, safe deposit boxes, money
orders, ATM access and other traditional retail services. Fremont I & L
generally effects deposit withdrawals by issuing checks rather than disbursing
cash, which minimizes operating costs associated with handling and storing
cash.
The table below summarizes Fremont I&L's investment certificates as of
December 31, 1994 which are stated in amounts of $100,000 or more, by maturity
and by type.
<TABLE>
<CAPTION>
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)
<C> <C> <C> <C> <C>
Retail $24,436 $20,277 $12,925 $10,121 $ 67,759
IRA's -- 105 646 221 972
Wholesale 4,403 1,600 2,591 8,626 17,220
Brokered 53,696 30,147 24,850 55,707 164,400
------- ------- ------- ------- --------
Total $82,535 $52,129 $41,012 $74,675 $250,351
======= ======= ======= ======= ========
</TABLE>
15
<PAGE> 17
Life Insurance and Premium Financing
The Company offers life insurance products, including annuities,
credit life and disability insurance and term life insurance for consumers,
through its subsidiary, Fremont Life Insurance Company. These life insurance
plans are offered through intermediaries such as insurance brokers, lending
institutions, automobile dealers and credit associations. The Company
generally obtains reinsurance for mortality risks exceeding $125,000 depending
upon the type of policy written. Revenue and operating income from this
subsidiary were not significant in 1994, 1993, 1992.
The Company also finances property and casualty insurance premiums
through its subsidiary, Fremont Premium Finance Corporation. This premium
finance loan portfolio is collateralized by the unearned premiums of the
underlying insurance policies. Revenue and operating income from this
subsidiary were not significant in 1994, 1993, 1992.
DISCONTINUED OPERATIONS
The Company's discontinued operations consist primarily of assumed
treaty and facultative reinsurance business that was discontinued between 1986
and 1991. In 1990, the Company established a management group to actively
manage the liquidation of this business. The liabilities associated with this
business are long term in duration and therefore, the Company continues to be
subject to claims being reported. Claims under these reinsurance treaties
include professional liability, product liability and general liability which
include environmental claims.
The Company supports these discontinued operations with $250 million
in cash and investment grade fixed income securities and other assets totaling
$20 million. Management believes the assets along with future cash flows of
these operations will be adequate to fund obligations of the discontinued
operations. However, should these 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 L of Notes
to Consolidated Financial Statements. The discontinued operations have
investment portfolios which closely resemble the portfolios in the ongoing
operations with regard to asset allocation, quality, performance and
maturities.
REGULATION
Insurance Regulation
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. 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.
Prior to the Company's acquisition of Casualty Insurance Company
("Casualty") on February 22, 1995, the Company wrote substantially all of its
workers' compensation and medical malpractice insurance in California, and all
of its insurance company subsidiaries were domiciled in that state. California
laws and regulations, therefore, had the most significant impact on the Company
and its operations. With its acquisition of Casualty, the Company now has an
insurance company that is domiciled in Illinois, and this subsidiary will be
subject to Illinois laws and regulations. The Company believes that in 1995
workers' compensation premium writings will be evenly distributed between
California and the mid-west, primarily in Illinois. The Company is authorized
to write workers' compensation and liability coverage in 42 other states and
writes credit life and disability and term life insurance in 14 states.
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<PAGE> 18
Workers' Compensation Regulation. Prior to January 1, 1995, manual
premium rates for workers' compensation insurance were set by the Insurance
Commissioner based upon recommendations of the Workers' Compensation Insurance
Rating Bureau of California. Such rates varied among the approximately 450
categories of employment. Additionally, the rates of each employer were
modified based on its actual loss experience, which is commonly referred to as
the Experience Modification Rating Factor. Employees are entitled by statute
to medical, vocational rehabilitation, disability and death benefits for work
related injuries and illness. The amounts of disability and death benefits
payable for claims are established by statute, but no dollar limitations have
historically been fixed for medical and rehabilitation benefits.
On July 16, 1993, the Governor of California signed a legislative
package significantly reforming the laws governing workers' compensation
insurance in California. The new legislation affects many areas of the
workers' compensation system in California. Some provisions of this
legislation have adversely affected workers' compensation insurers, such as
provisions (i) reducing manual premium rates by 7% effective July 16, 1993,
(ii) creating employers' rights regarding disclosure of insurer claims
information, (iii) requiring insurers to provide minimum levels of occupational
safety and health loss control services and (iv) increasing some benefits which
will be phased in over a three-year period commencing July 1, 1994. This
legislation authorizes the Insurance Commissioner to approve further reductions
in premium rates so long as the further reduced rates are "adequate" and
prohibits the Insurance Commissioner from approving any premium rate that is
greater than the reduced rates affected by the legislation. Pursuant to this
authorization, the Insurance Commissioner further reduced manual premium rates
by 12.7% on new and renewal business that became effective January 1, 1994, and
an additional 16% on all business incepting on or after January 1, 1994 that
became effective October 1, 1994. Other provisions of this legislation,
however, have benefited workers' compensation insurers, such as provisions (1)
tightening standards relating to stress related claims, (ii) limiting
post-termination claims, (iii) placing restrictions, including maximum benefit
payment limitations, on vocational rehabilitation claims, (iv) increasing
measures to reduce fraudulent claims, (v) increasing the ability of insurance
companies and employers to contract with managed care organizations and to
direct claimants' medical care, and (vi) changing procedures for medical-legal
evaluations. Implementation of some of these changes will begin immediately
while others will be phased in over time.
On July 28, 1993, California enacted further legislation to repeal the
minimum rate law effective January 1, 1995. In place of the minimum rate law,
workers' compensation insurance companies will be provided with advisory rates
by classification, and each insurance company will determine its own premium
rates based in part upon its operating costs and loss costs. The premium rates
determined by an insurer will be subject to limited review by the Department of
Insurance. Insurers will be permitted to use any rate within 30 days after
filing it with the Insurance Commissioner unless the rate is disapproved by the
Insurance Commissioner.
The impact of these legislative changes on the Company's operations
has been both lower premiums and lower incurred losses and loss
adjustment-expenses. The reductions in manual premium rates have resulted in
lower premiums on the Company's policies. However, the Company also had
favorable loss and loss adjustment expense experience during the twelve months
ended December 31, 1994. Before allowance for the accrual of policyholder
dividends, the Company's workers' compensation combined ratio for the twelve
months ended December 31, 1994 was 85.2%, compared to 91.0% for the same period
in 1993. See "--Insurance Operations -- Operating Data." The profitability of
the Company's insurance operations at these reduced premium levels could be
adversely affected if loss experience deteriorates or the cost savings
resulting from the new legislation are inadequate to offset the impact of the
increased benefits and the additional expenses relating to the expanded
employer's rights and the occupational safety and health loss control services.
The repeal of the minimum rate law on January 1, 1995, has resulted in lower
premiums and lower profitability on the Company's California workers'
compensation policies due to increased price competition. The Company believes
that its newly acquired Casualty Insurance Company business will mitigate the
impact of the repeal of the minimum rate law.
Prior to January 1, 1995, 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. After December 31, 1994,
the payment of policyholder dividends in respect of workers' compensation
policies written in California is not limited. 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.
Proposition 103. In November 1988, California voters adopted by
ballot initiative Proposition 103, a comprehensive system of regulation
applicable to all property and casualty insurance written in California.
Proposition 103, however, does not apply to workers' compensation insurance or
reinsurance. The major provisions of Proposition 103
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<PAGE> 19
included, among other things, a minimum 20% rate rollback for all policies
issued or renewed on or after November 8, 1988 and before November 8, 1989 (the
"rollback period") from the rates in effect on November 8, 1987. Proposition
103 further required that with respect to rates charged for policies issued or
renewed on or after November 8, 1989, all rates and subsequent rate changes
must be approved by the California Department of Insurance prior to use.
Because Proposition 103 does not apply to the workers' compensation
insurance business, its impact on the Company is limited. Proposition 103
applies to the Company's medical malpractice insurance operations. To date, the
results of operations of this business have not been materially affected except
with respect to changes in premium income in 1990 and 1991 resulting from
uncertainties regarding the application of Proposition 103. If any amounts are
ultimately paid, such amounts would be a charge to earnings in the period in
which the amount to be paid is determined. The Company believes that the
ultimate outcome of this matter will not have a material adverse affect on its
financial position or results of operations. The Company made the required
filing with the Department of Insurance with respect to its medical malpractice
insurance rates charged on November 8, 1989.
Proposition 103 also provided for an elected California Insurance
Commissioner, repealed the state antitrust exemption for insurance companies,
applied certain anti-discrimination laws to the business of insurance,
permitted banks to engage in the business of insurance and made various other
changes.
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.
In California, where the Company principally conducts its operations, an
insurer cannot be assessed an amount greater than 1% of its premiums written in
the preceding year, and the full amount is required to be recovered through a
mandated surcharge to policyholders. 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 in other jurisdictions.
Holding Company Regulation. The Company is subject to the California
Holding Company System Regulatory Act (the "Holding Company Act"). This act,
and similar laws in other states, require the Company periodically to 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 12-month period aggregate at least 5%
of its admitted assets or 25% of its statutory capital and surplus, also are
subject to prior approval by the Department of Insurance.
The Holding Company Act also provides that the acquisition or change
of "control" of a California domiciled insurance company or of any person who
controls such an insurance company cannot be consummated without the prior
approval of the Insurance Commissioner. In general, presumption of "control"
arises from the ownership of voting securities and securities that are
convertible into voting securities, which in the aggregate constitute 10% or
more of the voting securities of a California insurance company or of a person
that controls a California insurance company, such as Fremont General. The
Liquid Yield Option Notes ("LYON's") 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 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
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<PAGE> 20
effect, the maximum amount available for payment of dividends by the Company's
direct property and casualty subsidiaries during 1994 without prior regulatory
approval is approximately $24 million. In addition, insurance regulations
require that the Department of Insurance be given fifteen days advance notice
of any dividend payment.
Other Potential Regulations. Although the federal government does not
directly regulate the business of insurance, several Congressional inquiries
are considering the adequacy of existing state regulations related to the
financial health of insurance companies. In addition, the National Association
of Insurance Commissioners has adopted a formula to calculate risk based
capital ("RBC") of property and casualty insurance companies for inclusion in
1994 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, 1994 the Company's insurance subsidiaries
engaged in continuing operations exceed all RBC levels requiring any regulatory
intervention.
Medical Malpractice Tort Reform. The Medical Injury Compensation
Reform Act ("MICRA"), enacted in 1975, has been one of the most comprehensive
medical malpractice tort reform measures in the United States. The
constitutionality of the various provisions of MICRA were judicially challenged
soon after its enactment, and California trial courts and intermediate
appellate courts reached conflicting decisions. The California Supreme Court,
in a series of decisions rendered during 1984 and 1985, upheld the
constitutionality of MICRA. Bills have been introduced to the California
Legislature from time to time to modify or limit certain of the tort reform
benefits provided to physicians and other health care providers by MICRA. In
1987, the principal proponents and opponents of MICRA signed an agreement under
which the parties agreed to a five-year moratorium on amendments to MICRA,
except for an increase in the limits on plaintiffs' attorneys fees, which was
enacted at the time of this agreement. This moratorium expired by its terms on
December 31, 1992. The Company cannot predict what changes, if any, to MICRA
may be enacted during the next few years or what effect such changes might have
on the Company's medical malpractice insurance operations.
Thrift and Loan Regulation
Fremont I & L is subject to supervision and regulation by the
Department of Corporations of the State of California (the "DOC") and, as an
insured institution, by the FDIC. Neither Investors Bancor nor Fremont I & L
is regulated or supervised by the Office of Thrift Supervision, which regulates
savings and loan institutions. Fremont General is generally not directly
regulated or supervised by the DOC, the FDIC, the Federal Reserve Board or any
other bank regulatory authority, except with respect to guidelines concerning
its relationship with Investors Bancor and Fremont I & L. Such guidelines
include (i) general regulatory and enforcement authority of the DOC and the
FDIC over transactions and dealings between Fremont General and Fremont I & L,
(ii) specific limitations regarding ownership of the capital stock of the
parent company of any thrift and loan company, and (iii) specific limitations
regarding the payment of dividends from Fremont I & L as discussed below.
Fremont I & L is examined on a regular basis by both agencies. The DOC
completed its regular annual examination in August of 1993 and based thereon,
has determined to extend the next examination to eighteen months rather than
the usual twelve month examination cycle. There was no DOC examination in
1994. The FDIC examines Fremont I & L annually, as required by law.
California Law. The thrift and loan business conducted by Fremont I &
L is governed by the California Industrial Loan Law and the rules and
regulations of the Commissioner which, among other things, regulate the
collateral requirements and maximum maturities of the various types of loans
that are permitted to be made by California-chartered industrial loan
companies, i.e., thrift and loan companies or thrifts.
Subject to restrictions imposed by applicable California law, Fremont
I & L is permitted to make secured and unsecured consumer and non-consumer
loans. The maximum term for repayment of loans made by thrift and loan
companies range up to forty years and thirty days depending upon collateral and
priority of secured position, except that loans with repayment terms in excess
of thirty years and thirty days may not in the aggregate exceed 5% of total
outstanding loans and obligations of the thrift. Consumer loans secured by
real property with terms in excess of three years must be repayable in
substantially equal periodic payments unless such loans are covered under the
Garn-St. Germain Depository Institutions Act of 1982 (primarily single-family
residential loans). Nonconsumer loans may be repayable in unequal periodic
payments during their respective terms. California law limits lending
activities outside of California by thrift and loan companies to no more than
30% of total assets.
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California law contains extensive requirements for the diversification
of the loan portfolios of thrift and loan companies. A thrift and loan with
outstanding investment certificates may not, among other things, place more
than 5% of its loans or other obligations in loans or obligations which are
secured only partially, but not primarily, by real property; may not make any
one loan secured primarily by improved real property which exceeds 20% of its
paid-up and unimpaired capital stock and surplus not available for dividends;
may not lend an amount in excess of 5% of its paid-up and unimpaired capital
stock and surplus not available for dividends upon the security of the stock of
any one corporation; may not make loans to, or hold the obligations of, any one
person as primary obligor in an aggregate principal amount exceeding 20% of its
paid-up and unimpaired capital stock and surplus not available for dividends;
and may have no more than 70% of its total assets in loans which have remaining
terms to maturity in excess of seven years and are secured solely or primarily
by real property. At December 31, 1994, Fremont I & L was in compliance with
all of these requirements.
A thrift and loan generally may not make any loans to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the DOC. Nor may a thrift and loan make any loan to, or hold an
obligation of, any of its shareholders or any shareholder of its holding
company or affiliates, except that this prohibition does not apply to persons
who own less than 10% of the stock of a holding company or affiliate which is
listed on a national securities exchange, such as Fremont General. Any person
who wishes to acquire (i) 10% or more of the voting securities of a California
thrift and loan company, or (ii) 10% or more of the voting securities of a
holding company of a California thrift and loan company, such as the Company,
must obtain the prior approval of the DOC. The LYONs are not voting securities
of the Company, but the shares of Common Stock into which such LYONs are
convertible constitute voting securities of the Company. Fremont I & L must
also obtain prior written approval from the DOC before it may open or relocate
any branch or loan production office or close a branch office.
The Industrial Loan Law prohibits an industrial loan company from
having deposits at any time in an aggregate sum in excess of 20 times the
aggregate amount of its paid-up unimpaired capital and such of its unimpaired
surplus as is declared by its by-laws not to be available for cash dividends.
Fremont I & L currently has an authorized ratio of deposits to such capital of
17 to 1.
Federal Law. Fremont I & L's deposits are insured by the FDIC to the
full extent permitted by law. As an insurer of deposits, the FDIC issues
regulations, conducts examinations, requires the filing of reports and
generally supervises the operations of institutions to which it provides
deposit insurance. Fremont I & L is subject to the rules and regulations of
the FDIC to the same extent as other financial institutions which are insured
by that entity. The approval of the FDIC is required prior to any merger,
consolidation or change in control or the establishment or relocation of any
branch office of Fremont I & L. This supervision and regulation is intended
primarily for the protection of the insured deposit funds. Prior written
notice to the FDIC is required to close a branch office.
Fremont I & L is subject to federal risk-based capital adequacy
guidelines which provide a measure of capital adequacy and are intended to
reflect the degree of risk associated with both on and off-balance sheet
items, including residential 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, 1993, the Tier
2 capital of Fremont I & L consisted of approximately $5.7 million of provision
for possible loan losses. As of December 31, 1994, Fremont I & L's
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provision for possible loan losses for Tier 2 capital increased to $10.6
million. See "-- Financial Services -- Thrift and Loan." The following table
presents Fremont I & L's risk-based capital position at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------------------- ------------------------------
Percent of Percent of
Risk-Weighted Risk-Weighted
Amount Assets Amount Assets
-------------- -------- -------------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Tier 1 capital $ 80,385 9.57% $ 48,592 10.69%
Minimum requirement 33,590 4.00 18,190 4.00
---------- ----- ---------- -----
Excess $ 46,795 5.57% $ 30,402 6.69%
========== ===== ========== =====
Total capital $ 90,937 10.83% $ 54,325 11.95%
Minimum requirement 67,179 8.00 36,379 8.00
---------- ----- ---------- -----
$ 23,758 2.83% $ 17,946 3.95%
========== ===== ========== =====
Risk adjusted assets $839,743 $454,742
========== ==========
</TABLE>
The FDIC has adopted a 3% minimum leverage ratio which is intended to
supplement risk-based capital requirements and to ensure that all financial
institutions continue to maintain a minimum level of core capital. A minimum
leverage ratio of 3% is required for institutions which have been determined to
be the highest of five categories used by regulators to rate financial
institutions. All other institutions (including Fremont I & L) will likely be
required to maintain leverage ratios of at least 100 to 200 basis points above
the 3% minimum. It is improbable, however, that an institution with a 3% core
capital-to-total assets ratio would be rated in the highest category since a
strong capital position is so closely tied to the rating system. Therefore,
the "minimum" leverage ratio is, for all practical purposes, significantly
above 3%. The following table presents Fremont I & L's leverage ratio (the
ratio of Tier 1 capital to average total assets) at the dates indicated:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
--------------------------------- ---------------------------------
Percent of Percent of
Average Total Average Total
Amount Assets Amount Assets
-------- ------------- -------- -------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Tier 1 capital $ 80,385 9.79% $ 48,592 10.38%
Minimum requirement 24,643 3.00 14,043 3.00
-------- ---- -------- -----
Excess $ 55,742 6.79 $ 34,549 7.38%
======== ==== ======== =====
Average total assets $821,434 $468,106
======== ========
</TABLE>
The FDIC conducted an examination of Fremont I&L as of August 31,
1994. The examination resulted in the FDIC requiring Fremont I&L to enter into
a Memorandum of Understanding in January 1995 ("the MOU"). The MOU requires,
among other things, that Fremont I&L: (a) maintain management acceptable to the
FDIC, (b) maintain a ratio of Tier 1 capital as a percentage of average
quarterly assets of at least 8.5%, (c) maintain an adequate reserve for loan
losses, (d) reduce its dependence on volatile liabilities, (e) not pay cash
dividends without the prior written consent of the FDIC, and (f) effect
revisions and enhancements to certain policies and procedures, including
lending, collection, reserve for loan losses, asset/liability management and
affiliate transaction policies and procedures.
The FDIC and the California Department of Corporations ("the DOC"), the
primary regulatory authorities for Fremont I&L, conducted another examination
as of March 31, 1995. The FDIC's and DOC's reports issued as a result of this
examination indicated that Fremont I&L's compliance with the MOU was
satisfactory. Management does not believe that the restrictions on Fremont
I&L's ability to pay dividends imposed by the MOU or by federal or state law
will adversely affect the ability of Fremont General to meet its obligations,
including repayment of its indebtedness and other obligations. However, no
assurances can be given as to when, or if, the MOU will be terminated.
The Company contributed approximately $8 million to the capital of
Fremont I & L in June 1993 to qualify this subsidiary as a "well-capitalized"
institution under the regulations recently promulgated by the FDIC under the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). 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 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-adjusted assets and the Tier 1 risk-based capital ratio is the ratio of
Tier 1 capital to risk-adjusted assets. In
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August 1994, an additional $23 million was contributed to the capital of
Fremont I & L to support the growth in the loan portfolio during 1994.
Upon being designated a "well-capitalized" institution, Fremont I &
L's annual insurance premiums were reduced to 23 cents per $100 of eligible
domestic deposits effective January 1, 1994. The insurance premium payable is
subject to semiannual adjustment. The FDIC, by the first day of the month
preceding each semiannual 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 additional premiums to cover losses and expenses associated
with insuring deposits maintained at financial institutions and for other
purposes it deems necessary. Effective January 1, 1995 insurance premiums
increased to 26 cents per $100 of eligible domestic deposits. See "-- Federal
Deposit Insurance Reform."
Limitations on Dividends. Under California law, a thrift is not
permitted to declare dividends on its capital stock unless it has at least
$750,000 of unimpaired capital plus additional capital of $50,000 for each
branch office maintained. In addition, no distribution of dividends is
permitted unless: (i) such distribution would not exceed a thrift's retained
earnings; (ii) any payment would result in violation of the approved maximum
capital to thrift investment certificate ratio; or (iii) in the alternative,
after giving effect to the distribution, the sum of a thrift and loan's
qualified assets would be not less than 125% of certain of its liabilities, or
with certain exceptions, current assets would be not less than current
liabilities. In addition, a thrift and loan is prohibited from paying
dividends from that portion of capital which its board of directors has
declared restricted for dividend payment purposes. In policy statements, the
FDIC has advised insured institutions that the payment of cash dividends in
excess of current earnings from operations is inappropriate and may be cause
for supervisory action. Under the Financial Institutions Supervisory Act and
the Financial Institutions Reform, Recovery and Enforcement Act of 1989,
federal regulators also have authority to prohibit financial institutions from
engaging in business practices which are considered to be unsafe or unsound.
It is possible that, depending upon the financial condition of Fremont I & L
and other factors, such regulators could assert that the payment of dividends
in some circumstances might constitute unsafe or unsound practices and could
prohibit payment of dividends even though technically permissible.
Federal Deposit Insurance Reform. FDICIA modified certain provisions
of the Federal Deposit Insurance Act and revised several other banking
statutes. Among other things, FDICIA provides increased funding for the Bank
Insurance Fund (the "BIF") of the FDIC, primarily by increasing the authority
of the FDIC to borrow from the U.S. Treasury Department. It also provides for
expanded regulation of depository institutions and their affiliates. A
significant portion of the borrowings would be repaid by insurance premiums
assessed on BIF members, including Fremont I & L.
As required under FDICIA, the FDIC issued its final rule setting forth
the new risk-based assessment system which was implemented beginning with the
assessment period commencing January 1, 1994. Regardless of the potential risk
to BIF, FDICIA prohibits assessment rates from falling below the current
assessment rate of 23 cents per $100 of eligible deposits if the FDIC has
outstanding borrowings from the U.S. Treasury Department or the 1.25%
designated reserve ratio has not been met.
FDICIA requires the FDIC to specify relevant capital levels for
depository institutions it insures in the following categories:
well-capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. As of December 31, 1994,
Fremont I & L's capital category was "well-capitalized."
The FDIC issued its final rule governing annual independent audits and
reporting requirements for fiscal years commencing in 1993 and following years.
The rule applies to any insured depository institution that has total assets at
the beginning of a fiscal year of $500 million or more. Fremont I & L's total
assets as of December 31, 1994 were $834 million. Requirements under this rule
include an annual management report to be signed by the chief executive officer
and chief financial officer containing, among other things, a statement of
management's responsibility for establishing and maintaining internal controls
and procedures and for complying with laws and regulations pertaining to safety
and soundness. Additionally, annual audit statements must be prepared in
accordance with generally accepted auditing standards. Furthermore, the
institution is required to establish an independent audit committee of its
outside directors, which committee is responsible for reviewing with management
and the independent auditors the required reports. Fremont I & L is in
compliance with this rule as of December 31, 1994.
Fremont I & L is also subject to federal consumer protection laws,
including the Truth In Savings Act, the Truth in Lending Act and the Real
Estate Settlement Procedures Act.
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<PAGE> 24
Commercial Finance/Asset-Based Lending
Fremont Financial is licensed by the California Department of
Corporations as a commercial finance lender and a personal property broker and
holds certain other licenses.
EMPLOYEES
At December 31, 1994, the Company had 1,463 employees, none of whom is
represented by a collective bargaining agreement. The Company believes its
relations with employees are good.
23
<PAGE> 25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company began its workers' compensation insurance operations in
1959 and continues to derive the majority of its revenues from this business.
The Company's workers' compensation insurance business has grown through
internal expansion, as well as through the acquisition of other workers'
compensation insurance companies. In the early 1990's, the Company
restructured its workers' compensation insurance operations under a single
management group, consolidated fourteen offices into six full service regional
offices, significantly reduced the number of employees, and combined various
underwriting, marketing and claims administration functions. These changes
have resulted in increased efficiency and substantial cost savings.
More recently, on February 22, 1995, the Company completed the
acquisition of all outstanding stock of Casualty Insurance Company ("Casualty")
and its wholly-owned subsidiary Workers' Compensation and Indemnity Company
("WCIC") from the Buckeye Union Insurance Company ("Buckeye"). Buckeye is a
subsidiary of The Continental Corporation, a publicly held underwriter of
property and casualty insurance. Casualty underwrites workers' compensation
insurance primarily in Illinois and several other mid-western states, as well
as a modest amount through WCIC in California. Casualty currently leads the
Illinois workers' compensation market and the Company believes this acquisition
will provide the Company with a significant presence in the mid-west region.
The purchase price was $250 million, comprised of $225 million in cash and $25
million in a note payable to Buckeye.
The California recessionary economy resulted in high unemployment,
which had an adverse effect on workers' compensation insurance premiums written
and caused an increase in the frequency of claims in the early 1990's. As a
result of high claims frequency, including a high incidence of post-employment
job stress claims resulting from lay-offs attributable to the adverse economic
conditions, many workers' compensation insurers significantly reduced their
role in the Southern California market. The Company remained committed to the
Southern California market and sought solutions to these problems, such as the
institution of its "zero tolerance" program that promotes the aggressive
prosecution of workers' compensation fraud, and reunderwriting its business in
Southern California to focus on businesses with stable work forces that have
few seasonal employees and involve relatively less hazardous occupations.
During the past twelve months, the Company has experienced a continued
decrease in the frequency and severity of reported claims incurred on the 1992
and subsequent accident years, particularly in Southern California. The
Company believes this decrease, which began in mid-1992, is due in large part
to the enactment of additional anti-fraud legislation in 1992 and an aggressive
program to combat workers' compensation insurance fraud by regulatory and law
enforcement authorities and the Company. In July 1993, California enacted
legislation to reform the workers' compensation insurance system and to, among
other things, (i) reduce workers' compensation manual premium rates by 7%
effective July 16, 1993 and (ii) repeal the minimum rate law effective January
1, 1995. Some provisions of this legislation have adversely affected workers'
compensation insurers. However, other provisions have benefited workers'
compensation insurers, such as provisions increasing measures to reduce
fraudulent claims, placing restrictions on the filing of stress claims, capping
vocational rehabilitation benefits and limiting the number of medical-legal
evaluations. In addition to the 7% rate reduction, premiums were further
impacted in 1994 by additional reductions in manual premium rates of 12.7% on
new and renewal business that became effective January 1, 1994, and a further
16% on all business incepting on or after January 1, 1994 that became effective
October 1, 1994. The reductions in manual premium rates have resulted in lower
premiums on the Company's policies. The repeal of the minimum rate law
effective January 1, 1995 has also resulted in lower premiums and lower
profitability on the Company's California workers' compensation policies due to
increased price competition. The Company believes that its newly acquired
Casualty Insurance Company business will mitigate the impact of the repeal of
the minimum rate law.
The Company's medical malpractice insurance operation, Physicians and
Surgeons, predominantly writes standard professional liability insurance for
physicians and other healthcare providers, primarily in California. The
Company's medical malpractice business has been profitable since the Company
acquired it in 1985, and income before taxes was $6.6 million in 1994. During
the past three years, medical malpractice insurance has been subject to
substantial rate competition from physician-owned mutual insurance companies.
The Company has been able to maintain its premium volume and achieve favorable
loss experience through selective underwriting. However, the Company cannot
predict if rate competition will continue to increase and, if so, what the
impact of such rate competition will be on its future operations.
The Company's commercial finance subsidiary, Fremont Financial, makes
asset-based loans, to small and medium-sized businesses nationwide, that are
primarily secured by accounts receivable and inventory. Fremont Financial's
total loan
24
<PAGE> 26
portfolio grew from $189 million at December 31, 1991 to $557 million at
December 31, 1994. This growth has been achieved partly through development of
Fremont Financial's customer base and partly through purchases of loans
originated by others.
In 1990, the Company acquired Fremont Investment & Loan (formerly
Investors Thrift), a California thrift and loan that now serves more than
27,000 customers through its 11 branches. The thrift and loan operations are
primarily engaged in commercial and residential real estate lending. Assets of
the thrift and loan operation grew from $278 million at the end of 1991 to $887
million at the end of 1994, due to increased loan originations and to the
purchase of loans from other financial institutions.
The adverse economic environment in California has adversely affected
the commercial and residential real estate lending industry by impacting
borrowers' abilities to service their debts and by reducing the value of real
estate collateral. Because of the Company's lending policies, which require
conservative loan-to-value ratios and careful review of the value of the
property and the borrower, the Company's thrift and loan operations have not
been materially adversely affected by these economic conditions and have
benefited from the reduced competition that has also resulted from these
conditions. However, there can be no assurance that continued adverse
conditions will not impact the Company's thrift and loan operations in the
future.
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 L of Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
By providing diverse financial services to small and medium-sized
businesses, the Company has achieved growth in its operating results, as
evidenced by the growth in its net income during the three years ended December
31, 1994. The following table presents information for each of the three years
in the period ended December 31, 1994 with respect to the Company's principal
lines of business.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Revenues:
Workers' compensation $458,461 $489,126 $450,809
Medical malpractice 33,035 29,239 33,337
Property and casualty corporate and other 4,216 4,760 4,915
-------- -------- --------
Total property and casualty 495,712 523,125 489,061
Financial services 154,398 125,732 106,990
Corporate 3,038 2,548 2,642
-------- -------- --------
Total $653,148 $651,405 $598,693
======== ======== ========
Income (Loss) Before Taxes:
Workers' compensation $ 62,199 $ 49,775 $ 41,799
Medical malpractice 6,583 10,215 11,522
Property and casualty corporate and other (7,517) (7,898) (8,134)
-------- -------- --------
Total property and casualty 61,265 52,092 45,187
Financial services 28,014 21,456 14,878
Corporate (7,708) (9,200) (11,484
-------- -------- --------)
Total $ 81,571 $ 64,348 $ 48,581
======== ======== ========
</TABLE>
The Company generated revenues of $653 million for 1994, as compared
to revenues of $651 million and $599 million for 1993 and 1992, respectively.
Revenues between 1994 and 1993 were flat due primarily to the combined effects
of higher loan interest and higher medical malpractice premiums, substantially
offset by lower workers' compensation premiums. Revenues increased by 8.8% in
1993 over 1992 due primarily to higher workers' compensation insurance premiums
and higher
25
<PAGE> 27
loan interest income in the financial services business segment, offset by
lower realized investment gains. Realized investment gains (losses) were
$(315,000), $2,165,000, and $16,208,000 in 1994, 1993 and 1992, respectively.
The Company had income before cumulative effect of accounting change
of $55.8 million ($3.57 per share) for 1994, as compared to $42.7 million
($3.06 per share) and $35.2 million ($2.83 per share) for 1993 and 1992,
respectively. Net income for 1994 was $55.8 million ($3.57 per share) compared
to $42.7 million ($3.06 per share) and $78.7 million ($6.33 per share) for 1993
and 1992, respectively. Net income for 1992 reflects a one-time increase of
$43.5 million ($3.50 per share) as a result of the Company's adoption as of
January 1, 1992 of FASB 109. See Note F of the Notes to Consolidated Financial
Statements.
Workers' compensation insurance operations posted income before taxes
of $62.2 million for 1994, as compared to $49.8 million for 1993 and $41.8
million for 1992. The 25% increase in income before taxes between 1994 and
1993 is due primarily to the continued decline in the frequency and severity of
reported claims incurred on the 1992 and subsequent accident years and lower
than expected operating costs, offset partially by lower premiums. The
increase in income before taxes of 19% between 1993 and 1992 is due primarily
to an increase in net premiums earned, a reduction in underwriting expenses,
and a continuing decline in the frequency of reported claims. The combined
ratio for 1994 was 97.6% compared to 101.6% and 106.8% for 1993 and 1992,
respectively.
Medical malpractice insurance operations reported income before taxes
of $6.6 million, $10.2 million and $11.5 million for 1994, 1993 and 1992
respectively. The combined ratio for 1994 was 93.4% compared to 77.8% and
77.7% for 1993 and 1992, respectively. The decrease in income before taxes and
resulting increase in the combined ratio in 1994 is due primarily to an
increase in the frequency and severity of reported claims.
The Company's property and casualty corporate and other segment is
composed of property and casualty corporate and other revenues and expenses
that reflect miscellaneous revenues and expenses associated with the Company's
downstream property and casualty insurance holding company, Fremont Insurance
Group, Inc., ("Fremont Insurance Group") and credit disability insurance
assumed from an affiliated life insurance company. For all years presented,
both the credit disability insurance premiums and credit disability losses and
expenses remained relatively stable, resulting in this operation breaking even
for this period of time. Expenses that contributed to the net losses included
interest expense on Fremont Insurance Group's debt and other obligations of
$5.5 million, $4.5 million and $5.3 million, respectively, for the years ended
December 31, 1994, 1993 and 1992, and overhead expenses of $3.1 million, $3.3
million and $2.6 million for the corresponding periods. Since these operations
consist primarily of interest expense and overhead expenses, management does
not expect this segment to operate at a profit.
The financial services business segment posted increases of 31% and
44% in income before taxes for 1994 and 1993, respectively. The increase in
1994 was due primarily to the effects of an increasing loan portfolio, while
the increase in 1993 was due to the combined effects of an increasing loan
portfolio and a lower cost of financing. This segment, which includes
commercial finance, thrift and loan, and life insurance operations, recorded
income before taxes of $28.0 million, $21.5 million and $14.9 million for 1994,
1993 and 1992, 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 $7.7
million, $9.2 million and $11.5 million for 1994, 1993 and 1992, respectively.
The decrease in the corporate loss in 1994 over 1993 was due primarily to
increased investment income and higher intercompany interest income from the
Company's subsidiaries. The decrease in corporate loss before taxes in 1993
compared to 1992 was primarily due to lower interest expense.
Income tax expense of $25.8 million, $21.6 million and $13.4 million
for 1994, 1993 and 1992, respectively, represent effective tax rates of 32%,
34% and 28% on pretax income of $81.6 million, $64.3 million and $48.6 million,
respectively. In 1992, the lower effective tax rate resulted primarily from
the favorable resolution of certain tax matters related to the Company's
property and casualty subsidiaries that initially arose as a result of the 1986
Tax Act. On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993
("1993 Tax Act") was signed into law. The 1993 Tax Act increased the tax rate
to 35% effective January 1, 1993. This resulted in a re-estimation by the
Company of the deferred tax asset balance. At December 31, 1993, the deferred
tax balance of $48.9 million includes a rate adjustment of $1.4 million. The
lower effective tax rate in 1994 is due primarily to an increase in tax-exempt
investment income. With the adoption of FASB Statement 109 in 1992, the
effective tax rate will approximate the federal and state tax rates, as
adjusted for any permanent tax differences. See Note F of Notes to
Consolidated Financial Statements. The cumulative effect of adopting FASB
Statement 109 was to increase
26
<PAGE> 28
1992 earnings by $43.5 million ($3.50 per share) which is reported separately
in the Company's 1992 consolidated statement of income.
Property and Casualty Insurance Operations
The following table represents information with respect to the
Company's property and casualty insurance operations:
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Revenues $495,712 $523,125 $489,061
Expenses 434,447 471,033 443,874
-------- -------- --------
Income Before Taxes $ 61,265 $ 52,092 $ 45,187
======== ======== ========
</TABLE>
Revenues from the property and casualty insurance operations consist
primarily of premiums earned, net investment income and realized investment
gains (losses). Expenses consist primarily of loss and loss adjustment
expenses, policy acquisition costs, other operating costs and expenses and
dividends to policyholders.
Premiums. Premiums earned from the Company's workers' compensation
insurance operations were $401.5 million in 1994, as compared to $426.8 million
and $378.5 million in 1993 and 1992, respectively. Premiums were lower in 1994
as compared to 1993, due primarily to reductions in California workers'
compensation manual premium rates which occurred subsequent to the second
quarter of 1993. In July 1993, the California legislature enacted legislation
to reform the workers' compensation insurance system and to, among other
things, (i) reduce workers' compensation manual premium rates by 7% effective
July 16, 1993 and (ii) repeal the minimum rate law effective January 1, 1995.
In addition to the 7% rate reduction, premiums were further impacted in 1994 by
additional reductions in manual premium rates of 12.7% on new and renewal
business that became effective January 1, 1994, and a further 16% on all
business incepting on or after January 1, 1994 that became effective October 1,
1994. See "--California Workers' Compensation Reform Legislation." Management
believes the growth in premiums earned in 1993 as compared to 1992 resulted
from the expansion of market share due to the withdrawal of some competitors
from the Southern California region, offset in part by the 7% premium rate
reduction in California, effective July 16, 1993.
In 1994, premiums earned from the Company's medical malpractice
insurance operations were $28.6 million, as compared to $25.1 million and
$29.1 million for 1993 and 1992, respectively. The lower premium in 1993 as
compared to both 1994 and 1992 was due primarily to a shift in underwriting
focus away from those medical specialties that had relatively low policy
premiums. The initial effect of this shift was lower premium volume. This
lower volume was only partially offset in 1993 by increases in the average
premium-per-policy due to both new business and to premium increases on
existing business.
Net Investment Income. Net investment income in the property and
casualty insurance operations was $62.2 million, $65.7 million and $63.0
million in 1994, 1993 and 1992, respectively. The effects of lower invested
assets and lower investment yields during 1994 resulted in net investment
income levels lower as compared to 1993. The lower investment yields were due
primarily to the combined effects of a change in the type of securities
comprising the investment portfolio, as well as to generally lower yields on
securities purchased in the latter half of 1993 and held in the investment
portfolio during 1994. Beginning in the fourth quarter of 1993, the Company
began to purchase preferred stock securities in an effort to reduce the
Company's income tax expense. Under current income tax rules, a portion of the
dividend income on preferred stock is exempt from income tax. Due to this
favorable tax treatment, the dividend yields on preferred stock are generally
lower than similar securities whose interest or dividend income is fully
taxable. During 1994, the Company increased its preferred stock portfolio
(both redeemable and non-redeemable) from approximately $24 million in book
value at December 31, 1993 to $196 million in book value at December 31, 1994.
The increase in investment income in 1993 over 1992 was due primarily to the
increase in the investment portfolio.
Realized Investment Gains (Losses). The net investment gains (losses)
realized in the property and casualty insurance operations were $(41,000) in
1994, as compared to $1.6 million in 1993 and $14.1 million in 1992. The
opportunity to realize
27
<PAGE> 29
the gains in 1992, and to a lesser extent 1993, resulted from the decline in
interest rates in those years, which increased the value of the Company's fixed
income securities portfolio. See "Item 1. Business---Investment Portfolio."
Loss and Loss Adjustment Expense. Workers' compensation insurance
loss and LAE, as a percentage of premiums earned, was 62.1%, 70.4% and 82.2% in
1994, 1993 and 1992, respectively. The decreases in the loss ratio in 1994 and
1993 are due primarily to the positive impacts of the continued decrease in the
frequency and severity of reported claims on the 1992 and subsequent accident
years, particularly in Southern California, which began in mid-1992. The 1992
loss ratio was also impacted by an increase of $41 million in loss and LAE
reserves in 1992 for claims incurred in prior accident years, particularly 1990
and 1991. The recession in the California economy, together with the attendant
increase in unemployment, resulted in significant increases in the frequency
and severity of claims in 1990 and 1991, particularly post-employment stress
claims in the metropolitan Los Angeles area. The adjustments in 1992 to these
prior accident years were necessary because the Company did not fully recognize
in 1990 and 1991 the severity of the economic recession and the impact that the
resulting unemployment would have on claims during these years. These
additional reserves were partially offset by improved loss experience on the
1992 accident year, resulting from reduced frequency and severity of claims.
The Company attributes this reduction in claim frequency and severity to
aggressive loss control, improved underwriting, and a stabilization of the
California unemployment rate during the second half of 1992. Improved loss
control has been achieved through a significant effort to reduce fraudulent
workers' compensation claims by California law enforcement and regulatory
authorities, the insurance industry, and the Company under its "zero tolerance"
program. Underwriting improvements were made to focus on businesses with
stable work environments and less hazardous occupations.
While the Company believes that the incidence of fraudulent claims has
been significant, the process of identifying fraudulent claims is uncertain,
and the Company is unable to quantify the financial impact of fraudulent claims
on its operating results over the past several years. In connection with its
"zero tolerance" program, the Company has worked closely with local prosecutors
to pursue fraudulent claims. The Company believes that fraudulent claims have
been prevalent in the past based in part on the significant reduction in the
frequency of claims beginning in mid-1992 that has resulted from the Company's
aggressive campaign against fraud. See "Item 1. Business -- Insurance
Operations -- Loss and Loss Adjustment Expense Reserves."
As a percentage of premiums earned, medical malpractice loss and LAE
was 74.4%, 56.5% and 56.7% for 1994, 1993 and 1992, respectively. The
increase in the loss ratio in 1994, as compared to 1993, was due primarily to
an increase in the frequency and severity of reported claims in 1994. The loss
ratio in 1993 remained relatively stable as compared to 1992.
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.
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 23.4%, 21.3% and
22.5% in 1994, 1993 and 1992, respectively. The increase in this ratio in 1994
as compared to 1993 was due primarily to higher agents' commission costs in
1994. The improvement in this ratio during 1993 as compared to 1992 was due
primarily to the positive effects of the Company's cost control efforts.
Dividends to Policyholders. The Company's workers' compensation
insurance policies are predominantly written as participating policies which
means that dividends may be paid to policyholders depending upon their loss
experience. In 1994, 1993 and 1992 the ratios of dividends accrued to workers'
compensation insurance premiums earned were 12.4%, 10.6% and 2.8%,
respectively. Since it is the Company's policy to reward favorable loss
experience, the increases in the policyholder dividend ratio in 1994 and 1993
is consistent with the decreases in the loss ratio from 82.2% in 1992 to 70.4%
in 1993 and finally to 62.1% in 1994. The ability of the Company's workers'
compensation insurance subsidiaries to pay policyholder dividends is subject to
certain regulatory restrictions. See "Item 1. Business -- Regulation --
Insurance 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 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 make
28
<PAGE> 30
workers' compensation claims. For example, in 1992 the Company increased its
loss reserves for 1990 and 1991 to provide for increased frequency and severity
of claims in these years due to the recession in the California economy and the
attendant increases in unemployment. Legislative and regulatory changes can
also contribute to variable operating results for workers' compensation
insurance businesses. For example, in both 1994 and 1993 the Company
experienced the positive impacts of the continued decrease in the frequency and
severity of reported claims on the 1992 and subsequent accident years,
particularly in Southern California, that began in mid-1992. The Company
believes this decrease is due in large part to the enactment of additional
anti-fraud legislation in 1992 and the aggressive program to combat workers'
compensation insurance fraud by regulatory and law enforcement authorities and
the Company. See "-- California Workers' Compensation Reform Legislation"
below. Also, the establishment of appropriate reserves necessarily involves
estimates, and reserve adjustments have caused significant fluctuations in
operating results from year to year.
California Workers' Compensation Reform Legislation. In July 1993,
California enacted legislation to reform the workers' compensation insurance
system and to, among other things, (i) reduce workers' compensation manual
premium rates by 7% effective July 16, 1993 and (ii) repeal the minimum rate
law effective January 1, 1995. Some provisions of this legislation have
adversely affected workers' compensation insurers. However, other provisions
have benefited workers' compensation insurers, such as provisions increasing
measures to reduce fraudulent claims, placing restrictions on the filing of
stress claims, capping vocational rehabilitation benefits and limiting the
number of medical-legal evaluations. For example, in both 1994 and 1993 the
Company experienced the positive impacts of the continued decrease in the
frequency and severity of reported claims on the 1992 and subsequent accident
years, particularly in Southern California, that began in mid-1992. The Company
believes this decrease is due in large part to the enactment of additional
anti-fraud legislation in 1992 and the aggressive program to combat workers'
compensation insurance fraud by regulatory and law enforcement authorities, the
Company and others in the industry. In addition to the July 1993 legislation,
in December 1993, the California Insurance Commissioner reduced workers'
compensation manual premium rates on new and renewal business an additional
12.7% effective January 1, 1994. In September 1994, workers' compensation
manual premium rates were further reduced by 16% effective October 1, 1994 on
all business incepting on or after January 1, 1994.
The Company believes that the decrease in premiums in 1994 as compared
to 1993 resulted from a reduction in California workers' compensation manual
premium rates which occurred during and subsequent to 1993. The reductions in
manual premium rates have resulted in lower premiums on the Company's policies.
The Company had favorable loss and loss adjustment expense experience during
1994. Before allowance for the accrual of policyholder dividends, the
Company's workers' compensation combined ratio for 1994 was 85.2%, as compared
to 91.0% for 1993. The California Insurance Commissioner was precluded from
raising the manual premium rates prior to January 1, 1995. The repeal of the
minimum rate law on January 1, 1995 has also resulted in lower premiums and
lower profitability on the Company's California workers' compensation policies
due to increased price competition. The Company believes that its newly
acquired Casualty Insurance Company business will mitigate the impact of the
repeal of the minimum rate law.
Financial Services
The Company's financial services operations are principally engaged in
asset-based lending through Fremont Financial and commercial and residential
real estate lending through Fremont Investment & Loan (formerly Investors
Thrift). The Company also has small life insurance and premium finance
operations included in this segment. Revenues consist principally of interest
income and, to a lesser extent, life insurance premiums, fees and other income.
29
<PAGE> 31
The following table presents information with respect to the Company's
financial services operations:
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Revenues $154,398 $125,732 $106,990
Expenses 126,384 104,276 92,112
-------- -------- --------
Income Before Taxes $ 28,014 $ 21,456 $ 14,878
======== ======== ========
</TABLE>
Revenues increased 23% in 1994 and 18% in 1993, due primarily to
greater loan interest and fee revenue attributable to the general growth in the
loan portfolios of the commercial finance and thrift and loan operations. Other
financial services revenues remained relatively stable.
Income before taxes in the financial services operations was $28.0
million, $21.5 million and $14.9 million for 1994, 1993 and 1992, respectively.
The 31% increase in 1994 is due primarily to the general growth in the loan
portfolios and a lower provision for loan losses. The 44% increase in 1993 is
due primarily to the growth in the loan portfolios and a lower cost of funds.
The following table identifies the interest income, interest expense,
average interest-bearing assets and liabilities, and interest margins for the
Company's commercial finance and thrift and loan subsidiaries:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------
1994 1993 1992
----------------------------- ---------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
-------- -------- ------- -------- -------- ------- -------- -------- -------
(Thousands of dollars, except percents)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest bearing assets (1):
Commercial finance and
other assets $ 483,778 $ 52,128 10.78 % $323,479 $33,474 10.35 % $222,535 $25,212 11.33 %
Thrift and loan:
Cash equivalents 56,014 2,282 4.07 34,744 1,032 2.97 25,157 885 3.52
Investments 4,503 450 9.99 220 6 2.73 1,935 80 4.13
Commercial real estate loans 452,950 43,582 9.62 243,701 23,732 9.74 130,396 13,611 10.44
Consumer real estate loans 67,053 8,293 12.37 100,646 14,170 14.08 97,484 13,799 14.16
Contract loans 42,204 5,595 13.26 58,113 8,104 13.95 71,639 9,939 13.87
Installment loans 4,294 541 12.60 6,799 866 12.74 9,235 1,252 13.56
Finance leases 377 47 12.47 1,903 223 11.72 5,442 584 10.73
----------- --------- --------- -------- --------- --------
Total interest bearing assets $1,111,173 $112,918 10.16 % $769,605 $81,607 10.60 % $563,823 $65,362 11.59 %
=========== ========= ========= ======== ========= ========
Interest bearing liabilities:
Savings deposits $ 81,475 $ 2,940 3.61 % $ 95,674 $ 3,824 4.00 % $ 48,684 $ 2,168 4.45 %
Time deposits 464,960 23,928 5.15 277,765 15,868 5.71 260,520 15,652 6.01
Commercial paper and other 14,332 820 5.72 14,545 882 6.06 13,842 1,003 7.25
Securitization obligation 300,094 14,653 4.88 165,278 6,171 3.73 -- -- --
Short-term debt 80,770 4,921 6.09 71,572 3,561 4.98 134,146 7,092 5.29
Debt from affiliates 28,499 2,205 7.74 24,830 1,905 7.67 29,439 2,609 8.86
----------- --------- --------- -------- --------- --------
Total interest bearing liabilities $ 970,130 $ 49,467 5.10 % $649,664 $32,211 4.96 % $486,631 $28,524 5.86 %
=========== ========= ========= ======== ========= ========
Net interest income $ 63,451 $49,396 $36,838
========= ======== ========
Net yield 5.71 % 6.42 % 6.53 %
</TABLE>
- ----------------
(1) Average loan balances include non-accrual loan balances.
The margin between the Company's cost of funds and interest income
decreased in 1994 as compared to 1993, due primarily to an increase in lower
yielding commercial real estate loans and a decrease in higher yielding
consumer real estate loans in the thrift and loan business. Additionally, the
net margins decreased in the asset-based lending segment due primarily to
increases in the credit quality of the loan portfolio which has resulted in
lower loan yields, as well as to an increase in the competitive environment.
Interest rate sensitivity data for the Company's commercial finance
and thrift and loan subsidiaries as of December 31, 1994 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
30
<PAGE> 32
arise when assets are funded with liabilities having different repricing
intervals and to this degree earnings will be sensitive to interest rate
changes. The Company attempts to match interest rate sensitive assets and
liabilities to minimize the effect of fluctuating interest rates.
<TABLE>
<CAPTION>
Repricing Periods
--------------------------------------------------------------------------
Within Within Within Over
0-3 Months 4-12 Months 1-5 Years 5 Years Total
------------ ------------- ---------- ----------- -----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
Interest sensitive assets:
Commercial finance and other $487,177 $ 4,294 $ 2,947 $ 39,921 $ 534,339
Thrift and loan:
Cash equivalents 42,042 -- -- -- 42,042
Investments 421 -- -- -- 421
Commercial real estate loans 363,216 167,232 135,126 21,624 687,198
Consumer real estate loans 19,803 38,354 27,473 17,902 103,532
Contract loans 3,513 8,709 17,015 3,753 32,990
Installment loans 611 1,324 1,256 -- 3,191
Finance leases 114 -- -- -- 114
---------- ----------- ---------- ---------- ------------
Total interest sensitive assets $916,897 $ 219,913 $183,817 $ 83,200 $1,403,827
========== =========== ========== ========== ============
Interest sensitive liabilities:
Savings deposits $ 54,906 $ -- $ -- $ -- $ 54,906
Time deposits 222,233 314,880 154,958 -- 692,071
Commercial paper and other 9,291 8,463 -- -- 17,754
Securitization obligation 300,000 -- -- -- 300,000
Short-termdebt 157,000 -- -- -- 157,000
Debt from affiliates 40,886 20,000 -- -- 60,886
---------- ----------- ---------- ---------- ------------
Total interest sensitive liabilities $784,316 $ 343,343 $154,958 $ -- $1,282,617
========== =========== ========== ========== ============
Incremental interest rate sensitivity gap $132,581 $(123,430) $ 28,859 $ 83,200 $ 121,210
========== =========== ========== ========== ============
Cumulative gap $132,581 $ 9,151 $ 38,010 $121,210
========== =========== ========== ==========
</TABLE>
31
<PAGE> 33
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:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1994 1993 1992
-------------------- ------------------ ------------------
% of % of % of
Amount Total Amount Total Amount Total
---------- ----- -------- ----- -------- -----
(Thousands of dollars, except percents)
<S> <C> <C> <C> <C> <C> <C>
Accounts receivable and inventory loans:
Commercial finance $ 409,580 28 % $315,467 36 % $200,793 28 %
Term loans:
Commercial finance 124,379 8 63,814 7 49,045 7
Thrift and loan 807,527 55 425,432 49 375,519 53
Other 126,694 9 66,952 8 86,905 12
----------- --- -------- --- -------- ---
Total termloans 1,058,600 72 556,198 64 511,469 72
----------- --- -------- --- -------- ---
Total loans 1,468,180 100 % 871,665 100 % 712,262 100 %
Less allowance for possible loan losses 27,406 2 25,222 3 22,819 3
----------- --- -------- --- -------- ---
Loans receivable $1,440,774 98 % $846,443 97 % $689,443 97 %
=========== === ======== === ======== ===
</TABLE>
The following table illustrates the maturities of the Company's loans
receivable:
<TABLE>
<CAPTION>
Maturities at December 31, 1994
---------------------------------------------------------------------------
1 to 24 25 to 60 Over 60
Months Months Months Total
-------- -------- ------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Accounts receivable and inventory
loans -- variable rate $409,580 $ -- $ -- $ 409,580
Term loans -- variable rate 117,462 226,456 456,153 800,071
Term loans -- fixed rate 74,220 95,307 89,002 258,529
-------- -------- -------- ----------
Total $601,262 $321,763 $545,155 $1,468,180
======== ======== ======== ==========
</TABLE>
The adverse economic environment in California has adversely affected
the commercial and residential real estate lending industry by impacting
borrowers' abilities to service their debts and by reducing the value of real
estate collateral. Because of the Company's lending policies, which require
conservative loan-to-value ratios and careful review of the value of the
property and the borrower, the Company's thrift and loan operations have not
been materially adversely affected by these adverse economic conditions and
have benefited from the reduced competition that has resulted from these
conditions. However, there can be no assurance that adverse conditions will
not impact the Company's commercial finance and thrift and loan operations in
the future.
32
<PAGE> 34
The following table describes the asset classifications, loss
experience and reserve reconciliation of the commercial finance and thrift and
loan operations as of or for the periods ended as shown below:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1994 1993 1992 1991 1990
---------- -------- -------- -------- --------
(Thousands of dollars, except percents)
<S> <C> <C> <C> <C> <C>
Non-accrual loans $ 21,834 $ 17,304 $ 21,970 $ 12,521 $ 13,654
Accrual loans 90 days past due 1,711 1,763 1,370 2,460 1,427
Real estate owned ("REO") 17,467 842 786 836 639
---------- -------- -------- -------- --------
Total non-performing assets $ 41,012 $ 19,909 $ 24,126 $ 15,817 $ 15,720
========== ======== ======== ======== ========
Beginning allowance for possible loan losses $ 25,222 $ 22,819 $ 15,907 $ 14,475 $ 6,163
Provision for loan losses 11,980 16,873 9,550 5,298 7,393
Reserves established with portfolio acquisitions 3,605 -- 2,913 580 3,347
Charge-offs:
Commercial finance and other loans 4,265 7,614 3,159 3,374 3,838
Thrift and loan:
Commercial real estate loans 4,833 176 -- -- --
Consumer real estate loans 2,685 4,835 778 116 75
Contract and installment loans 2,434 2,627 1,910 2,207 1,597
Finance leases 37 314 179 341 159
---------- -------- -------- -------- --------
Total charge-offs 14,254 15,566 6,026 6,038 5,669
---------- -------- -------- -------- --------
Recoveries:
Commercial finance and other loans 207 360 96 1,316 3,041
Thrift and loan:
Commercial real estate loans 10 -- --
Consumer real estate loans 265 128 --
Contract and installment loans 349 468 284 240 185
Finance leases 22 140 95 36 15
---------- -------- -------- -------- --------
Total recoveries 853 1,096 475 1,592 3,241
---------- -------- -------- -------- --------
Net charge-offs 13,401 14,470 5,551 4,446 2,428
---------- -------- -------- -------- --------
Ending allowance for possible loan losses $ 27,406 $ 25,222 $ 22,819 $ 15,907 $ 14,475
========== ======== ======== ======== ========
Allocation of allowance for possible loan losses:
Commercial finance and other loans $ 13,015 $ 13,092 $ 15,511 $ 11,226 $ 10,701
Thrift and loan 14,391 12,130 7,308 4,681 3,774
---------- -------- -------- -------- --------
Total allowance for possible loan losses $ 27,406 $ 25,222 $ 22,819 $ 15,907 $ 14,475
========== ======== ======== ======== ========
Total loans receivable $1,468,180 $871,665 $712,262 $535,781 $446,219
Average total loans receivable 1,082,622 783,132 630,101 481,028 366,575
Net charge-offs to average total loans receivable 1.24 % 1.85 % 0.88 % 0.92 % 0.66 %
Non-performing assets to total loans receivable 2.79 % 2.28 % 3.39 % 2.95 % 3.52 %
Allowance for possible loan losses to total
loans receivable 1.87 % 2.89 % 3.20 % 2.99 % 3.24 %
Allowance for possible loan losses to non-performing
assets 66.82 % 126.69 % 94.58 % 100.57 % 92.08 %
Allowance for possible loan losses to non-performing
loans 116.40 % 132.28 % 97.77 % 106.18 % 95.98 %
</TABLE>
33
<PAGE> 35
Non-performing assets increased $21.1 million from $19.9 million at
December 31, 1993 to $41.0 million at December 31, 1994, primarily due to a
$16.6 million increase in real estate owned, and an increase in non-accrual
loans resulting from the general growth in the loan portfolio. Of the $16.6
million increase in real estate owned, $14.2 million is related to six
commercial real estate loans. The decrease in non-accrual loans in 1993 from
1992 is due primarily to the charging-off in 1993 of substantially all of the
loans from the Company's terminated commercial mortgage banking operations.
These loans had already been provided for in the allowance for possible loan
losses in prior years. This also accounts for the significant increase in
charge-offs for the commercial finance and other loans in 1993. The 1993
provision for loan losses is significantly higher than both 1994 and 1992, due
primarily to additional amounts recognized in 1993 for certain consumer real
estate loans in the thrift and loan operations whose charge-offs had previously
been covered by certain government and private insurance reserves. In 1993,
these insurance reserves were exhausted and this also accounts for the increase
in charge-offs in 1993 for the thrift and loan's consumer real estate
operations. Charge-offs for commercial real estate loans in the thrift and
loan operations were higher in 1994 as compared to both 1993 and 1992, due
primarily to the significant overall growth in the commercial real estate loan
portfolio from $302 and $204 million at December 31, 1993 and December 31,
1992, respectively, to $687 million at December 31, 1994. Included in the 1994
reserves established with portfolio acquisitions is $3.2 million in reserves
relating to a $225 million commercial real estate loan portfolio acquisition by
Fremont I&L which was completed in August 1994. The ratio of the
allowance for possible loan losses ("allowance") to non-performing loans, which
excludes Real Estate Owned ("REO") balances, decreased from 132.28% at December
31, 1993 to 116.40% at December 31, 1994, which is consistent with the
significant decline in the charge-off ratio from 1.85% in 1993 to 1.24% in
1994. The ratio of the allowance to non-performing assets decreased from
126.69% at December 31, 1993 to 66.82% at December 31, 1994 principally as a
result of an increase in REO. There are no amounts recorded in the allowance
for REO, as (1) loan balances in excess of management's estimate of fair value
less disposal cost are charged off at foreclosure date and (2) additional
allowances for management's estimate of reductions in fair value subsequent
to foreclosure date are recorded as reductions of REO carrying value.
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 equity securities with
an objective of providing a reasonable return while limiting credit and
liquidity risk. The Company's investment portfolio had an unrealized gain
(loss) of $(108) million and $44 million at December 31, 1994 and 1993,
respectively.
The Company's commercial finance operation funds its lending
activities primarily through its asset securitization program, an unsecured
revolving line of credit with a syndicated bank group and its capital. The
asset securitization program was established to provide a stable source of
funds to facilitate the expansion of this business. The proceeds to the
Company's subsidiary, Fremont Funding Inc., from the sale of the initial series
of securities under this program in April 1993, which bear interest at the rate
of LIBOR plus 0.47%, were approximately $200 million. In November 1993, the
Company sold an additional series of $100 million of these securities which
bear interest at the rate of LIBOR plus 0.5%. The securities issued in this
program have a scheduled maturity of three and four years, respectively, but
could mature earlier depending on fluctuations in outstanding balances of loans
in the portfolio and other factors. As of December 31, 1994, up to $500
million in additional publicly offered asset-backed certificates may be issued
pursuant to a shelf registration statement to fund future growth in the
commercial finance loan portfolio. The Company's commercial finance operation
has an unsecured revolving line of credit with a syndicated bank group that
presently permits borrowings of up to $180 million, of which $156 million was
outstanding as of December 31, 1994. This credit line is primarily used to
finance assets which are not included in the Company's asset securitization
program. This credit line expires August 31, 1995 and is renewable annually.
The Company's thrift and loan finances its lending activities
primarily through customer deposits, which have grown from $412 million at
December 31, 1993 to $747 million at December 31, 1994. The thrift and loan
operations also have access to a commercial paper facility for added liquidity
under which balances ranged from $11.3 million to $17.8 million during 1994.
As a holding company, Fremont General pays its operating expenses,
meets its other obligations and pays stockholder dividends from its cash on
hand, management fees paid by its subsidiaries and dividends paid by its
subsidiaries. Several of the Company's subsidiaries are subject to California
laws that restrict their ability to distribute dividends. The Company expects
that during the next few years dividends from its subsidiaries will consist
only of dividends from its property and casualty subsidiaries and dividends on
preferred stock of its commercial finance and thrift and loan holding company
subsidiaries. The
34
<PAGE> 36
maximum amount available for payment of dividends by the property and casualty
subsidiaries at December 31, 1994 without prior regulatory approval is
approximately $24 million. During 1994, dividends totaling $11 million were
paid.
To facilitate general corporate operations, in August 1994 the Company
obtained a revolving line of credit with a syndicated bank group that permits
borrowings of up to $150 million, of which $15 million was outstanding as of
December 31, 1994. This credit line expires in August 1997. In addition, in
July 1994 the Company replaced its internally financed loan to its ESOP with an
external bank financed loan totaling $11 million. The loan is due in seven
equal annual installments commencing on April 1, 1995 and is secured by certain
shares of the ESOP. The interest and principal payments are guaranteed by the
Company. Interest is based on, at the Company's option, the bank's prime
lending rate, LIBOR plus 1% or an applicable certificate of deposit rate. The
rate at December 31, 1994 was 6.563%.
In June 1993, the Company completed a public offering of 1,875,000
shares of Common Stock. Net proceeds to the Company were $41 million.
Approximately $15 million of the net proceeds was used to retire a substantial
portion of the Company's 11 1/4% Senior Subordinated Debentures due 1995. The
Company contributed approximately $8 million of the net proceeds to the capital
of its thrift and loan subsidiary to make this subsidiary a "well-capitalized"
institution under the rules adopted by the FDIC. The Company also loaned
approximately $7 million of the net proceeds to its ESOP, which used such funds
to purchase 300,000 shares of Common Stock in such offering.
In October 1993, the Company sold in a public offering an aggregate
$373,750,000 principal amount at maturity of Liquid Yield Option Notes due
October 12, 2013 (Zero Coupon-Subordinated) (the "LYONs") at an issue price of
$372.42 for a total net proceeds to the Company of approximately $135 million.
The yield to maturity is 5% with no periodic payments of interest. The LYONs
are convertible into the Company's Common Stock at a price of $31.86 per share
and are non-callable for five years. The outstanding balance of the LYONs at
December 31, 1994 was $144 million.
During October 1993, the Company retired the remaining balance of $3.2
million of its 11 1/4% Senior Subordinated Debentures due 1995. In December
1993, the Company called for redemption all of its 7 1/4% Convertible
Subordinated Debentures due 2011. Of the $57.5 million then outstanding, at
the option of the holders, $28.5 million was redeemed and $29.0 million was
converted into 1,201,202 shares of the Company's Common Stock.
On February 22, 1995, the Company completed an acquisition of Casualty
Insurance Company, an Illinois insurance company ("Casualty") pursuant to a
Stock Purchase Agreement dated as of December 16, 1994 among the Company,
Fremont Compensation Insurance Company, a California corporation and
wholly-owned subsidiary of the Company ("Fremont Compensation"), The Buckeye
Union Insurance Company, an Ohio insurance company ("Buckeye"), and The
Continental Corporation, a New York corporation, whereby Fremont Compensation
purchased all of the issued and outstanding capital stock of Casualty. 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 over a three year period.
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.
Stockholder dividends declared aggregated $11.5 million, $10.1 million
and $8.0 million during 1994, 1993 and 1992, respectively.
Net cash provided by continuing operations was $120 million, $111
million and $37 million for the years ended December 31, 1994, 1993 and 1992,
respectively. Net cash provided by continuing operations increased in 1994
over 1993 due primarily to an increase in net income and changes in premiums
receivable and agents' balances, partially offset by a lower increase in claims
and policy liabilities. Net cash provided by continuing operations increased
in 1993 compared to the prior year partly due to significant increases in
premium volume as well as decreases in loss and loss adjustment expenses paid
resulting from the continued decline in the frequency and severity of reported
claims which had begun in mid-1992. Net cash provided by continuing operations
was reduced by the payment of claims of $9 million, $16 million and $23 million
in 1994, 1993 and 1992, respectively, related to the run-off of a workers'
compensation insurance business that the Company acquired in 1989.
Net cash used in investing activities was $551 million, $448 million
and $180 million in 1994, 1993 and 1992, respectively. Net cash used in
investing activities increased in 1994 as compared to 1993 due primarily to the
combined effects of an increase in loans funded, net of repayments, offset
partially by a decrease in the purchase of securities, net of sales, maturities
and calls. Loans funded increased due primarily to the general growth in the
loan portfolio during 1994. Net securities purchased decreased in 1994 due
primarily to lower cash flow in the property and casualty insurance operations.
Net cash used in investing activities increased in 1993 over 1992, due in part
to increases in the purchase of securities, net of
35
<PAGE> 37
maturities and sales, resulting from increased cash flow from continuing
operations. In addition, short-term investments increased significantly in
1993 as the Company invested the unused proceeds from the public offerings
completed during the year.
Net cash provided by financing activities was $434 million, $321
million and $167 million for 1994, 1993 and 1992, respectively. Net cash
provided by financing activities increased in 1994 as compared to 1993, due
primarily to the combined net effects of, (i) an increase in net thrift
deposits; (ii) the net effect of an increase in short-term borrowing, net of
repayments; and (iii) a reduction in long-term debt proceeds. Net cash
provided by financing activities increased in 1993 primarily due to the
proceeds from the public offerings completed during 1993, offset by $69 million
in lower increases in thrift deposits and $167 million increase in debt
repayments.
The amortized cost of the Company's invested assets were $989 million,
$1.1 billion, and $783 million at December 31, 1994, 1993 and 1992,
respectively. The modest decrease in 1994 as compared to 1993 is due
primarily to a decrease in premium volume. The significant increase in 1993 as
compared to 1992 is due primarily to a growth in premium volume as well as to
the investment of the unused proceeds from the public offerings completed by
the Company during 1993.
The Company's property and casualty premium to surplus ratio for the
year ended December 31, 1994 was 1.8 to 1, which is within industry guidelines.
The FDIC has established certain capital and liquidity standards for its member
institutions, and Fremont Investment & Loan was in compliance with these
standards as of December 31, 1994. The Company contributed approximately $8
million to the capital of Fremont Investment & Loan in June 1993 to qualify
this subsidiary as a "well-capitalized" institution under the regulations
recently promulgated by the FDIC. In August 1994 an additional $23 million
was contributed to the capital of Fremont Investment & Loan to support the
growth in the loan portfolio during 1994.
The Company believes that its existing cash, its bank lines of credit,
revenues from operations and other available sources of liquidity will be
sufficient to satisfy its liquidity needs for the next several years.
The Company's strategy is to expand its business to the extent
possible without adversely impacting its loan portfolio and policyholder base.
However, the Company's strategic model is not dependent on growth as a source
of liquidity. While the level of revenues will obviously affect results of
operations, the Company's liquidity is not dependent on future revenue growth.
NEW ACCOUNTING STANDARDS
During 1993, the FASB issued Statement 114, "Accounting by Creditors
for Impairment of a Loan," which is effective for fiscal years beginning after
December 15, 1994. The Company has not yet adopted this new standard; however,
the effect on stockholders' equity and income is not considered to be
significant.
In May 1993, the FASB issued Statement 115, "Accounting for Certain
Investments in Debt and Equity Securities," ("FASB 115"). FASB 115 changes the
accounting treatment afforded the Company's fixed maturity and equity
investments by segregating these securities into three accounts: held to
maturity, available for sale and trading. Accounting for securities held to
maturity will be unchanged, and these securities will continue to be carried at
amortized cost. Available for sale securities and trading account securities
are to be carried at fair value. Unrealized gains and losses on available for
sale securities (net of applicable deferred taxes) are to be credited or
charged to stockholders' equity. Unrealized gains and losses on trading
account securities are to be recorded in the income statement. Transfers
between categories are severely restricted. FASB 115 is effective for the year
ended December 31, 1994, and retroactive application is not permitted. The
cumulative effect as of January 1, 1994 of adopting FASB 115 was an increase to
stockholders' equity of $28.5 million (net of deferred income taxes of $15.4
million) to reflect the net unrealized holding gains on securities previously
carried at amortized cost; there was no impact on net income. See Note A of
Notes to Consolidated Financial Statements.
In October 1994, the FASB issued Statement 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments." The
Company currently holds no derivative financial instruments subject to FASB 119
disclosure requirements.
Other recently issued accounting standards do not have a material
impact upon the Company's stockholders' equity or results of operations.
36
<PAGE> 38
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.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
(2)(i) 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
1-8007, and incorporated herein by reference.)
(2)(ii) 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)(i) Articles of Incorporation and By-laws (Filed as Exhibit No. (3) to Annual Report on Form 10-K, for the
Fiscal Year Ended December 31, 1988, Commission File Number 1-8007, and incorporated herein by reference.)
(3)(ii) Certificate of Amendment of Articles of Incorporation (Filed as Exhibit 3.2 to Registrtion Statement
File No. 33-68098 which was declared effective on October 4, 1993 and herein incorporated by reference.)
(4)(i) Form of Stock Certificate for Common Stock of the Company. (Filed as Exhibit No. (1) Form 8-A filed on March
17, 1993, Commission File Number 1-8007, and incorporated herein by reference.)
(4)(ii) Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust
Company. (Filed as Exhibit No. (4)(iv) to Registration Statement on Form S-3 filed on October 1, 1993, and
incorporated herein by reference.)
(10)(i) 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)(ii) 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)(iii) Trust Agreement for Supplemental Retirement Plan of the Company as amended. (Filed as Exhibit No. (10)(iv)
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)(iv) 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, 1990, Commission File Number 1-8007, and incorporated herein by reference.)
</TABLE>
37
<PAGE> 39
<TABLE>
<S> <C>
(10)(v) Non-Qualified Stock Option Plan of 1989 of the Company. (Filed as Exhibit No. (10)(vii) 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)(vi) 1994 Management Incentive Compensation Plan of the Company. (Filed as Exhibit No. (10)(vii) 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)(vii) Long-Term Incentive Compensation Plan of the Company. (Filed as Exhibit No. (10)(viii) 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)(viii) Promissory Notes, dated November 29, 1990 and June 4, 1993, as amended, and related Loan Agreement between
the Company and the Employee Stock Ownership Plan of the Company. (Filed as Exhibit No. (10)(ix) 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)(ix) Fremont General Corporation and Affiliated Companies Investment Incentive Program as amended. (Filed as an
exhibit to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1991, Commission File Number
1-8007, and incorporated herein by reference.)
(10)(x) 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)(xi) Fremont General Corporation Stock Ownership Plan as amended. (Filed as Exhibit No. (10)(vii) 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)(xii) Amended and Restated Trust Agreement for Fremont General Corporation Employee Stock Ownership Plan. (Filed
as Exhibit No. (10)(vii) 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)(xiii) Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank,
N.A., As Agent. (Filed as Exhibit No. (10)(xiv) to Quarterly Report on Form 10-Q for the period ended
September 30, 1994, Commission File Number 1-8007, and incorporated herein by reference.)
(11) Statement re: Computation of per share earnings. (Filed as Exhibit No (11) to Annual Report on Form 10-K for
the Fiscal Year Ended December 31, 1994, Commission File Number 1-8007, and incorporated herein by reference.)
(21) Subsidiaries of the Company. (Filed as Exhibit No (21) to Annual Report on Form 10-K for the Fiscal Year
Ended December 31, 1994, Commission File Number 1-8007, and incorporated herein by reference.)
(23) Consent of Ernst & Young LLP Independent Auditors.
(28) Information from reports provided to state insurance regulatory authorities. (Filed as Exhibit No (28) to
Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1994, Commission File Number 1-8007, and
incorporated herein by reference.)
</TABLE>
(b) REPORT ON FORM 8-K. None filed during the quarter ended December
31, 1994.
38
<PAGE> 40
FREMONT GENERAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ANNUAL REPORT ON FORM 10-K
----------
INDEX
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of Independent Auditors 40
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1995 and 1994 41
Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993 42
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 43
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 44
Notes to Consolidated Financial Statements 45
Schedules:
III -- Condensed Financial Information of Registrant 63
V -- Supplementary Insurance Information 66
VI -- Reinsurance 67
VIII -- Valuation and Qualifying Accounts 68
X -- Supplemental Information Concerning Property/Casualty Insurance Operations 69
</TABLE>
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.
39
<PAGE> 41
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, 1994 and 1993, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1994. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Fremont General
Corporation and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 1994, 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 Notes A and F to the consolidated financial statements, the
Company made certain accounting changes in 1994 and 1992.
ERNST & YOUNG LLP
Los Angeles, California
March 10, 1995
40
<PAGE> 42
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1994 1993
-------------- -----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Securities held to maturity:
Fixed maturity investments at amortized cost:
(fair value: 1994 - $199,103; 1993 - $310,566) $ 206,416 $ 291,262
Securities available for sale:
Fixed maturity investments, 1994 at fair value and 1993 at amortized cost
(cost: 1994 - $311,701; fair value: 1993 - $590,968) 235,442 566,376
Non-redeemable preferred stock at fair value
(cost: 1994 - $213,935; 1993 - $56,891) 189,632 56,891
------------ ------------
Total securities available for sale 425,074 623,267
Loans receivable 1,440,774 846,443
Short-term investments 255,751 138,835
Other investments 1,677 1,925
------------ ------------
TOTAL INVESTMENTS AND LOANS 2,329,692 1,901,732
Cash 31,058 28,433
Accrued investment income 13,622 20,137
Premiums receivable and agents' balances 48,556 76,746
Reinsurance recoverable on paid losses 7,204 11,425
Reinsurance recoverable on unpaid losses 136,151 138,737
Deferred policy acquisition costs 59,286 55,228
Costs in excess of net assets acquired 28,776 30,585
Deferred income taxes 88,426 48,839
Other assets 54,806 33,232
Assets held for discontinued operations 269,817 256,089
------------ ------------
TOTAL ASSETS $3,067,394 $2,601,183
============ ============
LIABILITIES
Claims and policy liabilities:
Losses and loss adjustment expenses $ 746,661 $ 782,927
Life insurance benefits and liabilities 172,425 123,066
Unearned premiums 47,551 54,724
Dividends to policyholders 46,067 46,337
------------ ------------
TOTAL CLAIMS AND POLICY LIABILITIES 1,012,704 1,007,054
Reinsurance premiums payable and funds withheld 6,961 8,662
Other liabilities 68,721 51,539
Thrift deposits 746,977 412,316
Short-term debt 176,325 78,087
Long-term debt 468,390 451,581
Liabilities of discontinued operations 236,303 222,575
------------ ------------
TOTAL LIABILITIES 2,716,381 2,231,814
Commitments and contingencies
STOCKHOLDERS' EQUITY
Common Stock, par value $1 per share -- Authorized: 1994 and 1993
30,000,000 shares; issued and outstanding (1994 - 15,388,000 and
1993 - 15,387,000) 15,388 15,387
Additional paid-in capital 80,264 80,217
Retained earnings 331,713 287,399
Unearned Employee Stock Ownership Plan shares (10,987) (13,634)
Net unrealized loss on investments, net of deferred taxes (65,365) --
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 351,013 369,369
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,067,394 $2,601,183
============ ============
</TABLE>
See notes to consolidated financial statements.
41
<PAGE> 43
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1994 1993 1992
---------- -------- --------
(Thousands of dollars, except per share data)
<S> <C> <C> <C>
REVENUES
Premiums earned:
Property and casualty $433,584 $455,765 $411,956
Life insurance 14,689 14,268 17,157
Net investment income 76,821 77,198 70,820
Loan interest 113,382 87,244 73,310
Realized investment gains (losses) (315) 2,165 16,208
Other revenue 14,987 14,765 9,242
-------- -------- --------
Total Revenues 653,148 651,405 598,693
EXPENSES
Losses and loss adjustment expenses 273,599 319,153 331,203
Life insurance benefits 13,002 8,829 11,909
Policy acquisition costs 86,990 82,255 72,812
Provision for loan losses 11,980 16,873 9,550
Other operating costs and expenses 77,076 70,351 70,302
Dividends to policyholders 49,654 45,218 10,576
Interest expense 59,276 44,378 43,760
-------- -------- --------
Total Expenses 571,577 587,057 550,112
-------- -------- --------
Income before taxes and cumulative
effect of accounting change 81,571 64,348 48,581
Income tax expense 25,759 21,638 13,381
-------- -------- --------
Income before cumulative effect of accounting change 55,812 42,710 35,200
Cumulative effect of accounting change for income taxes -- -- 43,509
-------- -------- --------
NET INCOME $ 55,812 $ 42,710 $ 78,709
======== ======== ========
PER SHARE DATA:
Primary:
Income before cumulative effect
of accounting change $ 3.57 $ 3.06 $ 2.83
Cumulative effect of accounting change -- -- 3.50
-------- -------- --------
NET INCOME $ 3.57 $ 3.06 $ 6.33
======== ======== ========
Fully diluted:
Income before cumulative effect
of accounting change $ 3.00 $ 2.73 $ 2.53
Cumulative effect of accounting change -- -- 2.90
-------- -------- --------
NET INCOME $ 3.00 $ 2.73 $ 5.43
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 44
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1994 1993 1992
------------- ------------- -------------
(Thousands of dollars)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before cumulative effect of accounting change $ 55,812 $ 42,710 $ 35,200
Adjustments to reconcile income before
cumulative effect of accounting change to
net cash provided by operating activities:
Change in premiums receivable and agents' balances
and reinsurance recoverable on paid losses 32,411 (10,060) 1,127
Change in accrued investment income 5,349 (6,429) 2,685
Change in claims and policy liabilities 8,236 55,844 (26,378)
Amortization of policy acquisition costs 86,990 82,255 72,812
Policy acquisition costs deferred (91,048) (79,936) (69,614)
Provision for deferred income taxes (4,391) (973) 6,224
Provision for loan losses 11,980 16,873 9,550
Provision for depreciation and amortization 15,709 10,512 8,592
Net amortization on fixed maturity investments 1,001 1,270 (567)
Realized investment (gains) losses 315 (2,165) (16,208)
Change in other assets and liabilities (2,338) 1,316 13,136
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 120,026 111,217 36,559
INVESTING ACTIVITIES
Securities held to maturity:
Purchases of securities (206,416) -- --
Sales of securities -- 6,354 --
Securities matured or called -- 65,946 --
Securities available for sale:
Purchases of securities (975,495) (1,079,114) (1,305,799)
Sales of securities 1,302,486 788,946 1,309,824
Securities matured or called 61,752 24,907 5,284
Increase in short-term and other investments (116,668) (74,691) (2,129)
Loans and bulk purchases funded (727,715) (401,493) (390,970)
Receipts from repayments of loans 121,404 227,620 211,851
Purchases of property and equipment (10,402) (6,557) (8,427)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (551,054) (448,082) (180,366)
FINANCING ACTIVITIES
Proceeds from short-term debt 140,813 29,740 83,284
Repayments of short-term debt (46,646) (159,666) (35,972)
Proceeds from long-term debt 26,000 435,013 25,000
Repayments of long-term debt (12,500) (56,790) (13,829)
Net increase in thrift deposits 334,661 45,141 114,287
Dividends paid (11,344) (9,369) (7,708)
Proceeds from sale of Common Stock -- 40,803 --
Stock options exercised 22 251 --
Purchase of fractional shares -- (8) --
Decrease (increase) in unearned Employee Stock
Ownership Plan shares 2,647 (4,475) 2,231
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 433,653 320,640 167,293
------------ ------------ ------------
Increase (Decrease) in Cash 2,625 (16,225) 23,486
Cash at beginning of year 28,433 44,658 21,172
------------ ------------ ------------
Cash at end of year $ 31,058 $ 28,433 $ 44,658
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 45
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Additional Unearned Unrealized
Common Paid-in Retained ESOP Gain (Loss) on
Stock Capital Earnings Shares Investments Total
-------- ---------- ---------- ---------- ------------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1992 $ 8,200 $17,891 $184,023 $(11,390) $ -- $198,724
Net income for 1992 -- -- 78,709 -- -- 78,709
Dividends to stockholders -- -- (7,954) -- -- (7,954)
Amount collected from ESOP -- -- -- 2,231 -- 2,231
--------- --------- ---------- ---------- ---------- ----------
Balance at December 31, 1992 8,200 17,891 254,778 (9,159) -- 271,710
Net income for 1993 -- -- 42,710 -- -- 42,710
Dividends to stockholders -- -- (10,089) -- -- (10,089)
Conversion of 7 1/4% debentures 1,201 27,266 -- -- -- 28,467
Issuance of Common Stock 1,250 39,553 -- -- -- 40,803
Three-for-two stock split 4,725 (4,725) -- -- -- --
Purchase of fractional shares -- (8) -- -- -- (8)
Stock options exercised 11 240 -- -- -- 251
Additional loan to ESOP less
amount collected -- -- -- (4,475) -- (4,475)
--------- --------- ---------- ---------- ---------- ----------
Balance at December 31, 1993 15,387 80,217 287,399 (13,634) -- 369,369
Cumulative effect of change in
accounting for investments -- -- -- -- 28,532 28,532
Net income for 1994 -- -- 55,812 -- -- 55,812
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
========= ========= ========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 46
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- ACCOUNTING POLICIES
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 L for the accounting treatment of
discontinued operations.
Investments: Fixed maturity investments represent bonds and
redeemable preferred stocks that mature more than one year after the purchase
date. Non-redeemable preferred stocks are equity securities, the majority of
which include adjustable dividend yield provisions. As of January 1, 1994, the
Company adopted the provisions of Financial Accounting Standards Board
Statement 115 ("FASB 115"), "Accounting for Certain Investments in Debt and
Equity Securities" for investments held as of or acquired after that date.
FASB 115 changed the accounting treatment afforded the Company's fixed maturity
and equity investments by segregating these securities into three accounts:
held to maturity, available for sale and trading. Accounting for securities
held to maturity was unchanged, and these securities are still carried at
amortized cost. Available for sale securities are carried at estimated fair
value. The Company has no securities classified as "trading". Unrealized
gains and losses on available for sale securities (net of applicable deferred
taxes) are credited or charged to stockholders' equity. Transfers between
categories are severely restricted. Pursuant to FASB 115, the Company
re-evaluated its fixed maturity investments at the adoption date and determined
that all of these investments should be classified as available for sale.
Subsequent to the adoption date, all security purchases have been classified by
the Company as either held to maturity or available for sale pursuant to the
FASB 115 requirements. In accordance with FASB 115, prior-period financial
statements have not been restated to reflect the change in accounting
principle. The cumulative effect as of January 1, 1994 of adopting FASB 115
increased stockholders' equity by $28,532,000 (net of deferred income taxes of
$15,364,000) to reflect the net unrealized holding gains on securities
previously carried at amortized cost; there was no effect on net income. In
the year ended December 31, 1994, those net unrealized holding gains decreased
by $93,897,000 to become a net unrealized loss of $65,365,000 (net of deferred
income taxes of $35,196,000).
In October 1994, the FASB issued Statement 119 ("FASB 119"),
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments." The Company currently holds no derivative financial instruments
subject to FASB 119 disclosure requirements.
Premiums and discounts on investments are amortized to investment
income 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 market value. Realized investment gains and
losses are included as a component of pretax 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 written off. The allowance is
maintained at a level considered adequate to provide for possible credit losses
based on management's evaluation of the loan portfolio. In evaluating the
adequacy of the allowance, management considers such factors as collateral
values, historical loss experience, portfolio composition and trends in various
economic conditions.
Management generally classifies loans as non-accrual when the
collection of interest and principal is not assured by the borrower's or
guarantor's financial condition and the value of the assets collateralizing the
loan. Interest recognition is generally suspended on term loans which are
sixty days or more contractually delinquent.
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.
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 ten years.
Premium Income: Revenues from property and casualty and credit
insurance 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. For traditional life insurance contracts, premiums are
recognized as revenue when due. Premiums receivable and agents' balances and
reinsurance recoverable on paid and unpaid losses include allowances for
doubtful accounts of $6,959,000 and $6,991,000 at December 31, 1994 and 1993,
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.
Unearned Premiums: Property and casualty insurance unearned premiums
are calculated using the monthly pro rata basis.
Life Insurance Benefits and Liabilities: Policyholder contract
liabilities for universal life and investment-type products represent the
premiums received plus accumulated interest, less mortality and other
administrative charges under the contracts and before applicable surrender
charges. Policy benefits and claims that are charged to expense include
benefit claims incurred in excess of related policy account balances. Interest
credited on such policies ranged from 5% to 6% at December 31, 1994. For
traditional life insurance products, the liabilities for future policy benefits
have been computed on the net level premium method based on estimated future
investment yields, withdrawals, mortality, and other assumptions, including
provisions for the risk of adverse deviation from the estimates, which were
appropriate at the time the policies were issued or acquired.
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
insurance contracts, principally commissions and certain variable selling
expenses which vary with, and are primarily related to, the acquisition of new
and renewal insurance contracts have been deferred. These deferred acquisition
costs are being amortized over anticipated gross margins for universal life
contracts. For traditional contracts, deferred acquisition costs are being
amortized over the premium-paying period of the related policies in a manner
which will charge each year's operations in direct proportion to the estimated
receipt of premium revenue, except for an appropriate provision for adverse
deviation from the estimates. Premium revenue estimates are made using the
same assumptions as to mortality and withdrawals as are used for computing
reserves for future policy benefits.
Dividends to Policyholders: Dividends to policyholders on workers'
compensation insurance contracts are accrued during the period in which the
related premiums are earned.
Thrift Deposits: Thrift deposits consist primarily of investment
certificates at the Company's California thrift and loan subsidiary. Such
balances are credited with interest at rates ranging from 3.40% to 8.81% at
December 31, 1994. The estimated fair value of the thrift deposits was
$740,203,000 at December 31, 1994.
Intangibles: The excess of the costs of acquisitions over net assets
acquired (net of accumulated amortization: 1994-$14,357,000; 1993-$12,549,000)
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.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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: 1994-15,650,000, 1993-13,963,000 and
1992-12,423,000. The weighted average number of shares computed for 1993 and
1992 were adjusted retroactively for the three-for-two stock split effected
June 17, 1993. Stock options granted to certain key members of management are
considered common stock equivalents for the computation of primary earnings per
share.
For the computation of fully-diluted earnings per share, stock options
(See Note I) and convertible securities (See Note H) had a dilutive effect of
$0.57, $0.33 and $0.90 per share for 1994, 1993 and 1992, respectively.
Fully-diluted earnings per share were computed based on 20,021,000, 17,117,000
and 14,990,000 weighted average number of shares outstanding for 1994, 1993 and
1992, respectively.
Credit Risk: Financial instruments which potentially subject the
Company to concentrations of credit risk consist principally of temporary cash
investments, fixed maturity securities, preferred stocks, mortgage and
commercial finance loans and reinsurance recoverables. The Company places its
temporary cash investments with high credit quality financial institutions and
limits the amounts of credit exposure to any one financial institution.
Concentrations of credit risk with respect to investments in fixed maturities,
preferred stocks and commercial finance loans are limited due to the large
number of such investments and their distribution across many different
industries and geographics. Concentration of credit risk with respect to
thrift and loan finance receivables is limited due to the large number of
borrowers; however, substantially all thrift and loan finance receivables are
from borrowers within the state of California. To minimize its exposure to
significant losses from reinsurance insolvencies, the Company evaluates the
financial condition of its reinsurers and monitors concentrations of credit
risk arising from similar geographic regions, activities, or economic
characteristics of the reinsurers. As of December 1994, General Reinsurance
Corporation and Employers Insurance of Wausau, a Mutual Company, were the only
reinsurers that accounted for more than 10% of total amounts recoverable from
all reinsurers on paid and unpaid losses. The remaining reinsurance
recoverables were spread over 152 reinsurers.
Fair Values of Financial Instruments: The Company uses various
methods and assumptions in estimating its fair value disclosures for financial
instruments. For fixed maturity investments and preferred stocks, fair values
are determined from certain valuation services, as well as from quoted market
prices. Loans receivable with variable rates, as well as thrift deposits for
passbook and money market type accounts, are deemed to be at fair value. The
fair values of thrift investment certificates, mortgage loans and other fixed
rate loans are estimated using discounted cash flow analyses, using interest
rates currently being offered for similar accounts or loans to borrowers with
similar credit ratings.
For short-term debt, the carrying amount of the Company's borrowings
approximates fair value. The fair value of the Company's long-term debt is
based on quoted market prices for securities actively traded. For long-term
debt not actively traded, and for bank borrowings, the fair value is estimated
using discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
The carrying amounts and fair values of the Company's financial
instruments at December 31, 1994 are summarized in the following table:
<TABLE>
<CAPTION>
Estimated
Carrying Fair
Amount Value
----------- ------------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Fixed maturity investments (Note B) $ 441,858 $ 434,545
Non-redeemable preferred stock (Note B) 189,632 189,632
Loans receivable (Note C) 1,440,774 1,440,727
LIABILITIES
Thrift deposits (Note A) 746,977 740,203
Short-term debt (Note G) 176,325 176,325
Long-term debt (Note H) 468,390 443,116
</TABLE>
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: During 1993, the FASB issued Statement 114,
"Accounting by Creditors for Impairment of a Loan" as amended in October 1994
by Statement 118, "Accounting by Creditors for Impairment of a Loan -- Income
Recognition" which are effective for fiscal years beginning after December 15,
1994. The Company has not yet adopted these new standards; however, the effect
on operations and stockholders' equity is not considered to be significant.
In March 1995, the FASB issued Statement No. 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. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of 1996 and, based on
current circumstances, does not believe the effect of adoption will be
material.
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassifications: Certain 1993 and 1992 amounts have been
reclassified to conform to the 1994 presentation.
NOTE B -- INVESTMENTS
The carrying values and fair values of the fixed maturity investments
and non-redeemable preferred stock by major category are summarized in the
following table:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
(Thousands of dollars)
<S> <C> <C> <C> <C>
Held to maturity:
At December 31, 1994
United States Treasury securities and obligations
of other US government agencies and corporations $ 53,695 $ 31 $ 2,319 $ 51,407
Mortgage-backed securities 152,721 -- 5,025 147,696
-------- ------- -------- --------
Total $206,416 $ 31 $ 7,344 $199,103
======== ======= ======== ========
Available for sale:
At December 31, 1994
United States Treasury securities and obligations
of other US government agencies and corporations $ 53,045 $ 78 $ 7,971 $ 45,152
Redeemable preferred stock 4,249 -- 758 3,491
Mortgage-backed securities 189,551 -- 58,876 130,675
Corporate securities
Banks 24,744 -- 4,619 20,125
Financial 10,000 -- 1,775 8,225
Industrial 30,112 -- 2,338 27,774
-------- ------- -------- --------
Total 311,701 78 76,337 235,442
Non-redeemable preferred stock 213,935 -- 24,303 189,632
-------- ------- -------- --------
Total $525,636 $ 78 $100,640 $425,074
======== ======= ======== ========
Held to maturity:
At December 31, 1993
United States Treasury securities and obligations
of other US government agencies and corporations $ 38,320 $ 1,870 $ 58 $ 40,132
Redeemable preferred stock 23,959 -- 539 23,420
Corporate securities
Utilities 90,871 7,504 -- 98,375
Banks 14,030 498 878 13,650
Financial 39,074 2,748 -- 41,822
Industrial 80,008 8,036 -- 88,044
Other 5,000 123 -- 5,123
-------- ------- -------- --------
Total $291,262 $20,779 $ 1,475 $310,566
======== ======= ======== ========
Available for sale:
At December 31, 1993
Mortgage-backed securities $227,901 $ 6,086 $ 2,791 $231,196
Corporate securities
Utilities 27,962 2,978 1,625 29,315
Banks 43,934 2,440 894 45,480
Financial 103,475 7,637 110 111,002
Industrial 107,190 5,811 -- 113,001
Foreign 36,901 4,235 -- 41,136
Transportation 9,978 735 -- 10,713
Other 9,035 90 -- 9,125
-------- ------- -------- --------
Total 566,376 30,012 5,420 590,968
Non-redeemable preferred stock 56,891 -- -- 56,891
-------- ------- -------- --------
Total $623,267 $30,012 $ 5,420 $647,859
======== ======= ======== ========
</TABLE>
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The amortized cost and fair value of debt securities at December 31,
1994 by contractual maturity, are summarized in the following table:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
(Thousands of dollars)
<S> <C> <C>
Held to maturity:
Over 10 years $ 53,695 $ 51,407
Mortgage-backed securities 152,721 147,696
-------- --------
Totals $206,416 $199,103
======== ========
Available for sale:
One year or less $ 15,092 $ 15,161
Over 1 year through 5 years 69,011 55,107
Over 5 years through 10 years 34,361 31,265
Over 10 years 3,686 3,234
Mortgage-backed securities 189,551 130,675
-------- --------
Totals $311,701 $235,442
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1994 1993 1992
---------- -------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
Proceeds from sales $1,302,486 $795,300 $1,309,824
Gross realized gains 13,987 14,028 22,716
Gross realized losses 14,302 11,863 6,508
</TABLE>
Investment income by major category of investments is summarized in
the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1994 1993 1992
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Fixed maturities $48,677 $71,476 $66,249
Non-redeemable preferred stock 19,407 238 0
Short-term 9,520 5,701 5,491
Other 206 255 208
------- ------- -------
77,810 77,670 71,948
Investment expenses 989 472 1,128
------- ------- -------
Net Investment Income $76,821 $77,198 $70,820
======= ======= =======
</TABLE>
The Company relies on external rating agencies to establish quality
ratings for its investments. The Company does not invest in non-investment
grade bonds, but may hold investments that are subsequently downgraded to
non-investment grade. As of December 31, 1994, all investments held by the
Company are current as to principal and interest, with no investment in default
and no investment exceeding 10% of stockholders' equity. 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, 1994 is
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
summarized in the following table:
<TABLE>
<S> <C>
AAA (including US government obligations) 55%
AA 1
A 29
BBB 14
BB 1
---
100%
===
</TABLE>
The par value of fixed maturity investments and cash totaling
$831,827,000 at December 31, 1994 were on deposit with regulatory authorities
in compliance with legal requirements related to the insurance operations.
NOTE C -- LOANS RECEIVABLE
Loans receivable consist of commercial finance, commercial and
residential real estate loans, and insurance premium notes receivable.
Commercial finance loans are asset-based loans that are secured by the
borrowers' eligible trade accounts receivable, inventories and equipment.
Commercial and residential real estate loans are secured by real property.
Insurance premium notes receivable are collateralized by security interests in
return premiums.
Commercial finance loans are stated at the unpaid balance of cash
advanced net of allowance for possible loan losses of $12,464,000 and
$11,719,000 at December 31, 1994 and 1993, respectively. The amount of cash
advanced under these loans is based on stated percentages of the borrowers'
eligible collateral. The majority of the loans are callable within 30 days at
the option of the Company. Interest on the commercial loans is computed on the
basis of daily outstanding balances times the contractual interest rate and is
reported as earned income on the accrual method. Total loan balances on which
income recognition has been suspended were $380,000 and $4,252,000 at December
31, 1994 and 1993, respectively.
Commercial finance loans are shown net of participation by other
financial institutions of $9,764,000 at December 31, 1994 and $3,572,000 at
December 31, 1993. The participation agreements are generally made for a fixed
percentage of the commercial loan balance and are made without recourse to the
Company.
The Company's thrift and loan subsidiary generates primarily real
estate loans. Commercial and residential real estate loans have terms ranging
from one to thirty years. Finance charges are recognized as revenue over the
life of the loan or contract 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 $14,391,000 and $12,130,000 at December 31, 1994, and 1993,
respectively. Included in loans receivable are real estate loans which have
been placed on non-accrual status totaling $21,454,000 and $12,765,000 at
December 31, 1994 and 1993, respectively. Real estate acquired in foreclosure,
which is classified under other assets, totaled $17.5 million at December 31,
1994 and is recorded at the lower of the carrying value of the loan or the
estimated fair value less disposal costs.
Insurance premium notes receivable mature within one year and are net
of allowances for possible loan losses of $551,000 and $1,373,000 at December
31, 1994 and 1993, 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:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1994 1993 1992
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Balance, beginning of year $ 25,222 $ 22,819 $15,907
Provision for loan losses 11,980 16,873 9,550
Recoveries 853 1,096 475
Charge-offs (14,254) (15,566) (6,026)
Reserves established with portfolio acquisitions 3,605 0 2,913
-------- -------- -------
Balance, end of year $ 27,406 $ 25,222 $22,819
======== ======== =======
</TABLE>
50
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying amounts at December 31, 1994 and 1993 and estimated fair
values at December 31, 1994 of loans receivable are summarized in the following
table:
<TABLE>
<CAPTION>
1994 1993
--------------------------------------- ----------
Carrying Estimated Carrying
Amount Fair Value Amount
----------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
Commercial finance loans $ 472,193 $ 472,193 $387,325
Real estate loans 969,921 968,561 401,710
Other loans 67,809 69,122 86,445
---------- ---------- --------
1,509,923 1,509,876 875,480
Purchase discount and deferred fees (41,743) (41,743) (3,815)
Allowance for possible loan losses (27,406) (27,406) (25,222)
---------- ---------- --------
Loans receivable $1,440,774 $1,440,727 $846,443
========== ========== ========
</TABLE>
NOTE D - 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, for 1994 and 1993,
to the gross amounts reported in the Company's balance sheet; the 1992
reconciliation is presented on a net-of-reinsurance basis only.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1994 1993 1992
----------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
Reserves for losses and LAE, net of reinsurance
recoverable, at beginning of year $ 644,190 $ 633,394 $ 627,103
Incurred losses and LAE:
Provision for insured events of the current year,
net of reinsurance 290,833 323,279 290,199
Increase (decrease) in provision for insured events
of prior years, net of reinsurance (17,234) (4,126) 41,004
--------- --------- ---------
Total incurred losses and LAE 273,599 319,153 331,203
Payments:
Losses and LAE, net of reinsurance,
attributable to insured events of:
Current year (70,505) (67,805) (67,321)
Prior years (236,774) (240,552) (257,591)
--------- --------- ---------
Total payments (307,279) (308,357) (324,912)
--------- --------- ---------
Reserves for losses and LAE, net of reinsurance
recoverable, at end of year 610,510 644,190 $ 633,394
=========
Reinsurance recoverable for
losses and LAE, at end of year 136,151 138,737
--------- ---------
Reserves for losses and LAE, gross of
reinsurance recoverable, at end of year $ 746,661 $ 782,927
========= =========
</TABLE>
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. In addition,
the foregoing table shows that a $41 million deficiency in the December 31,
1991 reserve emerged in 1992. This deficiency resulted primarily from
unexpected increases in workers' compensation claim frequency and severity for
claims incurred in 1991 and 1990.
51
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E -- REINSURANCE
In the normal course of business, the Company seeks to reduce the loss
that may arise from catastrophes or other events that cause unfavorable
underwriting results by reinsuring certain levels of risk in various areas of
exposure with other insurance enterprises or reinsurers. Amounts recoverable
from reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy.
Reinsurance contracts do not relieve the Company from its obligations
to policyholders. The failure of reinsurers to honor their obligations could
result in losses to the Company; consequently, allowances are established for
amounts deemed uncollectible. The Company evaluates the financial condition
and economic characteristics of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies.
The effect of ceded reinsurance on property and casualty premiums are
summarized in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Direct $431,500 $438,482 $460,164 $459,293 $420,724 $417,776
Assumed 4,264 4,224 3,109 3,916 3,769 4,437
Ceded 9,332 9,122 7,606 7,444 10,275 10,257
-------- -------- -------- -------- -------- --------
Net property and casualty premiums $426,432 $433,584 $455,667 $455,765 $414,218 $411,956
======== ======== ======== ======== ======== ========
</TABLE>
The effect of ceded reinsurance on losses and loss adjustment expenses
was an (increase) decrease in expenses of $7,456,000, $(12,427,000), and
$14,468,000 for the three years ended December 31, 1994, 1993 and 1992,
respectively.
The effect of reinsurance on life insurance premiums and life
insurance benefits was not significant.
NOTE F -- INCOME TAXES
The major components of income tax expense (benefit) are summarized
in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1994 1993 1992
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Federal income tax
Current $30,132 $20,460 $7,135
Deferred (4,391) (973) 6,224
------- ------- -------
25,741 19,487 13,359
State income tax 18 2,151 22
------- ------- -------
Total income tax provision $25,759 $21,638 $13,381
======= ======= =======
</TABLE>
The Company adopted the provisions of FASB Statement 109, "Accounting
for Income Taxes" in its financial statements as of January 1, 1992. The
cumulative effect of adopting FASB 109 was to increase 1992 earnings by
$43,509,000 ($3.50 per share) which is reported separately in the Company's
1992 consolidated statement of income.
52
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the effective tax rates in the consolidated
statements of income and the prevailing federal income tax rate of 35% (34% in
1992) is summarized in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1993 1992
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Federal income tax at 35% (34% in 1992) $28,550 $21,769 $16,518
Effects of:
Dividends received deduction (3,865) (229) --
Dividends in Employee Stock Ownership Plan shares (455) (402) (340)
Amortization of costs in excess of net assets acquired 366 511 636
Change in tax rate -- (1,408) --
Reduction in prior years' tax liabilities -- -- (2,123)
Life insurance proceeds -- -- (347)
Other 1,145 (754) (985)
------- ------- -------
Federal Income Tax Provision $25,741 $19,487 $13,359
======= ======= =======
</TABLE>
In 1992, the Company reversed $2,123,000 of a previously accrued
amount as a result of the favorable resolution of certain tax matters.
Details of the deferred tax expense (benefit) are summarized in the
following table:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1993 1992
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Earned but unbilled premiums $(3,363) $ 0 $ 0
Deferred policy acquisition costs 2,008 (1,568) (1,307)
Provisions for loan losses and other doubtful accounts (1,984) (50) (3,399)
Life insurance benefits and liabilities (1,669) (83) 1,624
Retrospective premium payable 1,228 (1,604) 1,037
Unearned premiums (811) (235) (939)
Discount on loss reserves 703 1,460 644
Dividends to policyholders 60 (2,508) 6,902
Deferred income -- 1,454 (1,329)
Salvage and subrogation -- 1,268 791
Effect of change in tax rate -- (1,408) --
Other (563) 2,301 2,200
------- ------- -------
Deferred Tax Expense (Benefit) $(4,391) $ (973) $ 6,224
======= ======= =======
</TABLE>
Net payments made (refunds received) for federal and state income
taxes were $18,471,000, $9,000,000, and $(2,441,000) for 1994, 1993 and 1992,
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.
53
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the Company's deferred tax assets as of December
31, 1994 and 1993 are summarized in the following table:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1994 1993
-------- --------
(Thousands of dollars)
<S> <C> <C>
Discount on loss reserves $ 35,656 $ 36,359
Net unrealized loss on investments 35,196 -
Dividends to policyholders 16,088 16,148
Allowance for possible loan losses and other doubtful accounts 10,739 8,755
Life insurance benefits and liabilities 6,570 4,901
Unearned premiums 3,538 2,710
Other, net 2,994 4,025
-------- --------
Deferred Income Tax Asset Amounts 110,781 72,898
Deferred policy acquisition costs (19,731) (17,723)
Excess intangibles amortization (2,624) (2,973)
Earned but unbilled premiums - (3,363)
-------- --------
Deferred Income Tax Liability Amounts (22,355) (24,059)
-------- --------
Net Deferred Income Tax Asset $ 88,426 $ 48,839
======== ========
</TABLE>
The Company's principal deferred tax assets arise due to the
discounting of loss reserves, which delays a portion of the loss reserve
deduction for income tax purposes, the accrual of dividends to policyholders,
and the provision for doubtful loan accounts. The effect of discounting the
loss reserves for tax purposes is to effectively tax the future investment
income stream associated with holding the investments necessary to support the
reserves. Future investment income, irrespective of other operating income,
should be sufficient to allow the future loss reserve deduction (i.e., the
accretion of the discount for income tax purposes) to be utilized. With
respect to the accrual of policyholders' dividends, the future periods will
permit the recognition of the tax benefits associated with these accruals as
the amounts are linked to future taxable income arising from existing
policyholders of the Company.
Also included in the 1994 deferred tax assets are $35,196,000 in
deferred tax benefits relating to the net unrealized losses on the Company's
available-for-sale investment portfolio (see Note A). These net unrealized
losses, net of deferred taxes, are recorded as a charge to stockholders' equity
pursuant to the adoption of FASB 115 in 1994.
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. Further, with respect
the net unrealized loss on investments, the Company has the ability to hold
such securities for an indefinite period and therefore no significant realized
losses are expected.
54
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G -- SHORT-TERM DEBT
Short-term debt is summarized in the following table:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1994 1993
--------- --------
(Thousands of dollars)
<S> <C> <C>
Bank lines of credit by a subsidiary of the Company
(weighted average interest rate, 1994-6.91%; 1993-4.725%) $157,000 $50,000
Commercial paper issued by a subsidiary, maturity dates
through September 25, 1995 (weighted average interest rate,
1994-6.68%; 1993-5.45%) 17,754 12,314
Financing arrangement with a special purpose funding corporation
(expired in December 1994) which provided financing up to
$30,000,000, collateralized by security interest in certain loans
receivable (interest based on commercial paper rates, 1993-3.20%) -- 15,773
Current portion of long-term debt 1,571 --
-------- -------
$176,325 $78,087
======== =======
</TABLE>
The commercial finance subsidiary of the Company has a $180,000,000
line of credit that expires August 31, 1995, renewable annually. Interest is
based on the banks' prime lending rate or, at the subsidiary's option,
certificate of deposit rate plus .875% or LIBOR plus .875%. Commitment fees of
.30% per annum are charged on the unused portion of the line of credit. The
balance outstanding at December 31, 1994 was $156,000,000. This subsidiary
also has a $12,000,000 line of credit with a bank that expires September 30,
1995. Interest is based on the bank's prime lending rate. At December 31,
1994, the balance outstanding was $1,000,000 with a weighted average interest
rate of 8.50%.
NOTE H -- LONG-TERM DEBT
Long-term debt is summarized in the following table:
<TABLE>
<CAPTION>
December 31,
------------------------------
1994 1993
-------- --------
(Thousands of dollars)
<S> <C> <C>
Fremont General Corporation
Liquid Yield Option Notes due 2013, less discount
(1994-$229,810; 1993-$237,190) $143,940 $136,560
Revolving Credit Facility, expiring 1997 15,000 --
Note Payable due 2001 11,000 --
Subsidiaries:
Variable Rate Asset Backed Certificates 300,000 300,000
Term Bank Loan due 1997, interest rate at year end, 4.50% -- 15,000
Other Notes Payable, interest rate at year end, 7.25% 21 21
-------- --------
469,961 451,581
Less current portion 1,571 --
-------- --------
$468,390 $451,581
======== ========
</TABLE>
In August 1994, the Company completed an agreement on a $150,000,000
Revolving Credit Facility with several banks. 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, 1994 on the
outstanding balance of $15,000,000 was 6.575%. 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 1994 was .30%. The stock of a
subsidiary insurance holding company has been pledged as collateral for this
loan.
55
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During July 1994, the Fremont General Employee Stock Ownership Plan
("ESOP") borrowed $11,000,000 (see Note J) from a bank due in seven equal
annual installments commencing on April 1, 1995. The Note Payable due 2001 is
secured by certain shares of the ESOP and the interest and principal payments
are guaranteed by the Company. Interest is based on, at the Company's option,
the bank's prime lending rate, LIBOR plus 1% or an applicable certificate of
deposit rate. The rate at December 31, 1994 was 6.563%.
In October 1993 the Company sold in a public offering an aggregate
$373,750,000 principal amount at maturity of Liquid Yield Option Notes due
October 12, 2013 (Zero Coupon-Subordinated) (the "LYONs") at an issue price of
$372.42 for a total net proceeds to the Company of approximately $135,000,000.
The yield to maturity is 5% with no periodic payments of interest. The LYONs
are convertible into the Company's Common Stock at a price of $31.86 per share
and are non-callable for 5 years.
On October 25, 1993, the Company called for redemption all of its
7-1/4% Convertible Subordinated Debentures due 2011. Of the $57,521,000 then
outstanding, $28,487,000 was redeemed at the option of the holders, and
$29,034,000 was converted into 1,201,202 shares of the Company's Common Stock.
Also during 1993 the Company retired the remaining outstanding 11-1/4% Senior
Subordinated Debentures due 1995 and the 9-1/4% Senior Note due 1997.
The Variable Rate Asset Backed Certificates reflect the sale of
securities pursuant to the asset securitization program established in April
1993 by a subsidiary of the Company. The proceeds to the Company from the sale
of the initial series of securities under this program in April 1993 were $200
million bearing interest at the rate of LIBOR plus 0.47%. In November, 1993,
this subsidiary sold an additional $100 million principal amount of these
securities bearing interest at the rate of LIBOR plus 0.5%. The securities
issued in this program have a scheduled maturity of three to four years but
could mature earlier depending on fluctuations in outstanding balances of loans
in the portfolio and other factors.
On August 11, 1994 the Company retired the remaining balance of the
Term Bank Loan due 1997. During 1993, the Company prepaid one year's required
principal payments. At the option of the Company, interest on the loan was
based on Eurodollar rates plus 1%, or the higher of the bank's prime lending
rate or Federal Funds rate plus 1/2%. The stock of a subsidiary insurance
holding company had been pledged as collateral for this loan.
The carrying amounts and the estimated fair values of long-term
borrowings at December 31, 1994 are summarized in the following table:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
-------- ----------
(Thousands of dollars)
<S> <C> <C>
LYONs $143,940 $118,666
Variable Rate Asset Backed Certificates 300,000 300,000
Revolving Credit Facility, expiring 1997 15,000 15,000
Note Payable due 2001 11,000 11,000
Other Notes Payable 21 21
-------- --------
Total Long-Term Borrowings $469,961 $444,687
======== ========
</TABLE>
The aggregate amount of maturities on long-term debt and sinking fund
requirements are summarized in the following table (thousands of dollars):
<TABLE>
<S> <C>
1995 $ 1,571
1996 201,593
1997 116,572
1998 1,571
1999 1,571
Thereafter 147,083
--------
$469,961
========
</TABLE>
56
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total interest payments on all debt were $49,294,000, $37,433,000, and
$36,847,000 in 1994, 1993 and 1992, respectively.
NOTE I -- STOCKHOLDERS' EQUITY AND RESTRICTIONS
At the Company's May 13, 1993 Annual Meeting, the stockholders
approved a three-for-two split of the Company's Common Stock. The stock split
was distributed on June 17, 1993 to stockholders of record on June 4, 1993.
In 1993 the Company sold 1,875,000 shares of Common Stock in a
public offering. Net proceeds to the Company were $41 million.
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, 1994, the most restrictive
loan covenants require the Company to maintain total stockholders' equity
before FASB 115 adjustments of at least $350,000,000.
The Company has adopted a stock option plan for the benefit of certain
key members of management. Under the plan, up to 1,125,000 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. The stock
option activity is summarized in the following table:
<TABLE>
<CAPTION>
Number of
shares Option Prices
--------- ----------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1992 577,794 $8.33 - $16.67
Granted 172,500 14.67 - 17.83
---------
Outstanding at December 31, 1992 750,294 8.33 - 17.83
Granted 137,650 22.17 - 24.75
Exercised (10,401) 8.33 - 16.67
Forfeited (8,687) 8.33 - 16.67
---------
Outstanding at December 31, 1993 868,856 8.33 - 24.75
Granted 222,750 23.63 - 24.13
Exercised (937) 14.67
---------
Outstanding at December 31, 1994 1,090,669 8.33 - 24.75
=========
</TABLE>
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 $23,529,000. No dividends are currently
available from the thrift and loan subsidiary.
Net income and stockholders' equity of domestic insurance
subsidiaries, as filed with regulatory authorities on the basis of statutory
accounting practices, are summarized in the following table:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Statutory net income for the year $ 48,220 $ 56,366 $ 33,943
Statutory stockholder's equity at year end 250,633 234,604 174,333
</TABLE>
57
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE J -- 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
$8,464,000, $5,947,000, and $5,255,000 for 1994, 1993 and 1992, respectively,
of which $5,961,000, $4,227,000 and $3,129,000 related to the ESOP. Cash
contributions to the ESOP, which relate to 1994, 1993 and 1992, were
$4,375,000, $4,147,000 and $2,525,000, respectively. The contributions, which
are generally discretionary, are based on total compensation of the
participants.
From 1990 to 1994, the ESOP purchased 1,760,000 shares of the
Company's Common Stock with funds provided by the Company in return for a note
maturing in 2000 and bearing interest at 8%. In July 1994 the ESOP borrowed
$11 million from a bank under a term loan due 2001 (See Note H). Proceeds from
the loan were used to repay the note with the Company. The principal of the
bank loan has been recorded as a liability of the Company. Shares pledged as
collateral are reported as unearned ESOP shares in the consolidated balance
sheet. The annual contributions made by the Company to the ESOP are used to
repay the loan. As the debt is repaid, shares are released from collateral and
are allocated to participants based on total compensation. Dividends received
by the ESOP on its investment in the Company's Common Stock, amounting to
$545,000, $645,000 and $602,000 in 1994, 1993 and 1992, respectively, were
additionally used to service these loans. Interest expense under the term loan
due 2001 was $34,000 for the year ended December 31, 1994.
In November 1993, the American Institute of Certified Public
Accountants issued Statement of Position 93-6 ("SOP 93-6"), "Employers'
Accounting for Employee Stock Ownership Plans." SOP 93-6, which supersedes
SOP 76-3, is effective for fiscal years beginning after December 15, 1993.
Under the provisions of SOP 93-6, compensation expense is recorded based on the
market price of the shares as they are released from the unearned ESOP shares
account. The provisions of SOP 93-6 have been applied prospectively for all
unearned shares acquired by the ESOP after December 31, 1992. Unearned shares
acquired prior to December 31, 1992 continue to be accounted for in accordance
with the historical cost approach of SOP 76-3. Substantially all of the
unearned ESOP shares held as of December 31, 1994 were acquired prior to
December 31, 1992.
All shares held by the ESOP are considered outstanding for earnings
per share purposes. Of the 1,764,000 shares of Company stock owned by the
plan at December 31, 1994, 1,033,000 shares are allocated to participants and
731,000 shares are not allocated to participants.
NOTE K -- COMMITMENTS AND CONTINGENCIES
The Company has outstanding $586,000 of open letters of credit, which
were issued for the benefit of reinsurance companies.
The Company is a defendant in various legal actions arising from the
normal conduct of business. Management believes that none of the actions will
result in any liabilities materially in excess of the provisions that have been
made.
In November 1988, California voters approved Proposition 103,
requiring, in part, a one-year 20% rate rollback for substantially all property
and casualty insurance, except workers' compensation and reinsurance. As such,
only the Company's medical malpractice insurance is subject to the provisions
of Proposition 103. Proposition 103 mandated that with respect to rates
charged for policies issued or renewed on or after November 8, 1989, all rates
for classes of insurance subject to Proposition 103 must be approved by the
Department of Insurance prior to use. The prior approval of the California
Insurance Commissioner must also be obtained with respect to any proposed
increase or decrease in the rates charged by an insurer. The Company believes
that any amounts ultimately paid, if any, will not have a material effect on
its financial position or results of operations.
In August, 1992, an insurance subsidiary of the Company outsourced its
data processing operation to Electronic Data Systems. Under terms of the
contract, this subsidiary will pay a minimum $7,500,000 per year for a period
of ten years.
Total rental expense for 1994, 1993 and 1992, was $9,115,000,
$8,926,000, and $9,705,000, respectively. The Company leases office facilities
and certain equipment under non-cancelable operating leases, the terms of which
range from
58
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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):
<TABLE>
<S> <C>
1995 $11,657
1996 11,439
1997 10,837
1998 9,572
1999 8,494
Thereafter 8,231
-------
$60,230
=======
</TABLE>
NOTE L -- DISCONTINUED OPERATIONS
The Company discontinued all of its assumed reinsurance operations
during the period 1986 to 1991. These operations consisted 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 estimates that the assets (primarily cash and investment
securities) supporting these operations and all future cash inflows will be
adequate to fund future obligations. The investment securities have carrying
values of $247,446,000 (market value of $188,039,000) and $203,518,000 (market
value of $201,993,000) at December 31, 1994 and 1993, respectively. The
average remaining maturity of the fixed income portfolio was 5.78 years at
December 31, 1994 and 3.79 years at December 31, 1993. 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.
59
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE M -- OPERATIONS BY INDUSTRY SEGMENT
The following data for the years ended December 31, 1994, 1993 and
1992 provide certain information necessary for industry segment disclosure.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1994 1993 1992
---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
REVENUES
Workers' compensation $ 458,461 $ 489,126 $ 450,809
Medical malpractice 33,035 29,239 33,337
Property and casualty corporate and other 4,216 4,760 4,915
---------- ---------- ----------
Total property and casualty 495,712 523,125 489,061
Financial services 154,398 125,732 106,990
Corporate 3,038 2,548 2,642
---------- ---------- ----------
$ 653,148 $ 651,405 $ 598,693
========== ========== ==========
INCOME (LOSS) BEFORE INCOME TAXES
Workers' compensation $ 62,199 $ 49,775 $ 41,799
Medical malpractice 6,583 10,215 11,522
Property and casualty corporate and other (7,517) (7,898) (8,134)
---------- ---------- ----------
Total property and casualty 61,265 52,092 45,187
Financial services 28,014 21,456 14,878
Corporate (7,708) (9,200) (11,484)
---------- ---------- ----------
$ 81,571 $ 64,348 $ 48,581
========== ========== ==========
AMORTIZATION AND DEPRECIATION EXPENSE
Workers' compensation $ 4,808 $ 5,051 $ 2,712
Medical malpractice 377 517 2,243
Property and casualty corporate and other -- -- --
---------- ---------- ----------
Total property and casualty 5,185 5,568 4,955
Financial services 2,442 1,962 1,825
Corporate 8,082 2,982 1,812
---------- ---------- ----------
$ 15,709 $ 10,512 $ 8,592
========== ========== ==========
CAPITAL EXPENDITURES
Property and casualty* $ 5,642 $ 3,362 $ 6,553
Financial services 4,107 2,982 1,646
Corporate 653 213 228
---------- ---------- ----------
$ 10,402 $ 6,557 $ 8,427
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1994 1993 1992
---------- ---------- ----------
(Thousands of dollars)
<S> <C> <C> <C>
IDENTIFIABLE ASSETS
Property and casualty * $1,096,781 $1,139,899 $ 920,197
Financial services 1,678,039 1,119,534 842,759
Corporate 22,757 85,661 19,288
---------- ---------- ----------
$2,797,577 $2,345,094 $1,782,244
========== ========== ==========
</TABLE>
- -----------
* It is not practicable to allocate asset amounts among lines of business
within the property and casualty insurance segment. Assets held for
discontinued operations are excluded from the above table.
60
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE N -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Month Periods Ended
-------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
1994
Revenues $156,058 $157,992 $173,749 $165,349
Net Income 13,487 14,077 14,095 14,153
Net income per share 0.86 0.90 0.90 0.91
1993
Revenues $151,505 $169,285 $167,143 $163,472
Net Income 9,227 10,129 11,404 11,950
Net income per share 0.73 0.77 0.78 0.81
</TABLE>
NOTE O -- SUBSEQUENT EVENT
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 of Columbus, Ohio ("Buckeye"). Buckeye is a
subsidiary of The Continental Corporation, a publicly held underwriter of
property and casualty insurance. 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.
Casualty, based in Chicago, Illinois, and its California-based
subsidiary, Workers' Compensation and Indemnity Company, underwrites workers'
compensation primarily in Illinois and California. Casualty is currently a
leader in the Illinois workers' compensation market and is licensed in six
states.
61
<PAGE> 63
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
1994 1993
-------- --------
(Thousands of dollars)
<S> <C> <C>
Cash $ 794 $ 775
Notes receivable from subsidiaries* 91,403 38,252
Investment in subsidiaries* 413,529 394,342
Short-term investments 7,405 15,332
Non-redeemable preferred stocks -- 56,891
Excess of cost of acquisition of subsidiaries over net
assets acquired 8,204 8,494
Other receivables from subsidiaries* 3,330 3,268
Deferred income taxes 88,426 48,839
Other assets 5,709 4,663
-------- --------
TOTAL ASSETS $618,800 $570,856
======== ========
LIABILITIES
Accrued expenses and other liabilities $ 18,818 $ 11,685
Amounts due to subsidiaries* 73,267 37,907
Amounts due to run-off subsidiaries* 5,762 15,335
Current portion of long-term debt 1,571 --
Long-term debt 168,369 136,560
-------- --------
TOTAL LIABILITIES 267,787 201,487
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:
1994 and 1993 - 30,000,000 shares; issued and outstanding:
1994 - 15,388,000 and 1993 - 15,387,000 shares 15,388 15,387
Additional paid-in capital 80,264 80,217
Retained earnings 331,713 287,399
Unearned Employee Stock Ownership Plan shares (10,987) (13,634)
Net unrealized loss on investments, net of deferred taxes (65,365) --
-------- --------
TOTAL STOCKHOLDERS' EQUITY 351,013 369,369
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $618,800 $570,856
======== ========
</TABLE>
- -----------
*Eliminated in consolidation
See notes to condensed financial statements.
62
<PAGE> 64
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
INCOME
Interest income from subsidiaries* $ 3,623 $ 654 $ 1,229
Dividends from consolidated subsidiary* 3,407 6,155 6,155
Net investment income 3,014 2,296 2,648
Realized investment gains (losses) -- 248 (8)
Other income* 5,508 5,221 3,968
------- ------- -------
TOTAL INCOME 15,552 14,574 13,992
EXPENSES
Interest expense 8,163 6,439 9,473
General and administrative 12,018 11,505 10,273
------- ------- -------
TOTAL EXPENSES 20,181 17,944 19,746
------- ------- -------
(4,629) (3,370) (5,754)
Income tax expense (benefit) (3,351) 1,573 (6,099)
------- ------- -------
Income (loss) before equity in undistributed income
of subsidiary companies and cumulative effect
of accounting change (1,278) (4,943) 345
Equity in undistributed income of subsidiary companies 57,090 47,653 34,855
------- ------- -------
Income before cumulative effect of accounting change 55,812 42,710 35,200
Cumulative effect of accounting change for income taxes -- -- 43,509
------- ------- -------
NET INCOME $55,812 $42,710 $78,709
======= ======= =======
</TABLE>
- -----------
*Eliminated in consolidation
See notes to condensed financial statements.
63
<PAGE> 65
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993 1992
-------- --------- --------
(Thousands of dollars)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income before cumulative effect of accounting change $ 55,812 $ 42,710 $ 35,200
Adjustments to reconcile income before cumulative
effect of accounting change to net cash provided
by operating activities:
Equity in undistributed income from continuing
operations of subsidiaries (57,090) (47,653) (34,855)
Change in accrued investment income 216 (220) 250
Change in amounts due to or from subsidiaries 102 3,337 (11,615)
Provision for (reduction in) deferred income taxes (4,391) (973) 6,224
Provision for depreciation and amortization 8,082 2,982 2,252
Realized investment (gains) losses -- (248) 8
Change in other assets and liabilities 6,022 (1,693) 4,635
-------- --------- --------
NET CASH PROVIDED BY (USED IN)
CONTINUING OPERATIONS 8,753 (1,758) 2,099
Effect of discontinued operations (9,573) 9,380 (7,317)
-------- --------- --------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES (820) 7,622 (5,218)
INVESTING ACTIVITIES
Purchases of fixed maturity investments (46,712) (113,569) (64,057)
Sales of fixed maturity investments 92,003 113,817 58,829
Fixed maturity investments matured or called 11,600 -- 5,184
Decrease (increase) in short-term and other investments 7,928 (69,273) 34,857
Net increase in credit lines with subsidiaries (57,652) (18,648) (2,926)
Purchase of and additional investments in subsidiaries (23,000) (35,088) (6,111)
Sale of subsidiaries -- -- 1,610
Purchase of property and equipment (653) (213) (228)
-------- --------- --------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (16,486) (122,974) 27,158
FINANCING ACTIVITIES
Repayment of short-term debt -- (8,250) (4,053)
Proceeds from long-term debt 26,000 135,013 --
Repayment of long-term debt -- (38,040) (12,447)
Dividends paid (11,344) (9,369) (7,708)
Proceeds from sale of Common Stock -- 40,803 --
Stock options exercised 22 251 --
Purchase of fractional shares -- (8) --
Decrease (increase) in unearned Employee Stock
Stock Ownership Plan shares 2,647 (4,475) 2,231
-------- --------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 17,325 115,925 (21,977)
-------- --------- --------
INCREASE (DECREASE) IN CASH 19 573 (37)
Cash at beginning of year 775 202 239
-------- --------- --------
CASH AT END OF YEAR $ 794 $ 775 $ 202
======== ========= ========
</TABLE>
See notes to condensed financial statements.
64
<PAGE> 66
FREMONT GENERAL CORPORATION (PARENT COMPANY)
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
In the parent company financial statements, the parent's investment in
subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since date of acquisition. Parent company financial statements
should be read in conjunction with the Company's consolidated financial
statements.
NOTE 2 -- GUARANTEE
The parent guaranteed certain debt obligations of a subsidiary of up
to $180 million, of which $156 million was outstanding at December 31, 1994.
65
<PAGE> 67
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
Column A Column B Column C Column D Column E
- ---------------------- ------------ ------------ ---------- -----------
Reserves
Deferred for Claims,
Policy Benefits and Dividends
Acquisition Settlement Unearned to Policy-
Segment Costs Expenses Premiums holders
- ---------------------- ------------ ------------ ---------- -----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
1994
Life insurance $42,156 $172,425 $ -- $ --
Workers' compensation 13,237 703,567 37,690 46,067
Medical malpractice 327 40,841 4,466 --
Property and casualty
corporate and other 3,566 2,253 5,395 --
------- -------- ------- -------
$59,286 $919,086 $47,551 $46,067
======= ======== ======= =======
1993
Life insurance $37,985 $123,066 $ -- $ --
Workers' compensation 13,364 728,582 45,472 46,337
Medical malpractice 366 52,066 3,930 --
Property and casualty
corporate and other 3,513 2,279 5,322 --
------- -------- ------- -------
$55,228 $905,993 $54,724 $46,337
======= ======== ======= =======
1992
Life insurance $41,332 $103,161 $ -- $ --
Workers' compensation 11,854 569,293 26,280 39,137
Medical malpractice 331 62,274 3,978 --
Property and casualty
corporate and other 4,030 1,827 6,131 --
------- -------- ------- -------
$57,547 $736,555 $36,389 $39,137
======= ======== ======= =======
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
Column A Column F Column G Column H Column I Column J Column K
- ---------------------- ---------- ---------- ------------ ------------ --------- ----------
Amortization
Claims, of Deferred
Net Benefits and Policy Other Net
Premium Investment Settlement Acquisition Operating Premiums
Segment Revenue Income Expenses Costs Expenses Written
- ---------------------- ---------- ---------- ------------ ------------ --------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
1994
Life insurance $ 14,689 $10,595 $ 13,002 $ 6,669 $ 3,453 $ N/A
Workers' compensation 401,455 57,047 249,370 74,621 17,137 393,755
Medical malpractice 28,554 4,481 21,231 3,357 1,855 29,030
Property and casualty
corporate and other 3,575 641 2,998 2,343 774 3,647
-------- ------- -------- ------- ------- --------
$448,273 $72,764 $286,601 $86,990 $23,219 $426,432
======== ======= ======== ======= ======= ========
1993
Life insurance $ 14,268 $11,404 $ 8,829 $ 9,809 $ 4,276 $ N/A
Workers' compensation 426,793 60,710 300,468 66,911 19,933 427,651
Medical malpractice 25,055 4,184 14,169 2,988 1,869 24,907
Property and casualty
corporate and other 3,917 843 4,516 2,547 812 3,109
-------- ------- -------- ------- ------- --------
$470,033 $77,141 $327,982 $82,255 $26,890 $455,667
======== ======= ======== ======= ======= ========
1992
Life insurance $ 17,157 $ 8,633 $ 11,909 $ 7,451 $ 2,965 $ N/A
Workers' compensation 378,468 59,435 310,986 59,059 23,569 381,449
Medical malpractice 29,050 3,440 16,467 3,518 2,536 29,000
Property and casualty
corporate and other 4,438 98 3,750 2,784 1,132 3,769
-------- ------- -------- ------- ------- --------
$429,113 $71,606 $343,112 $72,812 $30,202 $414,218
======== ======= ======== ======= ======= ========
</TABLE>
66
<PAGE> 68
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE VI -- REINSURANCE
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Life insurance in force* $1,559,869 $380,609 $334,124 $1,513,384 22%
============ ========== ========== ============
Premium Revenue
Life insurance premiums $ 11,990 $ (1,114) $ 1,585 $ 14,689 11%
Workers' compensation 408,519 7,064 -- 401,455 0%
Medical malpractice 30,612 2,058 -- 28,554 0%
Property and casualty corporate and other 3,575 -- -- 3,575 0%
----------- --------- ---------- ------------
$ 454,696 $ 8,008 $ 1,585 $ 448,273
============ ========== ========== ============
YEAR ENDED DECEMBER 31, 1993
Life insurance in force* $1,769,668 $460,946 $297,060 $1,605,782 18%
============ ========== ========== ============
Premium Revenue
Life insurance premiums $ 13,427 $ 551 $ 1,392 $ 14,268 10%
Workers' compensation 432,743 5,950 -- 426,793 0%
Medical malpractice 26,549 1,494 -- 25,055 0%
Property and casualty corporate and other 3,108 -- 808 3,916 21%
------------ ---------- ---------- ------------
$ 475,827 $ 7,995 $ 2,200 $ 470,032
============ ========== ========== ============
YEAR ENDED DECEMBER 31, 1992
Life insurance in force* $1,893,008 $548,313 $242,764 $1,587,459 15%
============ ========== ========== ============
Premium Revenue
Life insurance premiums $20,314 $ 4,373 $ 1,216 $ 17,157 7%
Workers' compensation 386,371 9,368 1,465 378,468 0%
Medical malpractice 29,939 889 -- 29,050 0%
Property and casualty corporate and other 3,770 -- 668 4,438 15%
------------ ---------- ---------- ------------
$ 440,394 $ 14,630 $ 3,349 $ 429,113
============ ========== ========== ============
</TABLE>
- ------------
* Balance at end of year.
Intercompany transactions have been eliminated.
67
<PAGE> 69
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- --------------------------------- ---------------- ------------------------------- ----------------- -----------------
Additions
-------------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other Accounts Deductions End
Description of Period Expenses Describe Describe of Period
- --------------------------------- ---------------- --------------- -------------- ----------------- -----------------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Deducted from asset accounts:
Allowance for possible loan losses $25,222 $11,980 $3,605 (1) $13,401 (2) $27,406
Premiums receivable and agents'
balances and reinsurance recoverable 6,991 320 -- 352 (2) 6,959
------- ------- ------ ------- -------
Totals $32,213 $12,300 $3,605 $13,753 $34,365
======= ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1993
Deducted from asset accounts:
Allowance for possible loan losses $22,819 $16,873 $ -- $14,470 (2) $25,222
Premiums receivable and agents'
balances and reinsurance recoverable 5,866 3,143 -- 2,018 (2) 6,991
------- ------- ------ ------- -------
Totals $28,685 $20,016 -- $16,488 $32,213
======= ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1992
Deducted from asset accounts:
Allowance for possible loan losses $15,907 $ 9,550 $2,913 (1) $ 5,551 (2) $22,819
Premiums receivable and agents'
balances and reinsurance recoverable 10,666 841 -- 5,641 (2) 5,866
------- ------- ------ ------- -------
Totals $26,573 $10,391 $2,913 $11,192 $28,685
======= ======= ====== ======= =======
</TABLE>
- ----------------
(1) Reserves established with portfolio acquisitions.
(2) Uncollectible accounts written off, net of recoveries and reclassifications.
68
<PAGE> 70
FREMONT GENERAL CORPORATION AND SUBSIDIARIES
SCHEDULE X-SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY
INSURANCE OPERATIONS
<TABLE>
<CAPTION>
December 31, Year Ended December 31,
-------------------------------------------------------------------------------------------- --------------------------
Column A Column B Column C Column D Column E Column F Column G
---------------- ----------- ---------- -------- -------- -------- ----------
Reserves
for Unpaid Discount
Deferred Claims if any
Policy and Claim Deducted Net
Affiliation with Acquisition Adjustment in Unearned Earned Investment
Registrant Costs Expenses Column C Premiums Premiums Income
---------------- ----------- ---------- -------- -------- -------- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Fremont Insurance Group
and Consolidated
Subsidiaries
1994 $17,130 $746,661 $ -- $ 47,551 $433,584 $62,169
1993 $17,243 $782,927 $ -- $ 54,724 $455,765 $65,737
1992 $16,215 $633,394 $ -- $ 36,389 $411,956 $62,973
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
Column A Column H Column I Column J Column K
---------------- ---------------------- ----------- ---------- --------
Claims and Claim
Adjustment
Expenses Incurred Amortiza-
Related to tion of Paid
---------------------- Deferred Claims
(1) (2) Policy and Claim
Affiliation with Current Prior Acquisition Adjustment Premiums
Registrant Year Years Costs Expenses Written
---------------- ------- ----- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Fremont Insurance Group
and Consolidated
Subsidiaries
1994 $290,833 ($17,234) $80,321 $307,279 $426,432
1993 $323,279 ($ 4,126) $72,446 $308,357 $455,667
1992 $290,199 $41,004 $65,361 $324,912 $414,218
</TABLE>
69
<PAGE> 71
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
FREMONT GENERAL CORPORATION
Date: January 19, 1996 By: /s/ JOHN A. DONALDSON
----------------------------------
John A. Donaldson
Controller and Chief
Accounting Officer
70
<PAGE> 72
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
(23) Consent of Ernst & Young LLP Independent Auditors
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated March 10, 1995, included in
the Annual Report on Form 10-K of Fremont General Corporation for the year
ended December 31, 1994, with respect to the consolidated financial statements,
as amended, included in this Form 10-K/A.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 18, 1996
