-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MLDV/AiLNH2cQjh0w/QJ0mhW5zXx006IRRHrBKCIDtn2KMHhPy2U6tTOOEApQAXZ zLkxmF81EEFrNiyMHWRdzw== 0000950148-97-000760.txt : 19970401 0000950148-97-000760.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950148-97-000760 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FREMONT GENERAL CORP CENTRAL INDEX KEY: 0000038984 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 952815260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08007 FILM NUMBER: 97568731 BUSINESS ADDRESS: STREET 1: 2020 SANTA MONICA BLVD STREET 2: STE 600 CITY: SANTA MONICA STATE: CA ZIP: 90404 BUSINESS PHONE: 3103155500 MAIL ADDRESS: STREET 1: 2020 SANTA MONICA BLVD CITY: SANTA MONICA STATE: CA ZIP: 90404 10-K 1 FORM 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ------------------------ [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 1-8007 ------------------------ FREMONT GENERAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) NEVADA 95-2815260 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 2020 SANTA MONICA BOULEVARD, SANTA MONICA, CALIFORNIA 90404 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICER) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 315-5500 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $1.00 PAR VALUE LIQUID YIELD OPTION(TM) NOTES DUE 2013 (ZERO COUPON-SUBORDINATED) FREMONT GENERAL FINANCING I -- 9% TRUST ORIGINATED PREFERRED SECURITIES(SM) (TITLE OF EACH CLASS) NEW YORK STOCK EXCHANGE (NAME OF EACH EXCHANGE ON WHICH REGISTERED) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant as of February 28, 1997: COMMON STOCK, $1.00 PAR VALUE -- $549,866,000 The number of shares outstanding of each of the issuer's classes of common stock as of February 28, 1997: COMMON STOCK, $1.00 PAR VALUE -- 29,403,000 SHARES DOCUMENTS INCORPORATED BY REFERENCE: Portions of the proxy statement for the 1997 annual meeting of stockholders are incorporated by reference into Part III of this report. ================================================================================ 2 ITEM 1. BUSINESS GENERAL Fremont General Corporation is engaged domestically in select insurance and financial services businesses. Fremont General's insurance business includes one of the largest underwriters of workers' compensation insurance in the nation. The Company also provides medical malpractice insurance. Fremont General's financial services business includes commercial real estate lending, residential real estate lending, commercial finance and premium financing. The Company's total assets as of December 31, 1996 were $4.3 billion, with 1996 pre-tax earnings of $128 million. The primary operating strategy of the Company is to build upon its core business units through acquisition opportunities and new business development. The Company's secondary strategy is to achieve income balance and geographic diversity among its business units in order to limit the exposure of the Company to industry, market and regional concentrations. The Company's stock is traded on the New York Stock Exchange under the symbol "FMT" (NYSE:FMT). The Company is one of the largest workers' compensation insurers in the United States, with major market positions in California and Illinois, and a presence in 11 other states. For the year ended December 31, 1996 and 1995, the Company had workers' compensation insurance premiums earned of $457.2 million and $575.0 million, respectively. (See "Insurance Operations.") The Company recently expanded its workers' compensation insurance operations through the acquisition on February 22, 1995 of Casualty Insurance Company ("Casualty") and its wholly-owned subsidiary Workers' Compensation & Indemnity Company of California ("WCIC"). Casualty is the largest underwriter of workers' compensation insurance in Illinois with additional operations in several other mid-western states. This acquisition has provided the Company with a national platform upon which to build its workers' compensation insurance business, while providing greater geographic diversification. (See "Insurance Operations and Note B of Notes to Consolidated Financial Statements.) A.M. Best rates the Company's workers' compensation insurance subsidiaries on a consolidated basis as "A-" (Excellent). An "A-" rating is A.M. Best's fourth highest rating category out of fifteen rating categories ranging from "A++" (Superior) to "F" (In Liquidation). The Company's financial services operations have grown significantly and are engaged primarily in commercial and residential real estate lending, primarily in California, commercial finance lending, principally to small and middle market companies nationwide, and insurance premium financing. The Company's financial services loan portfolio has grown from $536 million at December 31, 1991 to $1.7 billion at December 31, 1996. (See "Financial Services Operations.") In an effort to provide a clearer understanding of the Company's financial services business segment, the Company has consolidated the real estate lending operations of Fremont Investment & Loan, a California thrift and loan, and the commercial finance operations of Fremont Financial Corporation, under a newly formed company, Fremont General Credit Corporation ("FGCC"). At December 31, 1996, FGCC had assets of approximately $2 billion, and reported pre-tax income of $36.6 million. By engaging in several selected businesses which are geographically diverse the Company believes it can achieve greater stability in its operating results. Over the five years ended December 31, 1996, the Company's income before taxes grew at a compound annual rate of approximately 26% to $128 million in 1996. The Company's book value increased from $175 million at December 31, 1990 to $559 million at December 31, 1996. The Company's assets were $4.3 billion at December 31, 1996. Management believes that ownership of the Company's Common Stock by employees has been an important element in the Company's success by enabling the Company to attract and retain the best available personnel for positions of substantial responsibility and to provide additional incentive and motivation to such individuals to promote the success of the Company. As of December 31, 1996, officers and directors of the Company, their families and the Company's benefit plans beneficially owned approximately 33% of the Company's outstanding Common Stock. The following Business section contains forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking 1 3 statements as a result of certain factors, including those set forth in this section and elsewhere in this Form 10-K. Fremont General, a Nevada corporation, was incorporated in 1972. INSURANCE OPERATIONS Workers' Compensation Insurance Fremont Compensation Insurance Group and its subsidiaries ("Fremont Compensation") underwrites workers' compensation insurance principally in California and Illinois, with a smaller presence in 11 other states. With the acquisition of Casualty in 1995, Fremont Compensation is one of the largest workers' compensation insurers in the United States. In 1996, Fremont Compensation's workers' compensation insurance premiums were divided between the western region, primarily California (1996 -- 37%; 1995 -- 51%) and the mid-west region, primarily Illinois (1996 -- 63%; 1995 -- 49%). The Company believes this geographic diversity has mitigated potential fluctuations in earnings from cyclical downturns in various regional economies. A.M. Best rates the Company's workers' compensation insurance subsidiaries on a consolidated basis as "A-" (Excellent). In 1996, income before taxes from workers' compensation insurance operations was $120.1 million. Workers' compensation is a statutory system which requires every employer to either purchase insurance or self-insure in order to provide its employees with medical care and other specified benefits for work-related injuries or illnesses. Compensation is payable regardless of who was at fault. Most employers provide for this potential liability by purchasing workers' compensation insurance from insurance carriers. There are four types of benefits payable under workers' compensation policies: medical benefits, vocational rehabilitation benefits, disability benefits and death benefits. The amounts of disability and death benefits payable for claims are established by statute, vocational rehabilitation benefits are provided with certain limitations in some jurisdictions, including California, and no dollar limitation is set forth for medical benefits. (See "Regulation - Insurance Regulation.") Premiums. Workers' compensation insurance premiums are based upon the policyholder's payroll and may be significantly affected by changes in general economic conditions which impact employment and wage levels, as well as by government regulation. Insurance premiums are also subject to supervision and regulation by the state insurance authority in each state. In July 1993, the California legislature enacted legislation to reform the workers' compensation system and to, among other things, adopt an open rating system through the repeal of the minimum rate law effective January 1, 1995. Illinois has been operating under an open rating system since 1982. In an open rating system, workers' compensation insurers are provided with advisory premium rates by job classification and each insurance company determines its own rates based in part upon its particular operating and loss costs. Although insurance companies are not required to adopt such advisory premium rates, companies in Illinois generally follow such rates. This characteristic has resulted in price competition in Illinois, where overall average decreases in advisory premium rates of 13.6% and 10.0% became effective January 1, 1996 and 1997, respectively. However, insurance companies in California have, since the adoption of an open rating system, generally set their premium rates below such advisory premium rates. Before January 1, 1995, California operated under a minimum rate law, whereby premium rates established by the California Department of Insurance were the minimum rates which could be charged by an insurance carrier. (See "Regulation -- Insurance Regulation.") The repeal of the minimum rate law resulted in lower premiums and lower profitability on the Company's California workers' compensation insurance policies due to increased price competition. (See "Competition.") Underwriting and Loss Control. Prior to insuring a workers' compensation account, the Company's underwriting department reviews the employer's prior loss experience, safety record, credit history, operations, geographic location and employment classifications. The Company generally avoids industries and businesses involving hazardous conditions or high exposure to multiple injuries resulting from a single occurrence. The Company targets accounts that appear to have a strong work ethic among employees, long-term employees, and a genuine interest in the adoption of and adherence to loss control standards. 2 4 The Company's loss control department participates in both the initial underwriting process and provides on-going services to policyholders based on individual needs and potential risk exposure. In the initial underwriting phase, the Company underwriter will review both the loss experience and description of operations, and where there is a concern about the potential hazards or claim trends, a loss control consultant will be requested to pre-screen the account prior to policy issuance. This screening process involves meetings with the employer's management to assess the extent to which management is committed to safety in the workplace, surveying the employer's operations, reviewing past loss patterns and evaluating the safety program. After the policy is issued, the loss control department will provide service calls to the insured based on both regulatory requirements and specific needs to assist the employer in developing and maintaining safety programs and procedures, review periodic loss reports, identify weaknesses in the employer's loss prevention procedures and assist in correcting these weaknesses. In some states, loss control must target those employers who have a high claim frequency, and provide specific services to assist in accident prevention. Accident and claim records maintained by the Company are also reviewed by the loss control department and service calls are initiated when adverse claim trends develop. Any insured who requests loss control service is provided this service free of charge. Accident prevention services include physical surveys for hazard recognition, safety program evaluation, loss trend analysis and employee training. Policyholders' Dividends. Beginning in 1995, the Company's workers' compensation insurance policies, both in California and those underwritten by Casualty, were predominately written as non-participating, which does not include provisions for the insurer to declare and pay dividends to a policyholder after the expiration of the policy. Prior to 1995, the Company's California policies were predominately written as participating, thereby obligating the Company to consider the payment of dividends to a policyholder, based upon the policyholder's loss experience, the Company's overall loss experience and competitive conditions. This shift in policy type is due primarily to the increased competition in the California market which resulted from the repeal of the minimum rate law, effective January 1, 1995. (See "Premiums" and "Regulation -- Insurance Regulation.") The Company anticipates that this shift to non-participating policies will continue and be a characteristic element of the competitive environment. Claims Administration. The Company's policy is to settle valid claims promptly and to work closely with policyholders to return injured workers to the job quickly, while avoiding litigation if possible. Claims personnel communicate frequently with policyholders, injured employees and medical providers. The Company's policy is to control the number of cases assigned to its claims personnel, to identify and investigate questionable claims and to produce early and cost-effective case settlements of valid claims. As part of its "zero tolerance" program, the Company refuses to settle any claim that it believes to be fraudulent. In most claims litigated administratively, the Company utilizes its own non-lawyer hearing representatives and has found this practice to be significantly less expensive than using legal counsel. The Company provides rehabilitation programs for injured workers and aggressively pursues the containment of medical costs through a subsidiary, Fremont Health. This subsidiary provides services to the Company's claims personnel which are designed to reduce medical costs and return injured workers to the job quickly. Such services include integrated medical case management; a proprietary, directly-contracted group of preferred providers who have unique experience in industrial medicine; an in-house staff of auditors who review medical bills using the Company's own data along with specialized software; medical peer review panels of credentialed regional medical providers; and comprehensive return-to-work programs designed to return injured workers back to work as quickly as medical treatment standards permit. The integrated case management service involves nurses employed by Fremont Health who work closely with the claims personnel to provide prompt and aggressive medical treatment to mitigate the effects of the workers' injuries. Competition. The insurance industry is characterized by competition on the basis of price and service. Prior to January 1, 1995, minimum premium rates were prescribed for workers' compensation insurance in California by the Department of Insurance, and competition for underwriting such insurance in California had been based principally upon an insurance carrier's financial strength and history of paying policyholders' dividends. Secondary considerations included loss control and claims administration, the ability to respond 3 5 promptly to agents and brokers, and commission schedules for agents and brokers. The repeal of the California minimum rate law effective January 1, 1995 has resulted in increased price competition which has adversely affected the Company's results of operations for its workers' compensation insurance business in California. (See "Regulation - Insurance Regulation.") The Company recently expanded its workers' compensation operation through the acquisition on February 22, 1995 of Casualty, which underwrites workers' compensation insurance in several mid-western states, primarily in Illinois. Although Casualty is the largest underwriter of workers' compensation insurance in the Illinois market, based on the competitive nature of the insurance industry and the inherent risks associated with the Company entering into a new geographic market, there can be no assurance that Casualty will continue to maintain its market share in the future. In addition, advisory premium rates established by the National Council on Compensation Insurance, which workers' compensation insurance companies in Illinois generally tend to follow, decreased 6.7% in 1995 (effective January 1, 1995). Additional average overall decreases in such advisory premium rates of 13.6% and 10.0% went into effect on January 1, 1996 and 1997, respectively. As a result, the Company anticipates price competition to continue in Illinois which will impact the Company's results of operations. Furthermore, state regulatory changes could affect competition in the states where the Company transacts insurance business. Although the Company is one of the largest writers of workers' compensation insurance in California and Illinois, certain of the Company's competitors are larger and have greater resources than the Company. Marketing. The Company markets its workers' compensation insurance products through more than 1,200 non-exclusive independent insurance agents and brokers, many of whom have been associated with the Company for more than 15 years. During 1996, the ten largest agents accounted for approximately 10% of the Company's workers compensation insurance premiums written, and no single agent or broker accounted for more than 2% of premiums written. Medical Malpractice Insurance The Company's medical malpractice insurance operation underwrites primarily standard professional liability insurance on a "claims made" basis in California. Coverage is provided for claims reported to the Company during the policy period arising from incidents that occurred at any time that the insured was covered by the policy. Fremont Indemnity Company, a subsidiary of Fremont Compensation Insurance Group and within which the medical malpractice insurance is written, is currently rated "A-" (Excellent) by A.M. Best. The Company offers coverage for individual medical doctors, anesthesiologists, podiatrists, chiropractors, as well as medical groups, community clinics, laboratories and miscellaneous medical clinics. The Company markets its policies exclusively through approximately 300 non-exclusive independent insurance agents and brokers. Revenues from this subsidiary were not significant in 1996, 1995 and 1994. Reinsurance Ceded Reinsurance is ceded primarily to reduce the liability on individual risks and to protect against catastrophic losses. The Company follows the industry practice of reinsuring a portion of its risks. For this coverage, the Company pays the reinsurer a portion of the premiums received on all policies. The Company maintains excess of loss reinsurance treaties with various reinsurers for each of its insurance lines. Under the current workers' compensation reinsurance treaties, various reinsurers assume liability on that portion of the loss that exceeds $1 million per occurrence, up to a maximum of $199 million per occurrence. For medical malpractice insurance, excess of loss reinsurance covers claims and losses above $1 million, up to a maximum of $5 million. Although reinsurance makes the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded, it does not legally discharge an insurer from its primary liability for the full amount of the policy liability. All of the foregoing reinsurance is with non-affiliated reinsurers. The Company believes that the terms of its reinsurance contracts are consistent with industry practice and, based on its review of the reinsurers' financial statements and reputations in the reinsurance marketplace, that its reinsurers are financially sound. The Company encounters disputes from time to time with its reinsurers, which, if not settled, are typically resolved in arbitration. 4 6 The Company's treaties are generally for annual terms. The Company has maintained reinsurance treaties with many of these same reinsurers for a number of years and believes that suitable alternative reinsurance treaties are readily obtainable at the present time. In general, the reinsurance agreements are of the treaty variety and cover all underwritten risks of types specified in the treaties. As of December 31, 1996, Employers Reassurance Corporation was the only reinsurer that accounted for more than 10% of total reinsurance recoverables while Continental Insurance Company and General Reinsurance Corporation were the only reinsurers that accounted for more than 10% of total amounts recoverable from all reinsurers on property and casualty paid and unpaid losses. With respect to the Company's life insurance operations within the financial services segment, the Company entered into reinsurance and assumption agreements with a reinsurer whereby substantially all of the Company's universal life insurance was ceded to the reinsurer effective December 31, 1995, and all the annuity business was ceded to the reinsurer effective January 1, 1996. As a result of these agreements, substantially all of the Company's life insurance operations have been disposed of with no significant gain or loss recorded. (See "Financial Services Operations.") Operating Data Set forth below is certain information pertaining to the Company's workers' compensation insurance business as determined in accordance with generally accepted accounting principles ("GAAP") for the years indicated. (See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of certain of this information.)
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Workers' Compensation Net premiums earned............... $457,236 $574,952 $401,455 $426,793 $378,468 Net investment income and other(1)....................... 94,378 87,304 52,747 56,733 67,458 Underwriting profit (loss)........ 25,675 (2,295) 9,452 (6,958) (25,659) Net income before taxes........... 120,053 85,009 62,199 49,775 41,799 Loss ratio..................... 68.3% 75.9% 62.1% 70.4% 82.2% Expense ratio.................. 26.1% 24.5% 23.1% 20.6% 21.8% Policyholders' dividend ratio........................ 0.0% 0.0% 12.4% 10.6% 2.8% -------- -------- -------- -------- -------- Total combined ratio...... 94.4% 100.4% 97.6% 101.6% 106.8% ======== ======== ======== ======== ========
- --------------- (1) Includes net realized investment gains and interest expense. Statutory Combined Ratio. The following table reflects the combined ratios of the Company's property and casualty insurance subsidiaries determined in accordance with statutory accounting practices, together with the property and casualty industry-wide combined ratios after policyholders' dividends, as compiled by A.M. Best for the years indicated.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1996 1995 1994 1993 1992 ------------- ------ ------ ------ ------ Workers' Compensation Company.............................. 97.9% 100.1% 98.5% 98.8% 110.4% Industry(1).......................... not available 97.0% 101.4% 109.1% 121.5%
- --------------- (1) Nationwide statutory combined ratio information for the workers' compensation insurance industry for 1992 through 1995 is from A.M. Best's Aggregates & Averages, Property-Casualty (1993 through 1996 editions). 5 7 Premium-to-Surplus Ratio. Regulatory authorities regard the premium-to-surplus ratio as an important indicator of operating leverage, since the lower the ratio, the greater the insurer's ability to withstand abnormal loss experience. Guidelines established by the National Association of Insurance Commissioners ("NAIC") provide that a property and casualty insurer's premium-to-surplus ratio is satisfactory if it is below 3 to 1. The following table sets forth the Company's consolidated ratio of net property and casualty premiums written during the period to policyholders' surplus on a statutory basis at the end of the period, for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT RATIOS) Net premiums written during the year.............................. $473,123 $683,711(1) $425,631 $454,867 $414,218 Policyholders' surplus at end of year.............................. 399,893 299,408 235,294 221,857 162,714 Ratio............................... 1.2x 2.3x 1.8x 2.1x 2.5x
- --------------- (1) Includes net written premium for Casualty and WCIC for the period January 1, 1995 through February 21, 1995, which was prior to the Company's acquisition of Casualty on February 22, 1995. Loss and Loss Adjustment Expense Reserves In many cases, significant periods of time, ranging up to several years or more, may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer, and the insurer's payment of that loss. To recognize liabilities for future unpaid losses, insurers establish reserves, which are balance sheet liabilities, representing estimates of future amounts needed to pay claims with respect to insured events that have occurred. Reserves are also established for loss adjustment expense reserves ("LAE") representing the estimated expenses of settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. Reserves for losses and LAE ("loss reserves") are based not only on historical experience but also on management's judgment of the effects of matters such as future economic and social forces likely to impact the insurer's experience with the type of risk involved, circumstances surrounding individual claims, and trends that may affect the probable number and nature of claims arising from losses not yet reported. Consequently, loss reserves are inherently subject to a number of highly variable circumstances. Loss reserves are revalued periodically using a variety of actuarial and statistical techniques for producing current estimates of expected claim costs. Claim frequency and severity and other economic and social factors are considered in the reevaluation process. A provision for inflation in the calculation of estimated future claim costs is implicit since reliance is placed on both actual historical data, which reflect past inflation, and on other factors which are judged to be appropriate modifiers of past experience. Adjustments to liabilities are reflected in operating results for the periods to which they are made. 6 8 Reconciliation of Loss and Loss Adjustment Expense Reserves. The following table shows in accordance with GAAP the reconciliation of the estimated liability for losses and LAE for the Company's property and casualty insurance subsidiaries (excluding discontinued operations) and the effect on income for each of the three years indicated. RECONCILIATION OF RESERVES FOR LOSSES AND LAE
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ---------- ---------- --------- (THOUSANDS OF DOLLARS) Reserves for losses and LAE, net of reinsurance recoverable, at beginning of year.................... $1,185,706 $ 610,510 $ 644,190 Incurred losses and LAE: Provision for insured events of the current year, net of reinsurance.................................... 334,657 459,951 290,833 Increase (decrease) in provision for insured events of prior years, net of reinsurance................ 750 1,382 (17,234)(1) ---------- ---------- -------- Total incurred losses and LAE................ 335,407 461,333 273,599 Payments: Losses and LAE, net of reinsurance, attributable to insured events of: Current year...................................... (108,247) (132,358) (70,505) Prior years....................................... (401,980) (358,423) (236,774) ---------- ---------- -------- Total payments............................... (510,227) (490,781) (307,279) ---------- ---------- -------- Subtotal..................................... 1,010,886 581,062 610,510 Liability for losses and LAE for Casualty Insurance Company acquired during the year..................... -- 604,644 -- ---------- ---------- -------- Reserves for losses and LAE, net of reinsurance recoverable, at end of year.......................... 1,010,886 1,185,706 610,510 Reinsurance recoverable for losses and LAE, at end of year................................................. 245,459 269,986 136,151 ---------- ---------- -------- Reserves for losses and LAE, gross of reinsurance recoverable, at end of year.......................... $1,256,345 $1,455,692 $ 746,661 ========== ========== ========
- --------------- (1) See "Analysis of Loss and Loss Adjustment Expense Development" below for discussion of the decrease in reserve estimates during 1994. Analysis of Loss and Loss Adjustment Expense Development. The following table shows the cumulative amount paid against the previously recorded liability at the end of each succeeding year and the cumulative development of the estimated liability for the ten years ending December 31, 1996. Conditions and trends that have affected the development of these reserves and payments in the past will not necessarily recur in the future. Accordingly, it would not be appropriate to use this cumulative history to project future performance. The re-estimated liability portion of the following table shows the year by year development of the previously estimated liability at the end of each succeeding year. The re-estimated liabilities are increased or decreased as more information becomes known about the frequency and severity of claims for individual years. The increases or decreases are reflected in the current year's operating earnings. Each column shows the reserve held at the indicated calendar year-end and cumulative data on re-estimated liabilities for the year and all prior years making up those calendar year end liabilities. The effect on income of the charge (credit) during the current period (i.e., the difference between the estimated liability at December 31 and the liability 7 9 estimated one year later) is shown in the previous table above for each of the three most recent years as "Increase (decrease) in provision for insured events of prior years." CHANGES IN HISTORICAL RESERVES FOR LOSS AND LAE FOR THE LAST TEN YEARS GAAP BASIS AS OF DECEMBER 31, 1996
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------------ 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- -------- -------- -------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Reserves for Loss and LAE, net of reinsurance recoverable... $384,923 $390,799 $406,823 $647,559 $652,284 $627,103 $633,394 $644,190 $ 610,510 $1,185,706 $1,010,886 Net reserve re-estimated as of: One year later..... 413,549 402,902 396,091 636,039 624,953 668,107 629,268 626,956 611,892 1,186,456 -- Two years later..... 410,654 389,973 377,080 607,253 647,959 660,729 615,747 633,333 632,397 Three years later..... 403,767 374,330 356,961 607,492 638,879 651,482 621,348 641,166 Four years later..... 394,868 361,209 350,736 599,052 627,194 654,403 626,174 Five years later..... 384,891 358,645 375,550 593,527 631,165 659,050 Six years later..... 385,732 369,320 373,514 596,808 634,628 Seven years later..... 391,036 371,863 375,364 600,646 Eight years later..... 394,790 372,920 380,467 Nine years later..... 396,359 378,011 Ten years later..... 401,472 Net cumulative redundancy (deficiency)... (16,549) 12,788 26,356 46,913 17,656 (31,947) 7,220 3,024 (21,887) (750) -- Cumulative amount of reserve paid, net of reserve recoveries, through: One year later..... 136,523 128,565 125,563 226,101 245,777 257,951 240,552 236,774 241,667(1) 401,980 -- Two years later..... 228,926 213,323 211,529 374,876 403,105 419,638 402,048 392,237 397,640 Three years later..... 286,155 266,605 263,229 461,366 495,707 521,729 499,924 484,474 Four years later..... 320,729 298,956 291,817 514,890 550,404 583,013 558,935 Five years later..... 342,673 316,483 320,511 547,535 585,094 623,022 Six years later..... 354,069 333,461 339,998 567,871 608,802 Seven years later..... 365,410 346,547 351,805 583,580 Eight years later..... 375,384 353,517 362,802 Nine years later..... 380,437 361,092 Ten years later..... 386,883 Net reserve -- December 31 $1,185,706 $1,010,886 Reinsurance recoverable 269,986 245,459 -------- ---------- Gross reserve -- December 31 $1,455,692 $1,256,345 ======== ========== Net re-estimated reserve $1,186,456 Re-estimated reinsurance recoverable 276,564 -------- Gross re-estimated reserve $1,463,020 ======== Gross cumulative redundancy (deficiency) $ (7,328) ========
- --------------- (1) Excludes $116,756,000 in loss and LAE payments on 1994 and prior years related to reserves acquired from Casualty. 8 10 The Company is required to maintain reserves to cover its estimated ultimate liability for losses and LAE with respect to reported and unreported claims incurred as of the end of each accounting period. These reserves do not represent an exact calculation of liabilities, but rather are estimates involving actuarial projections at a given time of what the Company expects the ultimate settlement and administration of claims will cost based on facts and circumstances then known, predictions of future events, estimates of future trends in claims' frequency and severity and judicial theories of liability as well as other factors. The Company regularly reviews its reserving techniques, overall reserve position and its reinsurance. In light of present facts and current legal interpretations, management believes that adequate provision has been made for loss reserves. In making this determination, management has considered its claims experience to date, loss development history for prior accident years, estimates of future trends of claims frequency and severity, and various external factors such as judicial theories of liability. However, establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. Subsequent actual experience has resulted and could result in loss reserves being too high or too low. Future loss development could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. In 1996 and 1995, there was relatively insignificant aggregate development on prior accident years. In 1994, the Company decreased its losses and LAE reserves for 1993 and prior accident years by $17.2 million. This reserve decrease was partially offset by an increase in the liability for dividends to policyholders. Further, this reduction in loss reserves represents the recognition of a continued decrease in the frequency and severity of reported claims on 1993 and prior accident years. The Company is not able to determine with certainty the specific cause or causes of increases and decreases in claims experience that led to these changes in reserves but has reached its own conclusion based on a review of its internal data base and a subjective evaluation of external factors. The following discussion is a summary of the principal considerations that the Company evaluated in determining workers' compensation insurance reserve adjustments during 1994. The Company believes that a number of factors including the economic recession in California (including unemployment rates) in the early 1990's, primarily 1990 and 1991, led to increases in the occurrence and magnitude of post-employment stress claims submitted to the Company, including many fraudulent claims. These conditions mirrored those of the California workers' compensation industry in general as private workers' compensation insurers in California, including the Company, substantially increased loss reserves in calendar year 1992 for the 1990 and 1991 accident years. The effect of fraud on the industry during 1990 and 1991 is further supported by the impact of actions taken by the California legislature in 1992 to limit workers' compensation fraud. In connection with this legislation, the Company instituted its "zero tolerance" program and began to aggressively investigate and prosecute those attempting to defraud policyholders through filing and encouraging fraudulent workers' compensation insurance claims. Thus, while unemployment continued to remain high in California during 1992 the number of claims and loss ratios for the industry on the 1992 accident year declined. The Company believes the decline in claim frequency and severity, which continued into 1994, is due primarily to the anti-fraud legislation enacted in California and the anti-fraud campaigns thereafter undertaken by the Company and other members of the workers' compensation insurance industry. INVESTMENT PORTFOLIO The Company manages its investments internally. The following portfolio information reflects the Company's continuing operations. 9 11 The following table reflects the amortized cost and fair value of fixed maturity investments and non-redeemable preferred equity securities by major category, as well as the amortized cost and fair value of cash and short-term investments on the dates indicated.
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------------- ----------------------- AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Available for sale: United States Treasury securities and obligations of other US government agencies and corporations........................... $ 70,039 $ 76,314 $ 136,626 $ 149,250 Redeemable preferred stock.................... -- -- 15,887 15,764 Mortgage-backed securities.................... 324,011 308,228 340,682 337,133 Corporate securities Banks...................................... 35,000 35,155 123,144 125,836 Financial.................................. 115,382 118,443 117,013 120,242 Transportation............................. 27,163 27,559 16,888 17,241 Utilities.................................. 10,939 11,173 13,427 13,820 Industrial................................. 421,714 428,275 491,767 517,264 ----------- ----------- ----------- Total................................. 1,004,248 1,005,147 1,255,434 1,296,550 Non-redeemable preferred stock................ 351,812 354,958 285,337 277,451 ----------- ----------- ----------- Total................................. $1,356,060 $1,360,105 $1,540,771 $1,574,001 =========== =========== =========== Short-term investments.......................... $ 118,582 $ 118,582 $ 362,163 $ 362,163 Cash............................................ 55,378 55,378 39,559 39,559
As of December 31, 1996, substantially all of the fixed maturity investments in the portfolio were rated investment grade. Using Standard and Poor's, Moody's and Fitch's rating services, 65% were rated A or higher, 34% were rated BBB and 1% were rated BB. As of December 31, 1996, these investment securities had an approximate fair value of $1.0 billion, which was higher than amortized cost by approximately $1 million. The Company does not currently plan or intend to invest in securities rated below investment grade. The following table reflects the average cash and investment assets of the Company and its subsidiaries for the periods indicated.
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Average cash and investment assets Cash............................................... $ 40,467 $ 24,657 $ 29,693 Investment assets.................................. 1,752,181 1,591,972 1,060,001 ----------- ----------- ----------- Total...................................... $1,792,648 $1,616,629 $1,089,694 =========== =========== =========== Investment yield earned on (excluding realized gains and losses): Cash and investment assets......................... 7.06% 7.38% 6.99% Investment assets only............................. 7.22% 7.49% 7.19% Investment yield earned on (including realized gains and losses): Cash and investment assets......................... 6.97% 7.38% 6.97% Investment assets only............................. 7.13% 7.49% 7.16%
Due to changing accounting and industry practice and management's evaluation of the investment portfolio, the Company has designated its entire portfolio as investments that would be available for sale in response to changing market conditions, liquidity requirements, interest rate movements and other investment factors. At December 31, 1996 and 1995, the Company held securities having an amortized cost of 10 12 $1.356 billion and $1.541 billion, respectively, as available for sale. (See Notes A and C of Notes to Consolidated Financial Statements.) The following table sets forth maturities in the fixed maturity and short-term investment portfolios at December 31, 1996:
AMORTIZED COST PERCENTAGE ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) One year or less..................................... $ 118,582 10% Over 1 year through 5 years.......................... 77,192 7 Over 5 years through 10 years........................ 346,217 31 Over 10 years........................................ 256,828 23 Mortgage-backed securities........................... 324,011 29 ---------- ---- Totals............................................. $1,122,830 100% ========== ====
Using Standard and Poor's, Moody's and Fitch's rating services, the following table sets forth the quality mix of the Company's fixed maturity investment portfolio at December 31, 1996:
PERCENTAGE ---------- AAA (Including US government obligations)......... 29% AA................................................ 5 A................................................. 31 BBB............................................... 34 BB................................................ 1 ---- 100% ====
FINANCIAL SERVICES OPERATIONS Real Estate Lending The real estate lending operations of FGCC, which began in 1990 through the acquisition of a California thrift and loan ("the thrift"), now serves more than 28,000 customers through 11 branch offices, and its deposits are insured by the Federal Deposit Insurance Corporation ("FDIC"). (See "Regulation -- Thrift and Loan Regulation.") The thrift's operations are primarily engaged in commercial and residential real estate lending. Income before taxes from the real estate lending operation has increased significantly from $2.5 million in 1991 to $17.3 million in 1996. Assets of the real estate lending operation have grown from $278 million at the end of 1991 to $1.24 billion at the end of 1996, due to increased loan originations and to the purchase of loan portfolios from other financial institutions. The thrift funds its lending activities through its deposits and capital. Deposits consist of full-paid investment certificates (which are similar to certificates of deposit) and installment investment certificates (which are similar to passbook accounts and money market accounts). Deposits totaled $1.114 billion at December 31, 1996. The ability of the Company to continue to originate loans, and of borrowers to repay outstanding loans, may be impaired by adverse changes in local or regional economic conditions which affect such areas or by adverse changes in the real estate market in those areas. Such events could also significantly impair the value of the underlying collateral. If the Company's collateral were to prove inadequate, the Company's results of operations could be adversely affected. In addition, the financial services industry is characterized by competition on the basis of price and service. Loan Origination. The thrift originates loans through independent loan brokers and through its own loan agents. In 1996, the thrift purchased an aggregate of $14 million in California commercial and residential real estate loans from third parties, primarily financial institutions. In 1995, no portfolios of commercial real estate loans were purchased, primarily due to increased competition which resulted in inadequate yields or unacceptable risk profiles for the portfolios considered. In 1994, the thrift purchased an aggregate of 11 13 $366 million in primarily California commercial real estate loan portfolios from financial institutions. Acquisition costs of purchased loan portfolios are significantly lower than if loans were originated by the Company. The Company originates and purchases loans primarily for its own portfolio rather than for resale to third parties. The Company performs an internal evaluation of the underlying collateral at the time each loan is purchased and applies strict underwriting guidelines that include conservative loan-to-value ratios. The thrift's commercial real estate loan originations are primarily secured by first trust deeds on income-producing properties in California. The real estate securing these loans include a wide variety of property types, such as small office buildings, small shopping centers, owner-user office/warehouses and retail properties. The thrift does not originate commercial real estate construction and development loans. The majority of the commercial real estate loans originated are adjustable rate loans and generally range between $1 million to $5 million. As of December 31, 1996, the average loan size was $1,650,000 and the approximate average loan-to-value ratio was 72%, using the most current available appraised values and current balances outstanding. The total amount of commercial real estate loans outstanding at December 31, 1996 was $855 million or 76% of the loan portfolio. Loans secured by commercial real estate are generally considered to entail a higher level of risk than loans secured by residential real estate. Although the properties securing the Company's commercial real estate loans generally have good operating histories, there is no assurance that such properties will continue to generate sufficient funds to allow their owners to make full and timely mortgage loan payments. At December 31, 1996, the thrift had 35 non-accrual commercial real estate loans totaling approximately $11.0 million and commercial real estate owned of approximately $6.2 million. The thrift also originates loans secured by single-family residences. At December 31, 1996, single family residential real estate secured loans represented $267 million, or 24%, of the thrift's loan portfolio. Substantially all of these loans are secured by first trust deeds. These loans have principal amounts primarily below $300,000, have maturities of nine to thirty years and are approved in accordance with lending policies approved by the thrift's Board of Directors which includes standards covering, among other things, collateral value, loan to value and customer debt ratio. At December 31, 1996, the average single-family loan amount was $118,000, and the approximate average loan-to-value ratio was 75%, using appraised values at the time of loan origination and current balances outstanding. The portfolio of the thrift's loans receivable as of the dates indicated are summarized in the following table by type of primary collateral.
YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---------- -------- -------- (THOUSANDS OF DOLLARS) Commercial real estate loans............... $ 855,150 $730,599 $687,198 Residential real estate loans.............. 267,428 165,888 103,532 Other thrift loans......................... 305 2,330 36,295 ---------- -------- -------- Loans receivable before deferred fees and costs.................................... 1,122,883 898,817 827,025 Purchase discount and deferred fees and costs.................................... (8,933) (9,865) (19,498) ---------- -------- -------- Total loans receivable, purchase discount and deferred fees and costs........... 1,113,950 888,952 807,527 Less allowance for possible loan losses.... (24,759) (17,498) (14,391) ---------- -------- -------- Loans receivable, net.................... $1,089,191 $871,454 $793,136 ========== ======== ========
Funding Sources. The thrift obtains funds from depositors by offering full-paid investment certificates and installment investment certificates insured by the FDIC to the legal maximum through its 11 branches in California. The thrift has typically offered higher interest rates to its depositors than do most full service financial institutions. At the same time, it has minimized the cost of maintaining these accounts by not offering transaction accounts or services such as checking, safe deposit boxes, money orders, ATM access and other traditional retail services. The thrift generally effects deposit withdrawals by issuing checks rather than disbursing cash, which minimizes operating costs associated with handling and storing cash. Additional financing became available from the Federal Home Loan Bank of San Francisco effective January 1995. This 12 14 financing is available at varying rates and terms. As of December 31, 1996, $231 million was available under the facility and no borrowings were outstanding. The table below summarizes the thrift's investment certificates as of December 31, 1996 which are stated in amounts of $100,000 or more, by maturity and by type.
INVESTMENT CERTIFICATES $100,000 OR MORE, MATURING ------------------------------------------------------ 3 MONTHS OVER 3 THROUGH OVER 6 THROUGH OVER OR LESS 6 MONTHS 12 MONTHS 12 MONTHS TOTAL -------- -------------- -------------- --------- ------- (THOUSANDS OF DOLLARS) Retail................................... $5,603 $ 10,095 $ 22,664 $ 4,963 $43,325 IRA's.................................... 323 201 2,289 628 3,441 Wholesale................................ 200 600 3,409 1,150 5,359 Brokered................................. 2,000 1,201 -- 42,724 45,925 ------ ------- ------- ------- ------- Total.......................... $8,126 $ 12,097 $ 28,362 $49,465 $98,050 ====== ======= ======= ======= =======
Commercial Finance The Company's commercial finance subsidiary provides working capital loans, primarily secured by accounts receivable and inventory, to small and middle market companies on a nationwide basis. Additionally, insurance premium financing is provided and is collateralized by security interests in return premiums. The total commercial finance loan portfolio has grown from $189 million at December 31, 1991 to $612 million at December 31, 1996. This growth has been achieved through development of the customer base through loan originations and through participation in syndicated loan transactions. In 1996, income before taxes from commercial and premium financing was $20.0 million. The lending market has become increasingly competitive for small to middle market commercial borrowers. As a result, the Company has experienced decreasing yields on its commercial finance loans. In addition, adverse economic developments can negatively affect the Company's business and results of operations in a number of ways. Such developments can reduce the demand for loans, impair the ability of borrowers to pay loans and impair the value of the underlying collateral. Commercial finance loans made by the Company are primarily on a revolving short-term basis (generally two or three years) and secured by assets which primarily include accounts receivable, inventory, machinery and equipment and, to a lesser extent, real estate and other types of collateral. In addition, the Company also makes term loans secured primarily by equipment and real estate. The term loans originated in conjunction with revolving loans are cross-collateralized (i.e., the same collateral is used to support both the term loans and all the related revolving loans) and coterminous with the related revolving loan made to the same borrower. The term to maturity for the term loans is generally five to seven years; however, certain term loans are "balloon loans" that amortize over a longer period and, therefore, do not amortize fully before their respective maturities. Commercial finance loans also include secured loans originated and serviced by other asset-based lenders and participated in by the Company. As of December 31, 1996, the average outstanding commercial finance loan balance was $2.5 million. Loans outstanding to a single borrower generally range in size from $250,000 to $15 million. The major avenue of growth for the commercial finance operations remains the establishment of new lending relationships. The Company has a national presence with regional offices in Santa Monica, Chicago, New York and Atlanta, as well as eight other marketing offices across the country. To provide a stable source of funds to facilitate the continued expansion of its asset-based lending business, the Company, in 1993, established the Fremont Small Business Loan Master Trust ("Fremont Trust") for the purpose of securitizing the greater part of its commercial finance loan portfolio. The Fremont Trust is a master trust that can issue multiple series of asset-backed certificates which represent undivided interests in the Fremont Trust's assets (primarily commercial finance loans) and the Company will continue to service the loans thereunder. As of December 31, 1996, an aggregate $235 million of senior series and a $30 million subordinated series of asset-backed certificates were outstanding. The interest rate on the certificates, set monthly, ranged from LIBOR plus 0.34% to LIBOR plus 0.95% at December 31, 1996. The securities issued in this program have a scheduled maturity of three to five years, but could mature earlier depending on fluctuations in the outstanding balances of loans in the portfolio and other factors. As of December 31, 1996, up to $365 million in additional 13 15 publicly offered asset-backed certificates may be issued pursuant to a shelf registration statement to fund future growth in the commercial finance loan portfolio. In February 1996, $135 million of the senior series certificates ("Series C") were issued. The proceeds were used, in conjunction with existing cash, to retire $200 million in Series A certificates, which were outstanding as of December 31, 1995. The $30 million subordinated certificates were issued by the Company in April 1995 via a private placement. In December 1995, a commercial paper facility was established as part of the asset securitization program. This facility provides for the issuance of up to $150 million in commercial paper, dependent upon the level of assets within the asset securitization program. This facility, which expires in December 1998, had approximately $15 million outstanding under it as of December 31, 1996. The commercial finance operation also has an unsecured revolving line of credit with a syndicated bank group that presently permits borrowings of up to $400 million, which includes a revolving credit facility of $300 million expiring August 1998 and a term loan of $100 million maturing 2001. The balance outstanding at December 31, 1996 of the revolving credit facility and the term loan was $123 million and $100 million, respectively, with a weighted average interest rate of 6.11%. This credit line is primarily used to finance assets which are not included in the Company's asset securitization program. The Company's commercial finance customer base consists primarily of small to middle market manufacturers and distributors which generally require financing for working capital and debt restructuring. At December 31, 1996, the Company had approximately 223 commercial finance loans outstanding in 36 states. Approximately 35% of total commercial finance loans outstanding were made to companies based in California, and no other state accounted for more than 10% of total commercial finance loans outstanding. Commercial finance loans are asset-based revolving loans which permit a company to borrow from the lender at any time during the term of the loan agreement, up to the lesser of a maximum amount set forth in the loan agreement or a percentage of the value of the collateral which primarily secures such loans. Under an asset-based lending agreement, the borrower retains the credit and collection risk with respect to the collateral in which the lender takes a security interest. Cash collections are received as often as daily by or on behalf of the borrower after the loan is initially made. These collections are paid to the lender to reduce the loan balance. While consideration is given to the net worth and profitability of a client, asset-based loans are generally extended to borrowers who do not have bank sources of credit readily available and are based on the estimated liquidation value of the collateral pledged to secure the loan. The largest percentage of realized losses has resulted from fraud or collateral misrepresentations by the borrower. The Company seeks to protect itself against this risk through a comprehensive system of collateral monitoring and control. The Company's auditors perform auditing procedures of a borrower's books and records and physically inspects the collateral prior to approval and funding, as well as approximately every 90 days during the term of the loan. General economic conditions beyond the Company's control can and do impact the ability of borrowers to repay loans and also the value of the assets collateralizing such loans. Over the past four years, the majority of the Company's loans that have been liquidated have been fully repaid, as the Company attempts to work closely with the borrower through the liquidation to ensure repayment of the loan. The Company seeks to maintain conservative collateral valuations and perfection of security interests. The Company primarily competes with commercial finance companies and banks, most of whom are larger and have greater financial resources than the Company's commercial finance operation. The principal competitive factors are the rates and terms upon which financing is provided and customer service. The lending market has become increasingly competitive for small to middle market commercial borrowers. As a result, the Company has experienced decreasing yields on its commercial finance loans. The commercial finance operation also finances property and casualty insurance premiums. This premium finance loan portfolio is collateralized by the unearned premiums of the underlying insurance policies. Revenue and operating income from this subsidiary were not significant in 1996, 1995 or 1994. 14 16 Life Insurance Prior to January 1, 1996, the Company offered life insurance products, including annuities, credit life and disability insurance and term life insurance for consumers, through a subsidiary. On December 31, 1995 and on January 1, 1996, the Company entered into reinsurance and assumption agreements with a reinsurer whereby assets and liabilities related to certain life insurance and annuity policies were ceded to the reinsurer. These reinsurance agreements are part of several other agreements which have collectively resulted in the sale of substantially all of the Company's life insurance operations. The Company continues to remain primarily obligated for approximately $193 million of account value of annuities which, at December 31, 1996, have been fully coinsured with Employers Reassurance Corporation. The effect on operations from these agreements was not material, and revenue and operating income from this subsidiary were not significant in 1996, 1995 or 1994. DISCONTINUED OPERATIONS The Company's discontinued operations consist primarily of assumed treaty and facultative reinsurance business that was discontinued between 1986 and 1991. In 1990, the Company established a management group to actively manage the liquidation of this business. The liabilities associated with this business are long term in duration and, therefore, the Company continues to be subject to claims being reported. Claims under these reinsurance treaties include professional liability, product liability and general liability which include environmental claims. The discontinued operations' assets at December 31, 1996 consisted of $200 million in cash and investment grade fixed income securities, reinsurance recoverables of $58 million and other assets totaling $7 million. The Company estimates that the dedicated assets supporting these operations and all future cash inflows will be adequate to fund future obligations. However, should those assets ultimately prove to be insufficient, the Company believes that its property and casualty subsidiaries would be able to provide whatever additional funds might be needed to complete the liquidation without having a material adverse effect on the Company's consolidated financial position or results of operations. (See Note N of Notes to Consolidated Financial Statements.) The discontinued operations have investment portfolios which resemble the portfolios in the ongoing operations with regard to asset allocation, performance and maturities. REGULATION Insurance Regulation The Company's workers' compensation insurance operations are concentrated in California and Illinois, with additional writings in 11 other states. Insurance companies are subject to supervision and regulation by the state insurance authority in each state in which they transact business. Such supervision and regulation relate to numerous aspects of an insurance company's business and financial condition. The primary purpose of such supervision and regulation is the protection of policyholders rather than investors or shareholders of an insurer. The extent of such regulation varies, but generally derives from state statutes that delegate regulatory, supervisory and administrative authority to state insurance departments. Accordingly, the authority of the state insurance departments includes the establishment of standards of solvency which must be met and maintained by insurers, the licensing to do business of insurers and agents, the nature of and limitations on investments by insurers, premium rates for certain property and casualty insurance, and life and disability insurance, the provisions which insurers must make for current losses and future liabilities and the approval of policy forms. Additionally, most states require issuers to participate in assigned risk plans which provide insurance coverage to individuals or entities who are unable to obtain coverage from existing insurers in those states. The net profit or loss incurred in the administration of these plans is allocated back to participant insurers based on the insurers' relative market share (i.e., insurance premiums) in each state. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies. The Company's multistate insurance operations require, and will continue to require, significant resources of the Company in order to continue to comply with the regulations of each state in which it transacts business. 15 17 Workers' Compensation Regulation. Illinois began operating under an open rating system in 1982 and California began operating under such a system effective January 1, 1995. In an open rating system, workers' compensation companies are provided with advisory premium rates by job classification and each insurance company determines its own rates based in part upon its particular operating and loss costs. Although insurance companies are not required to adopt such advisory premium rates, companies in Illinois generally follow such rates. However, insurance companies in California have, since the adoption of an open rating system, generally set their premium rates below such advisory premium rates. Before January 1, 1995, California operated under a minimum rate law, whereby premium rates established by the California Department of Insurance were the minimum rates which could be charged by an insurance carrier. In July 1993, California enacted legislation to reform the workers' compensation insurance system and to, among other things, adopt an open rating system through the repeal of the minimum rate law effective January 1, 1995. The repeal of the minimum rate law on January 1, 1995 resulted in lower premiums and lower profitability in the Company's California workers' compensation insurance business due to increased price competition. The Company believes that its acquisition of Casualty, with policies written primarily outside of California, lessened the impact of the repeal of the minimum rate law by providing geographic diversity, which mitigates the impact of economic and regulatory changes within a regional marketplace. Prior to January 1, 1995, the Company's policies were predominately written as participating, thereby obligating the Company to consider the payment of dividends to policyholders. The ability of the Company's subsidiaries to pay policyholder dividends on workers' compensation insurance policies was subject to California regulations which stated in part that dividends under a workers' compensation policy could only be paid from surplus accumulated on workers' compensation policies issued in California. Beginning in 1995, the payment of policyholder dividends in respect of workers' compensation insurance policies written in California is not limited. However, in 1995 the Company's workers' compensation insurance policies, both in California and Illinois, were predominately written as non-participating, which does not include provisions for dividend consideration. This shift in policy type is due primarily to the increased competition in the California market which resulted from the repeal of the minimum rate law, effective January 1, 1995. The Company anticipates that this shift to non-participating policies will continue and be a characteristic element of the competitive environment. In addition, the Company's subsidiaries are required, with respect to their workers' compensation line of business, to maintain on deposit investments meeting specified standards that have an aggregate market value equal to the Company's loss reserves. Insurance Guaranty Association Laws. Under insolvency or guaranty fund laws in most states in which the Company's insurance subsidiaries operate, insurers doing business in those states can be assessed, up to the prescribed limits, for losses incurred by policyholders as a result of the insolvency of other insurance companies. The amount and timing of such assessments are beyond the control of the Company and generally have not had an adverse impact on the Company's earnings in years in which such assessments have been made. Premiums written under workers' compensation policies are subject to assessment only with respect to covered losses incurred by the insolvent insurer under workers' compensation policies. The Company believes it does not face any material exposure to guaranty fund assessments. Holding Company Regulation. The Company is subject to the California Insurance Holding Company System Regulatory Act (the "Holding Company Act"). This act, and similar laws in other states, require the Company to periodically file information with the California Department of Insurance and other state regulatory authorities, including information relating to its capital structure, ownership, financial condition and general business operations. Certain transactions between an insurance company and its affiliates, including sales, loans or investments which in any twelve month period aggregate at least 5% of its admitted assets or 25% of its statutory capital and surplus, also are subject to prior approval by the Department of Insurance. The Holding Company Act also provides that the acquisition or change of "control" of a California domiciled insurance company or of any person who controls such an insurance company cannot be consummated without the prior approval of the Insurance Commissioner. In general, presumption of "control" arises from the ownership of voting securities and securities that are convertible into voting securities, which in the aggregate constitute 10% or more of the voting securities of a California insurance company or of a person 16 18 that controls a California insurance company, such as Fremont General. The Liquid Yield Option(TM) Notes ("LYONs") constitute a security convertible into the voting Common Stock of the Company, and the shares of Common Stock into which a holder's LYONs are convertible and any other securities convertible into Common Stock must be aggregated with any other shares of Common Stock of the holder for purposes of determining the percentage ownership. A person seeking to acquire "control," directly or indirectly, of the Company must generally file with the Insurance Commissioner an application for change of control containing certain information required by statute and published regulations and provide a copy of the application to the Company. The Holding Company Act also effectively restricts the Company from consummating certain reorganizations or mergers without prior regulatory approval. The Holding Company Act also limits the ability of the Company's insurance subsidiaries to pay dividends to the Company. The act permits a property and casualty insurance company to pay dividends in any year which, together with other dividends or other distributions made within the preceding twelve months, do not exceed the greater of 10% of its statutory surplus or 100% of its net income as of the end of the preceding year, subject to a limit equal to prior year end unassigned funds less unrealized capital gains contained within unassigned funds. Larger dividends are payable only upon prior regulatory approval. Applicable regulations further require that an insurer's statutory surplus following a dividend or other distribution be reasonable in relation to its outstanding liabilities and adequate to its financial needs. Based upon restrictions presently in effect, the maximum amount available for payment of dividends by the Company's property and casualty subsidiaries during 1997 without prior regulatory approval is approximately $62.6 million. In addition, insurance regulations require that the Department of Insurance be given 15 days advance notice of any dividend payment. Other Regulations. The NAIC adopted a formula to calculate risk based capital ("RBC") of property and casualty insurance companies for inclusion in annual statements. The purpose of the RBC model is to help state regulatory authorities monitor the capital adequacy of property and casualty insurance companies by measuring several major areas of risk facing property and casualty insurers including underwriting, credit and investment risks. Companies having less statutory surplus than the RBC model calculates will be required to adequately address these risk factors and will be subject to varying degrees of regulatory intervention, depending on the level of capital inadequacy. As of December 31, 1996 the Company's insurance subsidiaries engaged in continuing operations exceed all RBC levels requiring any regulatory intervention. Thrift and Loan Regulation The Company's thrift is subject to supervision and regulation by the Department of Corporations of the State of California (the "DOC") and, as an insured institution, by the FDIC. None of the Company's subsidiaries which comprise the real estate lending operation are regulated or supervised by the Office of Thrift Supervision, which regulates savings and loan institutions. Fremont General is generally not directly regulated or supervised by the DOC, the FDIC, the Federal Reserve Board or any other bank regulatory authority, except with respect to guidelines concerning its relationship with the real estate lending subsidiaries. Such guidelines include (i) general regulatory and enforcement authority of the DOC and the FDIC over transactions and dealings between Fremont General and the thrift, (ii) specific limitations regarding ownership of the capital stock of the parent company of any thrift and loan company, and (iii) specific limitations regarding the payment of dividends from the thrift as discussed below. The thrift is examined on a regular basis by both agencies. Federal and state regulations prescribe certain minimum capital requirements and, while the thrift is currently in compliance with such requirements, the Company could in the future be required to make additional investments in the thrift in order to maintain compliance with such requirements. Federal and state regulatory authorities have the power to prohibit or limit the payment of dividends by the thrift. The Company does not believe that the restrictions on the thrift's ability to pay dividends imposed by federal or state law will adversely affect the ability of Fremont General to meet its obligations. Future changes in government regulation and policy could adversely affect the thrift and loan industry, including the Company's thrift. 17 19 The FDIC and DOC conducted an examination of the thrift as of March 31, 1996. The examinations resulted in the FDIC terminating in August 1996 a Memorandum of Understanding ("the MOU") which the FDIC had required the thrift to enter into in January 1995. The MOU had required the thrift to operate under certain conditions imposed by the FDIC. The thrift was in substantial compliance with all such conditions which were confirmed by the FDIC in their March 31, 1996 examination and which led to the termination of the MOU. California Law. The thrift and loan business conducted by the Company's thrift is governed by the California Industrial Loan Law and the rules and regulations of the Commissioner which, among other things, regulate the collateral requirements and maximum maturities of the various types of loans that are permitted to be made by California-chartered industrial loan companies, i.e., thrift and loan companies or investment and loans. Subject to restrictions imposed by applicable California law, the thrift is permitted to make secured and unsecured consumer and non-consumer loans. The maximum term for repayment of loans made by thrift and loan companies range up to forty years and thirty days depending upon collateral and priority of secured position, except that loans with repayment terms in excess of thirty years and thirty days may not in the aggregate exceed 5% of total outstanding loans and obligations of the thrift. Consumer loans secured by real property with terms in excess of three years must be repayable in substantially equal periodic payments unless such loans are covered under the Garn-St. Germain Depository Institutions Act of 1982 (primarily single-family residential loans). Non-consumer loans may be repayable in unequal periodic payments during their respective terms. California law limits lending activities outside of California by thrift and loan companies to no more than 30% of total assets. California law contains extensive requirements for the diversification of the loan portfolios of thrift and loan companies. A thrift and loan with outstanding investment certificates may not, among other things, place more than 5% of its loans or other obligations in loans or obligations which are secured only partially, but not primarily, by real property; may not make any one loan secured primarily by improved real property which exceeds 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; may not lend an amount in excess of 5% of its paid-up and unimpaired capital stock and surplus not available for dividends upon the security of the stock of any one corporation; may not make loans to, or hold the obligations of, any one person as primary obligor in an aggregate principal amount exceeding 20% of its paid-up and unimpaired capital stock and surplus not available for dividends; and may have no more than 70% of its total assets in loans which have remaining terms to maturity in excess of seven years and are secured solely or primarily by real property. At December 31, 1996, the thrift was in compliance with all of these requirements. A thrift and loan generally may not make any loans to, or hold an obligation of, any of its directors or officers or any director or officer of its holding company or affiliates, except in specified cases and subject to regulation by the DOC. Further, a thrift and loan may not make any loan to, or hold an obligation of, any of its shareholders or any shareholder of its holding company or affiliates, except that this prohibition does not apply to persons who own less than 10% of the stock of a holding company or affiliate which is listed on a national securities exchange, such as Fremont General. Any person who wishes to acquire (i) 10% or more of the voting securities of a California thrift and loan company, or (ii) 10% or more of the voting securities of a holding company of a California thrift and loan company, such as the Company, must obtain the prior approval of the DOC. The LYONs are not voting securities of the Company, but the shares of Common Stock into which such LYONs are convertible constitute voting securities of the Company. The Company's thrift must also obtain prior written approval from the DOC before it may open or relocate any branch or loan production office or close a branch office. The Industrial Loan Law prohibits an industrial loan company from having deposits at any time in an aggregate sum in excess of 20 times the aggregate amount of its paid-up unimpaired capital and such of its unimpaired surplus as is declared by its by-laws not to be available for cash dividends. The Company's thrift currently has an authorized ratio of deposits to such capital of 17 to 1. Federal Law. The thrift's deposits are insured by the FDIC to the full extent permitted by law. As an insurer of deposits, the FDIC issues regulations, conducts examinations, requires the filing of reports and 18 20 generally supervises the operations of institutions to which it provides deposit insurance. The Company's thrift is subject to the rules and regulations of the FDIC to the same extent as other financial institutions which are insured by that entity. The approval of the FDIC is required prior to any merger, consolidation or change in control or the establishment or relocation of any branch office of the thrift. This supervision and regulation is intended primarily for the protection of the insured deposit funds. Prior written notice to the FDIC is required to close a branch office. The thrift is subject to federal risk-based capital adequacy guidelines which provide a measure of capital adequacy and are intended to reflect the degree of risk associated with both on- and off-balance sheet items, including residential real estate loans sold with recourse, legally binding loan commitments and standby letters of credit. A financial institution's risk-based capital ratio is calculated by dividing its qualifying capital by its risk-weighted assets. Financial institutions are generally expected to meet a minimum ratio of qualifying total capital to risk-weighted assets of 8%, of which at least 4% of qualifying total capital must be in the form of core capital ("Tier 1") -- common stock, noncumulative perpetual preferred stock, minority interests in equity capital accounts of consolidated subsidiaries and allowed mortgage servicing rights, less all intangible assets other than allowed mortgage servicing rights and eligible purchased credit card relationships. Supplementary capital ("Tier 2") consists of the allowance for loan and lease losses up to 1.25% of risk-weighted assets, cumulative perpetual preferred stock, long-term preferred stock (original maturity of at least 20 years), perpetual preferred stock, hybrid capital instruments, term subordinated debt and intermediate term preferred stock (original average maturity of five years or more). The maximum amount of Tier 2 capital which may be recognized for risk-based capital purposes is limited to 100% of Tier 1 capital (after any deductions for disallowed intangibles). The aggregate amount of term subordinated debt and intermediate term preferred stock that may be treated as Tier 2 capital is limited to 50% of Tier 1 capital. Certain other limitations and restrictions also apply. At December 31, 1995, the Tier 2 capital of the thrift consisted of approximately $11.9 million of allowance for possible loan losses. As of December 31, 1996, the thrift's allowance for possible loan losses for Tier 2 capital increased to $13.8 million. (See "Financial Services -- Real Estate Lending.") The following table presents the thrift's risk-based capital position at the dates indicated:
DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------------- -------------------------- PERCENT OF PERCENT OF RISK-WEIGHTED RISK-WEIGHTED AMOUNT ASSETS AMOUNT ASSETS ---------- ------------- -------- ------------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Tier 1 capital........................... $ 104,521 9.52% $ 89,374 9.46% Minimum requirement...................... 43,898 4.00 37,782 4.00 ---------- ------ -------- ------ Excess................................. $ 60,623 5.52% $ 51,592 5.46% ========== ====== ======== ====== Total capital............................ $ 118,320 10.78% $101,248 10.72% Minimum requirement...................... 87,796 8.00 75,564 8.00 ---------- ------ -------- ------ Excess................................. $ 30,524 2.78% $ 25,684 2.72% ========== ====== ======== ====== Risk-weighted assets..................... $1,097,445 $944,553 ========== ========
The FDIC has adopted a 3% minimum leverage ratio which is intended to supplement risk-based capital requirements and to ensure that all financial institutions continue to maintain a minimum level of core capital. A minimum leverage ratio of 3% is required for institutions which have been determined to be the highest of five categories used by regulators to rate financial institutions. All other institutions (including the Company's thrift) will likely be required to maintain leverage ratios of at least 100 to 200 basis points above the 3% minimum. It is improbable, however, that an institution with a 3% core capital-to-total assets ratio would be rated in the highest category since a strong capital position is so closely tied to the rating system. Therefore, the "minimum" leverage ratio is, for all practical purposes, significantly above 3%. The following table 19 21 presents the thrift's leverage ratio (the ratio of Tier 1 capital to the quarterly average total assets) at the dates indicated:
DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------------- -------------------------- PERCENT OF PERCENT OF RISK-WEIGHTED RISK-WEIGHTED AMOUNT ASSETS AMOUNT ASSETS ---------- ------------- -------- ------------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Tier 1 capital........................... $ 104,521 8.55% $ 89,374 9.02% Minimum requirement...................... 36,683 3.00 29,735 3.00 ---------- ------ -------- ---- -- Excess................................. $ 67,838 5.55% $ 59,639 6.02% ========== ====== ======== ====== Risk-weighted assets..................... $1,222,751 $991,163 ========== ========
The FDIC has designated the Company's thrift as a "well-capitalized" institution under the regulations promulgated under the Federal Deposit Insurance Corporation Improvement Act of 1991. A "well-capitalized" institution has a total risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital ratio of at least 6.0%, has a leverage ratio of at least 5.0% and is not subject to any written agreement, order, capital directive or prompt corrective action directive issued by the FDIC under Section 8 or Section 38 of the Federal Deposit Insurance Act to meet and maintain a specific capital level for any capital measure. The total risk-based capital ratio is the ratio of qualifying total capital to risk-weighted assets and the Tier 1 risk-based capital ratio is the ratio of Tier 1 capital to risk-weighted assets. As a "well-capitalized" institution, the thrift's annual FDIC insurance premiums were 26 cents per $100 of eligible domestic deposits in 1995 for the period January 1, 1995 through June 31, 1995 and then significantly decreased to 7 cents for the period July 1, 1995 through December 31, 1995. In 1996, this annual insurance premium rate decreased to 3 cents for the period January 1, 1996 through December 31, 1996. This rate has been further decreased to 1.3 cents effective for the period January 1, 1997 through June 30, 1997. The insurance premium payable is subject to semi-annual adjustment. The FDIC, by the first day of the month preceding each semi-annual period, is required to notify each insured institution of its assessment risk-classification upon which the insurance premium assessment for the following period will be based. The FDIC has the authority to assess to all insured institutions collectively, additional premiums to cover losses and expenses associated with insuring deposits maintained at financial institutions and for other purposes it deems necessary. Limitations on Dividends. Under California law, a thrift is not permitted to declare dividends on its capital stock unless it has at least $750,000 of unimpaired capital plus additional capital of $50,000 for each branch office maintained. In addition, no distribution of dividends is permitted unless: (i) such distribution would not exceed a thrift's retained earnings; (ii) any payment would result in violation of the approved maximum capital to thrift investment certificate ratio; or (iii) in the alternative, after giving effect to the distribution, the sum of a thrift and loan's qualified assets would be not less than 125% of certain of its liabilities, or with certain exceptions, current assets would be not less than current liabilities. In addition, a thrift and loan is prohibited from paying dividends from that portion of capital which its board of directors has declared restricted for dividend payment purposes. In policy statements, the FDIC has advised insured institutions that the payment of cash dividends in excess of current earnings from operations is inappropriate and may be cause for supervisory action. Under the Financial Institutions Supervisory Act and the Financial Institutions Reform, Recovery and Enforcement Act of 1989, federal regulators also have authority to prohibit financial institutions from engaging in business practices which are considered to be unsafe or unsound. It is possible that, depending upon the financial condition of the Company's thrift and other factors, such regulators could assert that the payment of dividends in some circumstances might constitute unsafe or unsound practices and could prohibit payment of dividends even though technically permissible. The Company's thrift is also subject to federal consumer protection laws, including the Truth in Savings Act, the Truth in Lending Act, the Community Reinvestment Act and the Real Estate Settlement Procedures Act. 20 22 Commercial Finance The Company's commercial finance subsidiary is licensed by the California Finance Lenders Law by the California Department of Corporations as a commercial finance lender and a personal property broker and holds certain other licenses. Intercompany Transactions The payment of stockholders' dividends and the advancement of loans to the Company by its subsidiaries are and may continue to be subject to certain statutory and regulatory restrictions. EMPLOYEES At December 31, 1996, the Company had 1,815 employees, none of whom is represented by a collective bargaining agreement. The Company believes its relations with employees are good. ITEM 2. PROPERTIES Substantially all facilities used by the Company are leased. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries and affiliates are parties to various legal proceedings, which in some instances include claims for punitive damages, all of which are considered routine and incidental to their business. The Company believes that ultimate resolution or settlement of such matters will not have a material adverse effect on its consolidated financial position. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the New York Stock Exchange ("NYSE") under the trading symbol "FMT." The following table sets forth the high and low sales prices of the Company's Common Stock adjusted retroactively for a three for two stock split effective January 8, 1996 and a ten percent stock dividend distributed June 15, 1995 as reported as composite transactions on the NYSE and the cash dividends declared on the Company's Common Stock during each quarter presented.
HIGH LOW DIVIDENDS DECLARED ---- ---- ------------------ 1996 1st Quarter............................... 261/4 225/64 $ 0.15 2nd Quarter............................... 251/4 215/8 0.15 3rd Quarter............................... 295/8 211/2 0.15 4th Quarter............................... 311/2 281/4 0.15 ----- Total......................... $ 0.60 ===== 1995 1st Quarter............................... 145/32 113/4 $ 0.12 2nd Quarter............................... 1713/32 117/16 0.13 3rd Quarter............................... 195/32 16 0.13 4th Quarter............................... 2427/32 1721/32 0.13 ----- Total......................... $ 0.51 =====
On December 31, 1996, the closing sale price of the Company's Common Stock on the NYSE was $31.00 per share. There were 1,568 stockholders of record as of December 31, 1996. The Company has paid cash dividends in every quarter since its initial public offering in 1977. While the Company intends to continue to pay dividends, the decision to do so is made quarterly by the Board of Directors and is dependent on the earnings of the Company, management's assessment of future capital needs, 21 23 and other factors. As a holding company, Fremont General's ability to pay dividends to its stockholders is partially dependent on dividends from its subsidiaries. The ability of several of these subsidiaries to distribute dividends is subject to regulation under California law. (See Note K to Consolidated Financial Statements.) ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------- 1996 1995(1) 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS AND PER SHARE DATA) INCOME STATEMENT DATA: Property and casualty premiums earned............................. $ 486,860 $ 606,917 $ 433,584 $ 455,765 $ 411,956 Net investment income................ 123,531 119,523 76,821 77,198 70,820 Loan interest income................. 163,765 162,992 113,382 87,244 73,310 Realized investment gains (losses)... (1,658) 1 (315) 2,165 16,208 Other revenue........................ 23,306 34,381 29,676 29,033 26,399 --------- --------- --------- --------- --------- Total revenues....................... $ 795,804 $ 923,814 $ 653,148 $ 651,405 $ 598,693 ========= ========= ========= ========= ========= Property and casualty income......... $ 117,593 $ 83,092 $ 61,265 $ 52,092 $ 45,187 Financial services income............ 36,589 35,737 28,014 21,456 14,878 Other interest and corporate expense............................ (25,873) (18,502) (7,708) (9,200) (11,484) --------- --------- --------- --------- --------- Income before taxes and cumulative effect of accounting change........ 128,309 100,327 81,571 64,348 48,581 Income tax expense................... (41,021) (32,305) (25,759) (21,638) (13,381) Cumulative effect of accounting change for income taxes............ -- -- -- -- 43,509 --------- --------- --------- --------- --------- Net income........................... $ 87,288 $ 68,022 $ 55,812 $ 42,710 $ 78,709 ========= ========= ========= ========= ========= GAAP RATIOS FOR PROPERTY AND CASUALTY SUBSIDIARIES Loss ratio........................... 68.9% 76.0% 63.1% 70.0% 80.4% Expense ratio........................ 25.9% 24.5% 23.4% 21.3% 22.5% Policyholder dividends ratio......... 0.0% 0.0% 11.5% 9.9% 2.5% --------- --------- --------- --------- --------- Combined ratio....................... 94.8% 100.5% 98.0% 101.2% 105.4% ========= ========= ========= ========= ========= PER SHARE DATA: Cash dividends declared.............. $ 0.60 $ 0.51 $ 0.45 $ 0.44 $ 0.39 Stockholders' equity(3): Including FASB 115 for 1994 - 1996............................. 19.90 19.62 13.82 N/A N/A Excluding FASB 115 for 1994 - 1996............................. 19.81 18.76 16.40 14.55 13.39 Income before cumulative effect of accounting change: Primary............................ 3.26 2.61 2.16 1.85 1.73 Fully diluted...................... 2.73 2.17 1.82 1.65 1.53 Net income: Primary............................ 3.26 2.61 2.16 1.85 3.84 Fully diluted...................... 2.73 2.17 1.82 1.65 3.29 WEIGHTED AVERAGE SHARES USED TO CALCULATE PER SHARE DATA: Primary.............................. 26,762 26,079 25,823 23,039 20,498 Fully diluted........................ 33,630 33,343 33,034 28,243 24,734 BALANCE SHEET DATA: Total assets......................... $4,307,512 $4,477,399 $3,134,390 $2,669,290 $2,070,533 Fixed income and other investments... 1,484,310 1,937,890 888,918 1,055,289 782,542 Loans receivable..................... 1,688,040 1,499,043 1,440,774 846,443 689,443 Claims and policy liabilities........ 1,579,325 1,971,719 1,012,704 1,007,054 812,,081 Short-term debt...................... 16,896 72,191 176,325 78,087 208,013 Long-term debt....................... 636,456 693,276 468,390 451,581 100,572 Trust Originated Preferred Securities(SM)(2).................. 100,000 -- -- -- -- Stockholders' equity(3): Including FASB 115 for 1994 - 1996............................. 559,117 498,090 351,013 N/A N/A Excluding FASB 115 for 1994 - 1996............................. 556,488 476,491 416,378 369,369 271,710
- --------------- (1) The Company acquired Casualty Insurance Company on February 22, 1995. (2) Company-obligated mandatorily redeemable preferred securities of subsidiary Trust holding solely Company junior subordinated debentures. (3) Effective January 1994, FASB 115 changed the accounting treatment afforded the Company's investment portfolio wherein unrealized gains and losses on securities designated by the Company as available for sale are included net of deferred taxes, as a component of stockholders' equity. 22 24 ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain forward-looking statements which involve risks and uncertainties. The Company's actual results could differ materially from the results anticipated in these forward-looking statements as a result of certain factors including those set forth elsewhere in this Form 10-K. GENERAL Fremont General Corporation is engaged domestically in select insurance and financial services businesses. Fremont General's insurance business includes one of the largest underwriters of workers' compensation insurance in the nation. The Company also provides medical malpractice insurance. Fremont General's financial services business includes commercial real estate lending, residential real estate lending, commercial finance and premium financing. The Company's total assets as of December 31, 1996 were $4.3 billion, with 1996 pre-tax earnings of $128 million. The primary operating strategy of the Company is to build upon its core business units through acquisition opportunities and new business development. The Company's secondary strategy is to achieve income balance and geographic diversity among its business units in order to limit the exposure of the Company to industry, market and regional concentrations. The Company's stock is traded on the New York Stock Exchange under the symbol "FMT" (NYSE:FMT). The Company began its workers' compensation insurance operations in 1959 and continues to derive the majority of its revenues from this business. The Company's workers' compensation insurance business has grown through internal expansion, as well as through the acquisition of other workers' compensation insurance companies. On February 22, 1995, the Company completed the acquisition of all outstanding stock of Casualty Insurance Company ("Casualty") and its wholly-owned subsidiary Workers' Compensation & Indemnity Company of California ("WCIC") from the Buckeye Union Insurance Company. Casualty underwrites workers' compensation insurance primarily in Illinois and several other mid-western states. Casualty currently is the largest underwriter of workers' compensation insurance in Illinois and has provided the Company with a significant presence in the mid-western region. The Casualty acquisition has provided geographic diversity within the Company's workers' compensation insurance business and approximately 63% of the Company's 1996 revenues from workers' compensation insurance premiums were generated in the mid-west region, with the remaining 37% emanating from the west region, primarily in California. The Company believes this geographic diversity mitigates potential fluctuations in earnings from cyclical downturns in various regional economies. (See Note B of Notes to Consolidated Financial Statements for additional information with respect to the acquisition of Casualty.) In July 1993, California enacted legislation to reform the workers' compensation insurance system and to, among other things, adopt an open rating system through the repeal of the minimum rate law effective January 1, 1995. The repeal of the minimum rate law resulted in lower premiums and lower profitability on the Company's California workers' compensation insurance policies in 1995 and 1996 due to increased price competition. (See "Results of Operations -- Property and Casualty Insurance Operations -- Premiums.") The Company's acquisition of Casualty, with policies written primarily outside of California, lessened the impact of the repeal of the minimum rate law by providing geographic diversity, which mitigates the impact of economic and regulatory changes within a regional marketplace. In Illinois, where Casualty underwrites the majority of its workers' compensation insurance premiums, price competition continues to impact workers' compensation companies due in part to overall average decreases in advisory premium rates of 13.6% and 10.0% which became effective January 1, 1996 and 1997, respectively. Although insurance companies are not required to adopt such advisory premium rates, companies in Illinois generally follow such rates. (See "Results of Operations -- Property and Casualty Insurance Operations -- Workers' Compensation Regulation.") In an effort to provide a clearer understanding of the Company's financial services business segment, the Company has consolidated the real estate lending operations of Fremont Investment & Loan, a California thrift and loan, and the commercial finance operations of Fremont Financial Corporation, under a newly 23 25 formed company, Fremont General Credit Corporation ("FGCC"). At December 31, 1996, FGCC had assets of approximately $2 billion, and reported pre-tax income of $36.6 million. The Company's real estate lending operations, which began in 1990 through the acquisition of a California thrift and loan, now serves more than 28,000 customers through 11 branch offices. The thrift and loan operations are primarily engaged in commercial and residential real estate lending. For commercial real estate loans, principal amounts primarily range between $1 million to $5 million and for residential real estate loans, principal amounts are generally below $300,000. The Company's operating strategy is to pursue growth of the loan portfolio through origination of new loans and acquisition of loan portfolios that meet its underwriting guidelines applied to origination of new loans. Assets of the real estate lending operation grew from $278 million at the end of 1991 to $1.24 billion at the end of 1996, due primarily to increased loan originations and to the purchase of loan portfolios from other financial institutions. (See "Item 1. Business -- Financial Services Operations -- Real Estate Lending.") The ability of the Company to continue to originate loans, and of borrowers to repay outstanding loans, may be impaired by adverse changes in local or regional economic conditions which affect such areas or by adverse changes in the real estate market in those areas. Such events could also significantly impair the value of the underlying collateral. If the Company's collateral were to prove inadequate, the Company's results of operations could be adversely affected. The commercial finance operation of FGCC provides working capital loans, primarily secured by accounts receivable and inventory, to small and middle market companies on a nationwide basis. Additionally, insurance premium financing is provided and is collateralized by security interests in return premiums. The total commercial finance loan portfolio grew from $189 million at December 31, 1991 to $612 million at December 31, 1996. This growth has been achieved primarily through development of the customer base through loan originations and through participation in syndicated loan transactions. (See "Item 1. Business -- Financial Service Operations -- Commercial Finance.") The lending market has become increasingly competitive for small to middle market commercial borrowers. As a result, FGCC has experienced decreasing yields on its commercial finance loans. Between 1986 and 1991, the Company discontinued its domestic treaty reinsurance business, its other primary and excess property and casualty insurance operations and the underwriting of all remaining assumed reinsurance. In 1990, a single management group was put in charge of all discontinued operations, and it is the intention of the Company to complete the liquidation of these operations by the commutation of liabilities and as claims are paid. (See "Item 1. Business -- Discontinued Operations" and Note N of Notes to Consolidated Financial Statements.) 24 26 RESULTS OF OPERATIONS By providing diverse insurance and financial services to small and medium-sized businesses, the Company has achieved growth in net income during the three years ended December 31, 1996. Higher revenues and net income were also achieved through the acquisition of Casualty. The following table presents information for each of the three years in the period ended December 31, 1996 with respect to the Company's core business segments.
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) Revenues: Property and casualty................................. $596,841 $708,187 $495,712 Financial services.................................... 197,601 214,975 154,398 Corporate............................................. 1,362 652 3,038 -------- -------- -------- Total............................................ $795,804 $923,814 $653,148 ======== ======== ======== Income (Loss) Before Taxes: Property and casualty................................. $117,593 $ 83,092 $ 61,265 Financial services.................................... 36,589 35,737 28,014 Corporate............................................. (25,873) (18,502) (7,708) -------- -------- -------- Total............................................ $128,309 $100,327 $ 81,571 ======== ======== ========
The Company generated revenues of $796 million for 1996, as compared to revenues of $924 million and $653 million for 1995 and 1994, respectively. Revenues were lower in 1996 as compared to 1995, due principally to lower workers' compensation insurance premiums and lower life insurance revenues in the financial services segment. The lower workers' compensation insurance premiums are due primarily to lower premiums earned in California and, to a lesser extent, lower premiums earned in Illinois. (See "Property and Casualty Insurance Operations -- Premiums.") The lower life insurance revenues in the financial services segment are due to certain reinsurance and assumption agreements with a reinsurer which became effective December 31, 1995 and January 1, 1996 and resulted in the sale of substantially all of the Company's life insurance operations. (See "Financial Services.") Revenues were higher in 1995 as compared to 1994, due primarily to higher workers' compensation insurance premiums, net investment income and loan interest income. The higher workers' compensation insurance premiums and net investment income are due primarily to the acquisition of Casualty, partially offset by lower insurance premiums earned in California. Realized investment gains (losses) were $(1,658,000), $1,000 and $(315,000) for 1996, 1995 and 1994, respectively. The Company had net income of $87.3 million or $3.26 per share for 1996, as compared to $68.0 million or $2.61 per share and $55.8 million or $2.16 per share for 1995 and 1994, respectively. Income before taxes for 1996 was $128.3 million as compared to $100.3 million and $81.6 million for 1995 and 1994, respectively. Workers' compensation insurance operations posted income before taxes of $120.1 million for 1996, as compared to $85.0 million for 1995 and $62.2 million for 1994. The increase in income before taxes of 41% in 1996 as compared to 1995 is due predominately to lower claim frequency and the acquisition of Casualty, offset partially by lower income on the Company's California business. The 37% increase in income before taxes in 1995 as compared to 1994 is due primarily to the acquisition of Casualty, offset partially by lower income on the Company's California business. The combined ratio for 1996 was 94.4% compared to 100.4% and 97.6% for 1995 and 1994, respectively. Also included within the property and casualty business segment are revenues and expenses that pertain to the Company's professional medical liability business ("medical malpractice"), as well as miscellaneous expenses associated with the Company's downstream property and casualty insurance holding company, Fremont Compensation Insurance Group, ("FCIG", formerly Fremont Insurance Group). Medical malpractice revenues were $31.6 million for 1996, as compared to $34.3 million and $33.0 million for 1995 and 1994, respectively. Income before taxes for the medical malpractice business was $3.8 million, $5.2 million and 25 27 $6.6 million for 1996, 1995 and 1994, respectively. The decrease in income before taxes in 1996 as compared to 1995 is due primarily to lower premiums earned. The decrease in income before taxes in 1995, as compared to 1994, is due primarily to an increase in the frequency and severity of reported claims. Expenses of FCIG include interest expense on debt and other obligations of $5.9 million, $6.7 million and $5.5 million, respectively, for 1996, 1995 and 1994, and overhead expenses of $0.7 million, $2.2 million and $3.1 million for the corresponding periods. The financial services business segment posted increases of 2% and 28% in income before taxes for 1996 and 1995, respectively. Although income before taxes was relatively flat in 1996 as compared to 1995, the results in 1996 were negatively impacted by the establishment of a specific loan loss associated with one loan in the commercial finance loan portfolio. Also impacting the financial services segment in 1996 is the reduction in life insurance operations resulting from certain reinsurance and assumption agreements entered into between the Company and a reinsurer which became effective December 31, 1995 and January 1, 1996. These transactions essentially resulted in the sale of the life insurance operations. (See "Financial Services.") The increase in income before taxes of 28% in 1995 is consistent with the increase in financial services revenues and is due primarily to the significant growth in the average loan portfolio in 1995 to $1.5 billion from $1.1 billion in 1994. The average loan portfolio further grew to $1.6 billion in 1996. This segment, which consists principally of real estate lending, commercial finance and premium finance, recorded income before taxes of $36.6 million, $35.7 million and $28.0 million for 1996, 1995 and 1994, respectively. Corporate revenues consisted primarily of investment income, while corporate expenses consisted primarily of interest expense and general and administrative expense. The corporate loss before income taxes was $25.9 million, $18.5 million and $7.7 million for 1996, 1995 and 1994, respectively. The increase in the corporate loss before taxes in 1996 as compared to 1995 was due principally to increased interest expense and increased administrative expenses. The increase in interest expense is mainly due to additional debt incurred in the acquisition of Casualty, as well as to accrued dividends in connection with a public offering on March 1, 1996 of $100 million of 9% Trust Originated Preferred Securities(SM) (the "Preferred Securities") sold by a consolidated wholly-owned subsidiary of the Company. (See "Liquidity and Capital Resources.") The accrued dividends on the Preferred Securities have been classified in the Consolidated Statements of Income as interest expense. (See Note J of Notes to Consolidated Financial Statements.) The increase in the corporate loss before taxes in 1995 over 1994 was due primarily to increased interest expense and decreased investment income. The increase in interest expense is due primarily to additional debt incurred in the acquisition of Casualty, along with modest increases in administrative expenses. Income tax expense of $41.0 million, $32.3 million and $25.8 million for 1996, 1995 and 1994, respectively, represents an effective tax rate of 32% each year on pretax income of $128.3 million, $100.3 million and $81.6 million for the corresponding periods. The Company's effective tax rates for all years presented are lower than the enacted federal income tax rate of 35%, due primarily to tax exempt investment income which reduces the Company's taxable income. Property and Casualty Insurance Operations The following table represents information with respect to the Company's property and casualty insurance operations:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) Revenues................................................... $596,841 $708,187 $495,712 Expenses................................................... 479,248 625,095 434,447 -------- -------- -------- Income Before Taxes........................................ $117,593 $ 83,092 $ 61,265 ======== ======== ========
Revenues from the property and casualty insurance operations consist primarily of workers' compensation insurance premiums earned, medical malpractice premiums earned and net investment income. Expenses 26 28 consist primarily of loss and loss adjustment expenses, policy acquisition costs, other operating costs and expenses and, for the year ended December 31, 1994, dividends to policyholders. Premiums. Premiums earned from the Company's workers' compensation insurance operations were $457.2 million for 1996, as compared to $575.0 million and $401.5 million for 1995 and 1994, respectively. Premiums were significantly lower in 1996 due primarily to lower premiums earned in California and to a lesser extent lower premiums earned in Illinois. Premiums were significantly higher in 1995 as compared to 1994, due primarily to the acquisition of Casualty, partially offset by lower premiums earned in California. For the year ended December 31, 1996, the Company's workers' compensation insurance premiums earned in its western region, consisting primarily of California, accounted for $171 million, or 37% of the Company's total workers' compensation insurance premiums earned for such period, representing decreases of $121 million and $230 million from west region premiums earned in 1995 and 1994, respectively. These decreases are due primarily to the increased price competition resulting from California's adoption of an open rating system and the repeal of the minimum rate law. (See "Workers' Compensation Regulation.") This increased price competition has led to (i) lower premium rates and (ii) a lower average policy size due to the Company's shift in focus to smaller employers. Additionally, an increase in 1995 in non-renewing policies also contributed to the lower premium volume in California. The increase in non-renewing policies occurs as a result of certain premium prices falling below required minimum pricing pursuant to the Company's underwriting standards. For the year ended December 31, 1996, the Company's workers' compensation insurance premiums earned in its mid-western region, consisting primarily of Illinois, accounted for $286 million, or 63% of the Company's total workers' compensation insurance premiums earned. Price competition in Illinois has impacted the Company's results of operations and will continue to affect such results, due in part to overall average decreases in advisory premium rates of 13.6% and 10.0% that became effective January 1, 1996 and 1997, respectively, and which workers' compensation insurance companies in Illinois tend to follow. Net Investment Income. Net investment income within the property and casualty insurance operations was $111.6 million, $101.3 million and $62.2 million in 1996, 1995 and 1994, respectively. Significantly higher invested assets, due primarily to the acquisition of Casualty, resulted in increased investment income in 1996 and 1995 as compared to 1994. (See "Item 1. Business -- Investment Portfolio.") Loss and Loss Adjustment Expense. Workers' compensation loss and loss adjustment expenses ("LAE") were $312.2 million, $436.7 million and $249.4 million in 1996, 1995 and 1994, respectively. In addition, the ratio of these losses and LAE to workers' compensation insurance premiums earned was 68.3%, 75.9% and 62.1% in 1996, 1995 and 1994, respectively. The decrease in the dollar amount of incurred loss and LAE in 1996 as compared to 1995 is due principally to lower claim frequency and severity in the Company's mid-west region and a lower level of incurred losses and LAE in the Company's west region resulting from lower insurance premiums earned on California policies which resulted from increased competition. (See "Premiums.") The increase in incurred loss and LAE in 1995 as compared to 1994 is due primarily to the acquisition of Casualty, partially offset by lower incurred loss and LAE in California. Additionally, the increase in the loss and LAE ratio in 1995 as compared to 1994 is partially due to lower premiums on California policies which resulted from increased competition in 1995. The decrease in California premiums was greater than the decrease in California incurred loss and LAE, thereby resulting in a higher loss and LAE ratio. The negative impact on the Company's profitability resulting from the higher loss and LAE ratio has been mitigated to an extent by the elimination of dividends accrued on California workers' compensation business beginning in 1995. The dividend elimination occurred as substantially all of the workers' compensation policies written beginning in 1995 were non-participating. This type of policy is not eligible for dividend consideration. (See "Dividends to Policyholders" and "Item 1. Business -- Insurance Operations -- Loss and Loss Adjustment Expense Reserves.") The Company regularly reviews its reserving techniques, overall reserve position and reinsurance. In light of present facts and current legal interpretations, management believes that adequate provisions have been made for loss reserves. In making this determination, management has considered its claims experience to date, loss development history for prior accident years and estimates of future trends of claims frequency and severity. However, establishment of appropriate reserves is an inherently uncertain process, and there can be no certainty that currently established reserves will prove adequate in light of subsequent actual experience. 27 29 Subsequent actual experience has resulted and could result in loss reserves being too high or too low. Future loss development could require reserves for prior periods to be increased, which would adversely impact earnings in future periods. Policy Acquisition Costs and Other Operating Costs and Expenses. The ratio of policy acquisition costs and other operating costs and expenses to premiums earned is referred to as the expense ratio, which was 25.9%, 24.5% and 23.4% in 1996, 1995 and 1994, respectively. The increase in this ratio in 1996, as compared to 1995, was due primarily to higher operating costs and expenses, partially offset by lower agents' commission costs. The increase in this ratio in 1995, as compared to 1994, was due primarily to higher agents' commission costs. Dividends to Policyholders. In 1996 and 1995 there were no dividends accrued. This is compared to $49.7 million accrued in 1994. The ratio of dividends accrued to workers' compensation insurance premiums earned therefore decreased to 0% in 1996 and 1995 from 12.4% in 1994. The significant decrease in dividends accrued is due in part to a change in the type of workers' compensation insurance policy written on and after January 1, 1995. In 1995, the Company's workers' compensation insurance policies, both in California and those underwritten by Casualty, were predominately written as non-participating, which does not include provisions for dividend consideration. In 1994 and prior, the Company's policies were predominately written as participating, thereby obligating the Company to consider the payment of dividends. This shift in policy type is due primarily to the increased competition in the California market which has resulted from the repeal of the minimum rate law, effective January 1, 1995. The Company anticipates that this shift to non-participating policies will continue and be a characteristic element of the competitive environment established by the July 1993 California legislation. (See "Workers' Compensation Regulation.") Variability of Operating Results. The Company's profitability can be affected significantly by many factors including competition, the severity and frequency of claims, interest rates, regulations, court decisions, the judicial climate, and general economic conditions and trends, all of which are outside of the Company's control. These factors have contributed, and in the future could contribute, to significant variation of results of operations in different aspects of the Company's business from quarter to quarter and year to year. With respect to the workers' compensation insurance business, changes in economic conditions can lead to reduced premium levels due to lower payrolls as well as increased claims due to the tendency of workers who are laid off to submit workers' compensation claims. Legislative and regulatory changes can also contribute to variable operating results for workers' compensation insurance businesses. For example, in 1995, the Company experienced the negative impact of lower premiums and lower profitability on the Company's California workers' compensation business due to increased price competition resulting from legislation enacted in California in July 1993 which, among other things, repealed the minimum rate law effective January 1, 1995. (See "Workers' Compensation Regulation.") Also, the establishment of appropriate reserves necessarily involves estimates, and reserve adjustments have caused significant fluctuations in operating results from year to year. Workers' Compensation Regulation. Illinois began operating under an open rating system in 1982 and California began operating under such a system effective January 1, 1995. In an open rating system, workers' compensation companies are provided with advisory premium rates by job classification and each insurance company determines its own rates based in part upon its particular operating and loss costs. Although insurance companies are not required to adopt such advisory premium rates, companies in Illinois generally follow such rates. This characteristic has resulted in price competition in Illinois, where overall average decreases in advisory premium rates of 13.6% and 10.0% became effective January 1, 1996 and 1997, respectively. However, insurance companies in California have, since the adoption of an open rating system, generally set their premium rates below such advisory premium rates. Before January 1, 1995, California operated under a minimum rate law, whereby premium rates established by the California Department of Insurance were the minimum rates which could be charged by an insurance carrier. In July 1993, California enacted legislation to reform the workers' compensation insurance system and to, among other things, repeal the minimum rate law effective January 1, 1995. This repeal resulted in lower premiums and lower profitability in the Company's California workers' compensation insurance business due 28 30 to increased price competition. The Company's acquisition of Casualty, with policies written primarily outside of California, lessened the impact of the repeal of the minimum rate law by providing geographic diversity, which mitigates the impact of economic and regulatory changes within a regional marketplace. (See "Item 1. Business -- Regulation -- Insurance Regulation.") Financial Services The financial services operations of FGCC are principally engaged in commercial and residential real estate lending, commercial finance and premium financing. The Company also has small life insurance operations included in this segment which was substantially sold in 1996. Revenues consist principally of interest income and, to a lesser extent, life insurance premiums, fees and other income. The following table presents information with respect to the Company's financial services operations:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) Revenues................................................... $197,601 $214,975 $154,398 Expenses................................................... 161,012 179,238 126,384 -------- -------- -------- Income Before Taxes........................................ $ 36,589 $ 35,737 $ 28,014 ======== ======== ========
Revenues decreased 8% in 1996, due primarily to lower life insurance revenues. These lower life insurance revenues resulted from certain reinsurance and assumption agreements which the Company entered into on December 31, 1995 and January 1, 1996, primarily with one reinsurer, whereby assets and liabilities related to certain life and annuity insurance policies, primarily universal life and investment-type contracts and credit life and accident and health, were ceded to the reinsurer. The reinsurance agreements are part of several other agreements which have collectively resulted in a substantial reduction in the Company's life insurance operations. The effect on income before taxes and net income from these agreements was not material. (See Note F of Notes to Consolidated Financial Statements.) Revenues increased 39% in 1995, due primarily to greater loan interest and fee revenue attributable to the significant growth in the average loan portfolios of the real estate lending and commercial finance operations to $1.5 billion in 1995 from $1.1 billion in 1994. The average loan portfolio further grew to $1.6 billion in 1996. Income before taxes in the financial services operations was $36.6 million, $35.7 million and $28.0 million for 1996, 1995 and 1994, respectively. Income before taxes was relatively flat in the financial services segment for 1996 as compared to 1995. The Company realized higher income before taxes in the real estate lending operation as lower loan loss experience resulted in a lower provision for loan losses. This was offset substantially by lower income in the commercial finance operation due primarily to a specific loan loss associated with one loan in the commercial finance loan portfolio. Additionally, lower income was earned in the life insurance operation due to certain reinsurance agreements which became effective on December 31, 1995 and January 1, 1996 and which resulted in a substantial reduction in the Company's life insurance operations in 1996. The 28% increase in income before taxes in 1995 as compared to 1994 is due primarily to the significant growth in the average loan portfolios, offset partially by increases in the provision for loan losses and other expenses. (See "Item 1. Business -- Financial Services Operations.") 29 31 The following table identifies the interest income, interest expense, average interest-bearing assets and liabilities, and interest margins for the Company's financial services operations:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------ 1996 1995 1994 ------------------------------ ------------------------------ ------------------------------ AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST ---------- -------- ------ ---------- -------- ------ ---------- -------- ------ (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Interest bearing assets(1): Commercial finance, premium finance and other loans... $ 659,517 $ 72,024 10.92% $ 619,431 $ 73,376 11.85% $ 483,778 $ 52,128 10.78% Thrift and loan: Cash equivalents.......... 142,533 7,431 5.21 105,470 5,883 5.58 56,014 2,282 4.07 Investments............... 33,559 1,902 5.67 1,053 33 3.13 4,503 450 9.99 Commercial real estate loans................... 749,912 72,732 9.70 683,331 67,952 9.94 452,950 43,582 9.62 Residential real estate loans................... 209,802 20,151 9.60 133,761 12,843 9.60 67,053 8,293 12.37 Other thrift loans........ 528 63 11.93 8,110 1,056 13.02 46,875 6,183 13.19 ---------- -------- ---------- -------- ---------- -------- Total interest bearing assets.................... $1,795,851 $174,303 9.71 $1,551,156 $161,143 10.39 $1,111,173 $112,918 10.16 ========== ======== ========== ======== ========== ======== Interest bearing liabilities: Savings deposits............ $ 247,648 $ 12,268 4.95% $ 136,588 $ 7,279 5.33% $ 81,475 $ 2,940 3.61% Time deposits............... 755,160 43,351 5.74 664,397 40,072 6.03 464,960 23,928 5.15 Commercial paper and other..................... 3,353 189 5.64 15,873 1,189 7.49 14,332 820 5.72 Securitization obligation... 295,827 18,035 6.10 321,667 21,200 6.59 300,094 14,653 4.88 Debt with banks............. 243,292 12,864 5.29 174,816 12,308 7.04 80,770 4,921 6.09 Debt from affiliates........ 57,174 5,637 9.86 49,369 2,388 4.84 28,499 2,205 7.74 ---------- -------- ---------- -------- ---------- -------- Total interest bearing liabilities............... $1,602,454 $ 92,344 5.76 $1,362,710 $ 84,436 6.20 $ 970,130 $ 49,467 5.10 ========== ======== ========== ======== ========== ======== Net interest income........... $ 81,959 $ 76,707 $ 63,451 ======== ======== ======== Net yield..................... 4.56% 4.95% 5.71%
- --------------- (1) Average loan balances include non-accrual loan balances. The margin between the Company's interest income and cost of funds decreased in 1996 as compared to 1995, due primarily to an increase in lower yielding cash equivalents in the real estate lending operation and a decrease in net margins in the commercial finance operation resulting from an increase in the credit quality of the commercial loan portfolio, as well as to increased competition. These conditions affecting the commercial finance operation also existed in 1995 which resulted in net yields decreasing in 1995 as compared to 1994. Additionally, net yields decreased in 1995 due to changes in the mix of loans in the real estate lending operation. The change in portfolio mix occurred under a corporate strategy which began in 1993, to shift away from high rate, high risk loans secured by personal property or junior liens on real estate, to lower yielding commercial and residential first trust deed real estate loans. The lower yields on the commercial and residential real estate portfolios are compensated for by the improved underlying collateral and by the improved lien position on the collateral. Interest rate sensitivity data for the Company's financial services operations as of December 31, 1996 is presented in the table below. The relationships shown are for one day only and significant changes can occur in the sensitivity relationships as a result of market forces and management decisions. The interest rate gaps reported in the table arise when assets are funded with liabilities having different repricing intervals and to this 30 32 degree earnings will be sensitive to interest rate changes. The Company attempts to match interest rate sensitive assets and liabilities to minimize the effect of fluctuations in interest rates.
REPRICING PERIODS -------------------------------------------------------------------- WITHIN 0-3 WITHIN 4-12 WITHIN OVER 5 MONTHS MONTHS 1-5 YEARS YEARS TOTAL ---------- ----------- --------- -------- ---------- (THOUSANDS OF DOLLARS) Interest sensitive assets: Commercial finance, premium finance and other loans.... $ 506,046 $ 41,671 $ -- $ 81,253 $ 628,970 Thrift and loan: Cash equivalents........... 78,376 -- -- -- 78,376 Investments................ 43,660 -- -- -- 43,660 Commercial real estate loans.................... 389,631 331,046 128,271 6,327 855,275 Residential real estate loans.................... 57,639 77,640 125,435 6,590 267,304 Other thrift loans......... 62 125 118 -- 305 ---------- --------- -------- -------- ---------- Total interest sensitive assets.... $1,075,414 $ 450,482 $ 253,824 $ 94,170 $1,873,890 ========== ========= ======== ======== ========== Interest sensitive liabilities: Savings deposits.............. $ 221,678 $ -- $ -- $ -- $ 221,678 Time deposits................. 203,428 572,625 116,578 43 892,674 Commercial paper and other.... 14,929 -- -- -- 14,929 Securitization obligation..... 265,000 -- -- -- 265,000 Debt with banks............... 223,000 -- -- -- 223,000 Debt from affiliates.......... 49,700 -- -- -- 49,700 ---------- --------- -------- -------- ---------- Total interest sensitive liabilities......... $ 977,735 $ 572,625 $ 116,578 $ 43 $1,666,981 ========== ========= ======== ======== ========== Incremental interest rate sensitivity gap............... $ 97,679 $ (122,143) $ 137,246 $ 94,127 $ 206,909 ========== ========= ======== ======== ========== Cumulative gap.................. $ 97,679 $ (24,464) $ 112,782 $206,909 ========== ========= ======== ========
Loans Receivable and Reserve Activity. The following table shows loans receivable in the various financing categories and the percentages of the total represented by each category:
DECEMBER 31, ------------------------------------------------------------------------------- 1996 1995 1994 ----------------------- ----------------------- ----------------------- % OF % OF % OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ---------- -------- ---------- -------- ---------- -------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Accounts receivable and inventory loans: Commercial finance...... $ 385,734 22% $ 415,038 27% $ 409,580 28% Term loans: Thrift and loan......... 1,113,950 65 888,952 58 807,527 55 Commercial finance, premium finance and other loans.......... 226,103 13 226,834 15 251,073 17 ---------- --- ---------- --- ---------- --- Total term loans..... 1,340,053 78 1,115,786 73 1,058,600 72 ---------- --- ---------- --- ---------- --- Total loans.......... 1,725,787 100 1,530,824 100 1,468,180 100 Less allowance for possible loan losses.... 37,747 2 31,781 2 27,406 2 ---------- --- ---------- --- ---------- --- Loans receivable........ $1,688,040 98% $1,499,043 98% $1,440,774 98% ========== === ========== === ========== ===
31 33 The following table illustrates the maturities of the Company's loans receivable:
MATURITIES AT DECEMBER 31, 1996 ------------------------------------------------- 1 TO 24 25-60 OVER 60 MONTHS MONTHS MONTHS TOTAL -------- -------- -------- ---------- (THOUSANDS OF DOLLARS) Accounts receivable and inventory loans -- variable rate....................... $385,734 $ -- $ -- $ 385,734 Term loans -- variable rate.................... 176,883 441,432 520,101 1,138,416 Term loans -- fixed rate....................... 96,382 64,662 40,593 201,637 -------- -------- -------- ---------- Total........................................ $658,999 $506,094 $560,694 $1,725,787 ======== ======== ======== ==========
The Company monitors the relationship of fixed and variable rate loans and interest bearing liabilities in order to minimize interest rate risk. 32 34 Adverse economic developments can negatively affect the Company's financial services business and results of operations in a number of ways. Such developments can reduce the demand for loans, impair the ability of borrowers to pay loans and impair the value of the underlying collateral. The following table describes the asset classifications, loss experience and reserve reconciliation of the financial services operations as of or for the periods ended as shown below:
DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) Non-accrual loans...................................... $ 19,785 $ 33,467 $ 21,834 Accrual loans 90 days past due......................... 1,355 3,025 1,711 Real estate owned ("REO").............................. 10,016 4,941 17,467 ---------- ---------- ---------- Total non-performing assets............................ $ 31,156 $ 41,433 $ 41,012 ========== ========== ========== Beginning allowance for possible loan losses........... $ 31,781 $ 27,406 $ 25,222 Provision for loan losses.............................. 13,885 14,575 11,980 Reserves established with portfolio acquisitions....... 1,830 -- 3,605 Charge-offs: Commercial finance, premium finance and other loans............................................. 6,180 2,421 4,265 Thrift and loan: Commercial real estate............................ 4,244 9,248 4,833 Residential real estate loans..................... 624 1,012 2,685 Other thrift loans................................ 95 480 2,471 ---------- ---------- ---------- Total charge-offs.................................... 11,143 13,161 14,254 ---------- ---------- ---------- Recoveries: Commercial finance, premium finance and other loans............................................. 41 1,034 207 Thrift and loan: Commercial real estate............................ 862 37 10 Residential real estate loans..................... 186 1,659 265 Other thrift loans................................ 305 231 371 ---------- ---------- ---------- Total recoveries..................................... 1,394 2,961 853 ---------- ---------- ---------- Net charge-offs........................................ 9,749 10,200 13,401 ---------- ---------- ---------- Ending allowance for possible loan losses.............. $ 37,747 $ 31,781 $ 27,406 ========== ========== ========== Allocation of allowance for possible loan losses: Commercial finance, premium finance and other loans............................................. $ 12,988 $ 14,283 $ 13,015 Thrift and loan...................................... 24,759 17,498 14,391 ---------- ---------- ---------- Total allowance for possible loan losses............. $ 37,747 $ 31,781 $ 27,406 ========== ========== ========== Total loans receivable................................. $1,725,787 $1,530,824 $1,468,180 Average total loans receivable......................... 1,594,918 1,505,779 1,082,622 Net charge-offs to average total loans receivable...... 0.61% 0.68% 1.24% Non-performing assets to total loans receivable........ 1.81% 2.71% 2.79% Allowance for possible loan losses to total loans receivable........................................... 2.19% 2.08% 1.87% Allowance for possible loan losses to non-performing assets............................................... 121.15% 76.70% 66.82% Allowance for possible loan losses to non-accrual loans and accrual loans 90 days past due................... 178.56% 87.09% 116.40%
Non-performing assets decreased to $31.2 million at December 31, 1996 from $41.4 million at December 31, 1995. This decrease is due primarily to decreases in non-accrual loans in the real estate lending and commercial finance operations, offset partially by an increase in REO in the real estate lending operation. The decrease in non-accrual loans in the commercial finance lending operation is primarily due to one loan in the commercial finance portfolio classified as non-accrual at December 31, 1995 and subsequently charged-off 33 35 in 1996. Non-performing assets remained relatively stable at December 31, 1995 as compared to December 31, 1994. The lower provision for loan losses in 1996 as compared to 1995 is due primarily to improved loan loss experience in the real estate lending operation, offset partially by an additional specific loan loss in the commercial finance operation associated with one loan in the commercial finance portfolio. Substantially all of the charge-offs in the commercial finance operation in 1996 were related to this loan. The real estate lending operation has benefited from improved loan loss experience, as evidenced by the significant decrease in charge-offs in 1996 as compared to 1995. Overall, total charge-offs have decreased over the three years ended December 31, 1996 and these reductions occurred during a period in which loans receivable increased. The higher provision for loan losses in 1995 as compared to 1994 is consistent with the significant overall growth in the average total loans receivable. Charge-offs in 1995 as compared to 1994 decreased in the commercial finance operation and remained relatively stable in the real estate lending operation. Included in the reserves established with portfolio acquisitions in 1994 is $3.2 million in reserves relating to a $225 million commercial real estate loan portfolio acquisition by the Company's thrift and loan which was completed in August 1994. LIQUIDITY AND CAPITAL RESOURCES The property and casualty insurance operations must have cash and liquid assets available to meet their obligations to policyholders in accordance with contractual obligations, in addition to having the funds available to meet ordinary operating costs. These operations have several sources of funds to meet their obligations, including cash flow from operations, recoveries from reinsurance contracts and investment securities. By statute, the majority of the cash from these operations is required to be invested in investment grade securities to provide protection for policyholders. The Company invests in fixed income and preferred equity securities with an objective of providing a reasonable return while limiting credit and liquidity risk. The Company's investment portfolio had an unrealized gain of $4.0 million and $33.2 million at December 31, 1996 and 1995, respectively. The Company's thrift and loan subsidiary, which is principally engaged in real estate lending, finances its lending activities primarily through customer deposits, which have grown from $926 million at December 31, 1995 to $1.114 billion at December 31, 1996. In January 1995, this thrift and loan became eligible for financing through the Federal Home Loan Bank of San Francisco. This financing is available at varying rates and terms. As of December 31, 1996, $231 million was available under the facility and no borrowings were outstanding. The Company's commercial finance operation funds its lending activities primarily through its asset securitization program, an unsecured revolving line of credit with a syndicated bank group and its capital. The asset securitization program was established in 1993 to provide a stable and cost effective source of funds to facilitate the expansion of this business. As of December 31, 1996, an aggregate $235 million of senior series and a $30 million subordinated series of asset-backed certificates were outstanding. The interest rate on the certificates, set monthly, ranged from LIBOR plus 0.34% to LIBOR plus 0.95% at December 31, 1996. The securities issued in this program have a scheduled maturity of three to five years, but could mature earlier depending on fluctuations in the outstanding balances of loans in the portfolio and other factors. As of December 31, 1996, up to $365 million in additional publicly offered asset-backed certificates may be issued pursuant to a shelf registration statement to fund future growth in the commercial finance loan portfolio. In February 1996, $135 million of the senior series certificates ("Series C") were issued. The proceeds were used, in conjunction with existing cash, to retire $200 million in Series A certificates, which were outstanding as of December 31, 1995. The $30 million subordinated certificates were issued by the Company in April 1995 via a private placement. In December 1995, a commercial paper facility was established as part of the asset securitization program. This facility provides for the issuance of up to $150 million in commercial paper, dependent upon the level of assets within the asset securitization program. This facility, which expires in December 1998, had approximately $15 million outstanding under it as of December 31, 1996. The commercial finance operation's unsecured revolving line of credit is with a syndicated bank group that 34 36 presently permits borrowings of up to $400 million, which includes a revolving credit facility of $300 million expiring August 1998 and a term loan of $100 million maturing 2001. The balance outstanding at December 31, 1996 of the revolving credit facility and the term loan was $123 million and $100 million, respectively, with a weighted average interest rate of 6.11%. This credit line is primarily used to finance assets which are not included in the Company's asset securitization program. As a holding company, Fremont General pays its operating expenses, meets its other obligations and pays stockholders' dividends from its cash on hand, management fees paid by its subsidiaries and dividends paid by its subsidiaries. During 1996, stockholders' dividends totaling $15.0 million were paid. Stockholders' dividends declared aggregated $15.8 million, $13.1 million and $11.5 million during 1996, 1995 and 1994, respectively. Several of the Company's subsidiaries are subject to certain statutory and regulatory restrictions and various agreements, principally loan agreements, that restrict their ability to distribute dividends to the Company. The Company expects that during the next few years dividends from its subsidiaries will consist of dividends from its property and casualty subsidiaries and dividends on preferred stock of its thrift and loan holding company and commercial finance subsidiaries. The maximum amount available for payment of dividends by the property and casualty subsidiaries at December 31, 1996 without prior regulatory approval is approximately $62.6 million. To facilitate general corporate operations, in August 1994 the Company obtained a revolving line of credit with a syndicated bank group that permitted borrowings of up to $150 million. In August 1995, the Company negotiated an increase of this line to $200 million, of which $10 million was outstanding as of December 31, 1996. In August 1997, this credit line converts to a term loan of up to $100 million, with scheduled semi-annual payments through August 2001. In addition, in July 1994 the Company replaced its internally financed loan to its Employee Stock Ownership Plan ("ESOP") with an external bank-financed loan totaling $11 million. The maximum principal amount of this loan was increased to $15 million in August 1995. The loan is due in seven equal annual installments that commenced on April 1, 1996 and is secured by certain shares held by the ESOP. The balance outstanding at December 31, 1996 was $11.7 million. The interest and principal payments are guaranteed by the Company. Interest is based on, at the Company's option, the bank's prime lending rate, LIBOR plus 1% or an applicable certificate deposit rate. The average rate at December 31, 1996 was 6.51%. On February 22, 1995, the Company completed the acquisition of Casualty which resulted in the disbursement of funds totaling $256.5 million, comprised of $231.5 million in cash and $25 million in a note payable to the seller. In September 1995, the note payable to the seller was refinanced using the Company's existing revolving line of credit. The cash used to fund the acquisition includes $55 million in borrowings under the Company's existing line of credit and the remainder from internally generated funds. (See "General.") On March 1, 1996, Fremont General Financing I, a statutory business trust (the "Trust") and consolidated wholly-owned subsidiary of the Company, sold $100 million of 9% Trust Originated Preferred Securities(SM) ("the Preferred Securities") in a public offering. The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust. The proceeds from the sale of the Preferred Securities were invested in 9% Junior Subordinated Debentures of the Company ("the Junior Subordinated Debentures"). The proceeds from the sale of the Junior Subordinated Debentures were used to repay approximately $50 million in revolving bank line of credit indebtedness, with the remainder used for general corporate purposes. The $100 million Junior Subordinated Debentures are the sole asset of the Trust. The Preferred Securities will be redeemed upon maturity of the Junior Subordinated Debentures in 2026, subject to the election available to the Company to extend the maturity up to 2045, and they may be redeemed, in whole or in part, at any time on or after March 31, 2001 and under certain specified circumstances. The Junior Subordinated Debentures rank pari passu with the Company's $301,245,000 aggregate principal amount at maturity of Liquid Yield Option(TM) Notes due 2013, and subordinate and junior to all senior indebtedness of the Company. Payment of distributions out of cash held by the Trust, and payments on liquidation of the Trust or the redemption of the Preferred Securities are guaranteed by the Company. Net cash provided by (used in) operating activities of continuing operations was $(96.0) million, $39.5 million and $68.0 million for the years ended December 31, 1996, 1995 and 1994, respectively. Net cash 35 37 provided by (used in) operating activities decreased in 1996 as compared to 1995 due primarily to a decrease in claims and policy liabilities, a lower amortization of policy acquisition costs, higher discount amortization on fixed maturity investments, and a decrease in other liabilities due primarily to the settlement of accrued operating costs. These conditions were partially offset by higher net income, lower policy acquisition costs deferred, higher depreciation and amortization, and an increase in the change in accrued investment income. The decrease in claims and policy liabilities, the lower amortization of policy acquisition costs, and the lower policy acquisition costs deferred resulted primarily from lower premium volume in the Company's workers' compensation insurance business. The higher discount amortization on fixed maturity investments is due mainly to an acceleration of discount amortization on certain mortgage-backed securities during 1996. The higher depreciation and amortization in 1996 is due primarily to amortization on certain deferred stock-based compensation programs awarded in 1996. (See Note L of Notes to Consolidated Financial Statements.) The significant increase in the change in accrued investment income in 1996 as compared to 1995 is due primarily to the 1995 acquisition of Casualty which resulted in a significant increase in the accrual of investment income for 1995 and thereby negatively impacted net cash provided by operating activities in 1995. Net cash provided by (used in) operating activities decreased in 1995 over 1994 due primarily to the following items: (i) a smaller net decrease in agents' balances and reinsurance recoverables; (ii) the previously mentioned increase in accrued investment income; (iii) a greater decrease in claims and policy liabilities; (iv) and higher policy acquisition costs deferred, net of amortization. These conditions were partially offset by higher net income, a net increase in other liabilities, net of other assets and a significant increase in the provision for deferred income taxes. The decreases in agents' balances and claims and policy liabilities are primarily due to lower premium volume in the Company's California workers' compensation insurance business. Higher policy acquisition costs deferred are due primarily to increases in annuity contract receipts in the Company's life insurance operation. (See Note F of Notes to Consolidated Financial Statements.) The net increase in other liabilities, net of other assets, is due primarily to increased accruals for other operating costs. Net cash provided by (used in) investing activities increased to $229.8 million in 1996 from $(514.0) million and $(551.1) million for 1995 and 1994, respectively. The increase in net cash provided by (used in) investing activities in 1996 as compared to 1995 is due principally to a decrease in investment purchases, net of sales, maturities, and calls; the February 1995 purchase of Casualty for a net cash disbursement of $255.8 million; and an increase in receipts from repayments of loans. These conditions were partially offset by an increase in loan originations. The significant decrease in short-term and other investments of $376.0 million and the significant level of securities purchased in 1995, was due primarily to the effects of investing the acquired short-term investment portfolio of Casualty into long-term securities. Net cash provided by (used in) investing activities increased in 1995 as compared to 1994, due primarily to a decrease in bulk loan purchases, net of loan repayments, in the real estate lending operation. This net decrease is due in part to $366 million in bulk commercial real estate loan purchases which the Company completed in 1994. The decrease in net loan purchases was offset partially by the acquisition of Casualty and an increase in investment purchases, net of sales, maturities, and calls. Net cash provided by (used in) financing activities was $(118.0) million, $483.0 million and $485.6 million for 1996, 1995 and 1994, respectively. Net cash provided by (used in) financing activities decreased in 1996 as compared to 1995, due primarily to lower long-term debt proceeds, net of repayments; the payment in 1996 of $363.4 million in settlement of certain reinsurance and assumption agreements within the life insurance operation which became effective January 1, 1996 between the Company and a reinsurer (see "Financial Services"); a decrease in annuity contract receipts, net of contract withdrawals; and an increase in deferred compensation plans. These conditions were partially offset by a decrease in the repayments of short-term debt, net of proceeds, an increase in thrift deposits and the impact of the proceeds from the sale of 9% Trust Originated Preferred Securities(SM) on March 1, 1996 in a public offering by the Trust. The lower long-term debt proceeds and the decrease in repayments of short-term debt is due primarily to a reclassification in 1995 of the commercial finance operation's credit line from short-term debt to long-term debt as of December 31, 1995. This reclassification was made pursuant to the terms of the credit line, which was renegotiated in August 1995. The increase in repayments of long-term debt in 1996 is due principally to the repayment of $50 million in revolving bank line of credit indebtedness, which was paid out of the proceeds of the Company's sale of 9% Junior Subordinated Debentures in March 1996. The increase in deferred 36 38 compensation plans is due primarily to the repurchase by the Company of its Common Stock in the first quarter of 1996 pursuant to certain deferred compensation programs. Net cash provided by financing activities decreased modestly in 1995 as compared to 1994, due mainly to a lower increase in thrift deposits partially offset by a net increase in short-term and long-term debt and an increase in annuity contract receipts, net of contract withdrawals. The amortized cost of the Company's invested assets were $1.48 billion, $1.91 billion, and $.99 billion at December 31, 1996, 1995 and 1994, respectively. The approximate $430 million decrease in 1996 is due principally to the $363.4 million settlement of certain reinsurance and assumption agreements within the life insurance operation which became effective January 1, 1996 (see "Financial Services"); $96.0 million in cash flow used in operating activities; $202.9 million in loan originations, net of loan repayments; $89.2 million in repayments of short-term and long-term debt, net of debt proceeds; and $28.2 million used to fund certain deferred compensation plans. These conditions were partially offset by $100 million in proceeds from the public offering on March 1, 1996 of 9% Trust Originated Preferred Securities(SM) by a subsidiary of the Company, $188.0 million in net thrift and loan deposit increases and $88.4 million in annuity contract receipts, net of withdrawals. Contributing to the 1995 $.92 billion increase in the invested assets was approximately $512 million resulting from the Casualty acquisition and $199 million increase in net annuity receipts in the Company's life insurance operation. As of July 1, 1995 the Company's held to maturity portfolio totaling $319.4 million was transferred to available for sale in accordance with the provisions of Financial Accounting Standards Board Statement 115 ("FASB 115"), "Accounting for Certain Investments in Debt and Equity Securities." (See Note C of Notes to Consolidated Financial Statements.) The Company's property and casualty premium to surplus ratio for the year ended December 31, 1996 was 1.2 to 1, which is within industry guidelines. The FDIC has established certain capital and liquidity standards for its member institutions, and the Company's thrift and loan subsidiary was in compliance with these standards as of December 31, 1996. (See "Item 1. Business -- Regulation -- Thrift and Loan Regulation.") In August 1994 an additional $23 million was contributed to the capital of this subsidiary to support the growth in the loan portfolio during 1994. The Company believes that its existing cash, its bank lines of credit, revenues from operations and other available sources of liquidity will be sufficient to satisfy its liquidity needs for the next several years. NEW ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121 ("FASB 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which requires impairment losses to be recorded on long-lived assets used in operations, including intangible assets, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FASB 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted FASB 121 in the first quarter of 1996 and the effect of adoption was not material. Also, in 1995, the FASB issued Statement 123 ("FASB 123"), "Accounting for Stock-Based Compensation" that is effective for fiscal years beginning after December 15, 1995. FASB 123 establishes a method of accounting for stock-based compensation that is based on the fair value of stock options and similar instruments and encourages, but does not require, adoption of that method. The Company has elected to continue following Accounting Principles Board Opinion No. 25 for measuring compensation cost. Pursuant to FASB 123, the Company will disclose pro forma net income and earnings per share calculated as if the recognition and measurement provisions of the new standard had been adopted; however, for 1996, the pro forma effect was not material. In February 1997, the FASB issued Statement No. 128 ("FASB 128"), "Earnings Per Share and Disclosure of Information about Capital Structure" which is effective for periods ending after December 15, 1997. Under FASB 128, primary earnings per share, which currently includes the dilutive effect of stock options, will be replaced by basic earnings per share, which excludes the dilutive effect of stock options. Fully diluted shares would not change significantly but would be renamed diluted earnings per share. All previously 37 39 recorded earnings per share amounts will be required to be restated to conform to the new standard. The Company has not determined the earnings per share impact of adopting the new standard. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements, including supplementary data, are set forth in the "Index" on page 43 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the subheadings "Election of Directors," "Executive Officers and Compensation," and "Compliance with Section 16(a) of the Securities and Exchange Act of 1934" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the subheadings "Election of Directors, "Compensation of Directors," "Executive Officers and Compensation," "Summary Compensation Table," "Summary Compensation Table - Explanations," "Option/SAR Grants in Last Fiscal Year," "Option Exercises and Year-End Values Table/Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values," "Employment Agreements" and "Retirement and Other Benefit Plans, A-F" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the subheading "Principal and Management Stockholders" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information immediately following the caption "Election of Directors" and "Employment Agreements" in the Company's Proxy Statement for the 1997 Annual Meeting of Stockholders is incorporated herein by reference. 38 40 PART IV ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (a)(2) and (d) FINANCIAL STATEMENTS AND SCHEDULES. Reference is made to the "Index -- Consolidated Financial Statements and Financial Statements Schedules -- Annual Report on Form 10-K" filed as part of this Annual Report. (a)(3) and (c) EXHIBITS.
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------- 2.1 Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, dated as of December 16, 1994. (Filed as Exhibit No. 2.1 to Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 2.2 Amendment No. 1 to Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, Dated as of December 16, 1994. (Filed as Exhibit No. 2.2 to Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 3.1 Restated Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit No. 3.1 to Registration Statement on Form S-3 File No. 33-64771 which was declared effective on March 1, 1996, and incorporated herein by reference.) 3.2 Certificate of Amendment of Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit 3.2 to Registration Statement on Form S-3 File No. 33-64771 which was declared effective on March 1, 1996 and herein incorporated by reference.) 3.3 Amended and Restated By-Laws of Fremont General Corporation. (Filed as Exhibit No. 3.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed as Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust Company. (Filed as Exhibit No. 4.4 to Registration Statement on Form S-3 filed on October 1, 1993, and incorporated herein by reference.) 4.3 Indenture among the Registrant, the Trust and First Interstate Bank of California, a California banking corporation, as trustee. (Filed as Exhibit No. 4.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.4 Declaration of Trust among the Registrant, the Regular Trustees and The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee. (Filed as Exhibit No. 4.4 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.5 Amended and Restated Declaration of Trust among the Registrant, the Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A., a national banking association, as Institutional Trustee. (Filed as Exhibit No. 4.5 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)
39 41
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------- 4.6 Preferred Securities Guarantee Agreement between the Registrant and The Chase Manhattan Bank, N.A., a national banking association, as Preferred Guarantee Trustee. (Filed as Exhibit No. 4.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.7 Common Securities Guarantee Agreement by the Registrant. (Filed as Exhibit No. 4.7 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.8 Form of Preferred Securities. (Included in Exhibit 4.5). (Filed as Exhibit No. 4.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 4.9 Form of 9% Junior Subordinated Debenture. (Included in Exhibit 4.3). (Filed as Exhibit No. 4.9 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.1 Fremont General Corporation Employee Stock Ownership Plan as amended. (Filed as Exhibit No. 10.1 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.2 Amended and Restated Trust Agreement for Fremont General Corporation Employee Stock Ownership Plan. (Filed as Exhibit No. 10.2 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.3 Fremont General Corporation and Affiliated Companies Investment Incentive Program as amended. (Filed as Exhibit No. 10.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.4(a) Trust Agreement for Investment Incentive Program. (Filed as Exhibit No. (10)(xi) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.) 10.4(b) Amendment to Trust Agreement for Investment Incentive Program. (Filed as Exhibit No. 10.4 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.5(a) Supplemental Retirement Plan of the Company. (Filed as Exhibit No. (10)(v) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1990, Commission File Number 1-8007, and incorporated herein by reference.) 10.5(b) Amendment to Supplemental Retirement Plan. (Filed as Exhibit No. 10.5 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the Senior Supplemental Retirement Plan of the Company, as amended. (Filed as Exhibit No. 10.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.7 Senior Supplemental Retirement Plan, as amended. (Filed as Exhibit No. 10.7 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.8(a) Excess Benefit Plan of the Company. (Filed as Exhibit No. (10)(vi) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.)
40 42
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------- 10.8(b) Amendment to Excess Benefit Plan of the Company. (Filed as Exhibit No. 10.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.8(c) Trust Agreement for Excess Benefit Plan. (Filed as Exhibit No. 10.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.9 Amended Non-Qualified Stock Option Plan of 1989 of the Company and related agreements. 10.10(a) Long-Term Incentive Compensation Plan of the Company -- Senior Executive Plan. (Filed as Exhibit No. 10.10(a) on Form 10-Q for the period ended September 30, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 10.10(b) Long-Term Incentive Compensation Plan of the Company (Filed as Exhibit No. 10.10(b) on Form 10-Q for the period ended September 30, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 10.11 1995 Restricted Stock Award Plan as amended and forms of agreement thereunder. (Filed as Exhibit No. 4.1 to Registration Statement on Form S-8/S-3 File No. 333-17525 which was filed on December 10, 1996, and incorporated herein by reference.) 10.12 Fremont General Corporation Employee Benefits Trust Agreement ("Grantor Trust") dated September 7, 1995 between the Company and Merrill Lynch Trust Company of California. (Filed as Exhibit No. 10.12 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.13(a) Employment Agreement between the Company and James A. McIntyre. (Filed as Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period ended March 31, 1994, Commission File Number 1-8007, and incorporated herein by reference.) 10.13(b) First Amendment to Employment Agreement between the Company and James A. McIntyre. 10.14(a) Employment Agreement between the Company and Louis J. Rampino. (Filed as Exhibit No. 10.14 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.14(b) Employment Agreement between the Company and Wayne R. Bailey. (Filed as Exhibit No. 10.14 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.15 Management Continuity Agreement between the Company and Raymond G. Meyers. (Filed as Exhibit No. 10.15 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.16 1996 Management Incentive Compensation Plan of the Company. (Filed as Exhibit No. 10.16 to Quarterly Report on Form 10-Q, for the period ended March 31, 1996, Commission File Number 1-8007, and incorporated herein by reference.) 10.17 Continuing Compensation Plan for Retired Directors. (Filed as Exhibit No. 10.17 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.18 Non-Employee Directors' Deferred Compensation Plan. (Filed as Exhibit No. 10.18 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.19(a) Amended and Restated Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as Exhibit No. (10)(xiii) to Quarterly Report on Form 10-Q for the period ended September 30, 1995, Commission File Number 1-08007, and incorporated herein by reference.)
41 43
EXHIBIT NO. DESCRIPTION - ----------- ---------------------------------------------------------------------------------- 10.19(b) Amendment to Credit Agreement. (Filed as Exhibit No. 10.19(b) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.20 Keep Well Agreement, dated as of August 24, 1995 by the Company in connection with the Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as Exhibit No. 10.20 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.) 10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company of California as trustee for the Fremont General Corporation Employee Stock Ownership Trust. The Plan Committee (hereinafter described) on behalf of the Fremont General Corporation Employee Stock Ownership Plan, Fremont General Corporation, and First Interstate Bank of California August 10, 1995. (Filed as Exhibit No. (10)(viii) to Quarterly Report on Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference.) (11) Statement re: Computation of per share earnings. (21) Subsidiaries of the Company. (23) Consent of Ernst & Young LLP independent Auditors. (27) Financial Data Schedule (28) Information from reports provided to state insurance regulatory authorities.
(b) REPORT ON FORM 8-K. None filed during the quarter ended December 31, 1996. 42 44 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ANNUAL REPORT ON FORM 10-K INDEX
PAGES ------- Report of Independent Auditors...................................................... 44 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1996 and 1995...................... 45 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994........................................................................... 46 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994....................................................................... 47 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994............................................... 48 Notes to Consolidated Financial Statements........................................ 49 Schedules: II -- Condensed Financial Information of Registrant.............................. 71 III -- Supplementary Insurance Information........................................ 75 IV -- Reinsurance................................................................ 76 V -- Valuation and Qualifying Accounts........................................... 77 VI -- Supplemental Information Concerning Property/Casualty Insurance Operations..................................................................... 78
All other schedules are omitted because of the absence of conditions under which they are required or because the necessary information is provided in the consolidated financial statements or notes thereto. 43 45 REPORT OF INDEPENDENT AUDITORS Stockholders and Board of Directors Fremont General Corporation We have audited the accompanying consolidated balance sheets of Fremont General Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fremont General Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note A to the consolidated financial statements, the Company made certain accounting changes in 1994. ERNST & YOUNG LLP Los Angeles, California March 14, 1997 44 46 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ------------------------- 1996 1995 ---------- ---------- (THOUSANDS OF DOLLARS) Securities available for sale at fair value: Fixed maturity investments (cost: 1996 -- $1,004,248; 1995 -- $1,255,434)................. $1,005,147 $1,296,550 Non-redeemable preferred stock (cost: 1996 -- $351,812; 1995 -- $285,337)..................... 354,958 277,451 ---------- ---------- Total securities available for sale....................... 1,360,105 1,574,001 Loans receivable.................................................... 1,688,040 1,499,043 Short-term investments.............................................. 118,582 362,163 Other investments................................................... 5,623 1,726 ---------- ---------- TOTAL INVESTMENTS AND LOANS............................... 3,172,350 3,436,933 Cash................................................................ 55,378 39,559 Accrued investment income........................................... 26,794 30,396 Premiums receivable and agents' balances............................ 99,404 107,973 Reinsurance recoverable on paid losses.............................. 13,173 9,422 Reinsurance recoverable on unpaid losses............................ 438,459 289,461 Deferred policy acquisition costs................................... 25,551 76,638 Costs in excess of net assets acquired.............................. 67,287 70,656 Deferred income taxes............................................... 64,035 78,619 Other assets........................................................ 79,881 75,240 Assets held for discontinued operations............................. 265,200 262,502 ---------- ---------- TOTAL ASSETS.............................................. $4,307,512 $4,477,399 ========== ========== LIABILITIES Claims and policy liabilities: Losses and loss adjustment expenses............................... $1,256,345 $1,455,692 Life insurance benefits and liabilities........................... 202,465 374,724 Unearned premiums................................................. 87,422 100,481 Dividends to policyholders........................................ 33,093 40,822 ---------- ---------- TOTAL CLAIMS AND POLICY LIABILITIES....................... 1,579,325 1,971,719 Reinsurance premiums payable and funds withheld..................... 4,106 5,452 Other liabilities................................................... 65,574 81,371 Thrift deposits..................................................... 1,114,352 926,312 Short-term debt..................................................... 16,896 72,191 Long-term debt...................................................... 636,456 693,276 Liabilities of discontinued operations.............................. 231,686 228,988 ---------- ---------- TOTAL LIABILITIES......................................... 3,648,395 3,979,309 Commitments and contingencies Company-obligated mandatorily redeemable preferred securities of subsidiary Trust holding solely Company junior subordinated debentures........................................................ 100,000 -- STOCKHOLDERS' EQUITY Common Stock, par value $1 per share -- Authorized: 49,500,000 shares; Issued and outstanding: (1996 -- 28,093,000 and 1995 -- 25,393,000)............................................... 28,093 25,393 Additional paid-in capital.......................................... 168,452 110,103 Retained earnings................................................... 419,136 347,607 Deferred compensation............................................... (59,193) (6,612) Net unrealized gain on investments, net of deferred taxes........... 2,629 21,599 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY................................ 559,117 498,090 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $4,307,512 $4,477,399 ========== ==========
See notes to consolidated financial statements. 45 47 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) REVENUES Property and casualty premiums earned...................... $486,860 $606,917 $433,584 Net investment income...................................... 123,531 119,523 76,821 Loan interest.............................................. 163,765 162,992 113,382 Realized investment gains (losses)......................... (1,658) 1 (315) Other revenue.............................................. 23,306 34,381 29,676 -------- -------- -------- Total Revenues................................... 795,804 923,814 653,148 EXPENSES Losses and loss adjustment expenses........................ 335,407 461,333 273,599 Policy acquisition costs................................... 96,177 126,099 86,990 Provision for loan losses.................................. 13,885 14,575 11,980 Other operating costs and expenses......................... 107,260 120,963 90,078 Dividends to policyholders................................. -- -- 49,654 Interest expense........................................... 114,766 100,517 59,276 -------- -------- -------- Total Expenses................................... 667,495 823,487 571,577 -------- -------- -------- Income before taxes........................................ 128,309 100,327 81,571 Income tax expense......................................... 41,021 32,305 25,759 -------- -------- -------- NET INCOME....................................... $ 87,288 $ 68,022 $ 55,812 ======== ======== ======== PER SHARE DATA: Net Income: Primary.................................................. $ 3.26 $ 2.61 $ 2.16 Fully diluted............................................ 2.73 2.17 1.82
See notes to consolidated financial statements. 46 48 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------ 1996 1995 1994 ----------- ----------- ---------- (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES Net income.................................................... $ 87,288 $ 68,022 $ 55,812 Adjustments to reconcile net income to net cash provided by operating activities: Change in premiums receivable and agents' balances and reinsurance recoverable on paid losses................. 4,043 7,495 32,411 Change in accrued investment income...................... 3,602 (21,186) 5,349 Change in claims and policy liabilities.................. (211,482) (72,824) (43,741) Amortization of policy acquisition costs................. 96,177 126,099 86,990 Policy acquisition costs deferred........................ (93,478) (148,365) (91,048) Provision for deferred income taxes...................... 24,798 22,810 (4,391) Provision for loan losses................................ 13,885 14,575 11,980 Depreciation and amortization............................ 26,592 20,334 15,709 Net amortization on fixed maturity investments........... (21,976) (1,793) 1,001 Realized investment (gains) losses....................... 1,658 (1) 315 Change in other assets and liabilities................... (27,116) 24,323 (2,338) ---------- ---------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................................ (96,009) 39,489 68,049 INVESTING ACTIVITIES Securities available for sale: Purchases of securities..................................... (1,527,408) (2,773,842) (975,495) Sales of securities......................................... 1,679,631 2,000,772 1,302,486 Securities matured or called................................ 52,806 101,957 61,752 Securities held to maturity: Purchases of securities..................................... -- (117,660) (206,416) Sales of securities......................................... -- -- -- Securities matured or called................................ -- 5,464 -- Decrease (increase) in short-term and other investment........ 239,684 615,705 (116,668) Loan originations and bulk purchases funded................... (644,193) (458,801) (727,715) Receipts from repayments of loans............................. 441,311 377,768 121,404 Acquisition of Casualty Insurance Company, less cash acquired.................................................... -- (255,803) -- Purchases of property and equipment........................... (12,035) (9,527) (10,402) ---------- ---------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES........................................ 229,796 (513,967) (551,054) FINANCING ACTIVITIES Proceeds from short-term debt................................. 14,929 30,134 140,813 Repayments of short-term debt................................. (72,191) (199,268) (46,646) Proceeds from long-term debt.................................. 79,058 325,000 26,000 Repayments of long-term debt.................................. (111,004) (42,808) (12,500) Net increase in thrift deposits............................... 188,040 179,335 334,661 Annuity contract receipts..................................... 132,550 217,648 57,929 Annuity contract withdrawals.................................. (44,184) (18,874) (5,952) Settlement under life insurance reinsurance agreements........ (363,415) -- -- Proceeds from sale of Preferred Securities.................... 100,000 -- -- Dividends paid................................................ (15,016) (12,618) (11,344) Stock options exercised....................................... 1,428 80 22 Purchase of fractional shares................................. -- (25) -- Decrease (increase) in deferred compensation plans............ (28,163) 4,375 2,647 ---------- ---------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........................................ (117,968) 482,979 485,630 ---------- ---------- --------- INCREASE IN CASH.............................................. 15,819 8,501 2,625 Cash at beginning of year................................... 39,559 31,058 28,433 ---------- ---------- --------- CASH AT END OF YEAR........................................... $ 55,378 $ 39,559 $ 31,058 ========== ========== =========
See notes to consolidated financial statements. 47 49 FREMONT GENERAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NET ADDITIONAL UNREALIZED COMMON PAID-IN RETAINED DEFERRED GAIN (LOSS) ON STOCK CAPITAL EARNINGS COMPENSATION INVESTMENTS TOTAL ------- ---------- -------- ------------ -------------- -------- (THOUSANDS OF DOLLARS) Balance at January 1, 1994.............. $15,387 $ 80,217 $287,399 $(13,634) $ -- $369,369 Cumulative effect of change in accounting for investments......... -- -- -- -- 28,532 28,532 Net income for 1994................... -- -- 55,812 -- -- 55,812 Cash dividends to stockholders........ -- -- (11,498) -- -- (11,498) Stock options exercised............... 1 21 -- -- -- 22 ESOP contribution accrual cost to market adjustment.................. -- 26 -- -- -- 26 ESOP shares allocated less additional shares purchased................... -- -- -- 2,647 -- 2,647 Net change in unrealized gain (loss) on investments, net of deferred taxes.............................. -- -- -- -- (93,897) (93,897) ------- -------- -------- -------- ------ -------- Balance at December 31, 1994............ 15,388 80,264 331,713 (10,987) (65,365) 351,013 Net income for 1995................... -- -- 68,022 -- -- 68,022 Cash dividends to stockholders........ -- -- (13,080) -- -- (13,080) Ten percent stock dividend............ 1,538 37,498 (39,036) -- -- -- Three-for-two stock split............. 8,464 (8,464) -- -- -- -- Stock options exercised............... 3 77 -- -- -- 80 ESOP shares allocated................. -- -- -- 4,375 -- 4,375 Other adjustments..................... -- 728 (12) -- -- 716 Net change in unrealized gain (loss) on investments, net of deferred taxes.............................. -- -- -- -- 86,964 86,964 ------- -------- -------- -------- ------ -------- Balance at December 31, 1995............ 25,393 110,103 347,607 (6,612) 21,599 498,090 Net income for 1996................... -- -- 87,288 -- -- 87,288 Cash dividends to stockholders........ -- -- (15,759) -- -- (15,759) Conversion of LYONs................... 1,399 29,127 -- -- -- 30,526 Stock options exercised............... 57 (1,654) -- 3,025 -- 1,428 Shares issued or acquired for employee benefit plans...................... 1,244 31,291 -- (64,918) -- (32,383) Amortization of restricted stock...... -- -- -- 5,277 -- 5,277 ESOP shares allocated less additional shares purchased................... -- 9 -- 4,210 -- 4,219 Other adjustments..................... -- (424) -- (175) -- (599) Net change in unrealized gain (loss) on investments, net of deferred taxes.............................. -- -- -- -- (18,970) (18,970) ------- -------- -------- -------- ------ -------- Balance at December 31, 1996............ $28,093 $ 168,452 $419,136 $(59,193) $ 2,629 $559,117 ======= ======== ======== ======== ====== ========
See notes to consolidated financial statements. 48 50 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Fremont General Corporation is engaged domestically in select insurance and financial services businesses. Fremont General's insurance business includes one of the largest underwriters of workers' compensation insurance in the nation. The Company also provides medical malpractice insurance. Fremont General's financial services business includes commercial real estate lending, residential real estate lending, commercial finance and premium financing. Workers' compensation insurance has accounted for over 90% of property and casualty premiums earned. Workers' compensation premiums are divided between the western region, primarily California (1996 - 37%; 1995 - 51%), and the mid-west region, primarily Illinois (1996 - 63%; 1995 - 49%). Prior to 1995, substantially all of the premium revenue was derived from the California market. Real estate lending represents over 56% of loan interest revenues (1995 - 50%; 1994 - 51%) and represents both commercial and residential lending secured by real estate located primarily in California. Commercial finance accounts for substantially all of the remaining loan interest revenues (1995 - 44%; 1994 - 44%) and represents asset-based loans to middle market companies nationwide (35% in California), primarily secured by accounts receivable and inventory. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles which, as to the subsidiary insurance companies, differ from statutory accounting practices prescribed or permitted by regulatory authorities. The significant accounting policies followed by Fremont General Corporation and subsidiaries ("the Company") that materially affect financial reporting are summarized below. Consolidation: The consolidated financial statements include the accounts and operations, after intercompany eliminations, of Fremont General Corporation and all subsidiaries. (See Note N for the accounting treatment of discontinued operations.) Use of Estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investments: Fixed maturity investments represent bonds and redeemable preferred stocks that mature more than one year after the purchase date. Non-redeemable preferred stocks are equity securities, the majority of which do not include adjustable dividend yield provisions. As of January 1, 1994, the Company adopted the provisions of Financial Accounting Standards Board Statement 115 ("FASB 115"), "Accounting for Certain Investments in Debt and Equity Securities." The cumulative effect as of January 1, 1994 of adopting FASB 115 was to increase stockholders' equity by $28,532,000 (net of deferred income taxes of $15,634,000) to reflect the net unrealized holding gains on securities classified as available for sale that were previously carried at amortized cost. There was no effect on net income. Premiums and discounts on investments are primarily amortized using the interest method over the contractual lives of the investments. Adjustments for other-than-temporary market declines are recorded when determination of loss is probable and is reflected with a write-down of amortized cost to net realizable value. Short-term investments are carried at cost, which approximates their fair value. Realized investment gains and losses are included as a component of revenues based on specific identification of the investment sold. Loans: Loans are stated net of unearned income and allowance for possible loan losses. The allowance is increased by provisions charged against operations and reduced by loan amounts charged off by management. The allowance is maintained at a level considered adequate to provide for potential losses on loans based on management's evaluation of the loan portfolio. While management uses all available information to estimate the level of the allowance for credit losses, future additions may be necessary based on changes in the amounts and timing of future cash flows expected due to changes in collateral values supporting loans, general economic conditions and borrowers' financial conditions. 49 51 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Beginning in 1995, allowances for credit losses have been based on discounted cash flows using the loans' effective interest rate or the fair value of the collateral for collateral dependent loans. Prior to 1995, the allowances for credit losses on these loans were based on undiscounted cash flows or the fair value of the collateral for collateral dependent loans. The effect on net income was not material. Management classifies loans as non-accrual when the collection of future interest is not assured by the borrower's financial condition and the value of underlying collateral and guarantees securing the loan. Subsequent collections on non-accrual loans are applied as a reduction of principal. The Company's charge-off policy is based on a monthly loan-by-loan review. Loans in process of foreclosure, repossessed assets, and in-substance foreclosures are included in the financial statements at the lower of cost or estimated realizable value (net of estimated costs to sell). Estimated realizable values are based on management's evaluation of numerous factors, including appraisals, sales of comparable assets and estimated market conditions. Furniture and Equipment: Furniture and equipment are included in other assets and are stated at cost, less accumulated depreciation. Leasehold improvements are amortized over the terms of the lease. Generally, depreciation is computed by the straight-line method over periods ranging from three to twelve years. Premium Income: Revenues from property and casualty premiums are recognized proportionately over the terms of the related policies. Direct property and casualty premiums earned but not billed at the end of each accounting period are estimated and accrued, and differences between such estimates and final billings are included in current operations. Revenues for universal life and investment-type insurance products consist of policy charges for the cost of insurance, policy initiation, administration and surrender fees and are included in other revenue. Premiums receivable and agents' balances and reinsurance recoverable on paid and unpaid losses include allowances for doubtful accounts of $7,401,000 and $9,630,000 at December 31, 1996 and 1995, respectively. Losses and Loss Adjustment Expenses: The estimated liabilities for losses and loss adjustment expenses include the accumulation of estimates for losses and claims reported prior to the balance sheet dates, estimates (based on projections of historical developments) of claims incurred but not reported and estimates of expenses for investigating and adjusting all incurred and unadjusted claims. Amounts reported are estimates of the ultimate costs of settlement, net of subrogation and salvage recoveries, which are necessarily subject to the impact of future changes in economic and social conditions. Management believes that, given the inherent variability in any such estimates, the aggregate reserves are within a reasonable and acceptable range of adequacy. Reserves are continually monitored and reviewed, and as settlements are made or reserves adjusted, differences are included in current operations. Included in the loss and loss adjustment expense liability recorded on the consolidated balance sheet at December 31, 1996 is $90,148,000 of workers' compensation accident and health permanent disability and death reserves which have been discounted at 5%. These reserves arose from the acquisition in 1995 of Casualty Insurance Company ("Casualty"). (See Note B.) The Company has continued the practice previously adopted by Casualty of discounting permanent disability loss reserves for both statutory accounting practices and generally accepted accounting principles. Unearned Premiums: Property and casualty insurance unearned premiums are calculated using the monthly pro rata basis. Life Insurance Benefits and Liabilities: Policyholder contract liabilities for universal life and investmenttype products represent the premiums received plus accumulated interest, less mortality and other administrative charges under the contracts and before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in excess of related policy account balances. (See Note F.) 50 52 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Deferred Policy Acquisition Costs: Commissions, premium taxes and certain sales and underwriting expenses are capitalized and amortized as premiums are earned over the terms of the related property and casualty policies. Anticipated investment income is considered in determining if premium deficiencies exist. The costs of acquiring new and renewal life and annuity insurance contracts, prior to the transactions described in Note F, have been deferred. These life and annuity deferred acquisition costs were amortized over anticipated gross margins for such contracts prior to their reinsurance. As a result of the transactions described in Note F, substantially all acquisition costs on life insurance and annuity contracts have been eliminated. Dividends to Policyholders: Dividends, if applicable, to policyholders on workers' compensation insurance contracts are accrued during the period in which the related premiums are earned. Thrift Deposits: Thrift deposits consist of investment certificates at the Company's California thrift and loan subsidiary. Such balances are credited with interest at rates ranging from 2.96% to 8.81% at December 31, 1996. The estimated fair value of the thrift deposits was $1,115,443,000 at December 31, 1996. Intangibles: The excess of the costs of acquisitions over net assets acquired (net of accumulated amortization: 1996 - $20,882,000 ; 1995 - $17,513,000) is being amortized over various periods ranging primarily from 7 to 25 years, which represents the estimated life of the intangible assets associated with such acquisitions. Additionally, the trade name acquired in the acquisition of Casualty (net of accumulated amortization: 1996 - $697,000; 1995 - -$326,000) is being amortized over 40 years. (See Note B regarding intangibles related to the acquisition of Casualty.) Per Share Data: Primary earnings per share data have been computed based on the weighted average number of common and common equivalent shares outstanding, which were as follows: 1996 - 26,762,000; 1995 - 26,079,000 and 1994 - 25,823,000. Common stock options granted to certain key members of management are considered common stock equivalents for the computation of primary earnings per share. The pro forma dilutive effect on primary earnings per share of conversions of debt to common stock during 1996, adjusted to give effect of such conversions at the beginning of the period, was not material. For the computation of fully-diluted earnings per share, common stock options (see Note K) and convertible securities (see Note I) had a dilutive effect of $0.53, $0.44 and $0.34 per share for 1996, 1995 and 1994, respectively. Fully-diluted earnings per share were computed based on 33,630,000, 33,343,000 and 33,034,000 weighted average number of shares outstanding for 1996, 1995 and 1994, respectively. Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, fixed maturity securities, preferred stocks, real estate and commercial finance loans and reinsurance recoverables. The Company places its temporary cash investments with high credit quality financial institutions and limits the amounts of credit exposure to any one financial institution. Concentrations of credit risk with respect to investments in fixed maturities, preferred stocks and commercial finance loans are limited due to the large number of such investments and their distribution across many different industries and geographic regions. Concentration of credit risk with respect to thrift and loan finance receivables is limited due to the large number of borrowers; however, substantially all thrift and loan finance receivables are from borrowers within the state of California. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. As of December 31, 1996, Employers Reassurance Corporation was the only reinsurer that accounted for more than 10% of total reinsurance recoverables while Continental Insurance Company and General Reinsurance Corporation were the only reinsurers that accounted for more than 10% of total property and casualty reinsurance recoverables. The remaining reinsurance recoverables were spread over 159 reinsurers. Fair Values of Financial Instruments: The Company uses various methods and assumptions in estimating its fair value disclosures for financial instruments. For fixed maturity investments and preferred 51 53 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) stocks, fair values are determined from certain valuation services, as well as from quoted market prices. Loans receivable with variable rates, as well as thrift deposits for passbook and money market type accounts, are deemed to be at fair value. The fair values of thrift investment certificates, real estate loans and other fixed rate loans are estimated using discounted cash flow analyses, using interest rates currently being offered for similar accounts or loans to borrowers with similar credit ratings. For short-term debt, the carrying amount of the Company's borrowings approximates fair value. The fair value of the Company's long-term debt and Preferred Securities is based on quoted market prices for securities actively traded. For long-term debt not actively traded, and for bank borrowings, the fair value is estimated using discounted cash flow analyses, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts and fair values of the Company's financial instruments at December 31, 1996 are summarized in the following table:
ESTIMATED CARRYING FAIR AMOUNT VALUE ---------- ---------- (THOUSANDS OF DOLLARS) ASSETS Fixed maturity investments (Note C)............... $1,005,147 $1,005,147 Non-redeemable preferred stock (Note C)........... 354,958 354,958 Loans receivable (Note D)......................... 1,688,040 1,705,360 LIABILITIES Thrift deposits (Note A).......................... 1,114,352 1,115,443 Short-term debt (Note H).......................... 16,896 16,896 Long-term debt (Note I)........................... 636,456 680,944 Company-obligated manditorily redeemable preferred securities of subsidiary Trust holding solely Company junior subordinated deventures (Notes J).............................................. 100,000 101,000
Insurance related financial instruments, other than those classified as investment contracts, are exempt from fair value disclosure requirements. The carrying amount of reinsurance paid recoverables approximates their fair value as they are expected to be realized within one year. New Accounting Standards: In March 1995, the FASB issued Statement No. 121 ("FASB 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations, including intangible assets, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. FASB 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company adopted FASB 121 in the first quarter of 1996; however, the effect of adoption was not material. Also in 1995, the FASB issued Statement 123 ("FASB 123"), "Accounting for Stock-Based Compensation," that is effective for fiscal years beginning after December 15, 1995. FASB 123 establishes a method of accounting for stock-based compensation that is based on the fair value of stock options and similar instruments and encourages, but does not require, adoption of that method. The Company has elected to continue following Accounting Principles Board Opinion No. 25 for measuring compensation cost. Pursuant to FASB 123, the Company will disclose pro forma net income and earnings per share calculated as if the recognition and measurement provisions of the new standard had been adopted; however, for 1996, the pro forma effect was not material. 52 54 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In February 1997, the FASB issued Statement No. 128 ("FASB 128"), "Earnings Per Share and Disclosure of Information about Capital Structure" which is effective for periods ending after December 15, 1997. Under FASB 128, primary earnings per share, which currently includes the dilutive effect of stock options, will be replaced by basic earnings per share, which excludes the dilutive effect of stock options. Fully diluted shares would not change significantly but would be renamed diluted earnings per share. All previously recorded earnings per share amounts will be required to be restated to conform to the new standard. The Company has not determined the earnings per share impact of adopting the new standard. Reclassifications: Certain 1995 and 1994 amounts have been reclassified to conform to the 1996 presentation. NOTE B -- ACQUISITION On February 22, 1995 the Company, through its subsidiary Fremont Compensation Insurance Company, completed the acquisition of 100% of the outstanding common stock of Casualty Insurance Company ("Casualty") from the Buckeye Union Insurance Company ("Buckeye"). The purchase price paid by the Company was $250 million, comprised of $225 million in cash and $25 million in a note payable to Buckeye. In addition, $6.5 million of costs were incurred in connection with the acquisition bringing the total cost to $256.5 million. The acquisition, accounted for as a purchase, included approximately $45 million of costs in excess of net assets acquired which is being amortized over 25 years, and approximately $15 million of an intangible asset for the trade name which is being amortized over 40 years. Income from Casualty has been included in the consolidated income statement since February 22, 1995. Casualty, based in Chicago, Illinois, underwrites workers' compensation insurance primarily in Illinois. Casualty is currently the largest underwriter of workers' compensation insurance in Illinois and is licensed in six states. The following schedule summarizes certain pro forma unaudited results of operations for the years ended December 31, 1995 and 1994, assuming the purchase of Casualty had been consummated as of January 1, 1994:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1994 ----------- ----------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) Property and casualty premiums earned............... $ 663,917 $ 819,981 Net investment income............................... 124,523 115,261 Other revenues...................................... 197,374 149,680 -------- ---------- Total revenues............................ 985,814 1,084,922 Losses and loss adjustment expenses................. 509,327 579,383 Policy acquisition costs............................ 128,483 161,646 Other operating costs and expenses.................. 244,274 230,390 -------- ---------- 882,084 971,419 -------- ---------- Income before taxes 103,730 113,503 Income tax expense.................................. 33,708 40,360 -------- ---------- Net income................................ $ 70,022 $ 73,143 ======== ========== Per share data: Net income................................ $ 2.68 $ 2.83 ======== ==========
53 55 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The assets acquired and liabilities assumed, net of the purchase price, at the date of the acquisition of Casualty, are summarized in the following table:
(THOUSANDS OF DOLLARS) Assets acquired: Fixed maturity investments - at fair value.............. $ 15,646 Short-term investments.................................. 472,166 Premiums receivable and agents' balances................ 67,117 Reinsurance recoverable on paid and unpaid losses....... 185,145 Deferred policy acquisition costs....................... 12,656 Deferred income taxes................................... 59,830 Costs in excess of net assets acquired.................. 45,036 Other assets, including cash, accrued investment income, state deferred taxes and trade name.................. 37,719 -------- Total assets acquired........................... $895,315 ======== Liabilities assumed: Losses and loss adjustment expenses..................... $787,663 Unearned premiums....................................... 83,323 Dividends to policyholders.............................. 17,660 Other liabilities....................................... 6,669 -------- Total liabilities assumed....................... $895,315 ========
54 56 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE C -- INVESTMENTS The amortized cost and fair values of the fixed maturity investments and non-redeemable preferred stock by major category are summarized in the following table:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Available for sale: At December 31, 1996 United States Treasury securities and obligations of other US government agencies and corporations............................ $ 70,039 $ 6,621 $ 346 $ 76,314 Mortgage-backed securities.................... 324,011 2,202 17,985 308,228 Corporate securities Banks....................................... 35,000 193 38 35,155 Financial................................... 115,382 3,416 355 118,443 Transportation.............................. 27,163 396 -- 27,559 Utilities................................... 10,939 234 -- 11,173 Industrial.................................. 421,714 8,958 2,397 428,275 ----------- -------- -------- ----------- Total.................................... 1,004,248 22,020 21,121 1,005,147 Non-redeemable preferred stock................ 351,812 7,477 4,331 354,958 ----------- -------- -------- ----------- Total.................................... $1,356,060 $ 29,497 $ 25,452 $1,360,105 =========== ======== ======== =========== Available for sale: At December 31, 1995 United States Treasury securities and obligations of other US government agencies and corporations............................ $ 136,626 $ 13,914 $ 1,290 $ 149,250 Redeemable preferred stock.................... 15,887 1,940 2,063 15,764 Mortgage-backed securities.................... 340,682 11,223 14,772 337,133 Corporate securities Banks....................................... 123,144 4,944 2,252 125,836 Financial................................... 117,013 3,266 37 120,242 Transportation.............................. 16,888 353 -- 17,241 Utilities................................... 13,427 393 -- 13,820 Industrial.................................. 491,767 25,771 274 517,264 ----------- -------- -------- ----------- Total.................................... 1,255,434 61,804 20,688 1,296,550 Non-redeemable preferred stock................ 285,337 5,392 13,278 277,451 ----------- -------- -------- ----------- Total.................................... $1,540,771 $ 67,196 $ 33,966 $1,574,001 =========== ======== ======== ===========
55 57 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The amortized cost and fair value of debt securities at December 31, 1996 by contractual maturity, are summarized in the following table:
AMORTIZED COST FAIR VALUE ---------- ---------- (THOUSANDS OF DOLLARS) Available for sale: Over 1 year through 5 years......................... $ 77,192 $ 78,018 Over 5 years through 10 years....................... 346,217 354,346 Over 10 years....................................... 256,828 264,555 Mortgage-backed securities.......................... 324,011 308,228 ----------- ----------- Totals...................................... $1,004,248 $1,005,147 =========== ===========
The contractual maturities in the foregoing table may differ from actual maturities because certain borrowers have the right to sell or repay obligations with or without call or prepayment penalties. Proceeds from sales of investments in debt securities and related realized gains and losses are summarized in the following table:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Proceeds from sales.................... $1,679,631 $2,000,772 $1,302,486 Gross realized gains................... 10,012 20,923 13,987 Gross realized losses.................. 11,670 20,922 14,302
Investment income by major category of investments is summarized in the following table:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Fixed maturities....................... $ 85,352 $ 75,581 $ 48,677 Non-redeemable preferred stock......... 25,545 25,661 19,407 Short-term............................. 14,646 19,354 9,520 Other.................................. 147 109 206 --------- --------- -------- 125,690 120,705 77,810 Investment expenses.................... 2,159 1,182 989 --------- --------- -------- Net investment income........ $ 123,531 $ 119,523 $ 76,821 ========= ========= ========
The Company relies on external rating agencies to establish quality ratings for its investments. The Company only purchases securities that are rated investment grade by at least one rating agency, but may hold investments that are subsequently downgraded to non-investment grade. As of December 31, 1996, all investments held by the Company are current as to principal and interest, with no investment in default. Included in investments is $20,196,000 of fixed maturity investments and $37,971,000 of non-redeemable preferred stock of Chase Manhattan Corporation that in total exceeds 10% of stockholders' equity at 56 58 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1996. Using Standard and Poor's, Moody's and Fitch's rating services, the quality mix of the Company's fixed maturity investment portfolio at December 31, 1996 is summarized in the following table: AAA (including US government obligations)...... 29% AA............................................. 5 A.............................................. 31 BBB............................................ 34 BB............................................. 1 --- 100% ===
As of July 1, 1995 the Company's held to maturity portfolio totaling $319.4 million was transferred to available for sale in accordance with the provisions of FASB 115. In addition, at this date there was a net unrealized gain of $9.9 million (net of deferred taxes of $5.3 million) on the held to maturity portfolio which was transferred to stockholders' equity. The transfer became necessary as the Company sold certain investment securities in July which were classified as held to maturity at June 30, 1995. These investment sales were part of an overall review and restructuring of the investment portfolio performed in conjunction with the investing of cash received in the acquisition of Casualty. (See Note B.) This review and restructuring caused the Company to consider the appropriateness of the remaining held to maturity investments, which resulted in the reclassification. The par value of fixed maturity investments and cash totaling $841,093,000 at December 31, 1996 were on deposit with regulatory authorities in compliance with legal requirements related to the insurance operations. The Company currently holds no derivative financial instruments. NOTE D -- LOANS RECEIVABLE Loans receivable consist of commercial and residential real estate loans, commercial finance loans and insurance premium notes receivable. Commercial and residential real estate loans are secured by real property. Commercial finance loans are asset-based loans that are secured by the borrowers' eligible trade accounts receivable, inventories, equipment and real estate. Insurance premium notes receivable are collateralized by security interests in return premiums. The Company's thrift and loan subsidiary generates primarily real estate loans. Commercial and residential real estate loans have terms ranging from one to thirty years. Finance charges are recognized as revenue over the life of the loan using the interest method. Loan origination fees and the related costs are deferred and amortized over the life of the loan using the interest method. The loans are net of allowance for possible loan losses of $24,759,000 and $17,498,000 at December 31, 1996, and 1995, respectively. Included in loans receivable are real estate loans which have been placed on non-accrual status totaling $17,439,000 and $23,544,000 at December 31, 1996 and 1995, respectively. Real estate acquired in foreclosure, which is classified under other assets, totaled $10,016,000 and $4,942,000 at December 31, 1996 and 1995, respectively, and is recorded at the lower of the carrying value of the loan or the estimated fair value less disposal costs. Commercial finance loans are stated at the unpaid balance of cash advanced net of allowance for possible loan losses of $11,933,000 and $12,554,000 at December 31, 1996 and 1995, respectively. The amount of cash advanced under these loans is based on stated percentages of the borrowers' eligible collateral. Interest on the commercial loans is computed on the basis of daily outstanding balances times the contractual interest rate and is reported as earned income on the accrual method. Total loan balances on which income recognition has been suspended were $2,346,000 and $9,344,000 at December 31, 1996 and 1995, respectively. The 1996 balance consists of three loans. The 1995 balance consists of three loans, including one with a balance of $8,881,000. 57 59 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Commercial finance loans are shown net of participation by other financial institutions. There were no participations by other financial institutions at December 31, 1996 and $8,119,000 at December 31, 1995. The participation agreements are generally made for a fixed percentage of the commercial loan balance and are made without recourse to the Company. Insurance premium notes receivable mature within one year and are net of allowances for possible loan losses of $1,055,000 and $1,024,000 at December 31, 1996 and 1995, respectively. Interest income on these notes is recognized using the rule-of-seventy-eight method which results in approximately level interest rate yield over the life of the notes. Activity in the allowance for possible loan losses is summarized in the following table:
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) Balance, beginning of year................. $ 31,781 $ 27,406 $ 25,222 Provision for loan losses.................. 13,885 14,575 11,980 Recoveries................................. 1,394 2,961 853 Charge-offs................................ (11,143) (13,161) (14,254) Reserves established with portfolio acquisitions............................. 1,830 -- 3,605 -------- -------- -------- Balance, end of year....................... $ 37,747 $ 31,781 $ 27,406 ======== ======== ========
At December 31, 1996, the recorded investment in loans that are considered to be impaired under FASB 114 was $22,534,000, of which $19,785,000 were on a non-accrual basis. The Company's policy is to consider a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Evaluation of a loan's collectibility is based on the present value of expected cash flows or the fair value of the collateral, if the loan is collateral dependent. As a result of charge-offs, these impaired loans do not necessarily have a related specific reserve for credit losses allocated to them. However, $19,712,000 of loans considered impaired do have an allowance that totaled $2,195,000. The average net investment in impaired loans was $26,833,000 and $31,325,000 for 1996 and 1995, respectively. Interest income of $463,000 has been recognized on the cash basis of accounting on loans classified as impaired during the year ended December 31, 1996. The carrying amounts at December 31, 1996 and 1995 and estimated fair values at December 31, 1996 of loans receivable are summarized in the following table:
1996 1995 ------------------------- ---------- CARRYING ESTIMATED CARRYING AMOUNT FAIR VALUE AMOUNT ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Real estate loans...................... $1,122,578 $1,139,898 $ 980,283 Commercial finance, premium finance and other loans.......................... 618,503 618,503 578,589 ---------- ---------- ---------- 1,741,081 1,758,401 1,558,872 Purchase discount and deferred fees.... (15,294) (15,294) (28,048) Allowance for possible loan losses..... (37,747) (37,747) (31,781) ---------- ---------- ---------- Loans receivable....................... $1,688,040 $1,705,360 $1,499,043 ========= ========= =========
58 60 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE E -- CLAIM LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES The following table provides a reconciliation of the beginning and ending reserve balances for the Company's claim liabilities for losses and loss adjustment expenses ("LAE") on a net-of-reinsurance basis to the gross amounts reported in the Company's consolidated balance sheets.
YEAR ENDED DECEMBER 31, --------------------------------------- 1996 1995 1994 ---------- ---------- --------- (THOUSANDS OF DOLLARS) Reserves for losses and LAE, net of reinsurance recoverable, at beginning of year.............................. $1,185,706 $ 610,510 $ 644,190 Incurred losses and LAE: Provision for insured events of the current year, net of reinsurance....................... 334,657 459,951 290,833 Increase (decrease) in provision for insured events of prior years, net of reinsurance.................... 750 1,382 (17,234) ---------- ---------- --------- Total incurred losses and LAE........................ 335,407 461,333 273,599 Payments: Losses and LAE, net of reinsurance, attributable to insured events of: Current year.................... (108,247) (132,358) (70,505) Prior years..................... (401,980) (358,423) (236,774) ---------- ---------- --------- Total payments............... (510,227) (490,781) (307,279) ---------- ---------- --------- Subtotal................... 1,010,886 581,062 610,510 Liability for losses and LAE for Casualty Insurance Company acquired during the year...................... -- 604,644 -- ---------- ---------- --------- Reserves for losses and LAE, net of reinsurance recoverable, at end of year................................. 1,010,886 1,185,706 610,510 Reinsurance recoverable for losses and LAE, at end of year.................. 245,459 269,986 136,151 ---------- ---------- --------- Reserves for losses and LAE, gross of reinsurance recoverable, at end of year................................. $1,256,345 $1,455,692 $ 746,661 ========= ========= =========
The foregoing reconciliation shows that a $17 million redundancy in the December 31, 1993 reserve emerged in 1994. This redundancy resulted primarily from lower than previously estimated claim frequency and severity on workers' compensation claims incurred in 1993 and prior years. NOTE F -- REINSURANCE In the normal course of business, the Company seeks to reduce the loss that may arise from catastrophes or other events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its obligations to policyholders. The failure of reinsurers to honor their obligations could result in losses to the Company; consequently, allowances are established for amounts deemed uncollectible. The Company evaluates the financial condition and economic characteristics of its reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. 59 61 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The effect of ceded reinsurance on property and casualty premiums are summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- --------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED -------- -------- -------- -------- -------- -------- (THOUSANDS OF DOLLARS) Direct................... $462,881 $470,111 $564,675 $580,442 $431,500 $438,482 Assumed.................. 18,839 25,075 41,613 55,572 4,264 4,224 Ceded.................... 7,536 8,326 22,498 29,097 9,332 9,122 -------- -------- -------- -------- -------- -------- Net property and casualty premiums............... $474,184 $486,860 $583,790 $606,917 $426,432 $433,584 ======== ======== ======== ======== ======== ========
The effect of ceded reinsurance on losses and loss adjustment expenses was a decrease in expenses of $13,617,000, $19,651,000 and $7,456,000 for the three years ended December 31, 1996, 1995 and 1994, respectively. The Company entered into reinsurance and assumption agreements with a reinsurer whereby substantially all of the Company's universal life insurance and annuity business was ceded to the reinsurer effective December 31, 1995, and all the annuity business was ceded to the reinsurer effective January 1, 1996. As a result of these agreements, substantially all of the Company's life insurance operations have been disposed of with no significant gain or loss recorded. Included in life insurance benefits and liabilities and reinsurance recoverable on unpaid losses in the accompanying balance sheet is approximately $193,000,000 related to one of the reinsurance contracts that continues to be on a coinsurance basis. NOTE G -- INCOME TAXES The major components of income tax expense (benefit) are summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (THOUSANDS OF DOLLARS) Federal income tax Current..................................... $13,233 $ 6,964 $30,132 Deferred.................................... 24,798 22,810 (4,391) ------- ------- ------- 38,031 29,774 25,741 State income tax.............................. 2,990 2,531 18 ------- ------- ------- Total income tax provision.................. $41,021 $32,305 $25,759 ======= ======= =======
60 62 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A reconciliation of the effective federal tax rates in the consolidated statements of income with the prevailing federal income tax rate of 35% is summarized in the following table:
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- (THOUSANDS OF DOLLARS) Federal income tax at 35%..................... $44,908 $35,114 $28,550 Effects of: Dividends received deduction................ (6,238) (5,678) (3,865) Dividends in Employee Stock Ownership Plan shares................................... (357) (432) (455) Amortization of costs in excess of net assets acquired.......................... 1,269 839 366 Other....................................... (1,551) (69) 1,145 ------- ------- ------- Federal income tax provision.................. $38,031 $29,774 $25,741 ======= ======= =======
Net payments made for federal and state income taxes were $778,000, $13,429,000, and $18,471,000 for 1996, 1995 and 1994, respectively. The deferred income tax balance includes the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes. The components of the Company's deferred tax assets as of December 31, 1996 and 1995 are summarized in the following table:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Discount on liabilities for losses and loss adjustment expenses............................................. $ 57,915 $ 68,619 Allowance for possible loan losses and other doubtful accounts............................................. 14,578 12,507 Dividends to policyholders............................. 11,578 14,288 Unearned premiums...................................... 8,009 12,316 Accrued expenses....................................... 4,535 4,660 Life insurance benefits and liabilities................ 117 13,432 -------- -------- Deferred income tax asset amounts............ 96,732 125,822 Earned but unbilled premiums........................... (9,057) (3,698) Deferred policy acquisition costs...................... (8,937) (26,814) Deferred loan origination costs........................ (5,230) (3,832) Accrual of market discount............................. (3,463) (1,427) Net unrealized gain on investments..................... (1,416) (11,630) Other, net............................................. (4,594) 198 -------- -------- Deferred income tax liability amounts........ (32,697) (47,203) -------- -------- Net deferred income tax asset...... $ 64,035 $ 78,619 ======== ========
The Company's principal deferred tax assets arise due to the discounting of liabilities for losses and loss adjustment expenses ("loss reserves") which delays a portion of the loss reserve deduction for income tax purposes, the provision for doubtful loan accounts, the accrual of dividends to policyholders, a portion of the unearned premiums, certain accrued expenses and, in 1995 and prior years, certain life insurance benefits and liabilities. The effect of discounting the loss reserves for tax purposes is to effectively tax the future investment income stream associated with holding the investments necessary to support the reserves. Future investment 61 63 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) income, irrespective of other operating income, should be sufficient to allow the future loss reserve deduction (i.e., the accretion of the discount for income tax purposes) to be utilized. During 1996, substantially all of the deferred tax asset relating to the discounting of life insurance benefits and liabilities was realized as a result of certain reinsurance agreements which became effective January 1, 1996. (See Note F.) The recognition of the future tax benefits relating to the allowance for possible loan losses will be realized through future interest income earned on the related loans receivable. With respect to the accrual of policyholders' dividends and unearned premiums, the future periods will permit the recognition of the tax benefits associated with these accruals as the amounts are linked to future taxable income arising from existing policyholders of the Company. In the Company's opinion, the deferred tax assets will be fully realized and no valuation allowance is necessary because the Company has the ability to generate sufficient future taxable income in both the insurance and financial services segments to realize the tax benefits. NOTE H -- SHORT-TERM DEBT Short-term debt is summarized in the following table:
DECEMBER 31, -------------------- 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Asset backed $150,000,000 commercial paper facility of a subsidiary, maturity dates through January 8, 1997 (weighted average interest rate, 1996 - 5.67%)......... $ 14,929 $ -- Commercial paper issued by a subsidiary (weighted average interest rate, 1995 - 7.13%)........................... -- 7,191 Current portion of long-term debt........................ 1,967 65,000 ------- ------- $ 16,896 $ 72,191 ======= =======
At December 31, 1996, the thrift and loan subsidiary had a borrowing capacity with the Federal Home Loan Bank of San Francisco in excess of $231 million of which there were no outstanding advances. This subsidiary has pledged certain loans to secure any future borrowings which are available at varying rates and terms. The commercial finance subsidiary has lines of credit totaling $15,000,000 that expire September 30, 1997. Interest is based on the prime lending rate. At December 31, 1996, there were no outstanding advances under these lines of credit. 62 64 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE I -- LONG-TERM DEBT Long-term debt is summarized in the following table:
DECEMBER 31, ---------------------- 1996 1995 --------- --------- (THOUSANDS OF DOLLARS) Fremont General Corporation: Liquid Yield Option Notes due 2013, less discount (1996 - $172,517; 1995 - $222,115)................ $ 128,728 $ 151,635 $200 million Revolving Credit Facility............... 10,000 85,000 Note Payable due 2002................................ 11,674 6,620 Subsidiaries: Variable Rate Asset Backed Certificates.............. 265,000 330,000 $400 million Bank Line of Credit..................... 223,000 185,000 Other Notes Payable, interest rate - 7.25%........... 21 21 -------- -------- 638,423 758,276 Less current portion................................. 1,967 65,000 -------- -------- $ 636,456 $ 693,276 ======== ========
In August 1995, the Company amended and restated an agreement on a $200,000,000 Revolving Credit Facility with several banks. Borrowings and repayments are at the option of the Company until the conversion date of August 31, 1997, at which time the facility converts to a term loan with a limit of $100 million that matures in 2001. Interest is based on, at the Company's option, the higher of the Federal Funds rate plus 1/2% or the banks' prime lending rate plus an applicable margin, Eurodollar rates plus an applicable margin or by competitive bids by the banks. All applicable margins are based on the Company's credit rating. The rate at December 31, 1996 on the outstanding balance of $10,000,000 was 5.94%. A facility fee ranging from .25% to .45%, dependent on the Company's credit rating, is charged on the total facility. The facility fee rate during 1996 was .30%. The stock of a subsidiary insurance holding company has been pledged as collateral for this loan. During July 1994, the Fremont General Employee Stock Ownership Plan ("ESOP") borrowed $11,000,000 (see Note L) from a bank due in seven equal annual installments commencing on April 1, 1996. The maximum principal amount of this loan was increased to $15 million in August, 1995 and the term was extended to April 1, 2002. The Note Payable due 2002 is secured by certain shares of the ESOP and the interest and principal payments are guaranteed by the Company. Interest is based on, at the Company's option, the bank's prime lending rate, LIBOR plus 1%, or an applicable certificate of deposit rate. The average rate at December 31, 1996 was 6.51%. In 1993 the Company sold in a public offering an aggregate $373,750,000 principal amount at maturity of Liquid Yield Option Notes due October 12, 2013 (Zero Coupon-Subordinated) (the "LYONs") at an issue price of $372.42 for a total net proceeds to the Company of approximately $135,000,000. The yield to maturity is 5% with no periodic payments of interest. Each LYON is convertible into 19.287 shares of the Company's Common Stock and is non-callable for five years. During 1996, holders converted an aggregate principal amount of $72,505,000 of LYONs into 1,398,000 shares of the Company's Common Stock. The Variable Rate Asset Backed Certificates reflect the sale of certificates pursuant to the asset securitization program established by the commercial finance subsidiary of the Company in 1993. As of December 31, 1996, an aggregate $235 million of senior series and a $30 million subordinated series of asset-backed certificates were outstanding. The interest rate on the certificates, set monthly, ranged from LIBOR plus 0.34% to LIBOR plus 0.95% at December 31, 1996. The securities issued in this program have a 63 65 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) scheduled maturity of three to five years but could mature earlier depending on fluctuations in the outstanding balances of loans in the portfolio and other factors. This subsidiary also has an agreement for a committed bank line of credit totaling $400 million. The total commitment includes a revolving credit facility of $300 million expiring August 1998 and a term loan of $100 million maturing June 2001. The balance outstanding at December 31, 1996 of the revolving credit facility and the term loan was $123 million and $100 million, respectively, with a weighted average interest rate of 6.11%. The carrying amounts and the estimated fair values of long-term borrowings at December 31, 1996 are summarized in the following table:
CARRYING ESTIMATED AMOUNT FAIR VALUE -------- ---------- (THOUSANDS OF DOLLARS) LYONs.................................................. $128,728 $ 173,216 Variable Rate Asset Backed Certificates................ 265,000 265,000 $200 million Revolving Credit Facility................. 10,000 10,000 $400 million Bank Line of Credit....................... 223,000 223,000 Note Payable due 2002.................................. 11,674 11,674 Other Notes Payable.................................... 21 21 -------- -------- Total long-term borrowings................... $638,423 $ 682,911 ======== ========
The aggregate amount of maturities on long-term debt and sinking fund requirements are summarized in the following table (thousands of dollars): 1997.................................... $ 1,967 1998.................................... 138,696 1999.................................... 28,696 2000.................................... 207,746 2001.................................... 30,645 Thereafter................................ 230,673 -------- $ 638,423 ========
Total interest payments on all debt were $101,515,000, $91,278,000, and $49,294,000 in 1996, 1995 and 1994, respectively. NOTE J -- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY JUNIOR SUBORDINATED DEBENTURES On March 1, 1996, Fremont General Financing I, a statutory business trust (the "Trust") and consolidated wholly-owned subsidiary of the Company, sold $100 million of 9% Trust Originated Preferred Securities(SM) ("the Preferred Securities") in a public offering. The Preferred Securities represent preferred undivided beneficial interests in the assets of the Trust. The proceeds from the sale of the Preferred Securities were invested in 9% Junior Subordinated Debentures of the Company ("the Junior Subordinated Debentures"). The $100 million Junior Subordinated Debentures are the sole asset of the Trust. The Preferred Securities will be redeemed upon maturity of the Junior Subordinated Debentures in 2026, subject to the election available to the Company to extend the maturity up to 2045, and they may be redeemed, in whole or in part, at any time on or after March 31, 2001 and under certain specified circumstances. The Junior Subordinated Debentures rank pari passu with the Company's $301,245,000 aggregate principal amount at maturity of Liquid Yield Option Notes due 2013, and subordinate and junior to all senior 64 66 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) indebtedness of the Company. Payment of distributions out of cash held by the Trust, and payments on liquidation of the Trust or the redemption of the Preferred Securities are guaranteed by the Company to the extent that the Trust has funds available to make such payments. Trust distributions of $7,375,000 in 1996 were included in interest expense. The Company has provided for back-up undertakings that, considered together, constitute a full and unconditional guarantee by the Company of the Trust's obligations under the Preferred Securities. NOTE K -- STOCKHOLDERS' EQUITY AND RESTRICTIONS During 1996, the Company issued 1,301,000 common shares with a fair value of approximately $33 million to fund stock-based compensation programs. (See Note L.) On December 4, 1995, the Board of Directors declared a three-for-two Common Stock split for stockholders of record on January 8, 1996 that was distributed on February 7, 1996. Also during 1995, a ten percent stock dividend was distributed June 15, 1995 to stockholders of record May 30, 1995. The Company is authorized to issue up to 2,000,000 shares of $.01 par value Preferred Stock; however none has been issued to date. Consolidated stockholders' equity is restricted by the provisions of certain long-term debt agreements. At December 31, 1996, the most restrictive loan covenants require the Company to maintain total stockholders' equity before FASB 115 adjustments of at least $375,000,000. The Company has a stock option plan for the benefit of certain key members of management. Under the plan, up to 2,681,000 shares are allocable to participants. Options are granted at exercise prices not less than the fair value of the stock on the date of grant. Grantees vest at the rate of 25% per year beginning on the first anniversary of the grant and expire after ten years. The stock option activity is summarized in the following table:
NUMBER OF SHARES OPTION PRICES ---------------- ------------------- Outstanding at January 1, 1994.............. 1,433,612 $ 5.05 - $15.00 Granted................................... 367,541 14.32 - 14.62 Exercised................................. (1,545) 8.89 --------- Outstanding at December 31, 1994............ 1,799,608 5.05 - 15.00 Granted................................... 30,940 15.68 Exercised................................. (19,489) 8.89 - 13.43 Forfeited................................. (11,015) 10.81 - 15.00 --------- Outstanding at December 31, 1995............ 1,800,044 5.05 - 15.68 Exercised................................. (170,218) 5.05 - 14.62 Forfeited................................. (39,353) 8.89 - 15.68 --------- Outstanding at December 31, 1996............ 1,590,473 5.05 - 15.68 =========
The portion of the consolidated stockholders' equity represented by the Company's investment in its insurance subsidiaries and its thrift and loan subsidiary is subject to various laws and regulations, whereby amounts available for payment of dividends are restricted. Retained earnings and additional paid-in capital of the property and casualty companies currently available for dividend distribution is $62,601,000. No dividends are currently available from the thrift and loan subsidiary. 65 67 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Net income and stockholders' equity of domestic insurance subsidiaries, as filed with regulatory authorities on the basis of statutory accounting practices, are summarized in the following table:
1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) Statutory net income for the year.......... $122,988 $104,032 $ 48,220 Statutory stockholder's equity at year end...................................... 438,203 321,148 250,633
NOTE L -- EMPLOYEE BENEFIT PLANS The Company sponsors a 401(k) Plan and a leveraged Employee Stock Ownership Plan ("ESOP"), both of which cover substantially all employees with at least one year of service. Contribution expense for these plans amounted to $6,005,000, $11,015,000, and $8,464,000 for 1996, 1995 and 1994, respectively, of which $3,115,000, $8,656,000 and $5,961,000 related to the ESOP. Cash contributions to the ESOP, which relate to 1996, 1995 and 1994, were $3,090,000, $3,000,000 and $4,375,000, respectively. The contributions, which are generally discretionary, are based on total compensation of the participants. Shares pledged as collateral under a loan made to the ESOP by a bank (see Note I) are reported as deferred compensation in the consolidated balance sheet. The annual contributions made by the Company to the ESOP are used to repay the loan. As the debt is repaid, shares are released from collateral and are allocated to participants based on total compensation. Dividends received by the ESOP on its pledged shares, amounting to $391,000, $374,000 and $545,000 in 1996, 1995 and 1994, respectively, were additionally used to service these loans. Interest expense was $392,000, $196,000 and $34,000 for 1996, 1995 and 1994, respectively. In May of 1996, an additional 341,000 shares of the Company's Common Stock were acquired by the ESOP. Of the 2,880,000 total shares of Company stock owned by the ESOP at December 31, 1996, 2,142,000 shares are allocated to participants and 738,000 shares are not allocated to participants and are considered unearned. Unearned shares acquired prior to January 1, 1993 (397,000 shares as of December 31, 1996) continue to be accounted for in accordance with the historical cost approach (AICPA Statement of Opinion 76-3). Unearned shares acquired subsequent to December 31, 1992 (341,000 shares as of December 31, 1996) are accounted for in accordance with the current fair value approach (AICPA Statement of Position 93-6) and are not considered outstanding for earnings per share purposes. At December 31, 1996, the fair value of the unearned shares accounted for under the current fair value approach was $10,574,000. During 1996, the Company adopted a Restricted Stock Award Plan ("RSAP") for certain management level employees. During 1996, the Company purchased an aggregate of 824,000 shares at an aggregate cost of approximately $20 million and issued 1,244,000 shares with a fair value at the date of award of approximately $33 million to fund this plan. Amounts awarded under the RSAP are amortized over 10 years. Amortization expense for the RSAP amounted to $5,277,000 for 1996. Unamortized amounts are reported as deferred compensation in the consolidated balance sheet. NOTE M -- COMMITMENTS AND CONTINGENCIES The Company is a defendant in a number of legal actions arising primarily from claims made under insurance policies or in connection with previous reinsurance agreements. Those actions have been considered in establishing the Company's liabilities. Management and its legal counsel are of the opinion that the settlement of those actions will not have a material effect on the Company's financial position or results of operations. An insurance subsidiary of the Company outsourced its data processing operation to Electronic Data Systems in 1992. Under terms of the contract, this subsidiary will pay a minimum $7,500,000 per year for a period of ten years, until 2002. 66 68 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Total rental expense for 1996, 1995 and 1994, was $11,120,000, $14,909,000, and $9,115,000, respectively. The Company leases office facilities and certain equipment under non-cancelable operating leases, the terms of which range from one to ten years. Certain leases provide for an increase in the basic rental to compensate the lessor for increases in operating and maintenance costs. The leases also provide renewal options. Under present leases, rental commitments are summarized in the following table (thousands of dollars): 1997....................................... $15,480 1998....................................... 13,761 1999....................................... 12,155 2000....................................... 9,600 2001....................................... 3,796 Thereafter................................. 4,452 ------- $59,244 =======
NOTE N -- DISCONTINUED OPERATIONS The Company discontinued all of its assumed reinsurance operations, as well as certain other insurance operations, during the period 1986 to 1991. These operations consisted primarily of facultative and treaty reinsurance covering primary and excess property and casualty insurance coverages. All discontinued insurance operations are accounted for using the liquidation basis of accounting whereby all future cash inflows and outflows are considered in determining whether dedicated assets are sufficient to meet all future obligations. The Company determines the adequacy of the assets dedicated to fund the liabilities of discontinued operations by: (i) estimating the ultimate remaining liabilities; (ii) discounting these liabilities using estimates of payment patterns and investment yields derived from the dedicated investment portfolio; and (iii) comparing this discounted estimate of liabilities to the dedicated assets. The Company estimates that the dedicated assets (primarily cash, investment securities and reinsurance recoverables) supporting these operations and all future cash inflows will be adequate to fund future obligations. However, should those assets ultimately prove to be insufficient, the Company believes that its property and casualty subsidiaries would be able to provide whatever additional funds might be needed to complete the liquidation without having a material adverse effect on the Company's consolidated financial position or results of operations. 67 69 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A statement of financial condition of the discontinued operations is summarized in the following table:
DECEMBER 31, --------------------- 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Assets Cash and invested assets, at amortized cost.......... $200,070 $190,777 Reinsurance recoverables............................. 57,908 54,448 Federal income taxes recoverable..................... 2,964 6,125 Other assets......................................... 4,258 11,152 -------- -------- Total........................................ $265,200 $262,502 ======== ======== Liabilities Reserves for loss and loss adjustment expenses....... $170,534 $162,219 Deferred income taxes................................ 48,655 41,810 Reinsurance payable and funds withheld............... 5,872 21,713 Other liabilities.................................... 6,625 3,246 -------- -------- Total........................................ $231,686 $228,988 ======== ========
The amortized cost and fair value of cash and invested assets of the discontinued operations as of December 31, 1996 are summarized in the following table:
AMORTIZED COST FAIR VALUE -------------- ---------- (THOUSANDS OF DOLLARS) Fixed maturities................................... $ 57,445 $ 56,111 Non-redeemable preferred stock..................... 119,213 119,489 Cash and other invested assets..................... 23,412 23,412 -------------- ---------- Cash and invested assets................. $200,070 $ 199,012 =========== ========
The average maturity of the fixed income portfolio was 4.27 years at December 31, 1996. The quality mix of the fixed maturity portfolio as of December 31, 1996 is summarized in the following table: AAA (including US government obligations)...... 7% AA............................................. 5 A.............................................. 9 BBB............................................ 36 BB............................................. 43 --- 100% ===
At December 31, 1996, all investments included in discontinued operations were current with respect to principal and interest. It is the Company's belief that the carrying value of the investments will be fully realized. 68 70 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE O -- OPERATIONS BY INDUSTRY SEGMENT The following data for the years ended December 31, 1996, 1995 and 1994 provide certain information necessary for industry segment disclosure.
YEAR ENDED DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) REVENUES Property and casualty.................. $ 596,841 $ 708,187 $ 495,712 Financial services..................... 197,601 214,975 154,398 Corporate.............................. 1,362 652 3,038 ---------- ---------- ---------- 795,804 923,814 653,148 ========= ========= ========= INCOME (LOSS) BEFORE INCOME TAXES Property and casualty.................. $ 117,593 $ 83,092 $ 61,265 Financial services..................... 36,589 35,737 28,014 Corporate.............................. (25,873) (18,502) (7,708) ---------- ---------- ---------- $ 128,309 $ 100,327 $ 81,571 ========= ========= ========= AMORTIZATION AND DEPRECIATION EXPENSE Property and casualty.................. $ 9,680 $ 8,677 $ 5,185 Financial services..................... 4,772 3,032 2,442 Corporate.............................. 12,140 8,625 8,082 ---------- ---------- ---------- $ 26,592 $ 20,334 $ 15,709 ========= ========= ========= CAPITAL EXPENDITURES Property and casualty.................. $ 7,232 $ 7,404 $ 5,642 Financial services..................... 2,813 1,931 4,107 Corporate.............................. 1,990 192 653 ---------- ---------- ---------- $ 12,035 $ 9,527 $ 10,402 ========= ========= =========
DECEMBER 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) IDENTIFIABLE ASSETS Property and casualty*................. $1,890,695 $2,055,511 $1,096,781 Financial services..................... 2,122,077 2,131,412 1,678,039 Corporate.............................. 29,540 27,974 22,757 ---------- ---------- ---------- $4,042,312 $4,214,897 $2,797,577 ========= ========= =========
- --------------- * Assets held for discontinued operations are excluded from the above table. 69 71 FREMONT GENERAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE P -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIODS ENDED --------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, --------- -------- ------------- ------------ (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1996 Revenues.......................................... $ 203,633 $199,708 $ 197,386 $195,077 Net income........................................ 18,517 22,426 22,939 23,406 Net income per share.............................. 0.72 0.85 0.85 0.83 1995 Revenues.......................................... $ 199,157 $252,995 $ 238,499 $233,163 Net income........................................ 14,206 16,867 18,265 18,684 Net income per share.............................. 0.55 0.65 0.70 0.71
Net income and net income per share increased after the quarter ended March 31, 1996 due primarily to lower incurred losses in the workers' compensation segment resulting from lower claim frequency. Net income and net income per share increased after the quarter ended March 31, 1995 due primarily to the acquisition of Casualty Insurance Company which was completed on February 22, 1995. (See Note B.) 70 72 FREMONT GENERAL CORPORATION (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS ASSETS
DECEMBER 31, --------------------- 1996 1995 -------- -------- (THOUSANDS OF DOLLARS) Cash................................................................... $ 1,678 $ 304 Notes receivable from subsidiaries*.................................... 80,218 85,310 Investment in subsidiaries*............................................ 724,524 660,663 Short-term investments................................................. 6,084 8,554 Excess of cost of acquisition of subsidiaries over net assets acquired............................................................. 7,549 7,876 Other receivables from subsidiaries*................................... 5,459 4,033 Deferred income taxes.................................................. 64,035 78,619 Other assets........................................................... 18,491 27,222 --------- --------- TOTAL ASSETS................................................. $908,038 $872,581 ========= ========= LIABILITIES Accrued expenses and other liabilities................................. $ 13,026 $ 14,318 Amounts due to subsidiaries*........................................... 79,435 110,793 Amounts due to run-off subsidiaries*................................... 2,965 6,125 Notes payable to subsidiary*........................................... 103,093 -- Current portion of long-term debt...................................... 1,946 -- Long-term debt......................................................... 148,456 243,255 --------- --------- TOTAL LIABILITIES............................................ 348,921 374,491 Commitments and contingencies STOCKHOLDERS' EQUITY Preferred Stock, par value $.01 -- authorized 2,000,000 shares; none issued Common Stock, par value $1 per share Authorized: 49,500,000 Issued and outstanding: (1996 -- 28,093,000 and 1995 -- 25,393,000)............. 28,093 25,393 Additional paid-in capital............................................. 168,452 110,103 Retained earnings...................................................... 419,136 347,607 Deferred compensation.................................................. (59,193) (6,612) Net unrealized gain on investments, net of deferred taxes.............. 2,629 21,599 --------- --------- TOTAL STOCKHOLDERS' EQUITY................................... 559,117 498,090 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................... $908,038 $872,581 ========= =========
- --------------- * Eliminated in consolidation See notes to condensed financial statements. 71 73 FREMONT GENERAL CORPORATION (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 -------- -------- -------- (THOUSANDS OF DOLLARS) INCOME Interest income from subsidiaries*......................... $ 5,841 $ 4,170 $ 3,623 Dividends from consolidated subsidiaries*.................. 4,228 6,051 3,407 Net investment income...................................... 1,357 648 3,014 Realized investment losses................................. (2) -- -- Other income*.............................................. 8,997 8,518 5,508 -------- -------- -------- TOTAL INCOME..................................... 20,421 19,387 15,552 EXPENSES Interest expense........................................... 12,151 13,282 8,163 Interest expense on notes payable to subsidiary*........... 7,603 -- -- General and administrative................................. 22,868 18,883 12,018 -------- -------- -------- TOTAL EXPENSES................................... 42,622 32,165 20,181 -------- -------- -------- (22,201) (12,778) (4,629) Income tax benefit......................................... (12,213) (1,632) (3,351) -------- -------- -------- Loss before equity in undistributed income of subsidiary companies................................................ (9,988) (11,146) (1,278) Equity in undistributed income of subsidiary companies..... 97,276 79,168 57,090 -------- -------- -------- NET INCOME....................................... $ 87,288 $ 68,022 $ 55,812 ======== ======== ========
- --------------- * Eliminated in consolidation See notes to condensed financial statements. 72 74 FREMONT GENERAL CORPORATION (PARENT COMPANY) SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 --------- -------- -------- (THOUSANDS OF DOLLARS) OPERATING ACTIVITIES Net income................................................ $ 87,288 $ 68,022 $ 55,812 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income from continuing operations of subsidiaries......................... (97,276) (79,168) (57,090) Change in accrued investment income.................. 2 (1) 216 Change in amounts due to or from subsidiaries........ (42,999) 6,676 102 Provision for (reduction in) deferred income taxes... 24,798 22,810 (4,391) Depreciation and amortization........................ 12,145 8,612 8,082 Realized investment gains............................ 2 -- -- Change in other assets and liabilities............... 6,999 (9,002) 6,022 --------- -------- -------- NET CASH PROVIDED BY (USED IN) CONTINUING OPERATIONS.................................... (9,041) 17,949 8,753 Effect of discontinued operations....................... (3,161) 363 (9,573) --------- -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................................... (12,202) 18,312 (820) INVESTING ACTIVITIES Purchases of fixed maturity investments................. (6,315) (4,988) (46,712) Sales of fixed maturity investments..................... 6,310 -- 92,003 Fixed maturity investments matured or called............ -- 5,000 11,600 Decrease (increase) in short-term and other investments.......................................... 2,469 (1,149) 7,928 Net decrease (increase) in credit lines with subsidiaries......................................... 5,092 6,094 (57,652) Purchase of and additional investments in subsidiaries......................................... (5,093) (81,000) (23,000) Purchases of property and equipment..................... (1,991) (192) (653) --------- -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.................................... 472 (76,235) (16,486) FINANCING ACTIVITIES Repayment of short-term debt............................ -- (1,571) -- Proceeds from long-term debt............................ 41,058 110,000 26,000 Repayment of long-term debt............................. (111,004) (42,808) -- Proceeds from notes due to subsidiary................... 103,093 -- -- Dividends paid.......................................... (15,016) (12,618) (11,344) Stock options exercised................................. 1,428 80 22 Purchase of fractional shares........................... -- (25) -- Decrease (increase) in deferred compensation plans...... (6,455) 4,375 2,647 --------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES....... 13,104 57,433 17,325 --------- -------- -------- INCREASE (DECREASE) IN CASH..................... 1,374 (490) 19 Cash at beginning of year............................... 304 794 775 --------- -------- -------- CASH AT END OF YEAR............................. $ 1,678 $ 304 $ 794 ========= ======== ========
See notes to condensed financial statements. 73 75 FREMONT GENERAL CORPORATION (PARENT COMPANY) SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO CONDENSED FINANCIAL STATEMENTS NOTE 1 -- BASIS OF PRESENTATION In the parent company financial statements, the parent's investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since date of acquisition. Parent company financial statements should be read in conjunction with the Company's consolidated financial statements. 74 76 FREMONT GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, --------------------------------------------------------- COLUMN C ---------- RESERVES COLUMN B FOR ----------- CLAIMS, DEFERRED BENEFITS COLUMN D COLUMN E COLUMN A POLICY AND -------- ------------- - ------------------------ ACQUISITION SETTLEMENT UNEARNED DIVIDENDS TO SEGMENT COSTS EXPENSES PREMIUMS POLICYHOLDERS - ------------------------ ----------- ---------- -------- ------------- (THOUSANDS OF DOLLARS) 1996 Life insurance........ $ 550 $ 202,465 $ -- $ -- Property and casualty............ 25,001 1,256,345 87,422 33,093 -------- -------- -------- -------- $25,551 $1,458,810 $87,422 $33,093 ======== ======== ======== ======== 1995 Life insurance........ $48,938 $ 374,724 $ -- $ -- Property and casualty............ 27,700 1,455,692 100,481 40,822 -------- -------- -------- -------- $76,638 $1,830,416 $100,481 $40,822 ======== ======== ======== ======== 1994 Life insurance........ $42,156 $ 172,425 $ -- $ -- Property and casualty............ 17,130 746,661 47,551 46,067 -------- -------- -------- -------- $59,286 $ 919,086 $47,551 $46,067 ======== ======== ======== ======== YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- COLUMN H COLUMN I --------- ------------ COLUMN G CLAIMS, AMORTIZATION COLUMN J COLUMN K COLUMN F ---------- BENEFITS OF DEFERRED -------- -------- COLUMN A -------- NET AND POLICY OTHER NET - ------------------------ PREMIUM INVESTMENT SETTLEMEN ACQUISITION OPERATING PREMIUMS SEGMENT REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN - ------------------------ -------- ---------- --------- ------------ -------- -------- 1996 Life insurance........ $ 55 $ 2,989 $ -- $ -- $ 1,971 $ N/A Property and casualty............ 486,860 111,637 335,407 96,177 26,555 474,184 -------- -------- -------- -------- -------- -------- $486,915 $114,626 $335,407 $ 96,177 $28,526 $474,184 ======== ======== ======== ======== ======== ======== 1995 Life insurance........ $14,469 $ 19,457 $ 19,928 $ 7,716 $ 4,412 $ N/A Property and casualty............ 606,917 101,270 461,333 118,383 26,895 583,790 -------- -------- -------- -------- -------- -------- $621,386 $120,727 $481,261 $126,099 $31,307 $583,790 ======== ======== ======== ======== ======== ======== 1994 Life insurance........ $14,689 $ 10,595 $ 13,002 $ 6,669 $ 3,453 $ N/A Property and casualty............ 433,584 62,169 273,599 80,321 19,766 426,432 -------- -------- -------- -------- -------- -------- $448,273 $ 72,764 $286,601 $ 86,990 $23,219 $426,432 ======== ======== ======== ======== ======== ========
75 77 FREMONT GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE IV -- REINSURANCE
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - ----------------------------------------- ----------- --------- --------- ----------- ---------- ASSUMED PERCENTAGE CEDED TO FROM OF AMOUNT GROSS OTHER OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ----------- --------- --------- ----------- ---------- (THOUSANDS OF DOLLARS, EXCEPT PERCENTS) YEAR ENDED DECEMBER 31, 1996 Life insurance in force*................. $ 324,368 $257,552 $ -- $ 66,816 0% =========== ======== ======== =========== Premium Revenue Life insurance......................... $ 263 $ 208 $ -- $ 55 0% Property and casualty.................. 469,912 8,326 25,274 486,860 5% ----------- -------- -------- ----------- $ 470,175 $ 8,534 $ 25,274 $ 486,915 =========== ======== ======== =========== YEAR ENDED DECEMBER 31, 1995 Life insurance in force*................. $ 1,513,199 $822,309 $ 8,742 $ 699,632 1% =========== ======== ======== =========== Premium Revenue Life insurance......................... $ 15,166 $ 2,333 $ 1,636 $ 14,469 11% Property and casualty.................. 579,845 29,097 56,169 606,917 9% ----------- -------- -------- ----------- $ 595,011 $ 31,430 $ 57,805 $ 621,386 =========== ======== ======== =========== YEAR ENDED DECEMBER 31, 1994 Life insurance in force*................. $ 1,559,869 $380,609 $334,124 $ 1,513,384 22% =========== ======== ======== =========== Premium Revenue Life insurance......................... $ 11,990 $ (1,114) $ 1,585 $ 14,689 11% Property and casualty.................. 442,706 9,122 -- 433,584 0% ----------- -------- -------- ----------- $ 454,696 $ 8,008 $ 1,585 $ 448,273 =========== ======== ======== ===========
- --------------- * Balance at end of year. Intercompany transactions have been eliminated. 76 78 FREMONT GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
COLUMN C ----------------------------- COLUMN A COLUMN B COLUMN D COLUMN E - --------------------------------- ---------- ADDITIONS ---------- ---------- ----------------------------- BALANCE AT CHARGED TO CHARGED TO BALANCE AT BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD - --------------------------------- ---------- ---------- -------------- ---------- ---------- (THOUSANDS OF DOLLARS) YEAR ENDED DECEMBER 31, 1996 Deducted from asset accounts: Allowance for possible loan losses...................... $ 31,781 $ 13,885 $1,830(1) $ 9,749(2) $ 37,747 Premiums receivable and agents' balances and reinsurance recoverable................. 11,147 -- -- 3,746(2) 7,401 ------- ------- ------ ------- ------- Totals................. $ 42,928 $ 13,885 $1,830 $ 13,495 $ 45,148 ======= ======= ====== ======= ======= YEAR ENDED DECEMBER 31, 1995 Deducted from asset accounts: Allowance for possible loan losses...................... $ 27,406 $ 14,575 $ -- $ 10,200(2) $ 31,781 Premiums receivable and agents' balances and reinsurance recoverable................. 6,959 2,465 1,723(1) -- 11,147 ------- ------- ------ ------- ------- Totals................. $ 34,365 $ 17,040 $1,723 $ 10,200 $ 42,928 ======= ======= ====== ======= ======= YEAR ENDED DECEMBER 31, 1994 Deducted from asset accounts: Allowance for possible loan losses...................... $ 25,222 $ 11,980 $3,605(1) $ 13,401(2) $ 27,406 Premiums receivable and agents' balances and reinsurance recoverable................. 6,991 320 -- 352(2) 6,959 ------- ------- ------ ------- ------- Totals................. $ 32,213 $ 12,300 $3,605 $ 13,753 $ 34,365 ======= ======= ====== ======= =======
- --------------- (1) Reserves established with company and portfolio acquisitions. (2) Uncollectible accounts written off, net of recoveries and reclassifications. 77 79 FREMONT GENERAL CORPORATION AND SUBSIDIARIES SCHEDULE VI -- SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
DECEMBER 31, ---------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------- ----------- ---------- -------- -------- RESERVES FOR UNPAID DISCOUNT DEFERRED CLAIMS IF ANY AFFILIATION POLICY AND CLAIM DEDUCTED WITH ACQUISITION ADJUSTMENT IN UNEARNED REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS - ----------- ----------- ---------- -------- -------- (THOUSANDS OF DOLLARS) Fremont Compensation Insurance Group and Consolidated Subsidiaries 1996..... $25,001 $1,256,345 $22,658 $87,422 1995..... $27,700 $1,455,692 $23,126 $100,481 1994..... $17,130 $ 746,661 $ -- $47,551
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------- COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K - ----------- -------- ---------- ------------------- ------------ ---------- -------- CLAIMS AND CLAIM ADJUSTMENT EXPENSES INCURRED AMORTIZATION RELATED TO OF PAID ------------------- DEFERRED CLAIMS AFFILIATION NET (1) (2) POLICY AND CLAIM NET WITH EARNED INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS REGISTRANT PREMIUMS INCOME YEAR YEARS COSTS EXPENSES WRITTEN - ----------- -------- ---------- -------- -------- ------------ ---------- -------- (THOUSANDS OF DOLLARS) Fremont Compensation Insurance Group and Consolidated Subsidiaries 1996..... $486,860 $111,637 $334,657 $ 750 $ 96,177 $510,227 $474,184 1995..... $606,917 $101,270 $459,951 $ 1,382 $118,383 $490,781 $583,790 1994..... $433,584 $ 62,169 $290,833 $(17,234) $ 80,321 $307,279 $426,432
78 80 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the day 28th of March 1997. FREMONT GENERAL CORPORATION By: /s/ JOHN A. DONALDSON ------------------------------------- Title: Senior Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------- --------------- /s/ JAMES A. MCINTYRE Chairman of the Board and Chief March 28, 1997 - --------------------------------------------- Executive Officer (Principal James A. McIntyre Executive Officer) /s/ LOUIS J. RAMPINO President, Chief Operating March 28, 1997 - --------------------------------------------- Officer and Director Louis J. Rampino /s/ WAYNE R. BAILEY Executive Vice President, March 28, 1997 - --------------------------------------------- Treasurer, Chief Financial Wayne R. Bailey Officer and Director (Principal Financial Officer) /s/ JOHN A. DONALDSON Senior Vice President, March 28, 1997 - --------------------------------------------- Controller and Chief Accounting John A. Donaldson Officer (Principal Accounting Officer) /s/ HOUSTON I. FLOURNOY Director March 28, 1997 - --------------------------------------------- Houston I. Flournoy /s/ C. DOUGLAS KRANWINKLE Director March 28, 1997 - --------------------------------------------- C. Douglas Kranwinkle /s/ DAVID W. MORRISROE Director March 28, 1997 - --------------------------------------------- David W. Morrisroe /s/ DICKINSON C. ROSS Director March 28, 1997 - --------------------------------------------- Dickinson C. Ross
79 81 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ----------------------------------------------------------------------- ------------- 2.1 Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, dated as of December 16, 1994. (Filed as Exhibit No. 2.1 to Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 2.2 Amendment No. 1 to Stock Purchase Agreement among Fremont Compensation Insurance Company, Fremont General Corporation, the Buckeye Union Insurance Company, The Continental Corporation and Casualty Insurance Company, Dated as of December 16, 1994. (Filed as Exhibit No. 2.2 to Current Report on Form 8-K, as of February 22, 1995, Commission File Number 1-8007, and incorporated herein by reference.).................. 3.1 Restated Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit No. 3.1 to Registration Statement on Form S-3 File No. 33-64771 which was declared effective on March 1, 1996, and incorporated herein by reference.)..................................... 3.2 Certificate of Amendment of Articles of Incorporation of Fremont General Corporation. (Filed as Exhibit 3.2 to Registration Statement on Form S-3 File No. 33-64771 which was declared effective on March 1, 1996 and herein incorporated by reference.)............................ 3.3 Amended and Restated By-Laws of Fremont General Corporation. (Filed as Exhibit No. 3.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 4.1 Form of Stock Certificate for Common Stock of the Registrant. (Filed as Exhibit No. (1) Form 8-A filed on March 17, 1993, Commission File Number 1-8007, and incorporated herein by reference.).................. 4.2 Indenture with respect to Liquid Yield Option Notes Due 2013 between the Registrant and Bankers Trust Company. (Filed as Exhibit No. 4.4 to Registration Statement on Form S-3 filed on October 1, 1993, and incorporated herein by reference.)..................................... 4.3 Indenture among the Registrant, the Trust and First Interstate Bank of California, a California banking corporation, as trustee. (Filed as Exhibit No. 4.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 4.4 Declaration of Trust among the Registrant, the Regular Trustees and The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee. (Filed as Exhibit No. 4.4 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)................................. 4.5 Amended and Restated Declaration of Trust among the Registrant, the Regular Trustees, The Chase Manhattan Bank (USA), a Delaware banking corporation, as Delaware trustee, and The Chase Manhattan Bank, N.A., a national banking association, as Institutional Trustee. (Filed as Exhibit No. 4.5 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.).....................................
82
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ----------------------------------------------------------------------- ------------- 4.6 Preferred Securities Guarantee Agreement between the Registrant and The Chase Manhattan Bank, N.A., a national banking association, as Preferred Guarantee Trustee. (Filed as Exhibit No. 4.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............. 4.7 Common Securities Guarantee Agreement by the Registrant. (Filed as Exhibit No. 4.7 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 4.8 Form of Preferred Securities. (Included in Exhibit 4.5). (Filed as Exhibit No. 4.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 4.9 Form of 9% Junior Subordinated Debenture. (Included in Exhibit 4.3). (Filed as Exhibit No. 4.9 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 10.1 Fremont General Corporation Employee Stock Ownership Plan as amended. (Filed as Exhibit No. 10.1 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 10.2 Amended and Restated Trust Agreement for Fremont General Corporation Employee Stock Ownership Plan. (Filed as Exhibit No. 10.2 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.3 Fremont General Corporation and Affiliated Companies Investment Incentive Program as amended. (Filed as Exhibit No. 10.3 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.4(a) Trust Agreement for Investment Incentive Program. (Filed as Exhibit No. (10)(xi) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.).................................................. 10.4(b) Amendment to Trust Agreement for Investment Incentive Program. (Filed as Exhibit No. 10.4 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 10.5(a) Supplemental Retirement Plan of the Company. (Filed as Exhibit No. (10)(v) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1990, Commission File Number 1-8007, and incorporated herein by reference.).................................................. 10.5(b) Amendment to Supplemental Retirement Plan. (Filed as Exhibit No. 10.5 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.6 Trust Agreement for Supplemental Retirement Plan of the Company and the Senior Supplemental Retirement Plan of the Company, as amended. (Filed as Exhibit No. 10.6 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.).....................................
83
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ----------------------------------------------------------------------- ------------- 10.7 Senior Supplemental Retirement Plan, as amended. (Filed as Exhibit No. 10.7 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.8 (a) Excess Benefit Plan of the Company. (Filed as Exhibit No. (10)(vi) to Annual Report on Form 10-K, for the Fiscal Year Ended December 31, 1993, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.8 (b) Amendment to Excess Benefit Plan of the Company. (Filed as Exhibit No. 10.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.8 (c) Trust Agreement for Excess Benefit Plan. (Filed as Exhibit No. 10.8 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.9 Amended Non-Qualified Stock Option Plan of 1989 of the Company and related agreements..................................................... 10.10(a) Long-Term Incentive Compensation Plan of the Company -- Senior Executive Plan. (Filed as Exhibit No. 10.10(a) on Form 10-Q for the period ended September 30, 1996, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 10.10(b) Long-Term Incentive Compensation Plan of the Company (Filed as Exhibit No. 10.10(b) on Form 10-Q for the period ended September 30, 1996, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.11 1995 Restricted Stock Award Plan as amended and forms of agreement thereunder. (Filed as Exhibit No. 4.1 to Registration Statement on Form S-8/S-3 File No. 333-17525 which was filed on December 10, 1996, and incorporated herein by reference.)..................................... 10.12 Fremont General Corporation Employee Benefits Trust Agreement ("Grantor Trust") dated September 7, 1995 between the Company and Merrill Lynch Trust Company of California. (Filed as Exhibit No. 10.12 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.13(a) Employment Agreement between the Company and James A. McIntyre. (Filed as Exhibit No. (10)(i) to Quarterly Report on Form 10-Q for the period ended March 31, 1994, Commission File Number 1-8007, and incorporated herein by reference.).................................................. 10.13(b) First Amendment to Employment Agreement between the Company and James A. McIntyre............................................................ 10.14(a) Employment Agreement between the Company and Louis J. Rampino. (Filed as Exhibit No. 10.14 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 10.14(b) Employment Agreement between the Company and Wayne R. Bailey. (Filed as Exhibit No. 10.14 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)..................................... 10.15 Management Continuity Agreement between the Company and Raymond G. Meyers. (Filed as Exhibit No. 10.15 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.).................................
84
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - -------- ----------------------------------------------------------------------- ------------- 10.16 1996 Management Incentive Compensation Plan of the Company. (Filed as Exhibit No. 10.16 to Quarterly Report on Form 10-Q, for the period ended March 31, 1996, Commission File Number 1-8007, and incorporated herein by reference.).................................................. 10.17 Continuing Compensation Plan for Retired Directors. (Filed as Exhibit No. 10.17 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.).................................................. 10.18 Non-Employee Directors' Deferred Compensation Plan. (Filed as Exhibit No. 10.18 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.).................................................. 10.19(a) Amended and Restated Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as Exhibit No. (10)(xiii) to Quarterly Report on Form 10-Q for the period ended September 30, 1995, Commission File Number 1-08007, and incorporated herein by reference.)........................ 10.19(b) Amendment to Credit Agreement. (Filed as Exhibit No. 10.19(b) to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995, Commission File Number 1-8007, and incorporated herein by reference.)............................................................ 10.20 Keep Well Agreement, dated as of August 24, 1995 by the Company in connection with the Credit Agreement among Fremont General Corporation, Various Lending Institutions and the Chase Manhattan Bank, N.A., As Agent. (Filed as Exhibit No. 10.20 to Annual Report on Form 10-K, for the fiscal year ended December 31, 1995. Commission File Number 1-8007, and incorporated herein by reference.)................................. 10.21 Credit Agreement $15,000,000 by and among Merrill Lynch Trust Company of California as trustee for the Fremont General Corporation Employee Stock Ownership Trust. The Plan Committee (hereinafter described) on behalf of the Fremont General Corporation Employee Stock Ownership Plan, Fremont General Corporation, and First Interstate Bank of California August 10, 1995. (Filed as Exhibit No. (10)(viii) to Quarterly Report on Form 10-Q for the period ended September 30, 1995, and incorporated herein by reference.)................................. (11) Statement re: Computation of per share earnings........................ (21) Subsidiaries of the Company............................................ (23) Consent of Ernst & Young LLP independent Auditors...................... (27) Financial Data Schedule................................................ (28) Information from reports provided to state insurance regulatory authorities............................................................ P
(b) REPORT ON FORM 8-K. None filed during the quarter ended December 31, 1996. EX-10.9 2 EXHIBIT 10.9 1 EXHIBIT 10.9 FREMONT GENERAL CORPORATION AMENDED NON-QUALIFIED STOCK OPTION PLAN OF 1989 STOCK OPTION AGREEMENT THIS AGREEMENT, dated ____________________________ is made by and between FREMONT GENERAL CORPORATION, a Nevada corporation (the "Company"), and ___________________________________________a key employee of the Company or a subsidiary of the Company (the "Optionee"); WHEREAS, the Shareholders at their meeting on June 27, 1989 adopted the NON-QUALIFIED STOCK OPTION PLAN OF 1989, and on May 14, 1992 adopted the amendment and restatement of the 1989 Plan; and WHEREAS, the Company wishes to afford the Optionee the opportunity to purchase shares of its Common stock, $1.00 par value (the "Common Stock"), and ; and WHEREAS, the Company wishes to carry out the Amended Non-Qualified Stock Option Plan of 1989, the terms of which are hereby incorporated by reference and made a part of this Agreement; and WHEREAS, the Stock Option Committee of the Company's Board of Directors (the "Committee"), appointed to administer said Plan, has determined that it would be to the advantage and best interest of the Company and its shareholders to grant the Non-Qualified Stock Option provided for herein to the Optionee as an inducement to remain in the service of the Company and as an incentive for increased efforts during such service, and has advised the Company thereof and instructed the undersigned officer to issue said Option; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.1 - General Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary. SECTION 1.2 - Option "Option" shall mean the option to purchase Common Stock of the Company granted under this Agreement. 1 2 SECTION 1.3 - Plan The "Plan" shall mean the Amended Non-Qualified Stock Option Plan of 1989. SECTION 1.4 - Pronouns The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates. SECTION 1.5 - Secretary "Secretary" shall mean the Secretary of the Company. SECTION 1.6 - Subsidiary "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 1.7 - Termination of Employment "Termination of Employment" shall mean the time when the employee-employer relationship between the Optionee and the Company or a Subsidiary is terminated for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, or retirement but excluding any termination when there is a simultaneous reemployment by the Company or a Subsidiary. The Committee, in its absolute discretion, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Terminations of Employment. ARTICLE II GRANT OF OPTION SECTION 2.1 - Grant of Option In consideration of the Optionee's agreement to remain in the employ of the Company or its Subsidiary and for other good and valuable consideration, on the date hereof the Company irrevocably grants to the Optionee the option to purchase any part or all of an aggregate of shares of its Common Stock upon the terms and conditions set forth in this Agreement. SECTION 2.2 - Purchase Price The purchase price of the shares of Common Stock covered by the Option shall be per share without commission or other charge. 2 3 SECTION 2.3 - Consideration to Company In consideration of the granting of this Option by the Company, the Optionee agrees to render faithful and efficient services to the Company or its Subsidiaries, with such duties and responsibilities as the Company shall from time to time prescribe, for a period of at least one (1) year from the date this Option is granted. Nothing in this Agreement or in the Plan shall confer upon the Optionee any right to continue in the employ of the Company or any Subsidiary or shall interfere with or restrict in any way the rights of the Company and its Subsidiaries, which are hereby expressly reserved, to discharge the Optionee at any time for any reason whatsoever, with or without good cause. SECTION 2.4 - Adjustments in Option In the event that the outstanding shares of Common Stock of the Company are hereafter changed into or exchanged from a different number or kind of shares or other securities of the Company, or of another corporation, by reason of merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend or combination of shares, appropriate adjustments shall be made by the Committee. ARTICLE III PERIOD OF EXERCISABILITY SECTION 3.1 - Commencement of Exercisability (a) Subject to Section 3.1(b) and the discretion of the Committee, the Option is exercisable at a rate of 25% per year beginning on the first (1st) anniversary of the date the Option is granted; provided, however, that by a resolution adopted after the Option is granted the Committee may accelerate the time at which the Option or any portion thereof may be exercised. (b) No Option or portion of an Option which is unexercisable at Termination of Employment shall thereafter become exercisable. SECTION 3.2 - Expiration of Option No Option may be exercised to any extent by anyone after the first to occur of the following events: (a) The expiration of ten (10) years from the date the option was granted; or (b) Except in the case of any Optionee who is disabled (within the meaning of Section 105(d) (4) of the Internal Revenue Code), the expiration of three (3) months from the date of the Optionee's Termination of Employment for any reason other than such Optionee's death unless the Optionee dies within said three (3) month period; or (c) In the case of an Optionee who is disabled (within the meaning of Section 105(d) (4) of the Internal Revenue Code), the expiration of twelve (12) months from the date of the Optionee's Termination of Employment for any reason other than such Optionee's death unless the Optionee dies within said twelve (12) month period; or (d) The expiration of one (1) year from the date of the Optionee's death; or 3 4 (e) The effective date of either the merger or consolidation of the Company into another corporation, or the exchange of all or substantially all of the assets of the Company for the securities of another corporation, or the acquisition by another corporation of 80% or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, unless the Committee waives, or is required to waive, this provision under the Plan in connection with such transaction. At least thirty (30) days prior to the effective date of such merger, consolidation, exchange, acquisition, liquidation or dissolution, the Committee shall give the Optionee notice of such event if the Option has then neither been fully exercised nor become unexercisable under this Section 3.2; or (f) The expiration of three (3) months from the date of Termination of Employment unless such Termination of Employment is for insubordination or refusal to perform assigned duties; being under the influence of, or use, sale, distribution, or possession of unauthorized drugs or intoxicating beverages while on duty or on the Company's premises; theft, embezzlement, fraud or forgery; willful destruction or defacement of Company, a visitor's, or an employee's property; unauthorized disclosure of confidential information; falsifying or altering Company records; continued and unexplained absences from work; in which case this Option shall expire immediately upon Termination of Employment. SECTION 3.3 - Acceleration of Exercisability In the event of the merger or consolidation of the Company into another corporation, or the exchange of all or substantially all of the assets of the Company for the securities of another corporation, or the acquisition by another corporation of 80% or more of the Company's then outstanding voting stock, or the liquidation or dissolution of the Company, the Committee shall provide by resolution, adopted prior to such event and incorporated in the notice referred to in Section 3.2(e), that for a period of at least thirty (30) days prior to the effective date of such event, this Option shall be exercisable as to all the shares covered hereby, notwithstanding that this Option may not yet have become fully exercisable under Section 3.1(a); provided, however, that this acceleration of exercisability shall not take place if: (a) This Option become unexercisable under Section 3.2 prior to said effective date; or (b) In connection with such an event, provision is made for an assumption of this Option or a substitution therefor of a new option by an employer corporation, or a parent or subsidiary of such corporation. The Committee may make such determinations and adopt such rules and conditions as it, in its absolute discretion, deems appropriate in connection with such acceleration of exercisability, including, but not by way of limitation, provisions to insure that any such acceleration and resulting exercise shall be conditioned upon the consummation of the contemplated corporate transaction, and determinations regarding whether provisions for assumption or substitution have been made as defined in subsection (b) above. ARTICLE IV EXERCISE OF OPTIONS SECTION 4.1 - Person Eligible to Exercise During the lifetime of the Optionee, only he may exercise the option or any portion thereof. After the death of the Optionee, any exercisable portion of the Option may, prior to the time when the Option becomes unexercisable under Section 3.2, be exercised by the Optionee's personal representative or by any person empowered to do so under the deceased optionee's will or under the then applicable laws of descent and distribution. 4 5 SECTION 4.2 - Partial Exercise At any time and from time to time prior to the time when any exercisable Option or exercisable portion thereof becomes unexercisable under Section 3.2, such Option or portion thereof may be exercised in whole or in part; provided, however, that the Company shall not be required to issue fractional shares and the Committee may, by the terms of the Option, require any partial exercise to be with respect to a specified minimum number of shares. SECTION 4.3 - Manner of Exercise The Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or his office of all of the following prior to the time when the Option or such portion becomes unexercisable under Section 3.2: (a) Notice in writing signed by the Optionee or the other person then entitled to exercise the Option or portion, stating such Option or portion is exercised, such notice complying with all applicable rules established by the Committee; and (b) (i) Full payment (in cash or by certified or cashier's check payable to the Company) for the shares with respect to which such Option or portion is exercised; or (ii) Shares of any class of the Company's stock owned by the Optionee duly endorsed for transfer to the Company with a fair market value (as determinable under Section 4.2(b) of the Plan) on the date of delivery equal to the aggregate Option price of the shares with respect to which such Option or portion is exercised; or (iii) At the option and in the sole discretion of the Committee, promissory note or notes of the Optionee, to be secured by a security interest in the shares issued upon exercise and such other security, if any, as the Committee may require. Any such promissory notes shall bear a rate of interest not less than a rate, if any, as it may change from time to time, required under federal tax law to prevent any imputation of interest, unless such rate exceeds the maximum rate permissible under California law, in which case the rate shall not exceed the maximum permitted under California law. All other terms of such loan shall be determined solely by the Committee, and all terms and conditions, including whether the loan shall become due upon Termination of Employment, shall be expressly set forth in the promissory note or notes executed by the Optionee. The Committee shall furnish the Optionee with a Truth-in-Lending Statement showing the terms of the loan, including the amount financed, total payments of interest, total payments of principal and annual percentage rate; or (iv) Any combination of the consideration provided in the foregoing subparagraphs (i), (ii) and (iii); and (c) A bona fide written representation and agreement, in a form satisfactory to the Committee, signed by the Optionee or other person then entitled to exercise such Option or portion, stating that the shares of stock are being acquired for his own account, for investment and without any present intention of distributing or reselling said shares or any of them except as may be permitted under the Securities Act of 1933, as amended (the "Act"), and then applicable rules and regulations thereunder, and that the Optionee or other person then entitled to exercise such Option or portion will indemnify the Company against and hold it free and harmless from any loss, damage, expense or liability resulting to the Company if any sale or distribution of the shares by such person is contrary to the representation and agreement referred to above. 5 6 The Committee may, in its absolute discretion, take whatever additional actions it deems appropriate to insure the observance and performance of such representation and agreement and to effect compliance with the Act and any other federal or state securities laws or regulations. Without limiting the generality of the foregoing, the Committee may require an opinion of counsel acceptable to it to the effect that any subsequent transfer of shares acquired on an Option exercise does not violate the Act, and may issue stop-transfer orders covering such shares. Share certificates evidencing stock issued on exercise of this Option shall bear an appropriate legend referring to the provisions of this subsection (c) and the agreements herein. The written representation and agreement referred to in the first sentence of this subsection (c) shall, however, not be required if the shares to be issued pursuant to such exercise have been registered under the Act, and such registration is then effective in respect of such shares; and (d) In the event the Option or portion thereof shall be exercised pursuant to section 4.1 by any person or persons other than the Optionee, appropriate proof of the right of such person or persons to exercise the Option or portion thereof. Section 4.4 - Conditions to Issuance of Stock Certificates The share of stock issuable and deliverable upon the exercise of the Option, or any portion thereof, may be either previously authorized by unissued shares or issued shares which have then been reacquired by the Company. Such shares shall be fully paid and nonassessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of the Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under rulings or regulations of the Securities and Exchange Commission or of any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee may from time to time establish for reasons of administrative convenience. SECTION 4.5 - Rights as Shareholder The holder of the Option shall not be, nor have any of the rights or privileges of, a shareholder of the Company in respect of any shares purchasable upon the exercise of any part of the Option unless and until certificates representing such shares shall have been issued by the Company to such holder. 6 7 ARTICLE V MISCELLANEOUS SECTION 5.1 - Administration The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Optionee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Option. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement. SECTION 5.2 - Options Not Transferable No Option or interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Optionee or his successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) and any attempted disposition thereof shall be null and void and of no effect; provided, however, that this Section 5.2 shall not prevent transfers by will or by the applicable laws of descent and distribution. SECTION 5.3 - Notices Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its Secretary and any notice to be given to the Optionee shall be addressed to him at the address given beneath his signature hereto. By notice given pursuant to this Section 5.3, either party may hereafter designate a different address for notices to be given to him. Any notice which is required to be given to the Optionee shall, if the Optionee is then deceased, be given to the Optionee's personal representative if such representative has previously informed the Company of his status and address by written notice under this Section. Any notice shall have been deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, deposited (with postage prepaid) in a post office or branch post office regularly maintained by the United States Postal Service. SECTION 5.4 - Titles Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. SECTION 5.5 - Notification of Disposition The Optionee shall give prompt notice to the Company of any disposition or other transfer of any shares of stock acquired under this Agreement if such disposition or transfer is made (a) within two (2) years from the date of granting the Option with respect to such shares or (b) within one (1) year after the transfer of such shares to him. Such notice shall specify the date of such disposition or other transfer and the amount realized, in cash, other property, assumption of indebtedness or other consideration, by the Optionee in such disposition or other transfer. 7 8 SECTION 5.6 - Tax Withholding Upon the exercise of the Option by the Optionee, or by any other person pursuant to Section 4.1, the Company shall have the right to require the Optionee or such other person to pay by cash or by certified or cashier's check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such exercise. Notwithstanding the foregoing, in any case where a tax is required to be withheld in connection with the issuance or transfer of Common Stock under the Plan, the Optionee may elect to (i) have the Company reduce the number of such shares issued or transferred by the appropriate number of shares, or (ii) deliver the appropriate number of shares of Common Stock owned by the Optionee, in order to accomplish such withholding; provided, however, that the election shall (a) be made prior to the date that the amount of tax to be withheld is to be determined (the "Tax Date"), (b) be irrevocable, (c) be subject to the disapproval of the Committee, (d) for Officers and Directors of the Company be made at least six (6) months after the grant of the Option (except that this limitation shall not apply in the event that death or disability of the Optionee occurs prior to the expiration of the six month period), and (e) for Officers and Directors of the Company be made either six (6) months prior to the Tax Date or in a ten day "window period" beginning on the third day following the release of the Company's quarterly or annual summary statement of sales and earnings. SECTION 5.7 - Governing Law This Agreement, the Plan and all other related documents shall be governed by the laws of the State of California, except as such laws may be supplanted by the laws of the United States of America, which laws shall govern to the extent they supplant California law. If any provision shall be held invalid and unenforceable by a court of competent jurisdiction, the remaining provisions shall continue to be fully effective. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto. Fremont General Corporation By: _______________________________ _______________________________ Raymond G. Meyers Optionee Senior Vice President and Name & Address Chief Administrative Officer Taxpayer Identification Date:______________________________ Number:________________________ 8 9 AMENDED NON-QUALIFIED STOCK OPTION PLAN OF 1989 FREMONT GENERAL CORPORATION (the "Company"), a corporation organized under the laws of the State of Nevada, hereby adopts this AMENDED NON-QUALIFIED STOCK OPTION PLAN OF 1989 (the "Plan") which amends the Non-Qualified Stock Option Plan of 1989 (1) to change the exercise price provisions of the Plan; (2) to establish a limitation on option grants to any one Optionee in any fiscal year; and (3) to conform the Plan to the new rules promulgated under Rule 16b-3 under the Securities Exchange Act of 1934, as amended. The purposes of this Plan are as follows: (1) To further the growth, development and financial success of the Company by providing additional incentives to certain of the key employees of the Company and its Subsidiaries who have been or will be given responsibility for the management or administration of the Company's business affairs, by assisting them to become owners of Common Stock of the Company and thus to benefit directly from its growth, development and financial success; (2) To enable the Company to obtain and retain the services of the type of professional, technical and managerial persons considered essential to the long-range success of the Company by providing and offering them an opportunity to become owners of Common Stock of the Company; and (3) To attract, motivate and retain experienced and knowledgeable outside directors through the benefits provided in Article III. ARTICLE I DEFINITIONS SECTION 1.1 - General Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. SECTION 1.2 - Board "Board" shall mean the Board of Directors of the Company. SECTION 1.3 - Code "Code" shall mean the Internal Revenue Code of 1986, as amended. SECTION 1.4 - Committee "Committee" shall mean the Stock Option Committee of the Board, appointed as provided in Section 5.1. SECTION 1.5 - Company "Company" shall mean Fremont General Corporation. 1 10 SECTION 1.6 - Director "Director" shall mean a member of the Board of Directors of Fremont General Corporation. SECTION 1.7 - Employee "Employee" shall mean any employee (including any officer) of the Company, or of any corporation which is then a subsidiary, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of this Plan. SECTION 1.8 - Employee Participant "Employee Participant" shall mean any Employee who has been granted an Option under the provisions of Article IV. SECTION 1.9 - Fair Market Value "Fair Market Value" shall mean: (i) the closing price of a share of the Company's stock on the principal exchange on which shares of the Company's stock are then trading (or the last sale price if the shares are traded on the National Market System), if any, on such date, or, if shares were not traded on such date, then on the next preceding day during which a sale occurred; or (ii) if such stock is not traded on an exchange but quoted on NASDAQ or a successor quotation system, the mean between the closing representative bid and asked prices for the stock on such date as reported by NASDAQ or such successor quotation system; or (iii) if such stock is not publicly traded on an exchange and not quoted on NASDAQ or a successor quotation system, the mean between the closing, bid and asked prices for the stock on such date; or (iv) if the Company's stock is not publicly traded, the fair market value as established by the Committee acting in good faith at such time for the purposes of this Plan. SECTION 1.10 - Non-Employee Director "Non-Employee Director" shall mean a member of the Board who is not an officer or employee of the Company or any Subsidiary. SECTION 1.11 - Non-Employee Director Participant "Non-Employee Director Participant" shall mean a Non-Employee Director who has been granted an Option under the provisions of Article III. SECTION 1.12 - Option "Option" shall mean an option to purchase Common Stock of the Company granted under the Plan. SECTION 1.13 - Plan The "Plan" shall mean this AMENDED NON-QUALIFIED STOCK OPTION PLAN OF 1989. SECTION 1.14 - Pronouns The masculine pronoun shall include the feminine and neuter and the singular shall include the plural, where the context so indicates. 2 11 SECTION 1.15 - Secretary "Secretary" shall mean the Secretary of the Company. SECTION 1.16 - Subsidiary "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns the stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. SECTION 1.17 - Termination of Employment "Termination of Employment" shall mean the time when the employee-employer relationship between the Employee Participant and the Company or a Subsidiary is terminated for any reason, including, but not by way of limitation, a termination by resignation, discharge, death or retirement, but excluding terminations where there is a simultaneous reemployment by the Company or a Subsidiary. For purposes of this Section 1.17, an Employee Participant who is employed by a Subsidiary will be deemed to have terminated employment at such time as the Employee Participant's employer ceases to be a Subsidiary. The Committee, in its absolute discretion, shall determine the effect of all other matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from a discharge for good cause, and all questions of whether particular leaves of absence constitute Termination of Employment. ARTICLE II SHARES SUBJECT TO PLAN SECTION 2.1 - Shares Subject to Plan The shares of stock subject to Options shall be shares of the Company's Common Stock. The aggregate number of such shares which may be delivered upon exercise of Options shall not exceed 2,681,250 (adjusted to reflect the 3-for-2 stock splits of June 1993 and February 1996, and the 10% stock dividend of June 1995) subject to adjustments required by this Plan and as may be required by Rule 16b-3. Shares subject to outstanding options shall be reserved for issuance under the Plan. SECTION 2.2 - Unexercised Options If any Option expires, terminates, is surrendered or cancelled without having been fully exercised, the number of shares subject to such Option but as to which such Option was not exercised prior to its expiration or cancellation will not be charged against the maximum number of shares set forth in Section 2. l above and may again be optioned hereunder. SECTION 2.3 - Changes in Company's Shares In the event that the outstanding shares of Common Stock of the Company are hereafter changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split, stock dividend or combination of shares, the Committee shall make an appropriate proportionate and equitable adjustment in the number and kind of securities for the purchase of which 3 12 Options may be granted, including adjustments of the limitations in Sections 2.1, 3.2 and 4.9 on the maximum and specific number and kind of securities which may be issued on exercise of Options. ARTICLE III NON-EMPLOYEE DIRECTOR OPTIONS SECTION 3.1 - Participation Grants of Options under this Article III shall be made only to Non-Employee Directors. Each such Option shall provide that the Option shall not be treated as an incentive stock option within the meaning of Section 422 of the Code. SECTION 3.2 - Annual Option Grants (a) Time of Initial Award. Upon approval of this First Restatement of the Plan by the shareholders of the Company, there shall be granted automatically (without any action by the Board or Committee) to each director who is not then an officer or employee of the Company an Option (the date of Extant of which shall be the date of such approval) to purchase 2,500 shares of Common Stock. (b) Subsequent Annual Awards. On the date of the annual shareholders' meeting of the Company in 1993, 1994, and 1995, there shall be granted automatically (without any action by the Committee or the Board) an Option (the date of grant of which shall be such shareholders' meeting date) to each Non-Employee Director then in office to purchase 2,500 shares of Common Stock. SECTION 3.3 - Option Price The exercise price per share of the Common Stock covered by each Option granted pursuant to Section 3.2 hereof shall be 100 percent of the Fair Marker Value of the Common Stock on the date such Option is granted. Upon exercise of an Option, the Optionee shall pay to the Company the option exercise price. SECTION 3.4 - Option Period Each Option granted under this Article III and all rights or obligations thereunder shall expire ten years after the date such Option is granted and shall be subject to earlier termination as provided below. SECIION 3.5 - Exercise of Options Each Option granted under this Article III shall become exercisable in four equal installments at the rate of 25 percent per year beginning on the first anniversary of the grant date. The exercise price of each Option granted under this Article III shall be paid in full at the time of exercise in cash or by check or in shares of Common Stock valued at their Fair Market Value on the date of exercise of the Option, or partly in such shares and partly in cash, provided that any such shares used in payment of such exercise price shall have been owned by the Non-Employee Director Participant at least six months prior to the date of exercise. An exercisable Option may be exercised solely by delivery to the Secretary or his or her office of a notice in writing signed by the Non-Employee Director Participant (or other person then entitled to exercise the Option or portion thereof pursuant to Section 6.3, subject to Section 6.8). 4 13 SECTION 3.6 - Termination of Directorship If a Non-Employee Director Participant's services as a member of the Board of Directors terminate, an Option granted pursuant to this Article III held by such Non-Employee Director Participant shall remain exercisable to the extent it was then exercisable until the first to occur of the following events: (i) The expiration of ten (10) years after the date the Option was granted; or (ii) Except in the case of any Non-Employee Director Participant who is disabled (within the meaning of Section 105(d) (4) of the Code), or dies, the expiration of three (3) months after the date of the Non-Employee Director Participant's termination from service; or (iii) In the case of any Non-Employee Director Participant who is disabled (within the meaning of Section 105(d) (4) of the Code), or dies, the expiration of twelve (12) months after the date of the Non-Employee Director Participant's termination from service. SECTION 3.7 - Acceleration Upon a Change in Control Event (a) Upon the occurrence of a Change in Control Event (as defined below), each Option granted under Section 3.2 shall become immediately exercisable in full; provided, however, that none of such Options shall be accelerated to a date less than six months after the initial date of grant of such Option. (b) For purposes of this Section 3.7, a "Change in Control Event" shall mean (i) Approval by the shareholders of the Company of the dissolution or liquidation of the Company; (ii) Approval by the shareholders of the Company of an agreement to merge or consolidate, or otherwise reorganize, with or into one or more entities that are not Subsidiaries, as a result of which less than 50 percent of the outstanding voting securities of the surviving or resulting entity immediately after the reorganization are, or will be, owned by shareholders of the Company immediately before such reorganization (assuming for purposes of such determination that there is no change in the record ownership of the Company's securities from the record date of such shareholder action until such reorganization and that such record owners hold no securities of the other parties to such reorganization); (iii) Approval by the shareholders of the Company of the sale of substantially all of the Company's business and/or assets to a person or entity which is not a Subsidiary; (iv) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of securities of the Company representing more than 80 percent of the combined voting power of the Company's then outstanding securities entitled to then vote generally in the election of directors of the Company; or (v) During any period not longer than two consecutive years, individuals who at the beginning of such period constituted the Board cease to constitute at least a majority thereof, unless the election, or the nomination for election by the Company's shareholders, of at least a 5 14 majority of the new Board members during such period was approved by a vote of at least two-thirds of the Board members then still in office who were Board members at the beginning of such period. SECTION 3.8 - Adjustments and Termination Options granted under this Article III shall be subject to adjustment as provided in Sections 2.3 and 6.2, but only to the extent that (a) such adjustment in the case of a Change in Control Event is effected pursuant to the terms of a reorganization agreement approved by shareholders of the Company, and (b) such adjustment is consistent with the adjustments to Options held by persons other than executive officers or directors of the Company. To the extent that any Option granted under this Article III is not exercised prior to (x) a dissolution of the Company, or a merger or other corporate reorganization that the Company does not survive, and (y) no provision is (or consistent with the provisions of the preceding sentence can be) made for the assumption, conversion, substitution or exchange of the Option, the Option shall terminate upon the occurrence of such event. ARTICLE IV EMPLOYEE OPTIONS SECTION 4.1 - Eligibility Any key Employee of the Company or a Subsidiary who is selected by the Committee shall be eligible to be granted Options under this Article. SECTION 4.2 (a) The Committee shall from time to time, in is absolute discretion: (i) Determine which Employees are key Employees and select from among the key Employees (including those to whom Options have been previously granted under the Plan) such of them as in its opinion should be granted Options; and (ii) Determine the number of shares to be subject to such Options granted to such selected key Employees; and (iii) Determine the terms and conditions of such Options, consistent with the Plan. (b) Upon the selection of a key Employee to be granted an Option, the Committee shall instruct the Secretary to issue such Option and may impose such conditions on the grant of such Option as deemed appropriate. Each such Option shall provide that the Option shall not be treated as an incentive stock option within the meaning of Section 422A of the Code. 6 15 SECTION 4.3 - Option Price The exercise price per share of the Common Stock covered by each Option granted pursuant to Section 3.2 hereof shall be 100 percent of the Fair Market Value of the Common Stock on the date such Option is granted. Upon exercise of an Option, the Optionee shall pay to the Company the option exercise price. SECTION 4.4 - Commencement of Exercisability (a) No Option granted under this Article IV may be exercised in whole or in part during the first year after such option is granted or, if the exercise price of an option is reduced by amendment, during the first year after such amendment. (b) Subject to the provisions of Section 4.4(a), 4.4(c) and 6.3, such Options are, subject to the discretion of the Committee to otherwise provide, exercisable at a rate of 25 percent per year beginning on the first anniversary of the grant date; provided, however, that by a resolution adopted after an Option is granted the Committee may, on such terms and conditions as it may determine to be appropriate and subject to Sections 4.4(a), 4.4(c), 4.5 and 6.3, accelerate or extend the time at which such Option or any portion thereof may be exercised. (c) Unless the Committee otherwise provides, no portion of an Option which is unexercisable at Termination of Employment shall thereafter become exercisable. SECTION 4.5 - Expiration of Options (a) No Option may be exercised to any extent by anyone after the first to occur of the following events (unless, as to clauses (ii) through (iv) below, the Committee otherwise provides): (i) The expiration of ten (10) years after the date the Option was granted; or (ii) Except in the case of any Employee Participant who is disabled (within the meaning of Section 105(d) (4) of the Code), the expiration of three (3) months after the date of the Employee Participant's Termination of Employment for any reason other than such Employee Participant's death unless the Employee Participant dies within said three (3) months period; or (iii) In the case of an Employee Participant who is disabled (within the meaning of Section 105(d) (4) of the Code), the expiration of twelve (12) months from the date of the Employee Participant's Termination of Employment for any reason other than such Employee Participant's death unless the Employee Participant dies within said twelve (12) month period; or (iv) The expiration of one (1) year after the date of the Employee Participant's death. (b) Subject to the provisions of Section 4.5(a), the Committee shall provide, in the terms of each individual Option granted to an Employee Participant, when such Option expires and becomes unexercisable; and (without limiting the generality of the foregoing) the Committee may provide in the terms of individual Options that said Options expire immediately upon a Termination of Employment for any one or more reasons. 7 16 SECTION 4.6 - Consideration In consideration of the granting of the Option, the Employee Participant shall agree, in the written Stock Option Agreement, to remain in the employ of the Company or a Subsidiary for a period of at least one (1) year after the Option is granted. Nothing in this Plan or in any Stock Option Agreement hereunder shall confer upon an Employee Participant any right to continue in the employ of the Company or any Subsidiary. The granting of the Option shall not interfere with or restrict in any way the rights of the Company and Subsidiaries, which are hereby expressly reserved, to discharge any Employee Participant at any time for any reason whatsoever, with or without good cause. SECTION 4.7 - Merger, Consolidation, Exchange, Acquisition, Liquidation or Dissolution In its absolute discretion, and on such terms and conditions as it deems appropriate, the Committee may provide by the terms of any Option granted to an Employee Participant that such Option cannot be exercised after the merger or consolidation of the Company into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, the acquisition by another corporation of 80 percent or more of the Company's then outstanding voting stock or the liquidation or dissolution of the Company; and if the Committee so provides, it may, in its absolute discretion and on such terms and conditions as it deems appropriate, also provide either by the terms of such Option or by a resolution adopted prior to the occurrence of such merger, consolidation, exchange, acquisition, liquidation or dissolution, that, for some period of time prior to such event, such Options or some of them shall be exercisable as to all shares covered thereby, notwithstanding anything to the contrary in Section 4.4(a), Section 4.4(b) and/or in any installment provisions of such Option. SECTION 4.8 - Manner of Exercise An exercisable Option granted to an Employee Participant, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or his or her office of all of the following prior to the time when such Option or such portion becomes unexercisable under Section 4.5 or Section 4.7: (a) Notice in writing signed by the Employee Participant or other person then entitled to exercise such Option or portion, stating that such Option or portion is exercised, such notice complying with all applicable rules established by the Committee; and (b) (i) Full payment (in cash or by check payable to the Company) for the shares with respect to which such Option or portion is thereby exercised; or (ii) Subject to such conditions and rules as the Committee may establish, shares of any class of the Company's stock owned by the Employee Participant duly endorsed for transfer to the Company with a Fair Market Value on the date of delivery equal to the aggregate Option price of the shares with respect to which such Option or portion is thereby exercised; or (iii) At the option and in the sole discretion of the Committee, promissory note or notes of the Employee Participant, to be secured by a security interest in the shares issued upon exercise and such other security, if any, as the Committee may require. Any such promissory notes shall bear a rate of interest not less than a rate, if any, as it may change from time to time required under federal tax law to prevent any imputation of interest, unless such rate exceeds the maximum rate permissible under Nevada law, in which case the rate shall not exceed the maximum permitted under Nevada law. All other terms of such note shall be determined, subject 8 17 to compliance with applicable laws (including federal margin requirements if applicable), solely by the Committee. All terms and conditions, including whether the note shall become due upon Termination of Employment, shall be expressly set forth in the promissory note or notes executed by the Employee Participant. The Committee shall furnish the Employee Participant with a Truth-in-Lending statement if required showing the terms of the loan, including the amount financed, total payments of interest, total payments of principal and annual percentage rate; or (iv) Any combination of the consideration permitted by the foregoing subsections. (c) Such representation and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to agents and registrars. (d) In the event the Option or portion shall be exercised pursuant to Section 6.3 by any person or persons other than the Employee Participant, appropriate proof of the right of such person or persons to exercise the Option or portion. SECTION 4.9 - Performance-Based Compensation Limitation The following limitations shall apply to grants of Options under the Plan: (i) No Employee shall be granted, in any fiscal year of the Company, Options under the Plan to purchase more than 165,000 shares of Common Stock, provided that the Company may make an additional one-time grant of up to 33,000 shares of Common Stock to newly-hired Employees. (ii) The foregoing limitations shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 6. 2. (iii) If an Option is cancelled (other than in connection with a transaction described in Section 4.7 or Section 6. 2), the cancelled Option will be counted against the limit set forth in Section 4.9(i). For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. ARTICLE V ADMINISTRATION SECTION 5.1 - Stock Option Committee (a) The Stock Option Committee shall be composed of no fewer than three (3) members (or, as of September l, 1992, two (2) members) of the Board, designated by and holding office at the pleasure of the Board. Appointment of Committee members shall be effective upon acceptance of appointment. Committee members may resign at any time by delivering written notice to the Board. Vacancies in the Committee shall be filled by the Board. 9 18 (b) No options shall be granted to any member of the Committee during the term of his or her membership on the Committee except as provided in Article III. No person shall be eligible to serve or continue to serve on the Committee unless he or she is a "non-employee director" for purposes of Rule 16b-3, as amended from time to time. SECTION 5.2 - Duties and Powers of Committee It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to interpret the Plan and the Options and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. Any such interpretations and rules shall be consistent with the basic purposes of the Plan. Notwithstanding the foregoing, the provisions of Article III relating to Non-Employee Director Options shall be nondiscretionary, automatic and, to the maximum extent possible, self-effectuating. SECTION 5.3 - Action by the Committee The Committee shall act by a majority of its members in office by vote at a meeting or by unanimous written consent of all members of the Committee. SECTION 5.4 - Compensation; Professional Assistance; Good Faith Actions Members of the Committee shall not receive compensation for their service as members but all expenses and liabilities they incur in connection with the administration of the Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company and its officers and Directors shall be entitled to rely upon the advice, opinions or valuations and determinations made by the Committee in good faith and the same shall be final and binding upon all Employee Participants and Non-Employee Director Participants, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Options and all members of the Committee shall be fully protected by the Company in respect to any such action, determination on interpretation. ARTICLE VI OTHER PROVISIONS SECTION 6.1 - Option Agreement Each Option granted under Article IV shall be evidenced by a written Stock Option Agreement, which shall be executed by the Employee Participant and an authorized officer of the Company and which shall contain such terms and conditions as the Committee shall determine, consistent with the Plan. Each Option granted under Article III shall be evidenced by a written Stock Option Agreement in the form heretofore approved by the Board and shall be signed by the President or a Senior Vice President of the Company. The terms upon which, the times at which and the exercise price of all Options granted under the Plan shall be established by resolution of the Committee providing for the grant of Option and shall be set forth in or incorporated by reference in the Stock Option Agreement. 10 19 SECTION 6.2 - Adjustments in Outstanding Options In the event that the outstanding shares of stock subject to Options are changed into or exchanged for a different number of kind of shares of the Company or other securities of the Company by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Options, or portions then unexercised, shall be exercisable, to the end that after such event the Employee Participant or Non-Employee Director Participant's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding Option shall be made without change in the total price applicable to the Option or the unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in the option price per share. SECTION 6.3 - Person Eligible to Exercise Except as permitted by Section 6.8, during the lifetime of the Employee Participant or Non-Employee Director Participant, his or her Option, or any portion, shall be exercisable only by him or her or by his or her guardian or legal representative. After the death of the Employee Participant or Non-Employee Director Participant, any exercisable portion of an Option may, prior to the time when such portion becomes unexercisable under Section 3.6, 4.5 or 4.7, be exercised by his or her personal representative or by any person empowered to do so under the deceased Employee Participant or Non-Employee Director Participant's will or under the then applicable laws of the descent and distribution. SECTION 6.4 - Partial Exercise At any time and from time to time prior to the time when any exercisable Option or exercisable portion becomes unexercisable under Section 3.6, 4.5 or 4.7, such Option or portion thereof may be exercised in whole or in part; provided, however, that the Company shall not be required to issue fractional shares and the Committee may, by the terms of an Option granted under Article IV, require any partial exercise to be with respect to a specified minimum number of shares. SECTION 6.5 - Conditions to Issuance of Stock Certificates The shares of stock issuable and deliverable upon the exercise of an Option, or any portion thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (a) The admission of such shares to listing on all stock exchanges, if any, on which such class of stock is then listed; and (b) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and 11 20 (c) The obtaining of any approval or other clearance from any state or federal governmental agency which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) The lapse of such reasonable period of time following the exercise of the Option as the Committee may establish from time to time for reasons of administrative convenience; and (e) The satisfaction of all other applicable legal requirements incident to such action. SECTION 6.6 - Rights as Shareholders The holders of Options shall not be, nor have any of the rights or privileges of, shareholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until certificates representing such shares have been issued by the Company to such holders. SECTION 6.7 - Transfer Restrictions After Exercise The Committee, in its absolute discretion, may impose such restrictions on the transferability of the shares purchasable upon the exercise of an Option as it deems appropriate and any such restriction shall be set forth in the respective Stock Option Agreement and may be referred to on the certificates evidencing such shares, but in respect of any option granted under Article III, such restrictions shall be limited to those required by applicable law. SECTION 6.8 - Options Not Transferable No Option or interest or right therein or part thereof shall be liable for the debts, contracts or engagements of the Employee Participant or Non-Employee Director Participant or his or her successors in interest or shall be subject to disposition by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition is volumes or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy) and any attempted disposition thereof shall be null and void and of no effect; provided, however, that nothing in this Section 6.8 shall prevent transfers by will or by the applicable laws of descent and distribution or, effective September 1, 1992 pursuant to a "qualified domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act of 1974. The designation by an Employee Participant or Non-Employee Director Participant of persons or trust entitled upon such participant's death, by will or the laws of descent and distribution, to receive the Employee Participant or Non-Employee Director Participant' Options in the event of the death of such option holder shall not constitute a transfer. SECTION 6.9 - Amendment, Suspension or Termination of the Plan; Amendment of Options Subject to Section 3. 8, the Plan may be wholly or partially amended or otherwise modified, suspended or terminated at any time or from time to time by the Board. The Company shall obtain shareholder approval of any Plan amendment to the extent necessary and desirable to comply with Rule 16b-3 or with Sections 162(m) or 422 of the Code (or any successor rule or statute or other applicable law, rule or regulation, including the requirements of any exchange or quotation system on which the Common Stock is listed). Such shareholder approval, if required, shall be obtained in such a manner and to such a degree as is required by the applicable law, rule or regulation. Neither the amendment, suspension nor termination of the Plan shall, without the consent of the holder of the Option, alter or impair any rights or obligations of the holder, and neither the suspension nor termination of the Plan shall impair the authority of the Committee in respect of outstanding options during any period of suspension. In no event may any Option be granted under this Plan after February 1, 1999. 12 21 The Committee by resolution may waive conditions of or limitations on rights under Options granted to any or all Employee Participants that the Committee in the prior exercise of its discretion has imposed, or make other changes to the terms of such Options consistent with the express provisions hereof that do not adversely affect such Participants. No change of or affecting an outstanding Option shall, however, without the written consent of the Participant, adversely affect the Participant's rights or benefits under any Option then outstanding. Changes contemplated by Sections 2.3, 3.8, 4.6 or 6.2 shall not be deemed to constitute changes for purposes of this Section. SECTION 6.10 - Approval of Plan by Stockholders This Plan was originally adopted by the Stockholders in May 1989. Subsequent amendments were adopted by the Shareholders in 1992 and in 1994. SECTION 6.11 - Effect of Plan Upon Other Options and Compensation Plans The adoption of this Plan shall not affect any other Compensation or incentive plans in effect for the Company or any Subsidiary. Nothing in this Plan shall be construed to limit the right of the Company or any Subsidiary (a) to terminate employees of the Company or any Subsidiary or (b) to grant or assume options otherwise than under this Plan in connection with any proper corporate purpose, including, but not by way of limitation, the grant or assumption of options in connection with the acquisition by purchase, lease, merger, consolidation or otherwise, of the business, stock or assets of any corporation, firm or association. SECTION 6.12 - Tax Withholding Upon the exercise of an option by an Employee Participant or other person, the Company shall have the right to require such person to pay, by cash or check payable to the Company, the amount of any taxes which the Company may be required to withhold with respect to such exercise. Notwithstanding the foregoing, in any case where a tax is required to be withheld in connection with the issuance or transfer of Company stock under this Plan, an Employee Participant or other person entitled to exercise an Option (other than an Option granted under Article III), may elect, pursuant to such rules as the Committee may establish, to have the Company reduce the number of such shares issued or transferred by the appropriate number of shares to accomplish such withholding; provided the Committee may impose such conditions on the payment of any withholding obligation as may be required to satisfy any applicable regulatory requirements. SECTION 6.13 - Governing Law (a) The Plan and the Option Agreements and all other related documents shall be governed by the laws of the State of California, except to the extent such laws way be supplanted by the supreme laws of the United States of America, or by Nevada law as the law of the State of incorporation of the Company. If any provision shall be held invalid and unenforceable by a court of competent jurisdiction, the remaining provisions shall continue to be fully effective. (b) It is the intent of the Company that this Plan and Options granted hereunder satisfy and be interpreted in a manner that in the case of Participants who are or may be subject to Section 16 of the Exchange Act satisfies the applicable requirements of Rule 16b-3 so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Securities Exchange Act of 1934 and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any 13 22 Option would otherwise frustrate or conflict with the intent expressed above, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, but to the extent of any remaining irreconcilable conflict with such intent as to such persons in the circumstances, such provision shall be deemed void. SECTION 6.14 - Titles Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. - ---------------- As last Amended on November 7, 1996 14 23 FREMONT GENERAL CORPORATION NON-EMPLOYEE DIRECTOR NON-QUALIFIED STOCK OPTION AGREEMENT THIS AGREEMENT dated as of the <>, between FREMONT GENERAL CORPORATION, a Nevada corporation (the "Corporation"), and <> <> (the "Director"). WITNESSETH WHEREAS, the Corporation adopted and the shareholders of the Corporation have approved an Amended Non-Qualified Stock Option Plan of 1989 (the "Plan"): WHEREAS, pursuant to Article III of the Plan, the Corporation has granted an option (the "Option") to the Director upon the terms and conditions evidenced hereby, as required by the Plan, which Option is not intended and shall not be deemed to be an incentive stock option within the meaning of Section 422 of the Code; NOW THEREFORE, in consideration of the services rendered and to be rendered by the Director, the Corporation and the Director agree to the terms and conditions set forth herein as required by the terms of the Plan. 1. OPTION GRANT. This Agreement evidences the grant to the Director, as of <> (the "Award Date"), of an Option to purchase an aggregate of <> shares of Common Stock, par value $1.00 per share, under Article III of the Plan, subject to adjustment as provided in or pursuant to the Plan. 2. EXERCISE PRICE. The Option entitles the Director to purchase all or any part of the Option shares at a price per share of $<>, which represents the Fair Market Value of the shares on the Award Date. 3. OPTION TERM. The Option shall terminate <>, unless earlier terminated in accordance with the terms of Article III of the Plan. Any portion of the Option that is unexercisable at the time the Director's services as a Director terminate shall thereupon terminate. 4. GENERAL TERMS. The Option and this Agreement are subject to, and the Corporation and the Director agree to be bound by, the provisions of the Plan that apply to the Option, including but not limited to Articles I, II, III and VI. Such provisions are incorporated herein by this reference. The Director acknowledges receiving a copy of the Plan and reading its applicable provisions. Capitalized terms not otherwise defined herein shall have the meaning assigned to such terms in the Plan. 24 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. FREMONT GENERAL CORPORATION BY:____________________________ Raymond G. Meyers Senior Vice President _______________________________ (Signature) <> <> <> <> <> <> Tax I.D. Number <> EX-10.13(B) 3 EXHIBIT 10.13(B) 1 EXHIBIT 10.13(b) FIRST AMENDMENT TO EMPLOYMENT AGREEMENT This amendment is made effective as of August 1, 1996, by and between Fremont General Corporation (the "Company") and James A. McIntyre (the "Executive"). Unless otherwise defined herein, capitalized terms used in this Amendment shall have the same meaning as in the Employment Agreement dated January 1, 1994. WHEREAS, the Executive and the Company entered into an Employment Agreement dated January 1, 1994 (the "Employment Agreement"), and WHEREAS, the Executive and the Company desire to amend the Employment Agreement to provide additional financial security and benefits to the Executive in recognition of past services and to encourage Executive to continue employment with the Company. NOW, THEREFORE, in consideration of the foregoing recitals and the respective covenants and agreements of the parties contained in this document and in consideration of the continuing employment of Executive by the Company, the Company and the Executive agree to amend the Employment Agreement as follows: 1. A new Section 3(f) will be added as follows: "3(f) Company Event. "Company Event" shall mean the occurrence of any of the following events: (i) Any "person" or "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company's then outstanding voting securities; or (ii) A change in the composition of the Board of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (A) are directors of the Company as of August 1, 1996, or (B) are elected, or nominated for election, to the Board of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election ofdirectors to the Company); or (iii) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or 2 disposition by the Company of all or substantially all the Company's assets (other than to a subsidiary or subsidiaries); or (iv) The Executive, while serving as Chairman of the Board, has a conservator of his person appointed or dies." 2. Section 11(a)(ii) shall be amended to read, in its entirety, as follows: "(ii) Options and Restricted Stock. The unvested portion of any options to acquire Company stock granted to Executive under any Company plan or arrangement ("Options") shall automatically be accelerated and for a period of three (3) months following the Termination date (or such longer period as is specified in the applicable option plan), the Executive shall have the right to exercise all or any portion of such Options in addition to any portion of the Options exercisable prior to the Termination Date. The unvested portion of any unvested stock issued to the Executive or held for the Executive's benefit under any Company plan or arrangement ("Restricted Stock") shall automatically be accelerated in full to become completely vested on the Termination Date. 3. A new section shall be added as Section 12 to read, in its entirety, as follows: "12. Benefits Upon a Company Event. In the event of a Company Event that occurs while the Executive is employed by the Company, the unvested portion of any Options or Restricted Stock held by the Executive shall automatically be accelerated in full so as to become completely vested." 4. A new section shall be added as Section 13 to read, in its entirety, as follows: "13. Limitation on Payments. Notwithstanding anything to the contrary contained herein, in the event it shall be determined that any payment by the Company to or for the benefit of the Executive, whether paid or payable but determined without regard to any additional payments required under this Section 13 (a "payment"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), or any comparable federal, state, or local excise tax (such excise tax, together with any interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in such an amount that after the payment of all taxes (including, without limitation, any interest and penalties on such taxes and the Excise Tax) on the payment and on the Gross-Up Payment, the executive shall retain an amount equal to the Payment minus all applicable taxes on the Payment. The intent of the parties is that the Company shall be solely responsible for, and shall pay, any Excise Tax on the Payment and Gross-Up Payment and any income and employment taxes (including, without limitation, penalties and interest) imposed on any Gross-Up Payment, as well as any loss of tax deduction caused by the Gross-Up Payment. All determinations required to be made under this Section, including without limitation, whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by a nationally recognized accounting firm that is the Company's outside auditor at the time of such determinations, which firm must be reasonably acceptable to the Executive (the "Accounting Firm"). All fees and expenses of the Accounting firm shall be borne solely by the Company." 3 5. Section number and references shall be amended as necessary throughout the Employment Agreement to reflect the foregoing. IN WITNESS WHEREOF, this amendment has been entered into as of the date first set forth above. EXECUTIVE: FREMONT GENERAL CORPORATION James A. McIntyre By: - ---------------------------- ---------------------------------- James A. McIntyre Date: August 8, 1996 Title: President and Chief Operating - ---------------------------- Officer By: Dickinson C. Ross ---------------------------------- Dickinson C. Ross Title: Chair, Compensation Committee of the Board of Directors EX-11 4 EXHIBIT 11 1 EXHIBIT 11 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS FREMONT GENERAL CORPORATION
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ------- ------- ------- (THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) PRIMARY: Weighted average shares outstanding 25,794 25,391 25,305 Net effect of dilutive stock options based on the treasury stock method using average market price 968 688 518 ------- ------- ------- Total 26,762 26,079 25,823 ======= ======= ======= Net income $87,288 $68,022 $55,812 ======= ======= ======= Per share amount $3.26 $2.61 $2.16 ======= ======= ======= FULLY DILUTED: Weighted average shares outstanding 25,794 25,391 25,305 Net effect of dilutive stock options based on the treasury stock method using the year-end market price, if higher than average market price 995 743 520 Assumed conversion of LYONs 6,841 7,209 7,209 ------- ------- ------- Total 33,630 33,343 33,034 ======= ======= ======= Net income $87,288 $68,022 $55,812 Income adjustments for fully diluted computation: Add interest expense, amortization of prepaid expense, net of federal income tax, for assumed conversion of LYONs 4,547 4,488 4,364 ------- ------- ------- Total $91,835 $72,510 $60,176 ======= ======= ======= Per share amount $2.73 $2.17 $1.82 ======= ======= =======
EX-21 5 EXHIBIT 21 1 Exhibit 21 SUBSIDIARIES OF FREMONT GENERAL CORPORATION Each of the subsidiary companies does business under its incorporated name. 1. Domestic Subsidiaries
NAME STATE OF INCORPORATION - ---- ---------------------- Fremont American Insurance Company California Casualty Insurance Company Illinois Comstock Insurance Company California Fremont Compensation Insurance Company California Fremont Indemnity Company California Fremont Compensation Insurance Group, Inc. Delaware Fremont Financial Corporation California Fremont Funding, Incorporated Delaware Fremont Health Corporation California Fremont Life Insurance Company California Fremont Premium Finance Corporation California Fremont Pacific Insurance Company California Fremont Reinsurance Company California Investors Bancor California Fremont Investment & Loan California Menlo Life Insurance Company Arizona Workers' Compensation and Indemnity Company California
2. Foreign Subsidiaries
NAME JURISDICTION OF INCORPORATION - ---- ----------------------------- Fremont Reinsurance Company, Ltd. Bermuda
EX-23 6 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement on Form S-8 pertaining to the Fremont General Corporation and affiliated companies Investment Incentive Program and in the Registration Statement on Form S-8 pertaining to the Fremont General Corporation Supplemental Retirement Plan and Fremont General Corporation Senior Supplemental Retirement Plan and in the Registration Statement on Form S-8 pertaining to the Fremont General Corporation non-qualified Stock Option Plan of 1989 and in the Registration Statement on Form S-8/S-3 pertaining to the Fremont General Corporation 1995 Restricted Stock Award Plan of our report dated March 14, 1997, with respect to the consolidated financial statements and schedules of Fremont General Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1996. /s/ ERNST & YOUNG LLP Los Angeles, California March 28, 1997 EX-27 7 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from SEC Form 10-K and is qualified in is entirety by reference to such financial statements. 0000038984 FREMONT GENERAL CORPORATION 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,005,147 0 0 354,958 0 0 3,172,350 55,378 13,173 25,551 4,307,512 1,458,810 87,422 0 33,093 653,352 100,000 0 28,093 531,024 4,307,512 486,860 123,531 (1,658) 187,071 335,407 96,177 29,937 128,309 41,021 87,288 0 0 0 87,288 3.26 2.73 1,185,706 334,657 750 108,247 401,980 1,010,886 750 Includes loans receivable, short-term and other investments. Sum of Additional paid-in-capital, Retained earnings, Deferred Compensation and Net unrealized gain on investments. Includes loan interest and other revenue. Reserve for Losses and LAE, net of reinsurance recoverable.
-----END PRIVACY-ENHANCED MESSAGE-----