Fremont General Pursues Deal for Sale of Ailing Unit
By LAURENCE DARMIENTO
Staff Reporter
Fremont General Corp., once the state’s second-largest underwriter of workers’ compensation insurance, has decided to exit that market and remake itself solely as a financial services firm.
The Santa Monica-based company, which suffered staggering losses in the market two years ago that left it under state supervision, is trying to sell its remaining workers’ compensation business to Employers Insurance Co. of Nevada.
Fremont, which revealed its decision in a press release on its quarterly results and declined further comment, expects to complete the deal sometime this quarter. But if it is unable to do so, it plans to discontinue the operations of its insurance division to focus on its growing financial services arm.
The company operates Fremont Investment & Loan business, a California thrift that makes commercial and sub-prime residential real estate loans nationwide.
The move comes after Fremont drastically cut its underwriting in the workers’ compensation market from nearly $1 billion at its height to just over $100 million last year after state regulators ordered it to stem its losses.
That downsizing left the company with a relatively stable book of business, but one too small to retain, said Norris Clark, a California deputy insurance commissioner in charge of financial surveillance.
“They shrunk so quickly they had a lot of overhead expenses they couldn’t absorb,” said Clark. “The company was of such a size and had such an infrastructure that there was a minimum amount of business they needed to do.”
Fremont was among several insurers that scrambled for market share in the late 1990s after the state’s workers’ compensation market was deregulated. The result was a brutal premium price war.
In the most high-profile case, Calabasas-based Superior National Insurance Group was declared insolvent in 2000, forcing 30,000 policyholders to find new customers. At the time it was the state’s largest private workers’ compensation insurer behind the State Compensation Insurance Fund and just ahead of Fremont.
Mounting losses
Fremont, meanwhile, saw its workers’ compensation business, which earned $115 million in 1998, slip into the red with $94.7 million in losses in 1999, a loss that ballooned to $547.4 million in 2000.
That led to a series of cuts that included closing offices, laying off workers and signing a reinsurance deal to keep afloat. By the end of 2000 the company was being informally supervised by the state Department of Insurance, and had seen its rating from the A.M. Best Co. drop to “E,” one step above an “F.” By last year, the company had net income of $2.3 million for its insurance operations.
The Employers Insurance deal is still being worked out and financial terms have not been disclosed. But Fremont has reported that it will involve only the sale of its new, on-going business. It will continue to service policies issued in the past.
Claims and payouts from workers’ comp policies can go on for years as injured workers seek compensation. Fremont General’s insurance infrastructure, including its software and employees, are part of the deal.
Employers Insurance is the largest workers’ compensation insurer in Nevada with nearly a third of the state’s market. It formerly operated as the state’s workers’ compensation fund but was privatized in early 2000.
The company reported net income of $20.6 million on $126.5 million in earned premiums last year, down from $26.9 million in net income on $206.7 million in earned premiums in 2000 as it has faced competition in the newly deregulated Nevada market.
Phil Levine, a spokesman for the company, said Employers Insurance is looking to expand its business, and adjacent California was a clear avenue, despite the turmoil in the market for the past few years. “California obviously presents a great opportunity,” he said.
Bob Farnham, a senior financial analyst with A.M. Best, said that Employers Insurance, which is not yet rated by the agency, might be coming into the California market at the right time.
After the debilitating price war of the late 1990s, workers’ comp insurers have been ratcheting up premiums 20 to 30 percent annually over the last few years, and there are indications that will continue.
“The California market is improving, and that is where a company like this might benefit,” Farnham said. “If you can start fresh now it’s probably a decent time to get in.”
The sale should also benefit policyholders, because their policies would be transferred to another insurer that should be stronger given its size after the sale. “They will have quite a business,” he said.
Robert Robotti, president of Robotti & Co., a Wall Street investment boutique, said he is not sold on Fremont’s new strategy, contending that the company’s plans to grow its loan business could result in higher non-performing loans.
“I do think their business has all kinds of red flags all over it,” said Robotti, who has a short interest in Fremont. “Their core business they ran into the ground and this is not even their core business.”
