Losses at Insurance Division Prompt Changes at Fremont.

BATTERED by losses in its workers' compensation business, Fremont General Corp. has spent the last year laying off staff, closing offices and increasing its reserves in an effort to reach profitability and avoid having its insurance division seized by state regulators.

The moves have helped revive the shares of the company, which in addition to operating California's largest private workers' comp insurance business has a profitable banking arm. Shares were trading last week at about $3.60 each, down almost 50 percent from their 52-week high of $6.87 on May 1, but still more than double their 52-week low of $1.50 last December.

"While premiums have been rising, they are still nowhere near where they need to be," said Bob Young, communications director with the Workers' Compensation Institute. "It's not an easy industry to make any money in because prices have remained low while losses continue to rise."

According to the Oakland-based trade association, insurers in California's $5.8 billion workers' comp market, which provides employers with coverage for medical treatment and disability payments for injured workers, pay $1.56 in claims and operating expenses for each $1 received in premiums.

"It really is a troubled line (of insurance) in a state that has very low premiums," said Michael Lewis, an insurance analyst with UBS Warburg LLC. "We are waiting to see if the action taken to downsize the company and shore up its reserves have been sufficient to return the company to profitability."

Lewis said the company's return to profitability hinges on how adeptly it evolves into a financial services company and away from its insurance roots.

He is projecting 2001 earnings of 80 cents a share, adjusted down from his previous estimate of $1. Nonetheless, that still compares favorably with the company's disastrous net loss of $8.02 per share in 2000.

Based in Santa Monica, Fremont General is an insurance and financial services holding company, with revenues derived from two subsidiaries: Fremont Compensation Insurance Group and Fremont Investment & Loan, a lender to industrial clients.

The financial services arm of the company generated net income of $102.1 million in 2000, while the insurance division generated a net loss of $748.5 million for the same period. Fremont General's insurance operations represent about $3.8 billion of the holding company's $8 billion in consolidated assets.

Fremont officials declined to comment on the company's financial performance or its outlook.

In December, the company announced plans to close 16 of 24 claims offices as part of a continuing effort to reduce costs. Fremont General said the closings would result in the elimination of 465 jobs, or about 29 percent of the company's workforce. Since last June, the troubled insurance division has cut more than 1,000 jobs, more than half of the company's employment at its peak.

Fremont was also placed on a watch list by the California Department of Insurance. Under terms of an agreement reached with the agency, the department has regulatory oversight of Fremont's operations on an ongoing basis. That has included appointment of a special examiner to provide supervision and regulatory oversight on behalf of the insurance commissioner.

Deputy Commissioner Scott Edelen declined to identify the special examiner.

"During the course of the financial examination being conducted by the California Department of Insurance, the department has confirmed unfavorable operating trends and significant deterioration in the statutory surpluses at Fremont Indemnity Co. and its subsidiary insurance companies," Insurance Commissioner Harry W. Low wrote in a Nov. 27 letter to the company.

As a result of the department's action and the company's weakened capital position, AM Best Co. downgraded the financial strength rating of Fremont Indemnity Co. from "B" (fair), to "E" (under regulatory supervision).

Fremont General reported a net loss of $258.6 million ($4.03 per diluted share) for the fourth quarter ended Dec. 31, compared to a net loss of $48.7 million (80 cents a share) in the like year-earlier period.

Fourth-quarter revenues were $365.8 million, vs. $412.9 million in the fourth quarter of 1999.

"The workers' compensation business likely will be experiencing significant changes over the next year," states a research report by Merrill Lynch & Co. "Price increases are being enacted and the company will likely lose (partly intentionally) much of its large account business. These efforts are clearly designed to make Fremont a smaller, more profitable workers' comp writer.

                           Fremont General Corp.
                               Stock Prices
YEAR (Dec. 31)                      2000     1999
Revenue (millions)              $1,577.2 $1,397.6
Pre-Tax Loss (millions)          (692.9)   (66.4)
Loss from Cont. Ops. (millions)  (518.7)   (40.4)
Net Loss (millions)              (506.3)   (65.3)
Loss Per Share                   ($8.02)  ($1.03)

Business: Insurance and financial services

Headquarters: Santa Monica

CEO: James McIntyre

Market Cap: $271.6 million

Dividend Yield: 2.06%

Total Liabilities: $7.8 billion

P/E Ratio: N/A [*]

Long-Term Debt: $376.8 million

(*.)Fremont General had no earnings last year.