Navigating the Straights, Fremont Compensation Sets its Course for Deeper Waters in 2001
By Robert Warne - March 9, 2001If fair weather signs are favorable within the next two to three weeks, Fremont General Corporation foresees its Workers’ Comp division breaking even in 2001, especially if its fronting company agreement under consideration is approved by the Department of Insurance.
Following a conference call with Fremont General on Thursday March 8, Wayne Bailey, Fremont General’s chief financial officer, explained that the pending fronting agreement would enable Fremont to retain a greater portion of its premium. Also, he explained how the arrangement with the fronting company will work.
Fremont Compensation will use the fronting company’s "A" rated paper in the market place. Fremont becomes the re-insurer and takes all the risk. The fronting company will be paid a fee for the use of its paper. This increases the security for the risk and allows Fremont to retain its accounts. Also noted was that a portion of Fremont’s business requires "A" rated paper. Fremont plans on passing most of its book on to the frontage company.
Fremont has reduced its gross written premiums from 1.2 billion to currently $695 million. The average policy now is $10,500, with 91% of its policies being $25,000 or smaller. Fremont has been renewing approximately 25% of its book since restructuring, averaging increases in premium of 50%.
Fremont’s renewal rate of approximately only 25% prompted the question of whether Fremont would have to re-evaluate its expenses. Bailey said that they are always looking for ways to reduce expenses, but doesn’t expect another 400-person lay-off.
Bailey was also asked whether Fremont’s loss cost trends were a direct result of medical costs. He responded saying that it is hard to pinpoint one exact cause to the sudden emergent costs doubling in ’98 and ’99 associated with Fremont’s claims. Yes, medical costs play a part in this, but he finds it disturbing that they don’t have an exact answer as to why this is happening. The good news in reference to this is, that for the first time, in a long time, the loss reserves have stabilized.
So with losses totaling pre-tax $750 million, Fremont General prepares to pull a "Waterworld," with its Workers’ Comp division.
It was rumored in ’95 Universal Pictures gave a blank check to the producers of the record setting box office $175 million bomb, "Waterworld." Universal took the hit with a smile to offset the tax burden of its financial windfall from "Jurassic Park."
Regardless of Fremont’s poor showing with its Workers’ Comp division, its Financial division posted a banner $215 million in profits. Perfect timing for a tax shelter, although not planned.
What also could work in Fremont’s favor is the possibility of Fremont General not having to pay any taxes in 2001. The situation could materialize if the Workers’ Comp division had a break-even year, and if Fremont runs a pre-tax charge of $100 to $120 million out of its Financial division.
Looking forward, Bailey said that there is no possibility that Fremont Compensation will be shut down. This is primarily due to the success of Fremont General’s Financial division thrift and loan operation, which has a projected net income of $350-$400 million for 2001. Bailey said that the thrift and loan business will be its key business going forward as the insurance business stabilizes.
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