Moody’s Downgrades Fremont General’s Senior Debt Rating

Moody’s Investors Service downgraded the senior debt ratings of Fremont General Corporation to Caa1 from B2. Moody’s also downgraded the company’s subordinated debt ratings to Caa3 from B3 and the preferred stock ratings of Fremont General Financing I to Caa3 from Caa1. In the same action, Moody’s downgraded the insurance financial strength ratings for members of the Fremont Indemnity Company to Caa3 from B2. Following these rating actions, Moody’s withdrew the insurance financial strength ratings as Fremont has discontinued its insurance operations and entered into an agreement to sell its ongoing workers’ compensation insurance business to Employers Insurance Company of Nevada. The outlook for the debt ratings is stable.

Moody’s noted that the debt ratings were downgraded following the company’s most recent agreement with the California Department of Insurance that requires ongoing capital contributions from Fremont General Corporation to support the run-off insurance liabilities, increasing fixed charges and reducing debt service capabilities. While the majority of the contributions are contingent upon reserve adequacy at the insurance operations, Moody’s believes that the weak balance sheet at the insurance operations, of which reinsurance recoverables are a substantial amount, coupled with the potential for adverse loss development in the company’s workers’ compensation reserves, increases the probability that the contingent capital contributions could become required and that the insurance operations could enter regulatory conservation.

Moody’s stated that the stable outlook reflects expectations that Fremont will continue to service debt and decrease leverage from cash flows generated at Fremont Investment & Loan (FIL), the company’s nationwide industrial banking operation. Moody’s noted that its current view of the company’s ratings rests largely with the cash flow generation capabilities of FIL, tempered by the financial difficulties and ongoing regulatory concerns of the discontinued insurance operations. Moody’s indicated that if FMT’s exposures to the problems at the insurance operations decline over time due to a successful run-off of the insurance liabilities, the capitalization and cash flow capabilities of FIL’s operations would drive the debt ratings.

The following rating actions have been taken:

Fremont General Corporation—Senior unsecured debt ratings downgraded to Caa1 from B2; subordinated debt ratings downgraded to Caa3 from B3;
Fremont General Financing I—Preferred stock ratings downgraded to Caa3 from Caa1;
Fremont Indemnity Company—insurance financial strength downgraded to Caa3 from B2, rating withdrawn;
Fremont Compensation Insurance Company—insurance financial strength downgraded to Caa3 from B2, rating withdrawn;
Fremont Casualty Insurance Company—insurance financial strength downgraded to Caa3 from B2, rating withdrawn;
Fremont Industrial Indemnity Company—insurance financial strength downgraded to Caa3 from B2, rating withdrawn;
Fremont Indemnity Company of the Northwest—insurance financial strength downgraded to Caa3 from B2, rating withdrawn;
Fremont Employers Insurance Company—insurance financial strength downgraded to Caa3 from B2, rating withdrawn;
Fremont Pacific Insurance Company—insurance financial strength downgraded to Caa3 from B2, rating withdrawn.