Fremont Downgraded, Under CDI’s Supervison

Fremont General Corp. and related entities are now under the increased regulatory oversight of the California Department of Insurance (CDI), and the three big rating organizations are not taking this as a good sign. A.M. Best Co., Standard & Poor’s, and Fitch were all quick to lower the company’s ratings following the announcement.

A.M. Best downgraded the financial strength rating (FSR) of Glendale, Calif.-based Fremont Compensation Insurance Group from “B” to “E” (under regulatory supervision) and removed it from under review. The FSR on the subsidiaries were previously downgraded from “A-” to “B++” on March 1, 2000. And in June, the FSR on the company’s workers’ comp insurance subsidiaries, the seven members of Fremont Compensation Insurance Group, were downgraded to “B.”

S&P lowered its ratings on Fremont General Corp. and Fremont General Financing I and revised to “R” its ratings on the members of the Fremont Comp Intercompany Pool.

Fitch lowered Fremont’s senior debt rating to “CCC-” from “B-” and the preferred securities of Fremont General Financing I to “CC” from “CCC.” The Fremont Compensation Insurance Group’s insurer FSR was lowered to “DDD” from “BB-” and the “BB-” ratings of Fremont Employers Ins. Co. and Fremont Indemnity Co. of the Northwest were withdrawn.

Due to Fremont’s weakened capital position, Fremont’s management entered into an agreement with the CDI late last month which allows the Department significant regulatory oversight of Fremont’s operations on an ongoing basis. This includes the appointment of a Special Deputy Examiner to provide supervision and regulatory oversight to Fremont on behalf of the Commissioner. According to Deputy Commissioner Scott Edelen, the CDI is currently interviewing candidates for the position.

The agreement also allows the members of the group to generate surplus through discounting their workers’ comp loss and allocated loss adjustment expense reserves for accident years 1999 and prior. In addition, the group has agreed with the CDI to limit consolidated new and renewal insurance premium writings to $400 million in 2001.

“The driver of taking the rating of ‘BB’ (Credit Watch Negative) to ‘R’ was based on the announcement that the company said that they reached an agreement with the regulators, that the reinsurance transaction with XL [Capital Ltd.] was not going to transpire,” said S&P Director Darin Feldman. “And the substance of the agreement was such that Standard & Poor’s deemed it to be the equivalent of regulatory supervision.”

The agreement states that “Fremont shall file by Jan. 1, 2001, a detailed business plan that sets forth forecasted premium writings, losses and expenses for 2001… Furthermore, forecasted new and renewal premium writings shall not exceed $400 million.”

Everyone is keeping a close eye on Fremont. S&P will keep the company under “R” with no change until there is some formal announcement that the company has successfully come out from underneath the watch of the regulators. “We will continue to monitor it, but not with the scrutiny as prior to being taken over by the regulators,” Feldman said.

Topics Legislation