Fremont General Posts $270 Million Quarterly Net Loss, Announces Strategic Reinsurance Plan

August 14, 2000

Fremont General Corporation reported a second quarter net loss of $268,073,000 comprised of a net loss from continuing operations of $270,318,000 and an after tax gain on the extinguishment of debt of $2,245,000.

The Company also announces the execution of a letter of intent with XL Capital Ltd that includes the establishment of an adverse development reinsurance agreement between certain of the insurance subsidiaries of the Company and XL.

This reinsurance agreement will provide coverage for the Company’s workers’ compensation losses that occurred primarily in 1999 and prior years, and is expected to mitigate the impact of the Company’s losses recognized in the three months ended June 30, 2000 on its property and casualty insurance operation.

Finally, the Board of Directors of Fremont General Corporation declared payment of a cash dividend of $.04 per share on the common stock, payable October 31, 2000 to shareholders of record on September 29, 2000.

This second quarter net loss from continuing operations of $270,318,000 compares to a net income from continuing operations of $34,975,000 for the same quarter a year ago. On a per share basis, the Company reports a basic and diluted net loss per share of $4.26 in the quarter ended June 30, 2000, comprised of $4.29 in net loss per share from continuing operations and $.03 in after tax gain per share on the extinguishment of debt.

This compares to $.52 and $.50 in basic and diluted net income per share from continuing operations, respectively, for the same quarter a year ago. For the six months ended June 30, 2000, the Company reported a net loss of $258,589,000 comprised of a net loss from continuing operations of $260,834,000 and an after tax gain on the extinguishment of debt of $2,245,000.

This compares to a net income from continuing operations of $69,286,000 for the same period a year ago. On a per share basis, the Company reports a basic and diluted net loss per share of $4.14 for the six months ended June 30, 2000, comprised of $4.17 in net loss per share from continuing operations and $.03 in after tax gain per share on the extinguishment of debt.

This compares to $1.03 and $.99 in basic and diluted net income per share from continuing operations, respectively, for the same period a year ago. The loss before tax from continuing operations for the second quarter of 2000 was $417,605,000 on revenue of $428,334,000 as compared to income before tax of $51,921,000 on revenue of $336,111,000 for the same prior year quarter.

The property and casualty operations recorded a loss before tax in the second quarter of $425,833,000, while the financial services operations posted income before tax of $23,072,000. Property and casualty insurance operations The property and casualty insurance operations, represented primarily by workers’ compensation insurance, recorded a loss before tax of $425,833,000 for the second quarter of 2000 as compared to income before tax of $42,227,000 for the second quarter of 1999.

Additionally, the combined ratio was 259.0% in the quarter ended June 30, 2000, as compared to 95.7% for the same prior year quarter. The significant property and casualty insurance segment loss before taxes in the three and six months ended June 30, 2000 is predominantly the result of increases during the three months ended June 30, 2000 in the Company’s gross liability for loss and loss adjustment expenses (“gross loss and LAE reserves”) totaling $450 million under workers’ compensation policies effective in or prior to 1999.

The Company’s reserve action was determined through an evaluation of several factors, including increased severity trends observed since December 31, 1999 relating to the 1999 and prior accident years, increased variability of actuarial indications, and increased uncertainty within the workers’ compensation industry as to the underlying causes and consequent ultimate impact of increases in claim severity and an observed acceleration in the payment of claims.

In an effort to mitigate the impact of the Company’s reserve action on its property and casualty insurance operation, the Company has entered into a letter of intent with XL which includes, among other things, an agreement to establish an adverse development reinsurance agreement between an insurance subsidiary of XL and the Company’s workers’ compensation insurance subsidiaries, and is expected to provide reinsurance protection for up to $400 million of the $450 million in loss and LAE reserves established by the Company in the three months ended June 30, 2000.

This reinsurance agreement primarily covers losses occurring in 1999 and prior years. In addition to the adverse development reinsurance agreement, the letter of intent includes an agreement to establish a second reinsurance agreement between the same insurance subsidiaries on a prospective basis.

This second reinsurance agreement is intended to be of the quota share type, wherein XL will have the option for a period of four years to share at a specified percentage in the insurance premiums earned, losses and certain loss adjustment expenses incurred, and certain underwriting expenses under the Company’s workers’ compensation insurance policies issued after the reinsurance agreement’s effective date.

Final terms and conditions of the reinsurance agreements, including pricing and profit sharing provisions for the benefit of the Company, have yet to be finalized and are subject, among other things, to the completion of due diligence procedures by XL. Furthermore, the reinsurance agreements will be subject to regulatory approval by the applicable state insurance authorities.

The two reinsurance agreements contemplated in the letter of intent are in addition to a reinsurance agreement, which was effective April 1, 2000 and purchased by the Company from the insurance subsidiary of XL, that indemnifies the Company for up to $750,000 in excess of $250,000 for each loss occurring under workers’ compensation insurance policies incepting or renewing on or after April 1, 2000.

The letter of intent also includes an agreement for Fremont General Corporation to issue both common stock warrants and senior non-callable convertible debentures (the “debentures”) to XL. The common stock warrants provide XL the option to purchase up to 7 million shares of common stock of Fremont General Corporation at an exercise price not to exceed $5.00 per share. With respect to the debentures, the Company is expected to issue, at XL’s discretion, between $15 and $25 million in principal amount of debentures, which will carry a coupon rate of 10%, a maturity of ten years, and be convertible into the common stock of Fremont General Corporation at a price not to exceed $5.00 per share.

Final terms of the debentures have yet to be determined by the Company and XL. The transaction was structured by XL Financial Solutions, a division of XL. XL’s common stock is traded on the New York Stock Exchange under the symbol “XL.” Financial services operations The financial services operations, represented by Fremont General Credit Corporation, recorded income before tax of $23,072,000 for the three months ended June 30, 2000, up 34% from $17,222,000 for the same prior year period.

Net loans receivable, which include commercial and residential real estate loans, investments in syndicated loans and insurance premium notes receivable, were approximately $3.1 billion at June 30, 2000, up 14% from $2.76 billion at June 30, 1999. Other interest and corporate expense Other interest and corporate expense was $14,844,000 in the three months ended June 30, 2000 as compared to $7,528,000 for the same prior year quarter.

The increase in other interest and corporate expense was due primarily to lower affiliate interest income from the Company’s downstream holding company subsidiaries. The affiliate interest income is included in the determination of other interest and corporate expense for segment reporting purposes. The lower affiliate interest income resulted from the Company’s conversions on January 1, 2000 and April 1, 2000 of approximately $154 million and $267 million, respectively, in notes receivable due from these subsidiaries to common equity in the subsidiaries, thereby establishing capital contributions to them.

With these debt conversions, beginning January 1, 2000, and to a larger extent April 1, 2000, the Company’s other interest expense is, and will continue to be, higher. After these conversions, there is no affiliate debt due from the Company’s downstream holding company subsidiaries. “FMT.”

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