Fremont General Corporation’s ongoing property and casualty insurance subsidiaries have entered into certain agreements with the California Department of Insurance which, among other things, will allow these insurance subsidiaries to adjust to present value their workers’ compensation net loss and allocated loss adjustment expense reserves for accident years 1999 and prior.
The adjustment to present value will be computed beginning Sept. 30, 2000 and is applicable to both indemnity and medical reserves. Upon reviewing various reinsurance options and other alternatives, the insurance subsidiaries’ management and the DOI believe that this approach is the most cost-effective method in mitigating the impact on the insurance subsidiaries of the gross loss and loss adjustment expense reserve action in the second quarter ended June 30, 2000.
At Sept. 30, 2000, the insurance subsidiaries will have a consolidated statutory insurance surplus of approximately $220 million. The impact of the present value adjustment only affects the statutory financial statements of the insurance subsidiaries.
The insurance subsidiaries’ other domiciliary insurance regulators have indicated, subject to their review of the entire arrangement, that this accounting practice would be permissible. In conjunction with this present value adjustment, the insurance subsidiaries have agreed with the DOI to limit their consolidated new and renewal insurance premium writings to $400 million in 2001.
This action is in line with the company’s intent to reduce its premium writings as stated in its Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission. The limitation on the insurance subsidiaries’ 2001 premium writings is part of an agreement that allows the DOI increased regulatory oversight of its operations.
Under the agreement, the insurance subsidiaries will provide the DOI with additional and more frequent regulatory financial information, and have agreed to obtain the DOI’s prior approval on future material transactions, including insurance subsidiary dividends.
The company has further agreed with the DOI to provide additional capital to the insurance subsidiaries in five annual installments of $6 million each beginning in the first quarter of 2001.
As a result of the regulatory approval of this alternative, the adverse loss development reinsurance agreement and associated transactions are no longer necessary and will not be consummated.
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