STATE OF CALIFORNIA
DEPARTMENT OF INSURANCE
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INSURANCE COMMISSIONER
300 CAPITOL MALL, SUITE 1700
SACRAMENTO, CA 95814
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July 2, 2002
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President
Fremont Compensation Insurance Group, Inc.
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Secretary and General Counsel
Fremont General Corporation
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Re: Letter Agreement of Run-Off and Regulatory Oversight of the Fremont
Compensation Insurance Group, Inc. Workers' Compensation Insurance
Companies
Dear ▇▇. ▇▇▇▇▇▇▇ and ▇▇. ▇▇▇▇▇▇:
On November 27, 2000, the California Department of Insurance (the "Department"),
Fremont Compensation Insurance Group, Inc. ("FCIG") and Fremont General
Corporation ("FGC") entered into a Letter Agreement of Regulatory Oversight (the
"November 27, 2000 Letter"). Fremont Indemnity Company ("FIC"),, FCIG's
insurance company subsidiary (FCIG and FIC, collectively "Fremont"), have been
operating under that Agreement through the present date. Since that time,
Fremont has been unable to improve its operating trends in a manner that it
believes is necessary for it to continue writing workers' compensation
insurance. The Department, however, has also determined that Fremont has
significant invested assets, including approximately $1 billion of invested
assets, and the capability to pay both claims and operating expenses as those
obligations become due. In light of those positive factors and Fremont's desire
to terminate writing new business and self-administer the run-off of its
business currently in force, the Department, FGC and Fremont agree as follows:
1. The Department's appointment of the Special Deputy Examiner pursuant to the
November 27, 2000 Letter to provide supervision and regulatory oversight on
behalf of the California Insurance Commissioner (the "Commissioner") to
Fremont will remain in effect. The Special Deputy Examiner, in consultation
with the Commissioner and his staff, may retain other staff provided by
California Insurance Code Section 733(g) to assist in that supervision and
oversight. Costs for retention of the Special Deputy Examiner and any other
staff shall be borne by Fremont. The Department shall use its best efforts
to minimize such costs.
2. Fremont shall not write, assume, or issue any new insurance policies on or
after June 30, 2002, unless and until it is given express written approval
to do so by the Department.
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July 1, 2002
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3. Fremont shall self-administer the run-off of its policies currently in
force by paying claims and operating expenses in the ordinary course of the
business run-off through the liquidation and realization of invested assets
by Fremont as such obligations come due and in accordance with the
applicable law, unless otherwise provided for herein or otherwise approved
by the Department.
4. Fremont shall not make any dividend payment or any other payment or
distribution to or engage in any transaction, or enter into any agreement
directly or indirectly with its parent company, or any affiliated company,
without prior written approval of the Department, except for payments and
transactions pursuant to the Services and Investment Management Agreement
between FGC and Fremont, effective February 1, 1999. However, the Services
and Investment Management Agreement fees shall not include FGC expenses
which would not be customary of a runoff operation such as, but not limited
to, bonuses, stock options, stock awards, or expenses related to sales,
marketing or entertainment.
5. Fremont shall not make any withdrawal of monies from its bank accounts,
disbursement or payment outside the ordinary course of the business run-off
without the prior written approval of the Department.
6. Fremont shall not incur any debt, obligation or liability for borrowed
money not related directly to the ordinary course of business run-off
without the prior written approval of the Department.
7. Fremont shall file regular quarterly statements no later than 45 days
following the quarter being reported thereon.
8. Effective December 31, 2001, the Department granted Fremont permitted
accounting practices to discount its loss and loss adjustment expense
reserves for all accident years and to hold assets in excess of the single
issuer investment limitations of the California Insurance Code (the
"Code"). The discount rate allowed was 5.5% and it was applied to the loss
and loss adjustment expense reserves identified as the "mid-point" reserves
in the most recently available actuarial analysis report prepared by an
agreed upon actuary, and based on the payout pattern contemplated by such
report ("Required Reserves").
The permitted accounting practices granted to Fremont by the Department are
an integral part of Fremont's comprehensive business run-off plan and this
Agreement. Since such run-off is anticipated to take course over several
years, it is anticipated that prior to the end of each year, Fremont will
request and the Department will consider the appropriateness of (a) loss
and loss adjustment expense reserves discounting, (b) the discount rate in
light of the actual yield on supporting assets and actual development of
incurred losses and loss adjustment expenses, and (c) permitting Fremont to
continue to maintain assets in excess of the Code's single issuer
investment limitations.
9. Fremont shall not enter into any new material reinsurance agreement nor
amend in any material respect any existing material reinsurance agreement
without the prior written approval of the Department.
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July 1, 2002
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10. Fremont shall not add any individual who is not currently a senior
executive officer of Fremont, or one of its affiliates, to the board of
directors of Fremont without the prior written approval of the Department.
11. Fremont shall not change the terms of any written plans for remuneration,
consulting, deferred compensation or bonus plans for directors and officers
of Fremont without the prior written approval of the Department.
12. Fremont shall not enter into any new agreement nor revise any existing
agreement for any form of current or future remuneration or other
compensation, including severance agreements (other than severance
agreements documenting terminations under existing plans, policies and
agreements) for services rendered to Fremont by officers of Fremont,
without the prior written approval of the Department.
13. Other than security interests granted in connection with repurchase
agreements acquired in the ordinary course of business, Fremont shall not
pledge or assign any of its assets to secure indebtedness for borrowed
money without the prior written approval by the Department.
14. Fremont shall provide to the Department any additional reports that the
Department reasonably determines are necessary to ascertain the financial
condition of Fremont.
15. Fremont shall not pay any fees related to the non-consummation of any
material agreement without the prior written approval of the Department.
16. Fremont shall obtain a resolution from the Board of Directors of each of
its insurance companies which consents to the terms of this agreement, and
requests ▇▇▇▇-▇▇▇ ▇▇▇▇▇▇▇, President of Fremont to execute this Agreement
on its/their behalf.
17. It is understood that the actuary report and analysis normally used for
completion of California Special Schedule P in determination of the
workers' compensation trust deposit requirement, may not be available to
establish release of deposits necessary to pay claims and operating
expenses. The Department shall make reasonable good faith efforts to
cooperate in the timely release of Fremont's workers' compensation trust
deposits as necessary to insure the timely payment of claims and operating
expenses in the ordinary course of the business run-off while optimizing
return on investment for protection of policyholders.
18. This Agreement will be superseded, in its entirety, except for Paragraphs
19 and 21 herein, if prior to March 1, 2004, the Department obtains an
Order of Conservation from a California Superior Court. However,
contributions received pursuant to Paragraph 20 are not refundable under
any circumstance. On and after March 1, 2004, this Agreement shall remain
in full force and effect until a) the Department provides written notice to
Fremont that it is released from its obligations required herein
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July 1, 2002
Page 4
or b) it is superseded by Order of a California Superior Court except for
Paragraphs 19 and 20, which shall remain in full force and effect.
Furthermore, the Department agrees to consider the surplus benefit derived
from any permitted accounting practice and future contributions set forth
in Paragraphs 8 and 20, respectively, prior to taking any action to place
Fremont in conservatorship, liquidation or receivership.
19. In consideration of FGC agreeing to make the contributions to FIC described
in Paragraph 20 hereof, FIC hereby transfers to FGC, with the Department's
express consent, any and all right, title and interest in and to the right
to benefit from the net operating loss of or attributable to FIC (the
"NOL"). The Department acknowledges that the NOL is critical to and the
property of FGC and maintenance of such asset is dependent on the continued
consolidation of FIC with FGC for federal income tax purposes. The
Department shall cooperate with FGC in the preparation of consolidated
income tax returns and shall not request from the Internal Revenue Service
termination of status of FIC as a member of the FGC consolidated group. If
FIC is placed into conservatorship or receivership, neither the Department
nor any of its agents or representatives shall sell any or all of FIC
stock, issue FIC stock, claim tax exempt or nonprofit status for FIC or
transfer substantially all of the assets of FIC to another corporation. If
FIC is placed in liquidation, the Department shall consult with FGC and its
advisors and shall take such reasonable actions as requested by FGC
necessary to preserve the benefit of the NOL for FGC, consistent with the
Department's obligations to FIC's policyholders and creditors.
20. FGC shall contribute $13.25 million cash to Fremont during each of the
calendar years 2002 - 2004. Except for the year 2002, the contributions
shall be made in equal quarterly installments of $3,312,500 on the 1st
business day of February, May, August and November of each year. The
contribution requirement for the year 2002 includes the $6 million that FGC
previously contributed for this year. The remaining $7.25 million
contribution for the year 2002 shall be made in installments as follows:
(1) $625,000 on the effective date of this agreement; (2) $3,312,500 on
August 1, 2002; and (3) $3,312,500 on November 1, 2002.
The Department shall evaluate Fremont's statutory surplus as of December
31, 2004, using the Required Reserves as of that date. If the Required
Reserves plus the statutory surplus are adequate to pay existing and future
claims then FGC shall not be required to make future contributions unless
and until the Required Reserves plus statutory surplus are determined to be
inadequate to pay existing claims.
If at December 31 for each year from 2005 and going forward, the Required
Reserves plus statutory surplus becomes or remains inadequate to pay
existing and future claims, FGC shall contribute cash equal to the
deficiency, up to $13.25 million in any one year, to Fremont during each of
the calendar years 2005 and going forward. The contributions shall be made
in equal quarterly installments on the 1st business day of February, May,
August and November in each of these years. Any deficiency not paid in any
of these years shall be a deferred contingent liability to be paid in any
future year if the
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July 1, 2002
Page 5
Required Reserves plus statutory surplus becomes or remains inadequate to
pay existing and future claims. However, the amount of contribution for any
one year, including deferred contingent liabilities from previous years,
shall be limited to no more than $13.25 million.
This agreement provides for a total of all contributions of FGC of up to
$92.75 million. However, nothing in this agreement shall preclude FGC from
making contributions in excess of this amount.
The contributions required in this Paragraph are not refundable under any
circumstances, and the obligation to make the contributions shall remain in
effect, notwithstanding any regulatory, conservation or liquidation
proceeding which may be taken on or after March 1, 2004; provided however,
such obligation shall not survive any regulatory, conservation or
liquidation proceeding taken prior to that date.
21. All intercompany balances between Fremont and FGC as of the effective date
of this agreement shall be considered settled, which includes all
management fees paid or incurred as well as any intercompany tax balances
arising out of the Tax Sharing Agreement between Fremont and FGC. The
Department agrees and acknowledges that all intercompany tax balances
between Fremont and FGC have been paid and settled and that no additional
tax payments for tax years 2001 and prior are due from FGC. Further, the
Department agrees and acknowledges that the utilization in the FGC
consolidated income tax returns of any tax net operating losses generated
prior to January 1, 2002 by Fremont or ▇▇▇▇▇▇▇▇ Insurance Company, shall
not give rise to a liability for any additional tax settlement payments to
FCIG and its associated companies. FGC agrees that no additional taxes will
be owed by Fremont in the event that any pending or future IRS tax audit
results in additional taxes owed.
22. All documents and copies thereof obtained by or disclosed to the Department
pursuant to this Agreement shall be kept strictly confidential by the
Department, except that the Department may share such information and
documents with other state regulatory authorities pursuant to a
confidentiality agreement. This provision does not apply to documents
already deemed public by law or regulation, e.g., quarterly financial
statements nor does this provision serve to limit the Commissioner's
authority or discretion provided pursuant to CIC section 735.5.
23. Fremont shall not enter into any sales, purchases, exchanges, loans,
extensions of credit or investments not in the ordinary course of its
runoff business if the transactions exceed one percent (1%) Fremont's
admitted assets without the Department's prior written consent.
24. As of the date this Agreement is executed by all parties to it, this
Agreement supersedes and terminates the November 27, 2000 Letter in all
respects.
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July 1, 2002
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Any questions related to and all filings required by this Agreement should be
directed to ▇▇▇▇▇▇ ▇. ▇▇▇▇▇, Deputy Commissioner, Financial Surveillance,
Department of Insurance, State of California, ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇
▇▇▇▇▇, ▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇. Telephone ▇▇▇-▇▇▇-▇▇▇▇.
Very truly yours,
/S/ ▇▇▇▇▇ ▇. ▇▇▇
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Insurance Commissioner
Date: July 2, 2002
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June 27, 2002
Page 7
FREMONT GENERAL CORPORATION:
/s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇ Date: June 28, 2002
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Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: Secretary & General Counsel
FREMONT COMPENSATION INSURANCE GROUP, INC.:
/s/ ▇▇▇▇ ▇▇▇ ▇. MISRAHY Date: June 28, 2002
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Name: ▇▇▇▇-▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: President & CEO
FREMONT INDEMNITY COMPANY:
/s/ ▇▇▇▇ ▇▇▇ ▇. MISRAHY Date: June 28, 2002
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Name: ▇▇▇▇-▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: President & CEO
