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SANTA MONICA, Calif.-Fremont General Corp. is moving closer to its goal of writing workers compensation insurance nationwide with its $365 million purchase of Industrial Indemnity Holdings Inc.
The deal also moves Xerox Corp., the current owner of Industrial Indemnity, closer to its goal of exiting the insurance and financial services business.
The transaction comes several months after a proposed $2.7 billion deal for Xerox to sell all of its insurance interests to Kohlberg Kravis Roberts & Co. fell through.
Instead, Xerox is now selling the individual units of its insurance holding company Talegen Holdings Inc. The sale of Industrial Indemnity is expected to be followed by the sale of two remaining Talegen units by years-end.
In addition to the cash payment of $365 million, which will be paid by subsidiary Fremont Indemnity Co., Fremont will pay off about $79 million of Industrial Indemnity's debt.
The main benefit of the purchase is that it adds greater geographical diversification to Fremont, said James E. Little, president and chief executive officer of Fremont Compensation Insurance Group, the holding company for Fremont General's workers comp insurers.
"It furthers our strategy of national expansion," he said.
Fremont traditionally focused on writing workers comp insurance in California. But it began to diversify in February 1995, with the purchase of Chicago-based Casualty Insurance Co., which writes business throughout the Midwest.
The purchase of Industrial Indemnity will bring to Fremont new workers comp business from most Western states, including Alaska, as well as additional business in California, Mr. Little said.
The California offices of Fremont and Industrial Indemnity will likely be merged, he said.
The geographic diversification drive will continue through new Fremont offices recently opened in New York, Massachusetts and New Jersey. New offices are expected to be opened in the Southeast later this year, Mr. Little said.
In addition to widening Fremont's geographic scope, Industrial Indemnity has substantial reserves, he said.
"Unlike many comp companies, it has $1.2 billion in cash that comes in the form of loss reserves, and as comp is driven by investment earnings that is very attractive," Mr. Little said.
The purchase will also boost Fremont's revenues. In 1996, Industrial Indemnity had gross revenues of about $325 million while Fremont's were $795 million.
Fremont's earned premiums last year totaled $487 million, more than 90% of which were attributable to workers comp.
Rating agencies and analysts welcomed the purchase.
"The key thing for us is that
Fremont has improved its spread of risk and (Industrial Indemnity) fits into its game plan," which is to be a national workers compensation insurer, according to Matthew Coyle, associate director at Standard & Poor's Corp. in New York.
The only hurdle Fremont will have to overcome is the integration of Industrial Indemnity, Mr. Coyle said.
"They did very well with the integration of Casualty, and that has been a boost to earnings," he added.
But the proximity of the two deals may make it harder for Fremont to quickly integrate Industrial Indemnity, said Eric Simpson, senior vp at A.M. Best Co. of Oldwick, N.J. Best placed its A-rating of Fremont under review following the announcement of the deal.
Nevertheless, the geographic diversification that Industrial Indemnity brings to Fremont will strengthen the insurer, he agreed.
"It will stretch the management in the near term, but in the long term it is a well-thought-out transaction," Mr. Simpson said.
Additionally, Industrial Indemnity is a well-structured company that has made significant investments in innovative new technology, said Russell R. Miller, chairman of Russell Miller Inc., a San Francisco investment company that specializes in the insurance industry.
"It does not look like a traditional workers comp insurer that just moves along putting one foot in front of the other," he said.
Xerox's sale of Industrial Indemnity follows the $421 million sale of other reinsurance units including Constitution Reinsurance Corp. to EXOR America Inc. in 1995 (BI, Dec. 26. 1994).
Xerox had agreed to sell the remaining Talegen units to KKR in January 1996 (BI, Jan. 22, 1996). But in September, KKR pulled out (BI, Sept. 16, 1996).
After the KKR deal collapsed, Xerox returned to selling Talegen in pieces and in January 1997 it agreed to sell Coregis, a professional liability insurer in Chicago, to GE Capital Corp. for $450 million.
With the sale of Industrial Indemnity, Xerox now has two other Talegen insurance units left for sale: Crum & Forster Holdings Inc. and Westchester Specialty Group Inc. Both units are expected to be sold by the end of 1997, a Xerox spokesman said.