Form 10-K

As of December 31,

Statutory capital and surplus

10-K 1 d10k.htm FORM 10-K Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: to

Commission file number: 000-50926

FREMONT MICHIGAN INSURACORP, INC.

(Exact name of registrant as specified in its charter)

Michigan

42-1609947

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

933 E. Main St., Fremont, Michigan 49412

(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (231) 924-0300

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

The aggregate market value of the registrants voting common stock held by non-affiliates was $32,329,800 based on the closing sales price of $18.75 per share on June 30, 2006 as reported by the OTC Bulletin Board.

The number of shares outstanding of the registrant’s common stock, no par value, was 1,727,456 shares as of March 20, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held May 10, 2007 are incorporated by reference in Part III of this report.

FORWARD-LOOKING STATEMENTS

Fremont Michigan InsuraCorp, Inc. (the “Holding Company”) and Fremont Insurance Company (the “Insurance Company”) may from time to time make written or oral “forward-looking statements,” including statements contained in our filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits), in its reports to shareholders and in other communications by the Holding Company, which are made in good faith by the Holding Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. You can find many of these statements by looking for words such as “believes,” “intends,” “expects,” “plans,” “anticipates,” “seeks,” “estimates,” “projects,” or similar expressions in this report. Determination of loss and loss adjustment expense reserves and amounts due from reinsurers are based substantially on estimates and the amounts so determined are inherently forward-looking.

The forward-looking statements are subject to numerous assumptions, risks and uncertainties. We have identified several important factors that could cause actual results to differ materially from any results discussed, contemplated, projected, forecasted, estimated or budgeted in the forward-looking information. These factors, which are listed below, are difficult to predict and many are beyond our control:

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future economic conditions and the legal and regulatory environment in Michigan;

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the effects of weather-related and other catastrophic events;

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financial market conditions, including, but not limited to, changes in fiscal, monetary and tax policies, interest rates and values of investments;

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the impact of acts of terrorism and acts of war on investment and reinsurance markets;

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inflation;

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the cost, availability and collectibility of reinsurance;

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estimates and adequacy of loss reserves and trends in losses and loss adjustment expenses;

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heightened competition, including specifically the intensification of price competition, the entry of new competitors and the development of new products by new and existing competitors;

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our inability to obtain regulatory approval of, or to implement, premium rate increases;

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inability to carry out marketing and sales plans, including, among others, development of new products or changes to existing products and acceptance of the new or revised products in the market;

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unanticipated changes in industry trends and ratings assigned by nationally recognized rating organizations;

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adverse litigation or arbitration results;

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technological change;

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the ability to carry out our business plans; and

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adverse changes in applicable laws, regulations or rules governing insurance holding companies and insurance companies, and changes that affect the cost of, or demand for, our products.

Because forward-looking information is subject to various risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking information. Therefore, we caution you not to place undue reliance on this forward-looking information, which speaks only as of the date of this filing.

All subsequent written and oral forward-looking information attributable to the Holding Company or the Insurance Company or any person acting on our behalf is expressly qualified in its entirety by the cautionary statements contained or referred to in this section. We do not undertake any obligation to publicly release any revisions that may be made to any forward-looking statements to reflect events or circumstances occurring after the date of this filing.

PART I

ITEM 1.

BUSINESS

THE CONVERSION TRANSACTION AND THE HOLDING COMPANY

Fremont Michigan InsuraCorp, Inc. (the “Company” or the “Holding Company”) is a holding company owning all of the outstanding shares of Fremont Insurance Company (the “Insurance Company”). On October 12, 2004, the Insurance Company, formerly Fremont Mutual Insurance Company, converted from a mutual to a stock form of insurance company and subsequently on October 15, 2004, all of its outstanding capital stock was transferred to Fremont Michigan InsuraCorp, Inc. thereby becoming a wholly owned subsidiary of Fremont Michigan InsuraCorp, Inc. Prior to the Conversion and since 1876, Fremont Mutual Insurance Company conducted business as a Michigan domiciled mutual property and casualty insurer. The Holding Company was formed on November 18, 2003 for the purpose of acquiring all of the stock of the Insurance Company. On October 15, 2004 the Holding Company issued and sold 862,118 shares of its Common Stock at $10 per share (the “Conversion”). As part of the Conversion, surplus note holders converted approximately $2,498,000 of principal and accrued interest on surplus notes into common stock of the Holding Company. The following table presents (in thousands) the net value of the common stock issued as well as the net cash proceeds received as a result of the Conversion:


Gross value of common stock issued	$	8,621
Less: Offering costs		(1,116	)

Net value of common stock issued		7,505
Less: Surplus notes and accrued interest converted to common stock		(2,498	)

Net cash received	$	5,007

Except for $250,000 that was retained for administrative expenses, the Holding Company, in exchange for all of the stock in the Insurance Company, contributed to the Insurance Company all of the net cash proceeds from the sale of the Holding Company Common Stock. The Conversion has been accounted for as a simultaneous conversion, recapitalization and share offering which did not change the historical accounting basis of the Insurance Company’s financial statements.

The Holding Company is subject to regulation by the Michigan Office of Financial and Insurance Services (“OFIS”) as its primary regulator because it is the holding company for Fremont Insurance Company.

OVERVIEW OF BUSINESS

The Insurance Company is a property and casualty insurance company that provides insurance to individuals, farms and small businesses in Michigan. We were founded in 1876 and have served Michigan policyholders for over 130 years. We market our policies through approximately 175 independent insurance agencies. We have four business segments: personal, commercial, farm and marine. As of December 31, 2006, we had approximately 54,800 policies in force and assets of $85.9 million.

The Company’s executive offices are located at 933 E. Main Street, Fremont, Michigan 49412-9753, and the telephone number is (231) 924-0300. Our website address is www.fmic.com. Information on the Company’s website is not a part of this Form 10-K. The Company makes available free of charge on its website, or provides a link to, the Company’s Forms 3, 4, 5, 10-K, 10-Q and 8-K filed and any amendments to these Forms, that have been filed with the SEC as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to the SEC. To access these filings, go to the Company’s website and click on “Investor Information”, then click on “SEC Filings.”

BUSINESS STRATEGIES

Our principal strategies for the future are to:

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Increase operating efficiencies both internally and externally using web-based rating and automation to decrease individual decision making and increase overall productivity;

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Manage our product lines and mix of business by continuing to increase personal auto insurance and commercial lines insurance in order to enhance profitability and lessen the impact of property losses on overall results; and

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Maintain profitable agency relationships having a business philosophy consistent with the Company’s and having diversification of customer risk bases located within our targeted growth markets within Michigan.

Web-based Rating and Automation. Major emphasis is occurring within the Information Technology area to develop and implement the Fremont Complete web-based rating and underwriting applications. During 2006 our business owners and personal automobile lines were converted to the Fremont Complete platform with very good success. By mid 2007 the homeowners, mobilowners and marine lines will be fully operational with Fremont Complete. This will include the capability for agents to make on-line endorsement and improve the ease of doing business with Fremont Insurance.

Management of Lines of Business. A primary strategy is to closely monitor and manage the profitability of each of our lines of business which include personal, commercial, farm and marine. The allocation of resources and capital to each of these categories is much like asset allocation strategy within an investment portfolio. The growth and profit opportunity of each line shifts with time and often do not move together. Strength in one category offsets weakness in another to assist in maintaining good operating results. Our product categories are broad enough to meet the overall property and casualty needs of our agents.

The strongest growth line of business in 2006 was our personal automobile area. It grew at an annualized rate of over 24%. The Company expects this rate of growth to continue during 2007. The shift in property risk associated with automobile is viewed favorably by the Company as risk balancing.

Profitable Agencies. We initiated an intense agency review process in 1999 to improve agency profitability. Since then, over 100 agencies have been canceled. During the last five years, 22 agencies were added to service Michigan’s Upper Peninsula and are performing very well. The agency count is now approximately 175 agencies. Over $9.5 million in business from canceled agencies was replaced with predominately profitable agency relationships. These changes have continued to improve our business since, as a group, the terminated agencies and their policies had produced losses at a higher level than our overall premium base. We will continue to actively monitor our agencies with a focus on identifying potential problems early and maintaining profitable relationships.

The need to submit profitable target market business has been reinforced through direct communication with our agents and their participation in Insurance Company sponsored meetings. A direct benefit to agents has been an enhanced profit sharing commission program that has been well received by agents. Through this new program, many agencies submitting profitable business have increased their commission by over 10% above their regular base commission. Emphasis to reward profitable agencies continues through special awards and incentive initiatives.

Business Plan

We continue to focus exclusively on the Michigan market with greater emphasis on geographic and product management and development of niche categories within existing lines. The Company has taken steps to improve its underwriting results by canceling unprofitable agents and is targeting reductions of business where it has

unacceptably high concentration of risk. The application of insurance scoring has assisted in more accurate pricing of risks.

Our agency reorganization process has been intense but was needed to reduce the negative impact that poorly performing agencies were having on rates and the resulting penalty forced upon profitable agencies. We feel the existing agency structure is better organized from a regional standpoint and that our goals and expectations are better understood by the remaining agents. We continue to monitor our agency performance from both a growth and profitability standpoint.

Rate adequacy has become more challenging. By rate adequacy we mean that the premium rate charged for a given line of business is expected to be sufficient to return an underwriting profit after payment of losses, loss adjustment expenses, policy acquisition costs and other underwriting expenses. Items that have impact on industry pricing include moderate investment return from required reserves and increased reinsurance costs due to catastrophes and reinsurer performance. Added emphasis is occurring in analyzing return on investment for each product line.

Underwriting income is projected to grow in the future as a result of many initiatives of the Insurance Company, including:

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Focus on underwriting for profit in every line of business;

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Increased utilization of technology internally and with our agency force to improve work flow;

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Higher reliance on analytical factors to evaluate risks;

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Development of web-based automation for agency rating and application input using Fremont Complete;

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Adequate analysis of pricing of risk within the industry;

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Increased fee income from partial payment, late payment and policy reinstatement;

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Increased emphasis on profit sharing for agencies and employees;

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Recognition of agency relationship value created by strong marketing efforts;

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Results of intense agency review and development of clearer expectations and business plans from agencies;

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Diversification of geographic risk to reduce reinsurance costs from a maximum probable loss standpoint;

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Increased recognition of the value and return that smaller companies, such as the Insurance Company, can provide agencies;

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Development of stronger relationships between agents and the Insurance Company; and

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Increased emphasis for agencies to maximize total return through equity investment within the Company.

The property and casualty business is affected by weather events that often are the driving factor from a profitability standpoint. Geographic diversification and the shift to add more automobile and less weather sensitive commercial business are designed to reduce risk factors.

Management of operating expenses, including loss adjusting and underwriting expenses, requires close attention. Loss adjusting expense (LAE) as a percentage of net premiums earned was 6.8%, 7.5% and 10.2% for the years ended December 31, 2006, 2005 and 2004, respectively. During 2006, the Company reduced its LAE ratio as a result of continued focus on managing external legal costs associated with claim defense. The decline

in the 2005 percentage is driven by the increase in net premiums earned, improved internal efficiencies related to claim processing and a reduction in the use of external independent adjusters which is partly attributable to reduced weather related losses during 2005 as compared to prior years. A major customer service component continues to be the use of in-house adjusters for handling most claims. During 2006, the claims department implemented several initiatives focused on improving customer service for our policyholders when a claim occurs. These new initiatives also are having a positive impact on our internal operating efficiency. During 2006, the claims department developed a large fire loss folder which is provided to a policyholder when the adjuster makes the initial onsite inspection. The folder includes helpful information to the policyholder so they understand the claim process and what they should expect from the Company. The folder also contains information on how to protect damaged property after the loss occurrence in order to avoid any further damage from weather exposure or potential looting. The claims department also implemented an electronic first notice of loss so that agents can submit a notice of loss to the Company through our website. This new feature allows the agent to notify the Company quicker in the event of a loss and allows our adjusters to get in touch with the policyholder in a shorter time frame. The Company also implemented claim inquiry capabilities for our agents which allow them to check the status of a claim through our website. This feature provides real time access to our agent which lessens the need for a phone call to a claim representative to find out the status of a claim. Lastly, the claims department implemented a customer satisfaction survey which solicits candid feedback from policyholders who had a recent claim. This survey process has confirmed that the Company is achieving a high degree of customer satisfaction when it comes to settling claims for our policyholders.

Underwriting expense as a percentage of net premiums earned was 34.6%, 32.3% and 35.4% for the years ended December 31, 2006, 2005 and 2004, respectively. One of the main reasons for the increase in the Company’s expense ratio in 2006 is increased depreciation associated with our investment in technology, mainly Fremont Complete—our web based rating platform used by our agent force. Fremont Complete, which was first rolled out to our agency force in the first quarter of 2006, is the Company’s proprietary web-based rating platform. Agents can access Fremont Complete 24 hours a day, seven days a week through the Company’s website. Within Fremont Complete agents can quote, bind and issue policies in a real time environment. Currently, agents are able to use Fremont Complete for the business owners and personal auto product lines. During 2007, the Company expects to expand the product lines available in Fremont Complete to include homeowners, mobilowners and marine with additional lines to be added in 2008. The Company has received strong support by its agent force in terms of their use of Fremont Complete.

Despite the increased investment in technology and the associated depreciation, the Company believes that the investment today will provide longer-term benefits in the area of improved underwriting efficiency by reducing paper applications, providing online data to agents thereby reducing the need for phone inquiries and speeding up the process for rating and issuing policies to our customers. Furthermore, the Company continues to take positive steps to reduce our expense ratio, including:

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Annual objective to process more premium per employee;

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Adoption of technological interface and communications with agents;

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Continued refinement of internal workflow processes to reduce paper handling;

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Greater accountability to budgetary plans by department managers;

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Diversification of product lines to include lower commission products, such as personal auto coverage; and

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Reduction in the number of agencies that must be serviced by our marketing department.

SEGMENT INFORMATION

Marine. All revenues are generated from external customers and the Company does not have a significant reliance on any single major customer or agency.

The Company evaluates product line profitability based on underwriting gain (loss). Certain expenses are allocated based on net premiums earned and net losses incurred. Underwriting gain (loss) by product line would change if different methods were applied. The Company does not allocate assets, net investment income, net realized gains (losses) on investments, other income (expense), interest expense or demutualization expenses to its product lines.

Segment data for the years ended December 31, 2006, 2005 and 2004 is included in the footnotes to the financial statements which are included herein under Part II, Item 8—Financial Statements and Supplementary Data.

PRODUCTS

We offer a variety of property and casualty insurance products primarily designed to meet the insurance needs of property owners and small businesses located in Michigan. The four primary segments of our business are personal, commercial, farm and marine. The following table presents the direct written premiums by major product line within each segment for the periods indicated:


	Year Ended December 31,
	2006		2005		2004
	(In thousands)
Direct premiums written:
Personal lines:
Homeowners	$	15,976	$	15,389	$	14,778
Mobilowners		1,482		1,513		1,588
Personal auto		14,066		11,418		8,826
Dwelling		1,427		1,428		1,460
Other		4		6		7

		32,955		29,754		26,659
Commercial lines:
Business owners		2,710		2,570		2,351
Commercial package		4,312		4,723		4,619
Commercial auto		680		665		780
Workers compensation		1,160		1,111		1,352
Other		137		109		120

		8,999		9,178		9,222
Farm		5,014		4,813		4,566
Marine		1,901		1,771		1,524

Total	$	48,869	$	45,516	$	41,971

Personal Lines. Personal lines policies include homeowners, mobilowners, dwelling fire, personal auto and personal umbrella.

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Homeowners. The policy is a multiple line insurance contract providing protection for both property and liability exposures for homeowners, condominium owners and renters on a replacement cost or actual cash value basis. Target areas in this line include home values between $100,000 and $500,000.

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Mobilowners. This is a similar product to homeowners providing coverage for mobile home owners. Units are insured for replacement cost, actual cash value or stated amount depending on the age of the mobile home.

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Dwelling Fire. This is a fire and wind coverage for owner occupied residences that do not qualify for a Homeowner policy or for residences that are non-owner occupied and rented to others. To be written in personal lines, residence must have no more than four units and be owned by individuals. Liability coverage for the owner is not included but may be added by endorsement.

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Personal Auto. This is our fastest premium growth line and provides individuals with protection for their personal auto(s). For liability protection, coverage options include Residual Bodily Injury, Property Damage, Personal Injury Protection, Uninsured and Underinsured Motorists. For physical damage, coverage options include Comprehensive and Collision. For Personal Injury Protection, losses above certain thresholds are automatically reinsured by the Michigan Catastrophic Claim Association (MCCA).

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Personal Umbrella. This is a form of excess liability insurance available to individuals protecting them against claims in excess of their limits on their primary policies or for claims not covered by their underlying policies. In order to be eligible, both an individual’s personal auto and home must be written with Fremont.

Commercial Lines. Commercial lines consist of products designed to serve primarily small to medium business operations. They are:

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Business Owners Policy (BOP). The policy is a multiple line insurance contract providing protection for both property and liability exposures for business owners. BOP risks are classified by the five categories listed below with each class having its own eligibility criteria primarily based on sales volume and property values.

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Bed & Breakfast/Condominiums. As the category name implies, insurance is provided for Bed & Breakfast owners and for condominium owner associations.

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Mercantile. This applies for buildings principally occupied for retail mercantile purposes (buying and selling of merchandise) and the contents of these operations.

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Offices. This applies to office buildings, building owners personal property or tenant personal property.

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Service. This applies to buildings occupied principally for service operations and the contents of these operations including mini storage businesses.

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Wholesale. As the category name implies, this covers wholesalers.

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Commercial Package Policy (CPP). The CPP policy is designed to insure a broader range of commercial operations with more specialized business coverage needs than the BOP provides. Examples of these types of businesses are manufacturing risks, contractors and restaurants. The policies are usually larger and generate higher premiums.

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Commercial Auto (CA). CA covers vehicles owned by a business or used in businesses and owned by individuals. This includes vehicles ranging from passenger cars to tractor-trailer rigs and earth moving equipment. Our targeted market is passenger cars, service vehicles (usually a pickup truck owned by a contractor and driven to the job site) and light, local delivery vehicles. Long haul truckers are ineligible.

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Workers Compensation. Workers compensation provides coverage to a worker if he or she is injured while at work for an employer, whether or not the employer has been negligent and is governed by state law. This product complements our Farm and Commercial offerings and affords us the ability to write all of the customer’s insurance needs.

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Other Commercial Products. Other commercial products include equipment breakdown, inland marine and umbrella liability coverage that must be written in conjunction with a BOP, CPP or CA policy.

Farm Line. The Insurance Company originated as a “farm fire” insurance provider and continues to be a strong provider of coverage for the agricultural industry in Michigan. This segment’s products include: farmowners for fully operating farms, country estate for the hobby or part time farmer, and farm for non-owner

occupied farms. Farmowners and country estate policies are comprehensive policies offering protection similar to our homeowner’s policy but also offer the option to cover the insured’s farm buildings, farm personal property (livestock, machinery, etc.), and provide farm liability protection. The farm policy is primarily a fire, wind and liability product designed for non-owner-occupied farms.

Marine. This line is composed of the boat owner’s program (usually smaller and less expensive boats) and the yacht program. The boat owner’s policy is designed for boats 32 feet long or less with values of $125,000 or less. Boats that exceed the length or value criteria for the boat owner’s policy are insured under the yacht program.

Rate Development. Development of rates for all lines is done by the Vice President of Product Management. Rate needs are analyzed on both an accident and calendar year basis and take into consideration competitive position, catastrophe loads, large loss impacts in addition to actual loss, expense and premium numbers. All rates are reviewed with senior management prior to implementation.

MARKETING

We market our property and casualty insurance products exclusively in Michigan through approximately 175 independent agencies. The company has maintained it strategic plans to expand in the northern and western regions of the state, but maintains a respectable presence in other areas. Our agency force has been selected from over 1200 independent agencies within the State of Michigan. One of our keys to success is our selectivity of our agents. Our company standards are clearly communicated to our agents; they include a strong commitment to ethics, professionalism, honesty and accountability. The company is fortunate to have a top rated agency force. Each year the Company receives in excess of 50 appointment requests from agencies in Michigan and less than 10% are provided contracts. Our team work philosophy has produced relationships focused on the common good of the Company, agency and policyholder. This commitment, in addition to product enhancements and pricing adjustments should solidify our position in the Michigan market.

One key to the Company’s success is identifying and procuring profitable business. The Company has maintained its underwriting discipline, even when behind the growth projection. This commitment to maintaining our discipline has provided stability and profitability, which is evident in our results. These underwriting responsibilities are shared with the Company and agent. To further reward our agencies for their selectivity, the Company expanded its agent profit-sharing program, adding additional incentives for increased profitability and premium development. The enhancement has been well received by our agency force and will support our core focus of increasing market share with select business.

The agency force is considered the core for future growth and is geographically spread across the state of Michigan. Our objective is to be ranked among the top four insurers within each agency. Our independent agencies represent other insurance companies and are established businesses in the communities in which they operate. Our agencies generally market and write the full range of our products. We believe our relationships with our agencies are very good.

We depend upon our agency force to produce new business and to provide customer service. Policy retention is an important component of agency relations. Our network of independent agencies also serves as an important source of information about the needs of our policyholders. This information is used to develop new products and new product features.

We compensate agencies through a fixed base commission with an opportunity for profit sharing, depending on the profitability of the business we receive from the agency. Our agencies are monitored and supported by a marketing manager and two experienced marketing representatives. Three personal lines underwriters and two commercial lines underwriters also support agency relations with direct calling efforts. Claim representatives also

make direct contact with agencies while handling claims. The strength of this move is to put more people in the field to develop profitable relationships and gather market intelligence. Visitation reports are required for each agency visit and are reviewed by senior management.

UNDERWRITING

We write personal and commercial lines by evaluating each risk with consistently applied standards. We maintain information on all aspects of our business that is regularly reviewed to determine product line profitability. We employ seven underwriters who specialize in personal lines, commercial lines, marine, and farm. The underwriters are supported by an experienced group of underwriting assistants and processors. This group handles initial screening of applications, running of reports, and policy issuance.

We have, in the past, relied heavily on underwriting information gathered from outside sources. Motor Vehicle Reports are obtained from the state of Michigan on all auto and marine applications. An exchange of claims information is available through two independent firms or through inquiry to the prior insurer and is accessed for all applicable applications. We believe the financial stability and responsibility of the insured has emerged as a reliable indicator of future loss potential. Extensive independent analysis has been done to support this correlation in the industry. In the commercial lines, financial stability has always been an acceptable underwriting criteria and the Insurance Company obtains either a Dun & Bradstreet report or other financial information on every policy application. In personal lines, an Insurance Score is obtained on every submission and insureds are tiered to receive the appropriate premium for their score. An Insurance Score is a numerical score from 200 to 900, with higher number being a better score, which is based on information in a person’s credit report maintained by one of the several national credit reporting firms. The Insurance Company’s pricing is targeted to attract policyholders with above average Insurance Scores. Insured’s with an Insurance Score of 700 or more or a strong Dun & Bradstreet report are part of the Insurance Company’s target market in all lines. Although we target insureds with Insurance Scores of 700 and above, we have policies in effect where the relevant Insurance Scores are less than our target. The Michigan Office of Financial and Insurance Services has proposed a ban on the use of a credit based insurance score. A further discussion on the use of credit based insurance scores is included under the heading “Insurance Scoring” in the “Regulation” section of Part 1, Item 1.

We also rely on photographs, inspections, and engineering reports. Agents are required to obtain photos on all new property business. The underwriter decides if additional engineering is necessary. A follow-up inspection may be made by us or subcontracted to an outside firm. If a loss occurs, the adjuster completes a risk evaluation form and sends it to underwriting for review. The Insurance Company’s agents have rating software available to them for use as pricing indicators. This software is a useful tool, but the ultimate underwriting decision is made by the Insurance Company.

CLAIMS

As of December 31, 2006, the Insurance Company’s claims department included the Senior Vice President of Claims, two managers, an attorney, nine adjusters and two support staff. Claims are normally received from our independent agencies. Typically, claims are assigned to an in-house adjuster who investigates and settles the claim. To a lesser extent, we assign claims to independent adjusters if, as in the case of a catastrophe, our in-house adjusters cannot promptly adjust such a large volume of claims, or if because of the location of the claim it is more economical to use an independent adjuster. Remote and independent adjusters report all information to the home office electronically. The majority of paper claim files are imaged and maintained electronically at the home office.

Claims settlement authority levels are established for each claims adjuster based upon his or her level of experience. We have multi-line teams to handle all claims. The claims department is responsible for reviewing all claims, obtaining necessary documentation, estimating the loss reserves, and resolving the claims. The Company takes a proactive approach to liability and defense cost management. The Company’s in-house counsel is

responsible for subrogation recovery, coverage-related issues and litigation, supervision of outside defense counsel and special projects. With the assistance of in-house counsel, the Insurance Company’s expeditious claims investigation creates the opportunity for exploration of an early negotiated resolution, where warranted, thereby avoiding protracted litigation and unnecessary legal expense. Additionally, in-house counsel provides valuable instruction for claims adjusters, as well as legal advice in connection with the drafting and revision of our policy and application forms.

As previously noted under Business Strategies, the Company’s claims department completed several technology initiatives during 2006. First, the Company implemented an electronic first notice of loss so that agents can submit a notice of loss to the Company through our website. This new feature allows the agent to notify the Company quicker in the event of a loss and allows our adjusters to get in touch with the policyholder in a shorter time frame. The Company also implemented claim inquiry capabilities for our agents which allow them to check the status of a claim through our website. This feature provides real time access to our agent which lessens the need for a phone call to a claim representative to find out the status of a claim. The Company continues to focus on eliminating paper and enhancing inquiry capabilities which are expected to yield increased operating efficiency for the Company and it agency force.

REINSURANCE

General. A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on business written by it to a reinsurer which assumes that risk for a premium. Consistent with insurance industry practice, we reinsure a portion of our exposure and pay to reinsurers a portion of the premiums received on all policies reinsured. Insurance is ceded principally to reduce net liability on individual risks, to mitigate the effect of individual loss occurrences (including catastrophe losses), to stabilize underwriting results, and to increase our underwriting capacity.

Reinsurance can be facultative reinsurance or treaty reinsurance. Under facultative reinsurance, each risk or portion of a risk is reinsured individually. Under treaty reinsurance, an agreed-upon portion of business written is automatically reinsured. Treaty reinsurance can also be classified as quota share reinsurance, pro-rata insurance or excess of loss reinsurance. Under quota share reinsurance and pro-rata insurance, the ceding company cedes a percentage of its insurance liability to the reinsurer in exchange for a like percentage of premiums, less a ceding commission, and, in turn, will recover from the reinsurer the reinsurer’s share of losses and loss adjustment expenses incurred on those risks. Under excess of loss reinsurance, an insurer limits its liability to all or a particular portion of the amount in excess of a predetermined deductible or retention. Regardless of type, reinsurance does not legally discharge the ceding insurer from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the ceding company to the extent of the coverage ceded.

Our Reinsurance Coverage. We have utilized three primary categories of treaty reinsurance coverage to reduce the impact of major losses. These include multi-lines excess of loss coverage, catastrophe excess of loss coverage, and quota share coverage. We determine the amount and scope of reinsurance coverage to purchase each year based on our evaluation of the risks accepted, consultation with reinsurance professionals and a review of market conditions, including availability and cost. During the years ended December 31, 2006, 2005 and 2004 we ceded to reinsurers $8.7 million, $6.1 million and $13.8 million of earned premiums, respectively.

Multi-Lines Excess of Loss Coverage. The multi-lines excess of loss program is the Company’s primary reinsurance coverage. The excess of loss program is designed to help stabilize financial results, limit exposure on larger risks, and increase capacity. The largest exposure retained by us on any one risk in 2006 was $150,000. The 2006 property coverage for this program provided up to $2,850,000 over the $150,000 retention per risk. The 2006 casualty coverage for this program provided up to $4,850,000 over the $150,000 retention. Our 2006 workers compensation reinsurance provided up to $9,850,000 coverage above the $150,000 retention.

Catastrophic Excess of Loss Coverage. Catastrophic reinsurance protects us from significant aggregate loss exposure arising from a single event such as windstorm, hail, tornado, hurricane, earthquake, blizzard, freezing temperatures, and other extraordinary events. The contract is designed to help stabilize underwriting results and to mitigate the effect of individual loss occurrences. In 2006, we had three layers of catastrophic excess of loss reinsurance providing coverage for up to $22,000,000 above the $1,000,000 retention. We had an automatic reinstatement provision after the first loss for each layer to provide coverage in the event of subsequent catastrophes during the year. Coverage would lapse after the second event, in which case we would evaluate the need for a new contract for the remainder of the year. The 2006 reinstatement fees were 100% of the initial premium.

Quota Share Coverage. The Company utilizes quota share reinsurance for its boiler and machinery coverage which is primarily an equipment breakdown endorsement to commercial policies. The contract is a 100% quota share agreement which includes a 30% ceding commission on the premiums ceded. The agreement also includes a profit sharing provision based on the profitability of the underlying underwriting performance of the business ceded.

Commutation of Multi-line Quota Share Coverage. In 2003 we also utilized quota share reinsurance under an agreement that provided coverage on all lines of business. In 2003, we ceded 45% of our net written premium and losses to the quota share reinsurers. The agreement was structured on a funds withheld basis and required the company to accrue interest at an annual rate of approximately 2.5%. During 2006 the Company recorded interest expense of approximately $26,000 on the funds withheld balance.

As part of our strategy to reduce our quota share reinsurance, the Insurance Company placed the 2003 quota share agreement into runoff after December 31, 2003. Despite placing the multi line quota share reinsurance into runoff, reinsurance coverage continued on those covered policies in force as of December 31, 2003. Losses from the policies in force continued to be ceded to the reinsurer until the agreement was commuted. On March 31, 2006, the Company entered into a commutation agreement with respect to this contract. As a result of this commutation, the funds withheld account liability was reduced by approximately $1,053,000 offset by an increase to the loss and loss adjustment expense liability of the same amount. No gain or loss was realized as a result of this commutation.

Facultative. We utilize facultative reinsurance to provide additional underwriting capacity, to mitigate the effect of individual losses and to reduce net liability on individual risks. Coverage is determined on each individual risk. In 2006, the Company obtained coverage ranging from $850,000 up to $4,000,000 for certain commercial properties it insured.

Michigan Catastrophic Claims Association. The Insurance Company is a member of the Michigan Catastrophic Claims Association, or MCCA, a statutorily created non-profit association which provides mandatory reinsurance to its members. Michigan is the only state that offers unlimited personal injury protection benefits which are offered through no-fault auto insurance policies. The reinsurance provided by the MCCA indemnifies its members for 100% of the losses sustained under personal injury protection policies issued by the members in excess of specified amounts. The MCCA must provide this reinsurance and the Insurance Company, like all insurance companies that write automobile insurance in Michigan, must accept and pay for the reinsurance.

2007 Coverages. The 2007 property coverage under the Multi-Line Excess of Loss program increased and now provides up to $5,000,000 over the $150,000 retention per risk. The Catastrophic Excess of Loss retention increased to $1,250,000 in 2007 from $1,000,000 in 2006. The 2007 casualty and workers compensation coverage under the Multi-Line Excess of Loss remained unchanged while the Company’s Facultative contracts remains much the same as they were in 2006.

Our Reinsurers. The financial stability of our reinsurers is an important consideration. The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of

operations or financial condition. As of December 31, 2006, our largest reinsurers based on a percentage of ceded written premiums are set forth in the following table. Except for the reinsurers listed below, no other individual reinsurer accounted for more than 5% of total ceded premiums written.


Reinsurer	Ceded Premiums Written		Percentage of Total		A.M. Best Rating
	(000’s)
Michigan Catastrophic Claims Association	$	2,699	31.1	%	(1)
G E Reinsurance Co.		1,770	20.4	%	A
Platinum Underwriters Reinsurance, Inc.		984	11.4	%	A
TOA Re Insurance Company of America		787	9.1	%	A
Other		2,427	28.0	%	A- or better

Total	$	8,667	100.0	%

(1)	The MCCA does not receive an A.M. Best rating.

The following table sets forth individual balances of loss and loss adjustment expenses recoverable from reinsurers on both paid and unpaid claims as of December 31, 2006. Except for the reinsurers listed below, no other individual reinsurer accounted for more than 5% of total loss and LAE recoverable from reinsurers.


Reinsurer	Loss and loss adjustment expenses recoverable		Percentage of Total Recoverable		A.M. Best Rating
	(000’s)
G E Reinsurance Co.	$	2,648	33.6	%	A
Michigan Catastrophic Claims Association		1,977	25.1	%	(1)
Platinum Underwriters Reinsurance, Inc.		1,110	14.1	%	A
TOA Re Insurance Company of America		950	12.1	%	A
Dorinco Reinsurance Co.		549	7.0	%	A-
Other		649	8.2	%	A- or better

Total	$	7,883	100.0	%

(1)	The MCCA does not receive an A.M. Best rating.

INVESTMENTS

All of our investments are classified as available for sale and are carried at fair market value. Our return on invested assets is an important component of our operating results. Our investment objectives are to:

•

Maximize current yield;

•

Maintain adequate liquidity for insurance operations;

•

Maintain safety of principal through a balance of high quality and diversified investments;

•

Maintain daily oversight to minimize risk;

•

Minimize fluctuations in market valuations due to increasing interest rates by monitoring duration;

•

Meet regulatory requirements; and

•

Increase surplus through appreciation.

The investment committee, appointed by the Insurance Company’s board of directors, sets our investment policy. The investment committee meets twice each year to review the investment portfolio, asset allocation,

performance, and liquidity. The Company utilizes an outside professional investment management firm for its fixed maturity securities. The firm specializes in management of insurance company investment portfolios and manages over $6.0 billion in assets. Professional asset management was deemed practical to allow for constant review of the portfolio and specialized focus.

The following table sets forth information concerning the composition of the Company’s investment portfolio at December 31:


	2006
	Amortized Cost		Fair Value		Carrying Value		Percent of Carrying Value
Fixed maturities:
U.S. Treasury securities and Obligations of U.S. government corporations and agencies	$	6,074,385		5,989,243	$	5,989,243	10.6	%
States and political subdivisions		13,414,841		13,404,819		13,404,819	23.7	%
Corporate securities		11,058,724		10,754,266		10,754,266	19.0	%
Mortgage-backed securities		14,965,481		14,810,938		14,810,938	26.1	%
Equity securities:
Common stocks		9,940,606		11,689,756		11,689,756	20.6	%

Total investments	$	55,454,037	$	56,649,022	$	56,649,022	100.0	%


	2005
	Amortized Cost		Fair Value		Carrying Value		Percent of Carrying Value
Fixed maturities:
U.S. Treasury securities and Obligations of U.S. government corporations and agencies	$	7,598,104	$	7,503,264	$	7,503,264	14.7	%
States and political subdivisions		7,645,905		7,548,082		7,548,082	14.8	%
Corporate securities		15,101,502		14,812,792		14,812,792	29.0	%
Mortgage-backed securities		12,016,345		11,780,291		11,780,291	23.0	%
Equity securities:
Preferred stocks		426,200		420,600		420,600	0.8	%
Common stocks		8,380,201		9,087,585		9,087,585	17.8	%

Total investments	$	51,168,257	$	51,152,614	$	51,152,614	100.0	%

At December 31, 2006, our fixed maturity portfolio had a fair value of approximately $44.9 million. All of the fixed maturity investments are rated by Moody’s as investment grade with an average credit quality rating of AA and an average duration of 3.96 years. As a result, the market value of our investments may fluctuate in response to changes in interest rates. In addition, we may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments. At December 31, 2006, our equity portfolio had a 100% concentration in the U. S. industrial and miscellaneous sector.

The following two tables show the estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at December 31, 2006 and 2005.


	December 31, 2006
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	1,004,990	$	3,925	$	3,632,444	$	83,972	$	4,637,434	$	87,897
States and political subdivisions		6,131,773		41,048		2,116,552		6,107		8,248,325		47,155
Corporate securities		507,298		6,402		9,838,932		298,958		10,346,230		305,360
Mortgage-backed securities		756,813		652		9,347,753		223,117		10,104,566		223,769

		8,400,874		52,027		24,935,681		612,154		33,336,555		664,181

Common stocks		242,992		7,634						242,992		7,634

		242,992		7,634		—		—		242,992		7,634

Total	$	8,643,866	$	59,661	$	24,935,681	$	612,154	$	33,579,547	$	671,815

As of December 31, 2006, the portfolio included 14 fixed maturity investments and 1 equity investment in an unrealized loss position for less than 12 months and 68 fixed maturity investments in an unrealized loss position for more than 12 months, none of which were trading below 90% of cost or amortized cost. All of the fixed maturity investments in an unrealized loss position and assigned a rating by commercial credit rating companies are rated investment grade investments. While all of these investments are monitored for potential impairment, the Company’s experience indicates that they generally do not present as great a risk of impairment, as fair value often recovers over time. These investments have generally been adversely affected by the downturn in the financial markets and overall economic conditions. Management believes that the analysis of each of these investments support the view that these investments were not other-than-temporarily impaired.


	December 31, 2005
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	2,304,852	$	8,462	$	3,826,826	$	89,355	$	6,131,678	$	97,817
States and political subdivisions		7,024,158		97,858		—		—		7,024,158		97,858
Corporate securities		7,274,921		120,315		5,640,488		202,712		12,915,409		323,027
Mortgage-backed securities		7,232,543		119,397		4,382,779		120,015		11,615,322		239,412

		23,836,474		346,032		13,850,093		412,082		37,686,567		758,114

Preferred stocks		420,600		5,600		—		—		420,600		5,600
Common stocks		960,777		54,510		—		—		960,777		54,510

		1,381,377		60,110		—		—		1,381,377		60,110

Total	$	25,217,851	$	406,142	$	13,850,093	$	412,082	$	39,067,944	$	818,224

position for more than 12 months, none of which were trading below 90% of cost or amortized cost. All of the fixed maturity investments in an unrealized loss position and assigned a rating by commercial credit rating companies are rated investment grade. While all of these investments are monitored for potential impairment, the Company’s experience indicates that they generally do not present as great a risk of impairment, as fair value often recovers over time. These investments have generally been adversely affected by the downturn in the financial markets and overall economic conditions. Management believes that the analysis of each of these securities support the view that these investments were not other-than-temporarily impaired.

The following table presents the maturity profile of our fixed maturity investments as of December 31, 2006 and 2005. As noted above the average duration of the portfolio at December 31, 2006 was 3.96 years compared to 3.95 years at December 31, 2005. Actual maturities of mortgaged-backed securities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures. These securities are presented separately in the maturity schedule due to the inherent risk associated with prepayment.


	December 31, 2006
	Amortized Cost		Fair Value		Percent of Fair Value
Due in one year or less	$	3,895,367	$	3,867,271	8.6	%
Due after one year through five years		9,136,950		8,973,527	20.0	%
Due after five years through 10 years		14,317,570		14,130,056	31.4	%
Due after 10 years		3,198,063		3,177,474	7.1	%
Mortgage-backed securities		14,965,481		14,810,938	32.9	%

Total	$	45,513,431	$	44,959,266	100.0	%


	December 31, 2005
	Amortized Cost		Fair Value		Percent of Fair Value
Due in one year or less	$	3,516,044	$	3,496,585	8.4	%
Due after one year through five years		10,919,577		10,734,940	25.8	%
Due after five years through 10 years		13,446,041		13,212,514	31.7	%
Due after 10 years		2,463,849		2,420,098	5.8	%
Mortgage-backed securities		12,016,345		11,780,292	28.3	%

Total	$	42,361,856	$	41,644,429	100.0	%

Management of Market Risk. We are subject to various market risk exposures, including interest rate risk and equity price risk. Our primary risk exposure is to changes in interest rates. We manage market risk through our investment committee and through the use of an outside professional investment management firm. We are vulnerable to interest rate changes because, like other insurance companies, we invest primarily in fixed maturity securities, which are interest-sensitive assets. Mortgage-backed securities, which make up approximately 33% of our investment portfolio, are particularly susceptible to interest rate changes. We invest primarily in classes of mortgage-backed securities that are less vulnerable to prepayment risk and, as a result, somewhat less sensitive to interest rate risk than other mortgage-backed securities.

The value of our equity investments is dependent upon general conditions in the securities markets and the business and financial performance of the individual companies in the portfolio. Values are typically based on future economic prospects as perceived by investors in the equity markets.

Effect of Interest Rate Changes. See Item 7A of this Report for a table that shows the effects of a change in interest rates on the fair value of our fixed maturity portfolio. The other financial instruments, which include cash, premiums due from reinsurers and accrued investment income, do not produce a significant difference in fair value when included in the market risk due to their short-term nature.

A.M. BEST RATING

In December of 2006, A.M. Best, which rates insurance companies based on factors of concern to policyholders, upgraded Fremont Insurance Company from a “B+” rating to a “B++” (Very Good) rating. A.M. Best assigns “B++” ratings to companies that, in its opinion, have demonstrated very good overall performance when compared to the standards established by A.M. Best. In evaluating our financial and operating performance, A.M. Best reviews our profitability, leverage and liquidity, as well as our book of business, the adequacy and soundness of our reinsurance, the quality and estimated market value of our assets, the adequacy of our loss reserves, the adequacy of our surplus, our capital structure, the experience and competency of our management, and our market presence. We have no assurance that A.M. Best will not reduce our current rating in the future. A.M. Best ratings are not directed toward the protection of investors. As such, our A.M. Best rating should not be relied upon as a basis for an investment decision to buy our common stock.

COMPETITION

The property and casualty insurance market is highly competitive. We compete against other Michigan-based insurance carriers as well as major regional and national carriers. The national carriers we compete with on a regular basis are Citizens Insurance Company of America, State Farm Mutual Automobile Insurance Company and the Allstate Corporation. Regional companies that are important competitors include Auto Owners Insurance Group, Allied Insurance, Farm Bureau Mutual Insurance Company of Michigan, Frankenmuth Mutual Insurance Company and Hastings Mutual Insurance Company. Smaller state competitors would include Michigan Insurance Company, Pioneer State Mutual Insurance Company and Wolverine Mutual Insurance Company. Some of these competitors are larger and have much greater financial, technical and operating resources than we have. Our ability to compete successfully depends upon a number of factors, many of which are out of our control, such as market conditions, our A.M. Best rating, and regulatory conditions. We compete primarily based upon the following factors:

•

the price and quality of our insurance products;

•

the quality and speed of our service and claims response;

•

our financial strength;

•

our A.M. Best rating;

•

our sales and marketing capability; and

•

our technical expertise.

REGULATION

General. Insurance companies are subject to supervision and regulation in the states in which they transact business relating to numerous aspects of their business and financial condition. The primary purpose of this supervision and regulation is the protection of policyholders. The extent of the regulation varies, but generally derives from state statutes that delegate regulatory, supervisory and administrative authority to state insurance departments.

We are licensed to write insurance only in Michigan and are subject to supervision and regulation by the Michigan Office of Financial and Insurance Services (“OFIS”). OFIS requires the filing of annual, quarterly and

other reports relating to the financial condition of insurance companies doing business in Michigan. The authority of the OFIS includes, among other things:

•

establishing standards of solvency which must be met and maintained by insurers;

•

requiring certain methods of accounting;

•

classifying assets as admissible for purposes of determining statutory surplus;

•

licensing of insurers and their agents to do business;

•

establishing guidelines for the nature of and limitations on investments by insurers;

•

reviewing premium rates for various lines of insurance;

•

approval of policy forms;

•

reviewing the provisions which insurers must make for current losses and future liabilities;

•

reviewing transactions involving a change in control;

•

restrictions on payments of dividends to shareholders;

•

restrictions on transactions between insurers and their affiliates; and

•

reviewing claims, advertising and marketing practices.

Examinations. Examinations are regularly conducted by the OFIS every three to five years. OFIS last examination of the Insurance Company was as of December 31, 2002. That examination did not result in any material adjustments to the Insurance Company’s financial position. In addition, there were no substantive qualitative matters indicated in the examination report that had an adverse impact on the Insurance Company’s operations.

NAIC Risk-Based Capital Requirements. In addition to state-imposed insurance laws and regulations, the OFIS administers the risk based capital standards adopted by the National Association of Insurance Commissioners (“NAIC”) that require insurance companies to calculate and report information under a risk-based formula that attempts to measure statutory capital and surplus needs based on the risks in a company’s mix of products and investment portfolio. Under the formula, we first determine our risk-based capital level by taking into account risks with respect to our assets and underwriting risks relating to our liabilities and obligations. We then compare our “total adjusted capital” to the base level. Our “total adjusted capital” is determined by subtracting our liabilities from our assets in accordance with rules established by the OFIS.

The following table highlights the ramifications of the various ranges of non-compliance. The ratios represent the relationship of a company’s total adjusted capital to its risk-based capital base level.


Ratio and Category		Action
2.0 or more		None-in compliance

1.5-1.99: Company Action		Company must submit a comprehensive plan to the regulatory authority discussing proposed corrective actions to improve its capital position

1.0-1.49: Regulatory Action		Regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be taken

0.7-0.99: Authorized Control		Regulatory authority may take any action it deems necessary, including placing the company under regulatory control

Less than 0.7: Mandatory Control		Regulatory authority is required to place the company under regulatory control

The Insurance Company has always exceeded the required levels of capital for compliance and has always been in compliance. There can be no assurance, however, that the capital requirements applicable to our business will not increase in the future. As of December 31, 2006, our risk-based capital authorized control level was $3,314,414 and our total adjusted capital was $33,669,680, yielding a ratio of 10.2.

IRIS Requirements. The NAIC has also developed a set of financial ratios, referred to as the Insurance Regulatory Information System (“IRIS”) for use by state insurance regulators in monitoring the financial condition of insurance companies. The NAIC has established an acceptable range of values for each of the IRIS financial ratios. Generally, an insurance company will become the subject of increased scrutiny when four or more of its IRIS ratio results fall outside the range deemed acceptable by the NAIC. The nature of increased regulatory scrutiny resulting from IRIS ratio results that are outside the acceptable range is subject to the judgment of the applicable state insurance department, but generally will result in accelerated review of annual and quarterly filings. Depending on the nature and severity of the underlying cause of the IRIS ratio results being outside the acceptable range, increased regulatory scrutiny could range from increased but informal regulatory oversight to placing a company under regulatory control.

NAIC values


		IRIS Ratios			Our Results
		Over	Under		2006
1	Gross Premiums Written to Surplus	900	—		145
2	Net Premiums Written to Surplus	300	—		120
3	Change in Net Premiums Written	33	(33	)	2
4	Surplus Aid to Surplus	15	—		0
5	Two-Year Overall Operating Ratio	100	—		77
6	Investment Yield	6.5	3		2.6	*
7	Gross Change in Surplus	50	(10	)	30
8	Net Change in Adjusted Surplus	25	(10	)	30	*
9	Liabilities to Liquid Assets	105	—		53
10	Gross Agents’ Balances to Surplus	40	—		2
11	One-Year Reserve Development to Surplus	20	—		(18	)
12	Two-Year Reserve Development to Surplus	20	—		(22	)
13	Estimated Current Reserve Deficiency to Surplus	25	—		(15	)

(1)	“*” denotes results outside of the usual range

(2)	“—” denotes no lower limit on the range

As of December 31, 2006, all ratios were within the usual range except ratio 6 and 8. The IRIS ratio “Investment yield” at a range between 3% and 6.5% was slightly higher than our calculated yield of 2.6%. The Company’s IRIS Investment Yield is below the minimum in part due to interest expense on the Company’s surplus notes. The Company’s actual IRIS ratio for the “Net Change in Adjusted Surplus” is above the maximum value as a result of the strong underwriting results for 2006.

Guaranty Fund. We participate in the Property and Casualty Guaranty Association of the State of Michigan (“PGCA”), which protects policyholders and claimants against losses due to insolvency of insurers. When an insolvency occurs, the Association is authorized to assess member companies up to the amount of the shortfall of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar year. We recognize a liability for insurance related assessments when an assessment has been imposed or information available indicates it is probable that an assessment will be imposed, or an event obligating us to pay an imposed or probable assessment has occurred and the amount of the assessment can be reasonably estimated. We incurred approximately $11,000, $12,000 and $16,000 in assessments related to the PCGA in 2006, 2005 and 2004, respectively.

Michigan Catastrophic Claim Association. Michigan’s no-fault law requires insurers to provide unlimited medical coverage to automobile accident victims. The cost of providing the unlimited medical coverage has somewhat offset the savings typically associated with a non-monetary threshold. In response, the Michigan Catastrophic Claim Association (“MCCA”), which is an unincorporated nonprofit association created by Michigan law, was established to spread the costs of medical coverage to all policyholders. The MCCA essentially acts as a reinsurer for all Michigan automobile insurers, reimbursing them for amounts paid on personal injury protection claims in excess of $400,000, in 2006. This limit will increase incrementally to $500,000 by July 1, 2011. Every insurer engaged in writing automobile personal injury protection insurance coverage in Michigan is required to be a member of MCCA. Personal injury protection is included in automobile insurance. Member companies cede premiums which are based on the number of vehicles for which coverage is written, to cover the losses reported by all member companies. Although the MCCA acts in the same manner as a reinsurer, it is not an insurance company and is not rated by A.M. Best.

Michigan Basic Property Insurance Association. The Michigan Basic Property Insurance Association (“MBPIA”) provides basic insurance to property-owners who cannot obtain insurance through insurance carriers in the normal course of business due to a high-risk exposure. The MBPIA assesses insurance carriers in Michigan a fee for continuation of the association based on the amount of losses incurred by the association and the amount of net written premium of the carrier related to property insurance. There were no assessments in 2006 or 2005, however, the Company did incur approximately $123,000 in assessments related to the MBPIA in 2004.

Michigan No-Fault Automobile Insurance. Under a pure no-fault automobile insurance system, responsibility for an automobile accident is not at issue. Each policyholder’s own insurance company pays for his or her medical expenses and lost wages, regardless of who caused the accident, and the individuals relinquish the right to sue to recover damages. The objective of such a system is to eliminate the delays and costs of court disputes associated with the tort system, encourage prompt payment of compensation, and return a larger percentage of insurance premium dollars to accident victims. Michigan has a modified no-fault system that limits lawsuits relating to automobile accidents. For example, a suit for damages is permitted under Michigan’s no-fault law when an injured person has suffered death, permanent serious disfigurement, or serious impairment of a body function. Damages are assessed on the basis of comparative fault, except that damages will not be assessed in favor of a party who is more than 50% at fault.

The Michigan Essential Insurance Act. The Michigan Essential Insurance Act (“MEIA”) requires an insurer to insure every applicant for automobile and homeowner insurance that meets the minimum requirements and the insurer’s underwriting rules. The underwriting rules must be applied uniformly to all applicants and policyholders. Each insurer must file its underwriting rules with the Insurance Commissioner. In addition, the MEIA limits rating criteria that insurers may employ, requires insurers to develop a “secondary” or merit rating plan under which premium surcharges are levied on poor drivers, establishes a joint underwriting association to provide insurance to individuals who cannot obtain coverage in the insurance market, and regulates other types of coverage and informational requirements.

Insurance Scoring. The financial stability of an insured, in all lines of business, has always been a strong consideration in underwriting and pricing. The Company currently uses insurance scoring (similar to a credit score) as a pricing tool in its homeowners, mobilowners, personal auto, marine and farm lines of business. Numerous studies have verified the validity of insurance scoring as a predictor of future losses.

On January 12, 2005, the Governor of Michigan and the Commissioner of the Office of Financial and Insurance Services issued proposed rules to reduce base insurance rates and ban the use of insurance credit scores as a rating factor or as a basis to refuse to insure or limit coverage on personal insurance. Personal insurance includes private passenger automobile, homeowners, motorcycle, boat, personal watercraft, snowmobile, recreational vehicle, mobile-homeowners and non-commercial dwelling fire lines. The proposed ban was to be effective on July 1, 2005.

The Insurance Institute of Michigan (“IIM”), of which the Company is a member, mounted a legal challenge to the ban and filed a suit on March 25, 2005 seeking relief from the proposed ban. On April 25, 2005 the presiding judge issued a final order in the matter of IIM et al v. OFIS, pertaining to insurers’ use of insurance credit scores to provide discounts on personal lines of insurance. In his final order the judge ruled in favor of IIM, stating that, “It is ordered that Plaintiff’s request for declaratory relief is granted, and the OFIS rules, R 500.2151-2155 are declared illegal, invalid and unenforceable. It is further ordered that Defendant is permanently enjoined from enforcing these rules against any Plaintiff in this action.” The Company was pleased with the outcome of the legal challenge and intends to continue to utilize insurance scoring as a pricing tool. The Commissioner of the OFIS filed an appeal to this ruling in the Michigan Court of Appeals. The appeal was heard before the appellate court on October 10, 2006. A decision is expected in the first half of 2007. Future action will depend on the outcome of the appeal.

Holding Company Regulation. Most states, including Michigan, have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. These laws permit the OFIS and any other relevant insurance departments to examine the Insurance Company and the Holding Company at any time, to require disclosure of material transactions between them and to require prior approval of transactions, such as extraordinary dividends from the Insurance Company to the Holding Company. All transactions between companies within a holding company system must be fair and equitable to the insurance company. Under Michigan law, the maximum amount of dividends that may be paid by an insurer to its stockholders during any twelve-month period without approval of the OFIS is the greater of 10% of the insurer’s surplus as reported on the most recent annual statement filed with the OFIS or the net income, excluding realized capital gains, of the insurer for the twelve-month period covered by such annual statement.

Change in Control. The Michigan Insurance Code requires that the Insurance Commissioner receive prior notice and approve of a change of control in either the Insurance Company or the Holding Company. The Insurance Code contains a complete definition of “control.” In simplified terms, a person, corporation or other entity would obtain “control” of the Insurance Company or the Holding Company if they possessed, had a right to acquire possession or had the power to direct any other person acquiring possession, directly or indirectly, of 10% or more of the voting securities of either company. To obtain approval for a change of control, the proposed acquirer must file an application with the Insurance Commissioner containing detailed information such as the identity and background of the acquirer and its affiliates, the sources and amount of funds to be used to effect the acquisition, and financial information regarding the proposed acquirer.

Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (the SEC) under the Securities Exchange Act of 1934 (the Exchange Act).

The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of specified issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. The SOA addresses, among other matters:

•

audit committees, including the independence of members, communications with auditors and selection and oversight of auditors;

•

certification of financial statements by the chief executive officer and the chief financial officer;

•

disclosure of off-balance sheet transactions;

•

a prohibition on personal loans to directors and officers;

•

expedited filing requirements for Form 4 statements of changes of beneficial ownership of securities required to be filed by officers, directors and 10% shareholders;

•

disclosure of whether or not a company has adopted a code of ethics;

•

various increased criminal penalties for violations of securities laws.

Under the current rules beginning with our annual report on Form 10-K for the year ended December 31, 2007, we will be subject to the provisions of Section 404 of the Sarbanes-Oxley Act that require an annual management assessment of our internal control over financial reporting. For the year ended December 31, 2008 we will be subject to both the management assessment of our internal controls over financial reporting as well as the related attestation by our independent registered public accounting firm.

ITEM1A.

RISK FACTORS

The Company’s financial performance is dependent upon its own specific business characteristics, however, risk factors do exist which could result in a significant or material adverse effect on our results of operations or financial condition and a corresponding decline in the market price of our common stock. Risk factors include, but may not be limited to, the following:

Our financial results could be affected by the cyclical patterns of the soft and hard market in the property and casualty industry.

The financial performance of the property and casualty industry tends to fluctuate in patterns of soft markets followed by hard markets. The Company’s strategy is to focus on disciplined underwriting and avoid riding the cycle of soft and hard markets. However, if the marketplace puts pressure on pricing we may not be able to implement rate increases which could have a negative effect on our financial performance.

Because we concentrate all of our business in Michigan, its weather will affect our results.

All insurance policies we write are generated in Michigan, with a significant portion in four counties (Kent, Newaygo, Van Buren and Muskegon). Companies that have a more diversified geographic portfolio would not be as exposed to Michigan weather as we are.

Catastrophe and natural peril losses may hurt our financial condition.

By their nature, catastrophe losses are unpredictable in their number and severity. They can be caused by various severe weather events, including snow storms, ice storms, freezing temperatures, tornadoes, wild fires, wind and hail.

The extent of net losses from catastrophes depends upon three factors:

•

the total amount of insured exposure in the area affected by the event,

•

the severity of the event, and

•

the amount and structure of our reinsurance coverage.

We obtain reinsurance to aid in paying catastrophe loss claims, but we may experience operating losses in years when catastrophe claims are higher than expected. Natural perils such as freezing rain, snow storms, wind

storms and tornadoes, which may occur frequently but not rise to the level of a catastrophe, may cause us to lose money because they are not classified as a catastrophe under our reinsurance program. If our reinsurance pays catastrophe loss claims, we may still incur substantial expense to reinstate the coverage used.

If we underestimated the amount of our required loss reserves, our results may suffer.

We maintain reserves to cover our estimated liability for losses and loss adjustment expenses (“LAE”) with respect to reported and unreported claims incurred. Reserves are estimates involving actuarial and statistical projections at a given point in time of what we expect to be the cost of the ultimate settlement and administration of claims based on facts and circumstances then known, actual and historical information, predictions of future events, estimates of future trends in claims severity and judicial theories of liability, legislative activity and other variable factors, such as inflation, investment returns, and price increases because of local shortages. The Company’s overall reserving practice provides for ongoing claims evaluation and adjustment (if necessary) based on the development of related data and other relevant information pertaining to such claims. Loss and LAE reserves, including reserves for claims that have been incurred but not yet reported, are analyzed regularly and we adjust our reserves based on such reviews. We believe our reserves are adequate. However, establishing appropriate reserves is an uncertain process. There is no guarantee that our ultimate losses will not exceed our reserves. To the extent that reserves prove to be inadequate in the future, we would have to increase reserves, which would reduce our earnings and could have a material adverse effect on the Company’s results of operations and financial condition.

We face strong competition from large companies, which may reduce our earnings and profits.

We principally insure against property and casualty losses. This segment of the market is highly competitive. We compete against other Michigan-based insurance carriers as well as major regional and national carriers. The national carriers we compete with on a regular basis are Citizens Insurance Company of America, State Farm Mutual Automobile Insurance Company and the Allstate Corporation. Regional companies that are important competitors include Auto Owners Insurance Group, Allied Insurance, Farm Bureau Mutual Insurance Company of Michigan, Frankenmuth Mutual Insurance Company and Hastings Mutual Insurance Company. Smaller state competitors would include Michigan Insurance Company, Pioneer State Mutual Insurance Company and Wolverine Mutual Insurance Company. Many of our competitors have substantially greater financial, technical and operating resources than we do. As a result, many of our lines of insurance are subject to strong price competition and heavy advertising by larger companies, which could result in loss of business and adversely affect our earnings.

Our reliance on independent insurance agencies to sell our products as well as their ability to sell products of our competitors could adversely affect the sale of our products.

We market our property and casualty insurance products exclusively in Michigan through approximately 170 independent agencies. Our independent insurance agencies represent other insurance companies, including our competitors, which also compete for the service and allegiance of these agencies. If a significant number of the independent agencies shift profitable accounts from us to our competitors, it could adversely affect our business.

A downgrade in our A.M. Best rating could hurt our premium volume.

Ratings assigned by A.M. Best Company, Inc. influence the competitive position of insurance companies. Their ratings are based upon factors of concern to policyholders and are not directed toward the protection of investors. Our current rating is “B++” (Very Good). Our business is sensitive to those ratings. If we were to experience a rating downgrade, our independent agents could be inclined to place their customers with higher-rated insurance carriers, which could result in a loss of premium volume and could have a material adverse effect on us. In addition, a downgrade in our A.M. Best rating could make it more difficult or costly to obtain reinsurance.

If we are unable to obtain adequate reinsurance coverage at reasonable rates in the future, we may be unable to manage our underwriting risks and operate our business profitably.

Reinsurance is the practice of transferring part of the liabilities and the premiums under an insurance policy to another insurance company. Like other insurance companies, we use reinsurance arrangements to limit and manage the amount of risk we retain and to stabilize our underwriting results. Reinsurance can be facultative reinsurance or treaty reinsurance. Under facultative reinsurance, each risk or portion of a risk is reinsured individually. Under treaty reinsurance, an agreed-upon portion of business written is automatically reinsured. Treaty reinsurance can also be classified as quota share reinsurance, pro-rata insurance or excess of loss reinsurance. Under quota share reinsurance and pro-rata insurance, the ceding company cedes a percentage of its insurance liability to the reinsurer in exchange for a like percentage of premiums, less a ceding commission, and, in turn, will recover from the reinsurer the reinsurer’s share of losses and loss adjustment expenses incurred on those risks. Under excess of loss reinsurance, an insurer limits its liability to all or a particular portion of the amount in excess of a predetermined deductible or retention. Regardless of type, reinsurance does not legally discharge the ceding insurer from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the ceding company to the extent of the coverage ceded. The availability and cost of reinsurance are subject to prevailing market conditions and may vary significantly over time. Reinsurance rates are not regulated and reinsurers are able to quickly raise their rates in response to changing market conditions. On the other hand, the Insurance Company’s rates are regulated, and it could take us years to obtain regulatory approval and collect rate increases based on the rising costs of reinsurance. There is no assurance that regulators would approve a rate increase based on these costs. Reinsurance may not be available to us in the future at commercially reasonable rates. If it is not available at reasonable rates, we may be unable to manage our underwriting risks and operate our business profitably.

If our reinsurers do not fulfill their financial obligations to us it may jeopardize our earnings and financial condition.

We are subject to loss and credit risk relating to the reinsurers we deal with because buying reinsurance does not relieve us of our liability to policyholders. The insolvency or inability of any reinsurer to meet its obligations may have a material adverse effect on the business, results of operations and financial condition of the Insurance Company.

If we do not have adequate reinsurance coverage, our earnings and financial condition would be in jeopardy.

It is possible that the losses we experience on risks we have reinsured will exceed the coverage limits on the reinsurance. If the amount of our reinsurance is not sufficient, our insurance losses would increase which could jeopardize our earnings and financial condition

Changes in prevailing interest rates may reduce our revenues, cash flows and shareholders’ equity.

We have invested a significant portion of our investment portfolio in fixed maturity securities. In recent years, we have earned our investment income primarily from interest income on this portfolio. Lower interest rates could reduce the return on our portfolio and the amount of this income if we must reinvest at rates below those we have on securities currently in the portfolio. The reduced investment income could also reduce our cash flows. In addition, in a declining interest rate environment, we may lower our credit quality standards in order to maintain yield on the investment portfolio, which would negatively impact the quality of our investment portfolio. A decline in the quality of our portfolio could result in realized losses on securities, creating additional volatility in our statement of operations. Higher interest rates could reduce the market value of our fixed income investments resulting in a reduction to stockholders’ equity.

We could be forced to sell investments to meet our liquidity requirements.

We believe that we maintain adequate amounts of cash and short-term investments to pay claims, and do not expect to sell securities prematurely for such purposes. We may, however, decide to sell securities as a result of changes in interest rates, credit quality, the rate of repayment or other similar factors. A significant increase in market interest rates could result in a situation in which we are required to sell securities at depressed prices to fund payments to our insureds. Since we carry debt securities at fair value, we expect that these securities would be sold with no material impact on our net equity. However, if these securities are sold, future net investment income may be reduced if we are unable to reinvest in securities with similar or better yields.

Declining debt and equity markets could adversely affect our investment portfolio.

A declining market could stress the values of investments of all firms and could cause the investment ratings of the issuers of debt or equity to decline. Therefore, a declining market could negatively impact the credit quality of our investment portfolio as adverse equity markets also affect issuers of securities held by us. Declines in the quality of the portfolio could cause additional realized losses on securities, thus causing volatility in our statement of operations.

The Sarbanes-Oxley Act of 2002 may have a material adverse effect on our business.

The Sarbanes-Oxley Act of 2002 requires new corporate governance standards, increased disclosures, expanded insider accountability, broadened sanctions and increased oversight by the Board and its committees. It also requires higher standards for the composition of the audit committee, heightens auditor independence, and limits non-audit services we can obtain from our outside auditor. In addition, the requirements of the Sarbanes-Oxley Act of 2002 will increase our audit-related costs as we and our independent auditors have elevated their standards and procedures. Our costs for legal compliance will also increase.

Regulatory changes could adversely affect our business.

The Michigan Office of Financial and Insurance Services (“OFIS”) regulates numerous aspects of our business and financial condition, which include:

•

approving premium rates;

•

establishing standards of solvency;

•

licensing our agents and us;

•

regulating the types and amounts of our investments;

•

regulating the reserves we must establish for our current losses and future liabilities; and

•

approving our policy forms.

The regulation and supervision are primarily for the protection of policyholders and not for the benefit of shareholders.

The insurance regulatory structure has been subject to increased scrutiny in recent years by federal and state legislative bodies and state regulatory authorities. Future legislation or regulatory changes could adversely affect our business and results of operations. Adverse legislative and regulatory activity, which increases our costs, adversely affects our capital or constrains our ability to adequately price insurance coverage, may occur in the future. In recent years, insurers have been under pressure from state insurance regulators, legislatures and special interest groups to reduce, freeze or set rates at levels that may not correspond with current underlying costs.

Regulators may limit our use of credit-based insurance scoring, adversely affecting our ability to effectively price our products.

We use credit-based insurance scoring as one means to price our products. Insurance companies have been criticized for using credit-based insurance scoring as a means to improve underwriting results. There are many variations of credit-based insurance scoring formulas and projections used by insurance companies. We use a form of credit- based insurance scoring which projects a numerical score ranging from 200 to 900 (“Insurance Score”), with the higher number indicating a better score, based on information in a person’s credit report maintained by one of the several national credit reporting firms. An Insurance Score, like a credit score, is based on various factors such as payment history, collections, credit utilization and bankruptcies. The score is used to predict how often you are likely to file claims, and how expensive those claims will be.

The Insurance Institute of Michigan (“IIM”), of which the Company is a member, mounted a legal challenge to the ban and filed a suit on March 25, 2005 seeking relief from the proposed ban. On April 25, 2005 the presiding judge issued a final order in the matter of IIM et al v. OFIS, pertaining to insurers’ use of insurance credit scores to provide discounts on personal lines of insurance. In his final order the judge ruled in favor of IIM, stating that, “It is ordered that Plaintiff’s request for declaratory relief is granted, and the OFIS rules, R 500.2151-2155 are declared illegal, invalid and unenforceable. It is further ordered that Defendant is permanently enjoined from enforcing these rules against any Plaintiff in this action.” The Commissioner of the OFIS has filed an appeal to this ruling in the Michigan Court of Appeals. The appeal was heard before the appellate court on October 10, 2006. A decision is expected in the first half of 2007. Future action will depend on the outcome of the appeal. Even if an appeal is rejected by the Michigan judiciary other reform legislation or regulatory action by OFIS could limit the effective use of this underwriting measure.

We believe that a higher Insurance Score indicates a lower expected risk of loss. If regulators were to restrict or prohibit our use of insurance scoring, it could impede us from effectively pricing our products.

Assessments and other surcharges for guaranty funds, second-injury funds and other mandatory pooling arrangements may reduce our profitability.

We participate in the Michigan Property and Casualty Guaranty Association (“MPCGA”), which protects policyholders and claimants against losses due to insolvency of insurers. When an insolvency occurs, the MPCGA is authorized to assess member companies up to the amount of the shortfalls of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar year. We recognize a liability for insurance related assessments when an assessment has been imposed or information available indicates it is probable that an assessment will be imposed, or an event obligating us to pay an imposed or probable assessment has occurred and the amount of the assessment can be reasonably estimated.

The Michigan Basic Property Insurance Association (“MBPIA”) provides basic insurance to property-owners who cannot obtain insurance through insurance carriers in the normal course of business due to a high-risk exposure. The MBPIA assesses insurance carriers in Michigan a fee for continuation of the association based on the amount of losses incurred by the association and the amount of net written premium of the carrier related to property insurance.

We cannot predict with certainty the amount of future assessments for these programs. Significant assessments could have a material adverse effect on our financial condition and results of operations and mandatory shared-market mechanisms or changes in them could reduce our profitability in any given period or limit our ability to grow our business.

Michigan’s regulatory environment restricts our ability to exclude potentially unprofitable risks.

Michigan’s laws and regulations, specifically the Michigan Essential Insurance Act (“MEIA”), limit our ability to cancel or refuse to renew personal automobile and homeowner policies and subject program withdrawals to prior approval by OFIS. The MEIA requires an insurer to insure every applicant for insurance that meets the minimum requirements and the insurer’s underwriting rules. The underwriting rules must be applied uniformly to all applicants and policyholders. Each insurer must file its underwriting rules with OFIS. In addition, MEIA limits rating criteria that insurers may employ, requires insurers to develop a “secondary” or merit rating plan under which premium surcharges are levied on poor drivers, establishes a joint underwriting association to provide insurance to individuals who cannot obtain coverage in the insurance market, and regulates other types of coverage and informational requirements.

Inflation could increase the cost of claims resolutions and hurt our profitability.

Changes in the severity of claims have an impact on the profitability of our business. Changes in bodily injury claim severity are driven primarily by inflation in the medical sector of the economy. Changes in auto physical damage claim severity are driven primarily by inflation in auto repair costs, auto parts prices and used car prices. Changes in homeowners insurance claims severity are driven by inflation in the construction industry, in building materials and in home furnishings and other economic and environmental factors. However, changes in the level of the severity of claims that we pay do not necessarily match or track with changes in the rate of inflation in these various sectors of the economy.

Acts of terrorism may adversely impact our financial results.

We are continuing to examine the potential exposure of our operations to acts of terrorism. In the event that a terrorist act occurs, we do not anticipate material direct losses from claims by our insureds, but our reinsurers may suffer significant losses that could adversely affect our reinsurers’ ability to provide adequate reinsurance coverage and our ability to obtain cost effective reinsurance coverage.

Federal regulation of insurers may have a material effect on our operations.

In recent years, the state insurance regulatory framework has come under increased federal scrutiny. Legislation that would provide for optional federal chartering of insurance companies has been introduced in Congress. We cannot predict whether any federal measures will be adopted to change the nature or scope of the regulation of the insurance business or what effect any such measures would have on us.

The Gramm-Leach-Bliley Act of 1999 allows banks to affiliate with insurers, which may increase the number and financial strength of our competitors.

The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial banks, insurers and securities firms under one holding company. Until passage of the Gramm-Leach-Bliley Act of 1999, the Glass Steagall Act of 1933 had limited the ability of banks to engage in securities-related businesses and the Bank Holding Company Act of 1956 had restricted banks from being affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act of 1999, bank holding companies may acquire insurers and insurance holding companies may acquire banks. In addition, grandfathered unitary thrift holding companies may engage in activities that are not financial in nature. The ability of banks to affiliate with insurers may materially and adversely affect our product lines by substantially increasing the number, size and financial strength of potential competitors.

Other factors not currently anticipated by management may also materially and adversely affect our financial position and results of operations. We do not undertake, and expressly disclaim, any obligation to update or alter our statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

ITEM 2. PROPERTIES

We own our main office, located at 933 E. Main Street, Fremont, Michigan, which is a 30,000 square foot brick veneer building constructed in 1981. There is no mortgage indebtedness on the building. Management believes that the building is sufficient for the needs of the Company, both now and in the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

The Company is party to litigation in the normal course of business. Based upon information presently available to us, we do not consider any litigation to be material. However, given the uncertainties attendant to litigation, we cannot be sure that our results of operations and financial condition will not be materially adversely affected by any litigation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

We consider our common stock to be thinly traded, therefore, any reported bid or ask price may not reflect a true market-based valuation. Quotes on our common stock are published on the OTC Bulletin Board (“OTCBB”) under the symbol “FMMH”. The following table sets forth the high and low bid prices of our common stock during the periods indicated as reported on the OTCBB. These bid quotations are inter-dealer prices without retail mark-up or mark-down or commissions and may not necessarily represent actual transactions.


	High		Low
*December 31, 2006*
First Quarter	$	14.95	$	10.75
Second Quarter	$	19.88	$	14.13
Third Quarter	$	21.25	$	18.75
Fourth Quarter	$	29.45	$	22.30

*December 31, 2005*
First Quarter	$	7.43	$	6.00
Second Quarter	$	8.25	$	7.18
Third Quarter	$	10.25	$	7.50
Fourth Quarter	$	12.03	$	9.13

As of March 16, 2007, the Company had 2 shareholders of record. For purposes of this determination, Cede & Co., the nominee for the Depositary Trust Company is treated as one holder.

The Company has not paid any dividends and does not intend to pay dividends on the common stock in the foreseeable future. Any payment of dividends in the future on the common stock is subject to determination and declaration by the Company’s Board of Directors, who will take into consideration the Company’s financial condition, results of operations and future prospects. The Holding Company’s principal source of cash available for payment of dividends is dividends from the Insurance Company. The payment of dividends by the Insurance Company is subject to limitations imposed by the Michigan Insurance Code. Information regarding restrictions and limitations on the payment of cash dividends can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the “Financial Condition, Liquidity and Capital Resources” section.

Information relating to securities authorized for issuance under equity compensation plans is set forth under Part III, Item 12 of this report and is incorporated herein by reference.

Stock Performance Graph

The following line graph compares the cumulative total shareholder return (i.e., the change in share price plus the cumulative amount of dividends, if any, assuming dividend reinvestment, divided by the beginning of the year share price, expressed as a percentage) on a $100 investment in the Company’s Class A Common Stock, with the same investment in the NASDAQ Stock Market and an industry peer group (the “Peer Group”) for the period commencing on October 15, 2004, the closing date of the Company’s initial public offering, through December 31, 2006. The Peer Group is the Hemscott Industry Group 432 comprised of 100 property and casualty insurance companies.

LOGO


	Fiscal Year Ending
Company/Index/Market	10/15/04	12/31/04	12/31/05	12/31/06
Fremont Michigan InsuraCorp, Inc.	100.00	120.50	220.38	510.00
Hemscott Industry Group 432—Property/Casualty Insurance	100.00	109.24	120.38	137.00
NASDAQ Market Index	100.00	110.06	112.47	124.02

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data for the Company. The financial data for 2002 through 2003 reflects the results of operations and financial position of the Insurance Company. The financial data for 2006, 2005 and 2004 reflects the consolidated results of operations and financial position of the Holding Company and the Insurance Company including the effects of the Conversion which occurred on October 15, 2004. You should read this data in conjunction with the Company’s consolidated financial statements and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this report.


	For the years ended December 31,
	2006		2005			2004		2003			2002
	(In thousands)
Income Statement Data:
Direct premium written	$	48,869	$	45,516		$	41,971	$	38,323		$	34,725
Net premium written (1)		40,263		39,512			36,504		18,891			16,405
Net premium earned (1)		39,249		38,756			27,196		18,099			16,426
Net investment income		1,888		1,689			1,176		815			650
Net realized investment gain (loss)		520		609			276		(32	)		(196	)
Other income, net		417		397			386		388			406

Total revenue		42,074		41,451			29,034		19,270			17,286

Net loss and loss adjustment expense		17,565		20,704			17,039		11,370			10,636
Policy acquisition and other underwriting expense		13,600		12,508			9,615		6,887			6,479
Interest expense		228		309			487		577			365
Demutualization expenses		—		—			302		175			—
Settlement of benefit plan (2)		—		—			—		—			425

Total expenses		31,393		33,521			27,443		19,009			17,905

Income (loss) before federal income tax expense (benefit)		10,681		7,930			1,591		261			(619	)
Federal income tax expense (benefit) (8)		3,466		(1,152	)		78		35			(45	)

Net income (loss)	$	7,215	$	9,082		$	1,513	$	226		$	(574	)

Selected Balance Sheet Data:
Total investments	$	56,910	$	51,415		$	42,414	$	27,804		$	17,024
Total assets	$	85,877	$	75,961		$	68,661	$	60,128		$	44,435
Total liabilities	$	51,447	$	50,125		$	51,356	$	51,881		$	37,110
Stockholders’ equity	$	34,430	$	25,836		$	17,305	$	8,247		$	7,325
Other Data:
Net loss and LAE ratio (3)		44.8		53.4			62.7		62.8			64.8
Expense ratio (4)		34.6		32.3			35.4		38.1			39.4
GAAP combined ratio (5)		79.4		85.7			98.1		100.9			104.2
Statutory surplus	$	33,670	$	25,994		$	20,270	$	15,658		$	13,875
Statutory premiums to surplus ratio (6)		1.20		1.52			1.80		1.21			1.18
Per Share Data: (7)
Basic earnings per share	$	4.18	$	5.27		$	0.52		N/A			N/A
Diluted earnings per share	$	4.10	$	5.24		$	0.52		N/A			N/A

(1)	The increase in net premiums written and earned in 2004 as compared to 2003 is due to the fact that as of January 1, 2004 the Insurance Company placed the quota share agreement into runoff.

(2)	Effective November 30, 2001, the Insurance Company terminated the sponsored defined benefit plan. As of January 1, 2001, the Insurance Company had estimated that plan assets would exceed the projected benefit

obligation as of the date of termination and a prepaid benefit cost was recorded. As a result of the termination of the Plan, during 2001, the Insurance Company recognized a curtailment gain of approximately $1,109,000 resulting in a prepaid benefit cost of $1,454,694 as of December 31, 2001.

During 2002 the Insurance Company recorded net periodic benefit income of approximately $138,000 and a $424,808 settlement loss. After giving effect to the 2002 net periodic benefit income and settlement loss, the remaining prepaid benefit cost was liquidated in August of 2002. In accordance with the terms of the liquidation, the Insurance Company received approximately $701,000 upon settlement. In addition to the net periodic benefit income, the Insurance Company also contributed approximately $293,000 to the Insurance Company’s 401(k) plan and approximately $175,000 was paid in excise taxes as a result of the termination. The impact of the net periodic benefit income, 401(k) contribution and excise taxes recorded during 2002 which approximated $330,000, is reflected within policy acquisition and other underwriting expenses in the 2002 statement of operations.

(3)	The net loss and loss adjustment expense (LAE) ratio is the net loss and LAE in relation to net premium earned.

(4)	The expense ratio is the policy acquisition and other underwriting expenses in relation to net premium earned.

(5)	The sum of net losses, loss adjustment expenses and policy acquisition and other underwriting expenses divided by net premiums earned. A combined ratio of less than 100% means a company is making an underwriting profit.

(6)	The ratio of net premiums written divided by ending statutory surplus.

(7)	Earnings per share data for 2004 reflects only net income for the period from October 16, 2004 through December 31, 2004, the period after the Conversion. Net income during this period was $902,711.

(8)

In 2005, the Company recorded a federal income tax benefit of $1,152,000 despite having pre-tax income of $7,930,000. The federal income tax benefit was due to the Company recognizing a $3,855,000 reduction in its deferred tax valuation allowance in 2005. See Note 5 to the consolidated financial statements, included elsewhere in this report, for further information regarding federal income taxes.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with the consolidated financial statements and notes thereto included in this report, and the narrative under the “Business” heading contained in Item 1 of this report. The following discussion contains forward-looking information that involves risks and uncertainties. Actual results could differ significantly from these forward-looking statements. See “Forward-Looking Statements”.

Critical Accounting Policies and Estimates

General. Our discussion and analysis of financial condition, results of operations and liquidity and capital resources is based upon the consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We generally base our estimates on historical experience or other appropriate assumptions that we believe are reasonable and relevant under the circumstances and evaluate them on an ongoing basis. The results of these estimation processes form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the critical accounting policies and estimates discussed below reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements. These may be further commented upon in applicable sections on Results of Operations and Liquidity and Capital Resources that follow. Information about the significant accounting policies we use in the preparation of our financial statements is included in Note 1—Significant Accounting Policies to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.

Liabilities for Loss and Loss Adjustment Expenses. The liability for losses and loss adjustment expenses represents estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported. The amount of loss reserves for reported claims is based primarily upon a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss. The amounts of loss reserves for unreported claims and loss adjustment expenses are determined using historical information by line of insurance as adjusted to current conditions. Inflation is ordinarily implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results over multiple years.

Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Specifically, on a quarterly basis, we review, existing reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior accident years. We use historical paid and incurred losses and accident year data to derive expected ultimate loss and loss adjustment expense ratios by line of business. We then apply these expected loss and loss adjustment expense ratios to earned premium to derive a reserve level for each line of business. In connection with the determination of the reserves, we also consider other specific factors such as recent weather-related losses, trends in historical paid losses, and legal and judicial trends with respect to theories of liability. Some of our business relates to coverage for short-term risks, and for these risks loss development is comparatively rapid and historical paid losses, adjusted for known variables, have been a reliable predictive measure of future losses for purposes of our reserving. Some of our business relates to longer-term risks, where the claims are slower to emerge and the estimate of damage is more difficult to predict. For these lines of business, more sophisticated actuarial methods, such as the Bornhuetter-Ferguson loss development methods (see “Methods” below) must be employed to project an ultimate loss expectation, and then the related loss history must be regularly evaluated and loss expectations updated, with the possibility of variability from the initial estimate of ultimate losses.

When a claim is reported to us, our claims representatives establish a “case reserve” for the estimated amount of the ultimate payment. This estimate reflects an informed judgment based upon general insurance reserving practices and on the experience and knowledge of the estimator. The individual estimating the reserve considers the nature and value of the specific claim, the severity of injury or damage, and the policy provisions relating to the type of loss. Case reserves are adjusted by our claims staff as more information becomes available. It is our policy to settle each claim as expeditiously as possible.

We maintain incurred but not reported (“IBNR”) reserves to provide for already incurred claims that have not yet been reported and developments on reported claims. The IBNR reserve is determined by estimating our ultimate net liability for both reported and IBNR claims and then subtracting the case reserves and payments made to date for reported claims.

Methods Used to Estimate Loss & Loss Adjustment Expense Reserves. We applied the following general methods in projecting loss and loss adjustment expense reserves:

•

Incurred loss development

•

Paid loss development

•

Bornhuetter-Ferguson incurred loss development

•

Bornhuetter-Ferguson paid loss development

Description of Ultimate Loss Estimation Methods. The incurred loss development method relies on the assumption that, at any given state of maturity, ultimate losses can be predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor. The validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development factors were calculated to measure the relative development of an accident year from one maturity point to the next. We then selected appropriate age-to-age loss development factors based on these historical factors and used the selected factors to project the ultimate losses.

The paid loss development method is mechanically identical to the incurred loss development method described above. The paid method does not rely on case reserves or claim reporting patterns in making projections.

The validity of the results from using a loss development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or variations in a company’s mix of business from year to year. Also, since the percentage of losses paid for immature years is often low, development factors are volatile. A small variation in the number of claims paid can have a leveraging effect that can lead to significant changes in estimated ultimates. Therefore, ultimate values for immature accident years are often based on alternative estimation techniques.

The Bornhuetter-Ferguson expected loss projection method based on incurred loss data relies on the assumption that remaining unreported losses are a function of the total expected losses rather than a function of currently reported losses. The expected losses used in this analysis were selected judgmentally. The expected losses are multiplied by the unreported percentage to produce expected unreported losses. The unreported percentage is calculated as one minus the reciprocal of the selected incurred loss development factors. Finally, the expected unreported losses are added to the current reported losses to produce ultimate losses.

The calculations underlying the Bornhuetter-Ferguson expected loss projection method based on paid loss data are similar to the incurred Bornhuetter-Ferguson calculations with the exception that paid losses and unpaid percentages replace reported losses and unreported percentages.

The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature accident years. For these immature years, the amounts reported or paid may be small and unstable and therefore not predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when changing reporting patterns or payment patterns distort the historical development of losses. As noted below, the Company tends to rely more heavily on the incurred Bornhuetter-Ferguson method for its most recent accident years due to the smaller size of each line of business and the instability in incurred and paid amounts.

In estimating our loss reserves for the multi-peril lines of business including homeowners, farmowners and commercial and the general liability line of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2003 to 2006 and the incurred loss development for accident years prior to 2003.

For the property lines of business including special property and personal and commercial auto physical damage as well as the personal and commercial auto liability lines of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2004 to 2006 while the incurred loss development method was used for accident years prior to 2004.

For the workers’ compensation line of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2001 to 2006 and the incurred loss development method for the remaining years. Given the longer tail development of workers’ compensation claims and the fact that the Company’s workers’ compensation book of business is relatively small we placed more reliance on the incurred Bornhuetter-Ferguson method.

Each quarter, we review our loss reviews to ascertain whether new developments have occurred which would require adjustment to our ultimate loss estimates. The quarterly review involves roundtable discussion involving the claims and accounting departments. Discussion is generally focused on claims involving liability and those claims that involve significant judgement. Because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on the Company’s results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.

Reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. Accordingly, the ultimate liability for unpaid losses and loss adjustment expenses will likely differ from the amount recorded at December 31, 2006.

The following table shows the breakdown of our gross loss reserves between reported losses and IBNR losses by segment (in thousands):


	December 31,
	2006		2005
Reported losses
Personal	$	6,094	$	5,497
Commercial		3,525		2,642
Farm		1,123		1,444
Marine		837		770

		11,579		10,353

IBNR losses
Personal		4,338		3,870
Commercial		3,520		3,775
Farm		486		646
Marine		254		223

		8,598		8,514

Total
Personal		10,432		9,367
Commercial		7,045		6,417
Farm		1,609		2,090
Marine		1,091		993

	$	20,177	$	18,867

The following table shows the activity in the loss and LAE reserve balances of the Company for the years ended December 31, 2006, 2005 and 2004, prepared in accordance with accounting principles generally accepted in the United States of America.


	Years ended December 31,
	2006			2005			2004
	(In thousands)
Balance, beginning of year	$	18,867		$	18,973		$	13,878
Less reinsurance balance recoverable		5,934			9,187			7,742

Net balance, beginning of year		12,933			9,786			6,136
Incurred related to:
Current year		22,790			23,059			17,705
Prior years		(5,224	)		(2,355	)		(666	)

Total incurred		17,566			20,704			17,039
Paid related to:
Current year		14,463			13,835			11,393
Prior years		2,889			3,722			1,996

Total paid		17,352			17,557			13,389

Net balance, end of year		13,147			12,933			9,786
Plus reinsurance balance recoverable		7,030			5,934			9,187

Balance, end of year	$	20,177		$	18,867		$	18,973

In 2006, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $5,224,000 which represents 40.4% of the net loss and LAE reserves as of the beginning of the year. During 2006, all product lines experienced favorable development as follows: homeowners—$1,340,000,

personal auto—$1,329,000, commercial multi-peril—$1,247,000, workers compensation—$715,000, farm— $379,000 while the remaining product lines had redundant development of $214,000. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2006. The favorable development was concentrated in accident years 2003 through 2005 and is a result of downward development on both case and incurred but not reported reserves and loss adjusting expense reserves.

In 2005, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $2,355,000 which represents 24.1% of the loss and LAE reserves as of the beginning of the year. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2005. As a result of the adverse development experienced during 2003 the Company has placed an emphasis on the claim reserving process to ensure that we are establishing adequate reserves reflecting our best estimate of the ultimate loss. The favorable development in 2005 was primarily in the homeowner and personal auto product lines. The homeowner’s line, which is the Company’s largest product line, experienced redundant development of approximately $1,904,000 primarily in the accident years of 2004, 2003 and 2002 as a result of lower than expected losses on both incurred but not reported and existing case reserves as of December 31, 2004. The personal auto line experienced redundant development of approximately $426,000 primarily in the 2004 accident year. The Company began writing personal auto policies in 1999. Given that this is a newer product line for the Company our initial ultimate loss estimates on undeveloped years are based more on estimated industry loss ratios as opposed to our actual historical loss ratios. As the 2004 accident year continues to develop, the Company has experienced redundant development on settled claims. This has resulted in a decrease in the ultimate loss ratio as compared to the ultimate ratio used at December 31, 2004.

During 2005, the commercial segment experienced adverse development of approximately $253,000 driven by the workers compensation product line which had adverse development of $234,000. The Company strengthened its workers compensation reserves for accident years 2001 through 2004 as a result of adjusting the ultimate loss estimates so they are more in line with industry averages. Given the fact that workers’ compensation claims take a much longer time to be reported and settled, coupled with the fact that the Company began writing workers’ compensation policies in 1997, the Company deemed industry loss ratios to be a more prudent estimate than loss ratios based on the Company’s historical development patterns since 1997. The remaining redundant development of $278,000 came from the marine segment’s 2004 and 2003 accident years.

In 2004, the Company experienced favorable development on losses and LAE for prior accident years of $666,000 which represents 10.9% of net loss and LAE reserves as of the beginning of the year. The favorable development was concentrated in the commercial segment’s product lines of commercial multiple peril and workers compensation which experienced favorable development of $1,076,000 primarily in accident years 2000, 2002 and 2003. During 2003, the Company strengthened its reserves in the commercial segment because the Company’s actuarial projections indicated higher ultimate losses on prior accident years driven primarily by the volatility in claim development within the newer product lines within the commercial segment. Throughout 2004 the development on commercial losses was less than what was expected as the settlement of reported cases was favorable. The homeowner and farm product lines experienced adverse development of $344,000 resulting from the normal claims review process, and not from changes in key assumptions or reserving methods.

The following table shows the development of our reserves for unpaid losses and LAE on a GAAP basis for each of the years ended December 31, from 1996 to 2006. The line in the table titled “Net liability for loss and LAE,” shows the initial reserves at the balance sheet date, including losses incurred but not reported. The portion of the table titled “Cumulative net paid as of,” shows the cumulative amounts subsequently paid as of successive years with respect to the reserve shown at the top of the table. The portion of the table titled “Re-estimated net liability as of:” shows the re-estimated amount of the previously reported liability for loss and LAE based on experience as of the end of each succeeding year. The estimates of liability for loss and LAE change as more information becomes available about the frequency and severity of claims for individual years. A redundancy (or deficiency) exists when the re-estimated amount of liability at each December 31 is less (or greater) than the prior liability estimate. The “Net cumulative redundancy (deficiency)” depicted in the table, for any particular

calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years and does not present accident year loss development. The portion of the table titled “Gross liability end of year” shows the impact of reinsurance for the years shown, reconciling the net reserves in the upper portion of the table to gross reserves. In evaluating the re-estimated liability and cumulative redundancy (deficiency), it should be noted that each data point includes the effects of changes in amounts for prior periods. Conditions and trends that have affected development of the liability in the past may not necessarily exist in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.


	As of and for the years ended December 31,
	1996			1997		1998			1999			2000			2001			2002			2003		2004		2005		2006
	(in thousands)
Gross liability end of year	$	7,451		$	8,810	$	7,606		$	8,942		$	7,830		$	11,061		$	8,677		$	13,878	$	18,973	$	18,867	$	20,177
Reinsurance recoverables		1,164			4,234		3,256			5,175			3,611			5,434			4,302			7,742		9,187		5,934		7,030

Net liability end of year	$	6,287		$	4,576	$	4,350		$	3,767		$	4,219		$	5,627		$	4,375		$	6,136	$	9,786	$	12,933	$	13,147

Net liability for loss & LAE	$	6,287		$	4,576	$	4,350		$	3,767		$	4,219		$	5,627		$	4,375		$	6,136	$	9,786	$	12,933	$	13,147

Cumulative net paid as of:
One year later		4,772			1,641		2,191			2,085			3,798			3,815			3,000			1,996		3,722		2,889
Two years later		4,933			2,727		2,309			3,068			4,973			5,156			3,807			3,007		2,905
Three years later		5,283			3,261		2,847			3,419			5,778			5,552			4,415			2,617
Four years later		5,400			3,561		3,012			3,862			5,928			5,570			4,373
Five years later		5,541			3,656		3,234			3,867			5,884			5,484
Six years later		5,559			3,782		3,219			3,889			5,819
Seven years later		5,683			3,766		3,241			3,912
Eight years later		5,683			3,807		3,261
Nine years later		5,732			3,807
Ten years later		5,732
Re-estimated net liability as of:
One year later		5,020			3,304		3,758			3,372			5,384			5,315			5,462			5,470		7,431		7,709
Two years later		5,702			3,578		3,099			3,610			5,747			6,083			5,547			4,786		4,910
Three years later		5,539			3,576		3,161			3,835			6,191			6,318			5,385			3,538
Four years later		5,447			3,629		3,296			4,114			6,245			6,233			4,917
Five years later		5,529			3,763		3,450			4,125			6,159			5,909
Six years later		5,606			3,863		3,459			4,135			6,099
Seven years later		5,701			3,872		3,485			4,210
Eight years later		5,699			3,891		3,483
Nine years later		5,751			3,894
Ten years later		5,751

Net cumulative redundancy (deficiency)	$	536		$	682	$	865		$	(443	)	$	(1,880	)	$	(282	)	$	(542	)	$	2,598	$	4,876		5,224

Gross re-estimated liability—latest	$	8,084		$	8,760	$	8,638		$	8,924		$	13,563		$	12,008		$	11,568		$	11,794	$	14,416	$	13,556
Re-estimated reinsurance recoverables		2,333			4,869		5,153			4,789			7,404			5,775			6,183			7,008		6,985		5,847

Net re-estimated liability—latest	$	5,751		$	3,891	$	3,485		$	4,135		$	6,159		$	6,233		$	5,385		$	4,786	$	7,431	$	7,709

Gross cumulative (deficiency) redundancy	$	(633	)	$	50	$	(1,032	)	$	18		$	(5,733	)	$	(947	)	$	(2,891	)	$	2,084	$	4,557	$	5,311

Investments. At December 31, 2006 and 2005, all of the Company’s investments are classified as available-for-sale and are those investments that would be available to be sold in response to the Company’s liquidity needs, changes in market interest rates and asset-liability management strategies, among others. Available-for-sale investments are recorded at fair value, with the corresponding unrealized appreciation or depreciation, net of deferred income taxes and any corresponding deferred tax asset valuation allowance, reported as a component of accumulated other comprehensive income or loss until realized.

The Company reviews the status and market value changes of its investment portfolio on at least a quarterly basis during the year, and any provisions for other-than-temporary impairments in the portfolio’s value are evaluated and established at each quarterly balance sheet date. In reviewing investments for other than temporary impairment, the Company, in addition to an investment’s market price history and its intent and ability to hold fixed maturity investments until maturity, considers the issuer’s operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities markets conditions, and analyst expectations, in their totality to reach its conclusions. When a security in the Company’s investment portfolio has an unrealized loss in value that is deemed to be other than temporary, the Company reduces the book value of such security to its current market value, recognizing the decline as a realized loss in the statement of operations. Any future increases in the market value of investments written down are reflected as changes in unrealized gains as part of accumulated other comprehensive income within stockholders’ equity.

Reinsurance. The Company accounts for reinsurance contracts under the provisions of Statement of Financial Accounting Standards (“SFAS”), No. 113, “Accounting and Reporting for Reinsurance on Short-Duration and Long-Duration Contracts.” Net premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned premiums ceded to them are reported as assets. Reinsurance assumed from other companies, including assumed premiums written and earned and losses and LAE, is accounted for in the same manner as direct insurance written.

Reinsurance recoverables include balances due from reinsurance companies for paid and unpaid losses and LAE that will be recovered from reinsurers, based on contracts in force. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk with respect to the individual reinsurer that participates in its ceded programs to minimize its exposure to significant losses from reinsurer insolvencies. When necessary the Company holds collateral in the form of letters of credit or trust accounts for amounts recoverable from reinsurers that are not considered authorized insurers by the State of Michigan Office of Financial and Insurance Services.

Federal Income Taxes. Deferred federal income tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized.

Results Of Operations—Fiscal Years Ended December 31, 2006 and 2005

loss and LAE and policy acquisition and other underwriting expenses. The Company’s underwriting performance is the most important factor in evaluating the overall results of operations given the fluctuations which can occur in loss and LAE due to weather related events as well as the uncertainties involved in the process of estimating reserves for losses and LAE. The underwriting results and the fluctuations in other revenue and expense items are discussed in greater detail below.


							Change
	2006			2005			Dollar			Percentage
Underwriting gain (loss)
Personal	$	4,129,003		$	4,399,461		$	(270,458	)	(6.1	)%
Commercial		2,659,237			791,719			1,867,518		235.9	%
Farm		1,011,147			499,411			511,736		102.5	%
Marine		285,404			(146,765	)		432,169		294.5	%

Total underwriting gain		8,084,791			5,543,826			2,540,965		45.8	%

Other revenue (expense) items
Net investment income		1,887,719			1,688,853			198,866		11.8	%
Net realized gains (losses) on investments		519,835			608,819			(88,984	)	(14.6	)%
Other income		417,392			397,673			19,719		5.0	%
Interest expense		(228,403	)		(308,805	)		80,402		(26.0	)%

Total other revenue (expense) items		2,596,543			2,386,540			210,003		8.8	%

Income before federal income taxes		10,681,334			7,930,366			2,750,968		34.7	%
Federal income tax benefit (expense)		(3,466,001	)		1,151,903			(4,617,904	)	400.9	%

Net income	$	7,215,333		$	9,082,269		$	(1,866,936	)	(20.6	)%

Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the years ended December 31, 2006 and 2005.


	2006			2005			Change			% Change
Direct premiums written	$	48,869,232		$	45,515,864		$	3,353,368		7.4	%

Net premiums written	$	40,263,135		$	39,512,088		$	751,047		1.9	%

Net premiums earned	$	39,249,248		$	38,755,853		$	493,395		1.3	%
Loss and LAE		17,564,611			20,703,929			(3,139,318	)	(15.2	)%
Policy acquisition and other underwriting expenses		13,599,846			12,508,098			1,091,748		8.7	%

Underwriting gain (loss)	$	8,084,791		$	5,543,826		$	2,540,965		45.8	%

Loss and LAE ratio		44.8	%		53.4	%		(8.7	)%
Policy acquisition and other underwriting expense ratio		34.6	%		32.3	%		2.4	%
Combined ratio		79.4	%		85.7	%		(6.3	)%

Premiums. Direct premiums written by major business segment for the years ended December 31 was as follows:


	2006		2005		$ Change		% Change
Personal	$	32,954,734	$	29,754,337	3,200,397		10.8	%
Commercial		8,999,194		9,178,470	(179,276	)	(2.0	)%
Farm		5,013,733		4,813,392	200,341		4.2	%
Marine		1,901,571		1,769,665	131,906		7.5	%

	$	48,869,232	$	45,515,864	3,353,368		7.4	%

Overall, direct premiums written were up 7.4% with new business premiums increasing 14.0% and renewal premiums up 6.7%. The total in-force policy count continues to grow and is up 7.4%. Direct premiums written for the personal segment increased 10.8% driven by growth in both new and renewal premium volume which increased 34.8% and 8.0%, respectively. Growth in the personal segment is driven by a combination of maintaining a high retention ratio, securing several agent books of business transfers and the roll-out of the Company’s web based rating platform—Fremont Complete for the personal auto line during the third quarter of 2006. The two largest product lines within the personal segment are personal auto and homeowners. Direct premiums written for the personal auto and homeowners product lines increased 24.0% and 4.2%, respectively, during 2006 compared to 2005. The total in-force policy count for the personal segment increased 9.0% driven by personal auto which was up 33.0%.

Direct premiums written for the commercial segment decreased 2.0%. The decline is due to an 8.7% decrease in commercial package (CPP) premium volume which is more susceptible to competitive pricing in the current soft market. Given the Company’s commitment to maintaining its underwriting discipline several larger commercial accounts were lost as a result of competitive pricing that was deemed unacceptable and inappropriately priced given the risk level of the exposure. Despite growth in other commercial products including businessowners (BOP) up 5.4%, commercial auto up 2.3% and workers compensation up 4.4%, these were not enough to offset the decline in the CPP product line. Despite the continued soft market in commercial throughout 2006 our in-force policy count did increase 4.0% and was a result of continued focus on maintaining our renewals and the introduction of our web based rating platform—Fremont Complete for the BOP line in early 2006.

Farm direct premiums written increased 4.2% with both new and renewal premiums up 1.1% and 5.0%, respectively. The premium growth was driven by rate increases of approximately 3.7% in 2005 and 4.9% in 2006. Direct premiums written for the marine segment increased 7.5% driven by renewal premiums which were up 14.3%. New business premium volume was down 14.5% as a result of increased competition for Michigan boat business as well as the stagnant Michigan economy.

Net premiums written by business segment for the years ended December 31 were as follows:


	2006		2005		$ Change		% Change
Personal	$	26,715,542	$	25,360,953	1,354,589		5.3	%
Commercial		7,537,315		8,115,201	(577,886	)	(7.1	)%
Farm		4,339,772		4,405,291	(65,519	)	(1.5	)%
Marine		1,670,506		1,630,643	39,863		2.4	%

	$	40,263,135	$	39,512,088	751,047		1.9	%

Net premiums written increased $751,000 due to a combination of normal volume growth, offset by an increase in current year ceded premiums written coupled with the impact from the quota share agreement in 2005. Net premiums written in 2005 included $1,400,000 related to the quota share reinsurance agreement which was placed into runoff on December 31, 2003. During 2005 the Company recognized $1,400,000 of profit commission under the quota share reinsurance agreement which reduced both ceded premiums written as well as ceded premiums earned and conversely increased both net premiums written and earned. Net premiums written for 2005 excluding the quota share impact would have been approximately $38,112,000 resulting in an increase of approximately $2,151,000 as compared to 2006. The change in net premiums written was affected by an increase of $3,353,000 due to the overall increase in direct premiums written offset by growth in ceded premiums written under the Company’s ongoing reinsurance agreements of approximately $1,202,000.

Net premiums earned by major business segment for the years ended December 31 was as follows:


	2006		2005		$ Change		% Change
Personal	$	25,752,956	$	24,758,161	994,795		4.0	%
Commercial		7,666,666		8,163,707	(497,041	)	(6.1	)%
Farm		4,222,485		4,304,745	(82,260	)	(1.9	)%
Marine		1,607,141		1,529,240	77,901		5.1	%

	$	39,249,248	$	38,755,853	493,395		1.3	%

Net premiums earned increased $493,000 due to a combination of normal volume growth, offset by an increase in current year ceded premiums earned coupled with the impact from the quota share agreement which occurred during 2005. Net premiums earned for 2005 included $1,400,000 related to the quota share reinsurance agreement which was placed into runoff on December 31, 2003. As noted above, during 2005 the Company recognized $1,400,000 of profit commission under the quota share reinsurance agreement which reduced both ceded premiums written as well as ceded premiums earned and conversely increased both net premiums written and earned. Net premiums earned for 2005 excluding the quota share impact would have been approximately $37,356,000 resulting in an increase of approximately $1,894,000 as compared to 2006. The change in net premiums earned was affected by an increase of $3,094,000 due to the overall increase in direct premiums earned offset by growth in ceded premiums earned under the Company’s ongoing reinsurance agreements of approximately $1,201,000.

Loss and Loss Adjustment Expenses (LAE). The Company’s net loss and LAE by major business segment as well as the loss and LAE ratio’s are shown in the tables below:


	2006			2005			$ Change			% Change
Loss and LAE:
Personal	$	12,700,566		$	12,368,229		$	332,337		2.7	%
Commercial		2,350,933			4,737,226			(2,386,293	)	(50.4	)%
Farm		1,748,249			2,416,018			(667,769	)	(27.6	)%
Marine		764,863			1,182,456			(417,593	)	(35.3	)%

	$	17,564,611		$	20,703,929		$	(3,139,318	)	(15.2	)%

Incurred Claim Count:
Personal		4,880			4,182			698		16.7	%
Commercial		454			476			(22	)	(4.6	)%
Farm		361			332			29		8.7	%
Marine		165			172			(7	)	(4.1	)%

		5,860			5,162			698		13.5	%

Average Loss and LAE per Claim:
Personal	$	2,603		$	2,957		$	(355	)	(12.0	)%
Commercial		5,178			9,952			(4,774	)	(48.0	)%
Farm		4,843			7,277			(2,434	)	(33.5	)%
Marine		4,636			6,875			(2,239	)	(32.6	)%

	$	2,997		$	4,011		$	(1,013	)	(25.3	)%

Loss and LAE Ratio:
Personal		49.3	%		50.0	%
Commercial		30.7	%		58.0	%
Farm		41.4	%		56.1	%
Marine		47.6	%		77.3	%

		44.8	%		53.4	%

Loss and LAE decreased approximately $3,139,000 or 15.2% in 2006 as compared to 2005. The decrease is attributed to favorable development of $5,224,000 experienced during 2006 on prior years’ reserves compared to favorable development of $2,355,000 experienced during 2005. The increase in favorable development during 2006 is a result of downward development of individual case reserves and loss adjustment expense reserves. The loss and LAE ratio declined to 44.8% in 2006 compared to 53.4% in 2005.

The personal segment’s loss and LAE increased $332,000 or 2.7% which included an increase of $1,486,000 in personal auto offset by a $1,082,000 decrease in homeowners while other personal product lines experienced a decrease of $72,000. The increase in loss and LAE for personal auto is driven by continued growth in this product line. During 2006, direct premiums written for personal auto increased 24% while the claim count for personal auto claims increased 20%. The increased claim activity in personal auto was primarily from auto physical damage claims and is consistent with management’s expectations. Offsetting the increased loss and LAE from personal auto volume growth was favorable development of $1,071,000 experienced during 2006 primarily on accident years 2005, 2003 and 2001. The decrease in loss and LAE for homeowners is caused primarily by favorable loss development of $1,340,000 from accident years 2003 through 2005. The increase in the personal segment’s incurred claim count is driven primarily by personal auto which experienced a claim count increase of 510 during 2006 while the remaining claim count increase of 188 is from the homeowner product line. The loss and LAE ratio remained fairly consistent in 2006 at 49.3% compared to 50% in 2005 as a result of higher loss and LAE in personal auto offset by favorable loss development in both personal auto and homeowners.

The commercial segment’s loss and LAE decreased $2,386,000 or 50.4% in 2006 while the loss and LAE ratio dropped from 58% in 2005 to 30.7% in 2006. The improvement was concentrated in the workers’ compensation and commercial multi-peril product lines. Loss and LAE in the workers compensation product line decreased approximately $1,357,000 which included favorable reserve development of approximately $715,000 concentrated in accident years 2002 through 2005. The rest of the decrease was due to higher incurred loss and LAE in 2005 as a result of reserve strengthening which occurred during 2005. During 2005 the Company strengthened its reserves for the workers compensation line so that the ultimate loss estimates were more in line with industry averages resulting in an increase of approximately $904,000 in loss and LAE in 2005. During 2006 as prior years’ claims continued to develop and settle the ultimate losses are settling for less than estimated. Loss and LAE for the commercial multi-peril product lines decreased approximately $977,000 during 2006 which included favorable reserve development of approximately $1,247,000 primarily from accident years 2003 through 2005. The favorable reserve development on prior accident years was offset by an increase in 2006 accident year loss and LAE for the commercial multi-peril product line. The increase is driven by a higher expected loss ratio for the commercial multi-peril product lines as a result of the current soft market conditions and relatively flat rate increases experienced during 2006.

The farm segment experienced a decline in incurred loss and LAE of $668,000 as well as a drop in its loss and LAE ratio from 56.1% in 2005 to 41.4% in 2006. The decrease in incurred loss and LAE was attributed to fewer fire related losses experienced in 2006 compared to 2005 as well as favorable reserve development. The marine segment, the Company’s smallest segment, experienced a decline in incurred loss and LAE of $418,000 and a decrease in its loss and LAE ratio from 77.3% in 2005 to 47.6% in 2006. The decreases are driven by a drop in claim severity.

Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses for the years ended December 31 were as follows:


	2006			2005			Change			% Change
Amortization of deferred policy acquisition costs	$	6,842,734		$	6,382,257		$	460,477		7.2	%
Other underwriting expenses		6,757,112			6,125,841			631,271		10.3	%

Total policy acquisition and other underwriting expenses	$	13,599,846		$	12,508,098		$	1,091,748		8.7	%

Net premiums earned	$	39,249,248		$	38,755,853		$	493,395		1.3	%

Expense ratio		34.6	%		32.3	%		2.4	%

Amortization of deferred policy acquisition costs increased $460,000 during 2006 due to the increase in premium volume as compared to the prior year. Items affecting the increase in other underwriting expenses include an increase of $144,000 in salaries and benefits, an increase of $179,000 in underwriting survey and inspection costs and an increase of $302,000 in depreciation driven primarily by capitalized costs associated with the Company’s web-based rating platform—Fremont Complete. The expense ratio, defined as the ratio of policy acquisition and other underwriting expenses to net premiums earned, increased to 34.6% from 32.3%. The increase in the ratio is driven by higher depreciation costs as well as higher underwriting survey and inspection costs. The increase in underwriting survey and inspection costs is due to the growth in the personal auto line. As part of the underwriting process the Company obtains motor vehicle records and prior loss history records in order to properly rate an auto policy. The Company utilizes several vendors to obtain this data and pays a transaction fee for obtaining the data. The increase is driven by the premium volume growth in personal auto of 24.0% in 2006.

Investment Income. The Company’s net investment income excluding realized gains and losses, average invested assets including cash and cash equivalents and the rate of return for the years ended December 31 are as follows:


	2006			2005			Change			% Change
Fixed maturities	$	1,895,827		$	1,658,852		$	236,975		14.3	%
Equity securities		136,503			183,883			(47,380	)	(25.8	)%
Cash and cash equivalents		171,428			111,580			59,848		53.6	%

Gross investment income		2,203,758			1,954,315			249,443		12.8	%
Less: Investment expenses		(316,039	)		(265,462	)		50,577		19.1	%

Net investment income	$	1,887,719		$	1,688,853		$	198,866		11.8	%

Average invested assets (amortized cost basis)	$	56,642,910		$	49,239,808		$	7,403,102		15.0	%

Rate of return on average invested assets		3.3	%		3.4	%		(0.1	)%

Gross investment income from fixed maturities increased $237,000 due primarily to an increase in invested assets within the fixed portfolio particularly in the area of tax-exempt securities. The Company invests in both taxable and tax-exempt fixed maturity securities. For 2006, the average assets in the taxable portfolio increased about 1% from 2005 levels, to just over $35 million. Income from this portion of the portfolio increased by 4%, however, as a result of higher interest rates which helped to push up the book yield. These effects combined to increase income from the taxable portfolio by about $70,000 over 2005 levels. The tax-exempt portfolio saw a more significant increase in both assets and income in 2006. The tax-exempt portfolio nearly doubled in size, averaging almost $9 million over the year and actually ending the year at over $13 million. Tax-exempt rates were fairly stable over time, but they allow the Company to capture a higher after-tax return than in the taxable portfolio. This increase in assets added over $160,000 in tax-exempt income when compared to 2005 levels.

Gross investment income from the equity portfolio decreased due to a decline in dividend income received on the portfolio. During 2005 and 2006 the Company liquidated its holdings in common and preferred stocks and shifted those investments into mutual funds. As a result of this shift the dividend income went down as the mutual funds held by the Company do not pay the regular dividends that had been traditionally paid by the common and preferred stocks historically held by the Company. The decline in investment income from the equity portfolio has been offset by an increase of $220,000 in net realized gains as a result of an increase in capital gains distribution paid by the mutual funds held by the Company. Gross investment income from cash and cash equivalents increased in 2006 due to a higher invested asset base coupled with increased yields during 2006. The increase in investment expenses is due to higher outside investment management fees as a result of the increase in invested assets coupled with increased internal costs allocated to managing the investment portfolio.

The decline in the rate of return on average invested assets was driven by the aforementioned decrease in gross investment income from the equity portfolio. However, as noted above, the decrease was recouped through an increase in net realized gains from the equity portfolio of approximately $220,000.

Net realized gains from the portfolio for the years ended December 31 are as follows:


	2006			2005		Change			% Change
Net realized gains (losses)—fixed maturities	$	(39,670	)	$	269,186	$	(308,856	)	(114.7	)%
Net realized gains (losses)—equity securities		559,505			339,633		219,872		64.7	%

Total net realized gains (losses)	$	519,835		$	608,819	$	(88,984	)	(14.6	)%

The decrease in net realized gains from the fixed maturity portfolio is due to less activity during 2006. During 2005 the Company focused on reducing the duration in the fixed maturity portfolio in order to temper the fluctuations in the market value of the portfolio. This resulted in a higher volume of selling activity resulting in net realized gains on the sale of fixed maturity securities of $269,000. The increase in net realized gains on the sale of equity securities is driven by an increase in capital gains distributions from mutual funds held by the Company.

Other Income, Net. Other income, net which includes premium installment charges, fees for non-sufficient fund checks, late payment fees and other miscellaneous income and expense items increased 5.0% to $417,000 in 2006 compared to $398,000 in 2005.

Interest Expense. Interest expense decreased approximately $81,000 to $228,000 in 2006 from $309,000 in 2005. The decrease is due to the decline in the balance of the quota share funds withheld account. The quota share agreement was commuted on March 31, 2006 thereby eliminating any future interest expense associated with this account.

Federal Income Tax. During the year ended December 31, 2006 the Company recorded income tax expense of $3,466,000 resulting in an effective tax rate of 32.4%. Federal income taxes do not bear the usual relationship to pre-tax income primarily as a result of the effects of non-taxable investment income and other provision to return variances as well as the change to the deferred tax asset valuation allowance. During the year ended December 31, 2005 the Company recorded an income tax benefit of approximately $1,152,000 resulting in an effective tax rate of 14.5%. For 2005, federal income taxes did not bear the usual relationship to pre-tax income primarily as a result of the effects of the reduction of the deferred tax asset valuation allowance, non-taxable investment income and other provision to return variances. During the quarter ended September 30, 2005 the Company’s management reassessed the need for a full valuation allowance, and based on all available evidence, including the Company’s cumulative net income for recent fiscal years, estimates of current and future profitability and the overall prospects of our business, concluded that a full valuation allowance was no longer necessary. As a result, the valuation allowance was reduced by approximately $3,855,000 which is reflected in the 2005 income tax benefit. The Company’s federal income tax expense excluding the effect of the change in the valuation allowance was $2,704,000 resulting in an effective tax rate of 34.1% for the year ended December 31, 2005.

Results Of Operations—Fiscal Years Ended December 31, 2005 and 2004

Consolidated Results of Operations. The following table shows the underwriting gain or loss as well as other revenue and expense items included in our consolidated statements of income for the years ended December 31, 2005 and 2004. The Company’s underwriting gain or loss consists of net premiums earned less loss and LAE and policy acquisition and other underwriting expenses. The Company’s underwriting performance is the most important factor in evaluating the overall results of operations given the fluctuations which can occur in loss and LAE due to weather related events as well as the uncertainties involved in the process of estimating reserves for losses and LAE. The underwriting results and the fluctuations in other revenue and expense items are discussed in greater detail below.


							Change
	2005			2004			Dollar			Percentage
Underwriting gain (loss)
Personal	$	4,399,461		$	(1,654,811	)	$	6,054,272		365.9	%
Commercial		791,719			2,424,210			(1,632,491	)	(67.3	)%
Farm		499,411			(116,021	)		615,432		530.4	%
Marine		(146,765	)		(111,621	)		(35,144	)	(31.5	)%

Total underwriting gain		5,543,826			541,757			5,002,069		923.3	%
Other revenue (expense) items
Net investment income		1,688,853			1,176,056			512,797		43.6	%
Net realized gains (losses) on investments		608,819			276,520			332,299		120.2	%
Other income		397,673			385,670			12,003		3.1	%
Interest expense		(308,805	)		(486,963	)		178,158		(36.6	)%
Demutualization expense		—			(302,050	)		302,050		(100.0	)%

Total other revenue (expense) items		2,386,540			1,049,233			1,337,307		127.5	%

Income before federal income taxes		7,930,366			1,590,990			6,339,376		398.5	%
Federal income tax benefit (expense)		1,151,903			(78,452	)		1,230,355		1568.3	%

Net income	$	9,082,269		$	1,512,538		$	7,569,731		500.5	%

Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the years ended December 31:


	2005			2004			Change			% Change
Direct premiums written	$	45,515,864		$	41,971,058		$	3,544,806		8.4	%

Net premiums written	$	39,512,088		$	36,504,193		$	3,007,895		8.2	%

Net premiums earned	$	38,755,853		$	27,195,990		$	11,559,863		42.5	%
Loss and LAE		20,703,929			17,038,693			3,665,236		21.5	%
Policy acquisition and other underwriting expenses		12,508,098			9,615,540			2,892,558		30.1	%

Underwriting gain (loss)	$	5,543,826		$	541,757		$	5,002,069		923.3	%

Loss and LAE ratio		53.4	%		62.7	%		(9.2	)%
Policy acquisition and other underwriting expense ratio		32.3	%		35.4	%		(3.1	)%
Combined ratio		85.7	%		98.1	%		(12.4	)%

Premiums. Direct premiums written by major business segment for the years ended December 31 was as follows:


	2005		2004		$ Change		% Change
Personal	$	29,754,337	$	26,659,272	3,095,065		11.6	%
Commercial		9,178,470		9,221,414	(42,944	)	(0.5	)%
Farm		4,813,392		4,565,985	247,407		5.4	%
Marine		1,769,665		1,524,387	245,278		16.1	%

	$	45,515,864	$	41,971,058	3,544,806		8.4	%

Overall, direct premiums written were up 8.4% with new business premiums down 1.3% and renewal premiums up 9.8%. The total in-force policy count continues to grow and is up 3.1%. Direct premiums written for the personal segment increased 11.6% driven by renewal premium volume which was up 15.2% as a result of a 1.2 point increase in premium retention and an overall 5% rate increase achieved in 2004 and 2005. New business premium volume for the personal segment was down 11.8%. The decline in new business premium volume is a result of the softening of the market which extended into the personal segment during 2005. The two main product lines within the personal segment include personal auto and homeowners which make up 38.4% and 51.7%, respectively, of the personal segment’s direct premiums written. Direct premiums written for personal auto and homeowner policies increased 29.4% and 4.1%, respectively during 2005 as compared to 2004. The total in-force policy count for the personal segment increased 3.6% driven by personal auto which was up 17.8%.

Direct premiums written for the commercial segment decreased .5%. The decrease is due to declines in premium volume in product lines considered to be commercial supporting lines of business such as commercial auto and workers compensation offset by premium growth in the core commercial product lines of business owners (BOP) and commercial package (CPP). While the commercial market remained soft throughout 2005, the Company has been successful writing new policies on small commercial exposures within the Company’s target market which focuses on small business operations. The two core commercial product lines of BOP and CPP make up 28.0% and 51.5%, respectively, of the commercial segment’s direct premiums written. BOP direct premium written was up 9.3% driven by new business premium volume which was up 28.5% and renewal premium volume which was up 4.5%. CPP direct premium written was up 2.3% driven by new business premium volume which was up 47% offset by a decrease of 4.5% in renewal premium volume. Current pricing levels were maintained for both BOP and CPP in 2005 even as the market softened. The supporting commercial product lines of workers compensation and commercial auto experienced a decrease in direct premiums written of 17.8% and 14.7%, respectively, which offset the growth in the core commercial products during 2005.

Farm direct premiums written were up 5.4% driven by renewal premiums which were up 6.8% driven by rate increases of 6.3% in 2004 and 3.7% in 2005, with new business premium down 14.1%. Direct premiums written for the marine business increased 16.1% driven by both an increase in new and renewal premiums of 4.2% and 20.1%, respectively and an increase in policy count of 6.7%.

Net premiums written by business segment for the years ended December 31 were as follows:


	2005		2004		$ Change		% Change
Personal	$	25,360,953	$	22,813,067	2,547,886		11.2	%
Commercial		8,115,201		8,221,546	(106,345	)	(1.3	)%
Farm		4,405,291		4,090,629	314,662		7.7	%
Marine		1,630,643		1,378,950	251,693		18.3	%

	$	39,512,088	$	36,504,193	3,007,895		8.2	%

The increase in net premiums written is due to growth in direct premiums written of $3,545,000 discussed above offset by an increase in ceded premiums written of $537,000 during 2005.

Net premiums earned by major business segment for the years ended December 31 was as follows:


	2005		2004		$ Change	% Change
Personal	$	24,758,161	$	16,837,528	7,920,633	47.0	%
Commercial		8,163,707		6,453,723	1,709,984	26.5	%
Farm		4,304,745		2,912,113	1,392,632	47.8	%
Marine		1,529,240		992,626	536,614	54.1	%

	$	38,755,853	$	27,195,990	11,559,863	42.5	%

Net premiums earned increased $3,903,000 as a result of overall volume growth coupled with an increase of $8,589,000 due to the decline in earned premium ceded to the reinsurer under the quota share reinsurance contract which was placed into runoff on January 1, 2004. The increase was offset by higher ceded premiums earned of $932,000 under the Company’s other reinsurance agreements.

Loss and Loss Adjustment Expenses (LAE). The Company’s net loss and LAE by major business segment as well as the loss and LAE ratio’s are shown in the tables below:


	2005			2004			$ Change			% Change
Loss and LAE:
Personal	$	12,368,229		$	12,539,184		$	(170,955	)	(1.4	)%
Commercial		4,737,226			1,747,705			2,989,521		171.1	%
Farm		2,416,018			1,998,514			417,504		20.9	%
Marine		1,182,456			753,290			429,166		57.0	%

	$	20,703,929		$	17,038,693		$	3,665,236		21.5	%

Incurred Claim Count:
Personal		4,182			3,694			488		13.2	%
Commercial		476			536			(60	)	(11.2	)%
Farm		332			382			(50	)	(13.1	)%
Marine		172			154			18		11.7	%

		5,162			4,766			396		8.3	%

Average Loss and LAE per Claim:
Personal	$	2,957		$	3,394		$	(437	)	(12.9	)%
Commercial		9,952			3,261			6,692		205.2	%
Farm		7,277			5,232			2,045		39.1	%
Marine		6,875			4,891			1,983		40.5	%

	$	4,011		$	3,575		$	436		12.2	%

Loss and LAE Ratio:
Personal		50.0	%		74.5	%
Commercial		58.0	%		27.1	%
Farm		56.1	%		68.6	%
Marine		77.3	%		75.9	%

		53.4	%		62.7	%

The increase in loss and LAE of $3,659,000 is due primarily to the impact of reinsurance. Direct incurred losses and LAE, or the losses and LAE incurred by the Company before considering the impact of reinsurance,

for 2005 were approximately $22,006,000 compared to $26,393,000 in 2004, a decrease of $4,387,000 or 16.6%. The decrease in direct incurred losses and LAE is due to a decline in claim severity coupled with redundant development on prior year reserves. Offsetting the drop in direct incurred losses and LAE was a decline in ceded incurred loss and LAE, or the amount ceded to reinsurers under the Company’s various reinsurance agreements. During 2005, the Company ceded to reinsurers $1,372,000 in incurred losses and LAE compared to $9,420,000 in 2004, a decrease of $8,047,000 or 85.4%. The decline in ceded incurred losses and LAE from 2005 to 2004 is due to the impact of the runoff of the quota share reinsurance agreement ($4,605,000), an increase in the Company’s excess of loss reinsurance retention level from $125,000 in 2004 to $150,000 in 2005 ($624,000) which translates into the Company retaining an increased level of losses and LAE, a decline in the severity of losses that exceeded the Company’s excess of loss retention in 2005 as compared to 2004 ($1,067,000), fewer severe weather related losses in 2005 ($500,000) and redundant development on prior year reserves ($1,250,000).

The Company’s net loss and LAE ratio declined to 53.4% in 2005 compared to 62.7% in 2004 as a result of the quota share runoff, overall favorable loss experience during 2005 as compared to 2004 as well as redundant development on prior year reserves. As noted above, the Company’s net premium earned increased $8,589,000 due to the decline in earned premium ceded under the quota share agreement. While at the same time loss and LAE increased only $4,605,000 due to the decline in ceded loss and LAE under the quota share agreement.

For the personal segment the decline in the loss ratio is due to higher net premiums earned as a result of the quota share runoff, redundant development on prior year reserves and the fact that the Company’s 2004 net loss and LAE ratio was higher as a result of weather related losses related to a July 2004 severe thunderstorm that passed through the northeast section of Michigan. The redundant development was primarily in the homeowner and personal auto product lines. The homeowner’s line experienced redundant development of approximately $1,904,000 primarily in the accident years of 2004, 2003 and 2002 as a result of lower than expected losses on both incurred but not reported and existing case reserves as of December 31, 2004. The personal auto line experienced redundant development of approximately $426,000 primarily in the 2004 accident year.

The commercial segment’s loss ratio increased as a result of increased claim severity in the commercial multi-peril product line in the 2005 and 2004 accident years in addition to reserve strengthening in the workers compensation product line on prior accident years. The loss ratio in 2004 was lower than what would normally be expected due to redundant development experienced during 2004 coupled with a decline in claim frequency during 2004. Although the farm segment experienced an increase in loss severity in 2005, primarily attributable to fire losses, the increase was more than offset by the increase in net premium earned which caused the decline in the segment’s loss ratio. The marine segment, the Company’s smallest and therefore most volatile segment in terms of its loss ratio, experienced an increase in its loss ratio despite the increase in its net premiums earned. The increased loss ratio was due to increased loss severity in 2005.

Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses for the years ended December 31 were as follows:


	2005			2004			Change			% Change
Amortization of deferred policy acquisition costs	$	6,382,257		$	3,286,328		$	3,095,929		94.2	%
Other underwriting expenses		6,125,841			6,329,212			(203,371	)	(3.2	)%

Total policy acquisition and other underwriting expenses	$	12,508,098		$	9,615,540		$	2,892,558		30.1	%

Net premiums earned	$	38,755,853		$	27,195,990		$	11,559,863		42.5	%

Expense ratio		32.3	%		35.4	%		(3.1	)%

Amortization of deferred policy acquisition costs increased $2,391,000 during 2005 due to the reduction in the quota share reinsurance ceding commission income component of deferred policy acquisition costs. The

remaining increase of $705,000 is due to the increase in premium volume as compared to the prior year. Items affecting the decline in other underwriting expenses include a decrease of $490,000 in the net periodic benefit cost related to the post-retirement benefit plan as a result of the plan amendment made at the end of 2004 coupled with a decrease of $128,000 in assessments from state mandated associations and guaranty funds. These decreases were offset by an increase in agent marketing incentives and profit sharing commissions of $219,000 and an increase in salaries and wages of $227,000 as a result of annual merit increases and the accrual of employee profit sharing which is directly tied to the performance and profitability of the Company. The expense ratio, defined as the ratio of policy acquisition and other underwriting expenses to net premiums earned, decreased to 32.3% from 35.4%. The decline in the ratio is due to the previously mentioned decrease in other underwriting expenses coupled with the increase in net premiums earned which is primarily attributable to the effects of the quota share runoff.

Investment Income. The Company’s net investment income excluding realized gains and losses, average invested assets including cash and cash equivalents and the rate of return for the years ended December 31 are as follows:


	2005			2004			Change			% Change
Fixed maturities	$	1,658,852		$	1,373,166		$	285,686		20.8	%
Equity securities		183,883			146,637			37,246		25.4	%
Cash and cash equivalents		111,580			61,389			50,191		81.8	%

Gross investment income		1,954,315			1,581,192			373,123		23.6	%
Less: Investment expenses		(265,462	)		(405,136	)		(139,674	)	(34.5	)%

Net investment income	$	1,688,853		$	1,176,056		$	512,797		43.6	%

Average invested assets (amortized cost basis)	$	49,239,808		$	39,871,879		$	9,367,929		23.5	%

Rate of return on average invested assets		3.4	%		2.9	%		0.5	%

Gross investment income increased $286,000 from fixed maturities, $37,000 from equity securities and $50,000 from cash and cash equivalents. Gross investment income from the fixed maturity portfolio increased in 2005 to $1,659,000 compared to $1,373,000 in 2004. The rise in investment income from the fixed maturity portfolio is attributable to three forces. First, tax-equivalent book yield of the portfolio increased 10 basis points during 2005 to 4.51%. This was accomplished despite shortening the portfolio’s effective duration by over 1 year. Portfolio duration was reduced in an effort to remove some of the interest rate risk present and minimize unrealized losses to the portfolio brought on by an increase in market-wide interest rates. The Company took advantage of the attractive tax-equivalent yields available in the intermediate and long term portion of the tax exempt municipal sector which offset the otherwise adverse book yield impact of reducing duration. Second, reinvested cash flows from mortgage-backed security payments, maturities and corporate actions were redeployed into a higher yield environment, as short and intermediate yields rose substantially over the course of 2005. This rise in yields on the short end of the curve was directly attributable to monetary policy actions on the part of the Federal Reserve, as the Fed continued to increase its key overnight lending rate. These increases were in direct response to the continued strength of the U.S. economy and the inflationary pressures brought on by a ramp up in housing, energy and commodity prices. Third, the fixed maturity portfolio’s invested asset base increased approximately $4.46 million during 2005. This was the result of direct cash contributions to the portfolio as well as organic asset growth. This asset base growth increased the income generating capacity of the fixed maturity portfolio.

Gross investment income increased from the equity portfolio as a result of increased dividends received from mutual funds during 2005. Gross investment income on cash and cash equivalents increased during 2005 primarily from rising interest rates. The decline in investment expenses is attributable to lower internal costs related to managing the portfolio through increased utilization of the Company’s outside investment management consultants.

Net realized gains from the portfolio for the years ended December 31 are as follows:


	2005		2004		Change		% Change
Net realized gains (losses)—fixed maturities	$	269,186	$	34,247	$	234,939	686.0	%
Net realized gains (losses)—equity securities		339,633		242,273		97,360	40.2	%

Total net realized gains (losses)	$	608,819	$	276,520	$	332,299	120.2	%

The increase in net realized gains is due to more selling activity during 2005 compared to 2004. During 2005, the Company continued to shift its equity portfolio from common stocks to mutual funds resulting in net realized gains from the sale of equity securities of $439,000 offset by realized losses of $100,000 related to two equity investments that the Company deemed to be other than temporarily impaired. During the year ended December 31, 2005 the Company focused on reducing the duration in the fixed maturity portfolio in order to temper the fluctuations in the market value of the portfolio. This resulted in net realized gains on the sale of fixed maturity securities of $269,000 during the year ended December 31, 2005.

Other Income, Net. Other income, net which includes premium installment charges, fees for non-sufficient fund checks, late payment fees and other miscellaneous income and expense items increased 3.1% to $397,673 in 2005 compared to $385,670 in 2004.

Interest Expense. Interest expense decreased approximately $178,000 to $309,000 in 2005 from $487,000 in 2004. Approximately $132,000 of the decrease is attributable to the reduction in the surplus note balance which occurred in October 2004 as part of the Conversion which was previously discussed above under Part I, Item 1.—Business. The remaining decrease of $46,000 is due to the decline in the balance of the quota share funds withheld account.

Demutualization Expense. Demutualization expenses related to the Conversion in 2004 and amounted to $302,000 for the year ended December 31, 2004, and include the cost of engaging external accounting, actuarial, legal and other consultants to advise the Company in the demutualization process as well as the cost of printing and postage for communications with policyholders.

Federal Income Tax. During the year ended December 31, 2005 the Company recorded an income tax benefit of approximately $1,152,000 resulting in an effective tax rate of 14.5%. Federal income taxes do not bear the usual relationship to pre-tax income primarily as a result of the effects of the reduction of the deferred tax asset valuation allowance, non-taxable investment income and other provision to return variances. During the quarter ended September 30, 2005 the Company’s management reassessed the need for a full valuation allowance, and based on all available evidence, including the Company’s cumulative net income for recent fiscal years, estimates of current and future profitability and the overall prospects of our business, concluded that a full valuation allowance was no longer necessary. As a result, the valuation allowance was reduced by approximately $3,855,000 which is reflected in the 2005 income tax benefit. The Company’s federal income tax expense excluding the effect of the change in the valuation allowance was $2,704,000 resulting in an effective tax rate of 34.1% for the year ended December 31, 2005. See Note 5 to the consolidated financial statements, included elsewhere in this report, for further information regarding federal income taxes. Such information is incorporated herein by reference.

Liquidity and Capital Resources

The principal sources of funds for the Insurance Company are insurance premiums, investment income and proceeds from the maturity and sale of invested assets. Funds are primarily used for the payment of claims, commissions, salaries and employee benefits, other operating expenses and surplus note service.

Liquidity is a measure of the ability to generate sufficient cash to meet cash obligations as they come due. In addition to the need for cash flow to meet operating expenses, our liquidity requirements relate primarily to the

payment of losses and loss adjustment expenses. Our short and long term liquidity requirements vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and because of the potential for large losses, either individually or in the aggregate.

We maintain investment and reinsurance programs that are intended to provide sufficient funds to meet our obligations without forced sales of investments. A portion of our investment portfolio is maintained in relatively short term and highly liquid assets, including mortgage-backed securities, which have shorter estimated durations, to ensure the availability of funds.

Cash flow provided by operations was $8,303,000 in 2006 compared to $6,745,000 in 2005, an increase of $1,558,000. During the year ended December 31, 2006 as compared to 2005 premiums collected increased $956,000 due to increased premium writings, net loss and LAE paid increased $503,000 while policy acquisition and other underwriting expenses paid decreased $179,000. During the year ended December 31, 2006, net cash used under the quota share funds withheld account was $39,000 while during the same period in 2005 net cash used was $1,827,000, a change of $1,787,000. Cash paid for income taxes increased $975,000 due to an increase in taxable income during 2006 compared to 2005. Other cash provided by operational activities increased $114,000 during the year ended December 31, 2006 compared to 2005.

Cash flow used in investing activities was $5,258,000 and $8,875,000 during the years ended December 31, 2006 and 2005, respectively, a decrease of $3,617,000. During 2006, net cash invested into the Company’s investment portfolio was $3,972,000 compared to $8,372,000 which was placed into the portfolio during 2005. At December 31, 2006, the Company is maintaining a higher cash and cash equivalent balance due to anticipated cash flow requirements during 2007, specifically the maturity of our surplus notes in September 2007 which amount to $2,890,000. As a result, the Company did not place as much cash into the investment portfolio during 2006 as compared to 2005. Despite the decrease in cash placed into the investment portfolio during 2006, the Company invested approximately $1,302,000 in capital expenditures, the majority of which related to Fremont Complete, the Company’s web based rating platform. As of December 31, 2006, product lines that are available through Fremont Complete include personal auto and business owners. During 2007, the Company expects to expand the product lines available through Fremont Complete to include homeowners, mobilowners and marine which will require additional investment.

Cash flow provided by operations was $6,745,000 in 2005 compared to $6,953,000 in 2004 a decrease of $208,000. During the year ended December 31, 2005 as compared to 2004 net premiums collected increased $2,417,000 due to policy growth, net loss and LAE paid increased $3,413,000 while policy acquisition and other underwriting expenses paid increased $1,920,000. During the year ended December 31, 2005, net cash used under the quota share funds withheld account was $1,827,000 while during the same period in 2004 net cash used was $5,599,000, a change of $3,773,000. Cash paid for income taxes increased $2,008,000 due to an increase in taxable income during 2005 compared to 2004. Other cash provided by operational activities increased $943,000 during the year ended December 31, 2005 compared to 2004.

Cash flow used in investing activities was $8,875,000 and $15,266,000 during the years ended December 31, 2005 and 2004, respectively, a decrease of $6,391,000. Net cash proceeds received from the issuance of common stock in the Conversion on October 15, 2004 amounted to $5,007,000. The majority of the net cash proceeds were placed into the Company’s fixed maturity investment portfolio during 2004 which caused the net cash used for investing activities to be higher in 2004.

Our debt structure consists of surplus notes which carry a 7 percent interest rate and mature on September 30, 2007. At December 31, 2006 and December 31, 2005, the Company had approximately $2,890,000 of Series B Surplus Notes outstanding. The Company expects to payoff the surplus notes in September 2007 from its existing cash and cash equivalents.

We believe that our existing cash and funds generated from operations will be sufficient to satisfy our financial requirements during the foreseeable future.

The Holding Company has not paid and does not intend to pay dividends in the foreseeable future and cannot assure our stockholders that dividends will be paid in the future. The Holding Company’s principal source of cash available for payment of dividends is dividends from the Insurance Company. The annual future cash requirements of the Holding Company are not foreseen to be significant. They will include director fees and other administrative expenses related to annual filings such as income tax returns and other compliance type filings. As of December 31, 2006 the Holding Company had a cash balance of $132,000.

The payment of dividends by the Insurance Company is subject to limitations imposed by the Michigan Insurance Code. The Insurance Company may not pay an extraordinary dividend unless it notifies the Insurance Commissioner and she does not disapprove the payment. An extraordinary dividend includes any dividend which, when taken together with other dividends paid within the preceding 12 months, exceeds the greater of 10% of the Insurance Company’s statutory policyholders’ surplus as of December 31 of the immediately preceding year or its statutory net income, excluding realized capital gains, for the 12-month period ending December 31 of the immediately preceding year. During the year ending December 31, 2007, the Insurance Company can pay a non-extraordinary dividend of up to $6,725,000 without prior approval from the Insurance Commissioner. In order to pay any dividends, the Insurance Company must be in a position to satisfy the requirement that the company continue to be safe, reliable and entitled to public confidence. Also, in the absence of approval of the Insurance Commissioner, dividends may only be paid from statutory earned surplus. Also, dividends may not exceed the amount of the Insurance Company’s statutory capital stock account in any one-year unless it meets certain other requirements.

Income Taxes

In accordance with FASB Statement No. 109, Accounting for Income Taxes, we may recognize certain tax assets whose realization depends upon generating future taxable income. These tax assets can only be realized through the generation of future taxable income and thereby utilizing the net operating loss (NOL) and Alternative Minimum Tax (AMT) credit carry-forwards we have available. At December 31, 2006, the Company has NOL carryforwards of approximately $7,748,000 and an AMT credit carryforward of approximately $358,000. The AMT credit carryforward can be carried forward indefinitely. The NOL carryforward expires as follows:


2010	$	1,966,000
2011		1,641,000
2012		1,764,000
2018		13,000
2019		898,000
2021		1,466,000

	$	7,748,000

As a result of the Holding Company’s acquisition of the stock of the Insurance Company a limitation on the ability to fully utilize the NOL occurred. The amount of annual taxable income that can be offset each year by the NOL carryforward is approximately $400,000. See Note 5 to the consolidated financial statements, included elsewhere in this report, for further information regarding federal income taxes. Such information is incorporated herein by reference.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

The Company has a contractual obligation with respect to its outstanding surplus notes and loss and LAE reserves which are recorded as liabilities in our financial statements. In addition, the Company is contractually committed to make certain minimum lease payments for the use of equipment under operating lease agreements. The following table summarizes our significant contractual obligations and commitments as of December 31,

2006 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal and interest payments on outstanding surplus notes. Additional information regarding these obligations is provided in Note 9—Surplus Notes and Note 11—Lease Agreements to the financial statements of the Company. The table below does not include contractual obligations with respect to our employee benefit plans, which are described more fully in Note 10—Employee Retirement Plans to the Company’s financial statements.


	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
	(In thousands)
Loss and LAE reserves	$	20,177	$	10,979	$	5,827	$	2,018	$	1,353
Surplus notes and interest		3,244		3,244		—		—		—
Operating leases		34		23		11		—		—

Total	$	23,455	$	14,246	$	5,838	$	2,018	$	1,353

The Company’s loss reserves do not have contractual maturity dates. However, based on historical payment patterns, the preceding table includes an estimate of when management expects the loss reserves to be paid. The timing of claim payments is subject to significant uncertainty. The Company maintains a portfolio of investments with varying maturities to provide adequate cash flows for the payment of claims.

ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

General. Market risk is the risk that we will incur losses due to adverse changes in market rates and prices. We have exposure to three principal types of market risk through our investment activities: interest rate risk, credit risk and equity risk. Our primary market risk exposure is to changes in interest rates. We have not entered, and do not plan to enter, into any derivative financial instruments for hedging, trading or speculative purposes.

Interest Rate Risk. Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. Our exposure to interest rate changes primarily results from our significant holdings of fixed rate investments. Fluctuations in interest rates have a direct impact on the market valuation of these securities. Therefore, an adverse change in market prices of these securities would result in losses reflected in the balance sheet. The following table shows the effects of a change in interest rate on the fair value of our fixed maturity investment portfolio. We have assumed an immediate increase or decrease of 1% or 2% in interest rates. You should not consider this assumption or the values shown in the table to be a prediction of actual future results.


Change in Rate	Portfolio Value		Change in Value
	(In thousands)
2%	$	41,180	$	(3,779	)
1%		43,109		(1,850	)
0		44,959		—
-1%		46,730		1,771
-2%		48,423		3,464

Credit Risk. The quality of our fixed maturity portfolio is generally good. At December 31, 2006, all of our fixed maturity securities were rated by Moody’s as investment grade.

Equity Risk. Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices. Our exposure to changes in equity prices primarily results from our holdings of common stocks, mutual funds and other equities. Our portfolio of equity securities is carried on the balance sheet at fair value. Therefore, an adverse change in market prices of these securities would result in losses.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Fremont Michigan InsuraCorp, Inc.

Fremont, MI

We have audited the accompanying consolidated balance sheets of Fremont Michigan InsuraCorp, Inc. and subsidiary (the Company) as of December 31, 2006 and 2005 and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fremont Michigan InsuraCorp, Inc. at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Notes 1 and 10 to the consolidated financial statements, the Company changed its method of accounting for defined benefit pension and other postretirement plans as of December 31, 2006, to adopt Financial Accounting Standards Board Statement No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

BDO Seidman, LLP

Grand Rapids, Michigan

March 20, 2007

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of

Fremont Michigan InsuraCorp, Inc.

In our opinion, the consolidated statements of operations, of stockholders’ equity and comprehensive income and of cash flows for the year ended December 31, 2004 present fairly, in all material respects, the results of operations and cash flows of Fremont Michigan InsuraCorp, Inc. and its subsidiary (the “Company”) for the year ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules for the year ended December 31, 2004 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audit of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Grand Rapids, Michigan

February 18, 2005

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2006 and 2005


	2006		2005
Assets
Investments:
Fixed maturities available for sale, at fair value	$	44,959,266	$	41,644,429
Equity securities available for sale, at fair value		11,689,756		9,508,185
Mortgage loans on real estate from related parties		260,808		262,294

Total investments		56,909,830		51,414,908
Cash and cash equivalents		4,598,843		1,542,581
Premiums due from policyholders, net		7,528,683		7,143,537
Amounts due from reinsurers		7,883,153		7,286,936
Prepaid reinsurance premiums		404,016		212,291
Accrued investment income		447,411		402,937
Deferred policy acquisition costs		3,235,383		3,092,618
Deferred federal income taxes		3,070,713		3,774,445
Property and equipment, net of accumulated depreciation		1,771,323		1,082,547
Other assets		28,078		7,827

	$	85,877,433	$	75,960,627

Liabilities and Stockholders’ Equity
Liabilities:
Losses and loss adjustment expenses	$	20,176,555	$	18,866,814
Unearned premiums		21,463,019		20,437,157
Reinsurance funds withheld and premiums ceded payable		50,313		1,026,340
Accrued expenses and other liabilities		6,867,081		6,903,968
Surplus notes		2,890,288		2,890,288

Total liabilities		51,447,256		50,124,567

Commitments and contingencies

Stockholders’ Equity
Preferred stock, no par value, authorized 4,500,000 shares, no shares issued and outstanding		—		—
Class A common stock, no par value, authorized 5,000,000 shares, 1,725,456 and 1,724,256 shares issued and outstanding at December 31, 2006 and 2005, respectively		—		—
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—		—
Additional paid-in capital		7,605,096		7,550,304
Retained earnings		25,511,413		18,296,080
Accumulated other comprehensive income (loss)		1,313,668		(10,324	)

Total stockholders’ equity		34,430,177		25,836,060

Total liabilities and stockholders’ equity	$	85,877,433	$	75,960,627

The accompanying notes are an integral part of the consolidated financial statements.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

For the Years Ended December 31, 2006, 2005 and 2004


	2006		2005			2004
Revenues:
Net premiums earned	$	39,249,248	$	38,755,853		$	27,195,990
Net investment income		1,887,719		1,688,853			1,176,056
Net realized gains (losses) on investments		519,835		608,819			276,520
Other income, net		417,392		397,673			231,710

Total revenues		42,074,194		41,451,198			28,880,276

Expenses:
Losses and loss adjustment expenses, net		17,564,611		20,703,929			17,038,693
Policy acquisition and other underwriting expenses		13,599,846		12,508,098			9,461,580
Interest expense		228,403		308,805			486,963
Demutualization expenses		—		—			302,050

Total expenses		31,392,860		33,520,832			27,289,286

Income before federal income tax expense (benefit)		10,681,334		7,930,366			1,590,990
Federal income tax expense (benefit)		3,466,001		(1,151,903	)		78,452

Net income	$	7,215,333	$	9,082,269		$	1,512,538


						For the Period October 16 through December 31
Net income after conversion						$	902,711
Basic income per share	$	4.18	$	5.27		$	0.52
Diluted income per share	$	4.10	$	5.24		$	0.52

The accompanying notes are an integral part of the consolidated financial statements.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

For the Years Ended December 31, 2006, 2005 and 2004


	Preferred Stock		Common Stock				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
	Preferred Stock		Class A		Class B		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2003	$	—	$	—	$	—	$	—	$	7,701,273	$	545,906		$	8,247,179
Comprehensive income:
Net income										1,512,538					1,512,538
Net unrealized gains on investments, net of taxes												32,579			32,579

Total comprehensive income															1,545,117
Stock-based compensation								7,916							7,916
Conversion of surplus notes and accrued interest into common stock and issuance of common stock (Note 1)								7,504,997							7,504,997

Balance, December 31, 2004		—		—		—		7,512,913		9,213,811		578,485			17,305,209
Comprehensive income:
Net income										9,082,269					9,082,269
Net unrealized losses on investments, net of taxes												(588,809	)		(588,809	)

Total comprehensive income															8,493,460
Stock-based compensation								37,391							37,391

Balance, December 31, 2005		—		—		—		7,550,304		18,296,080		(10,324	)		25,836,060

Comprehensive income:
Net income										7,215,333					7,215,333
Net unrealized gains on investments, net of taxes												799,014			799,014

Total comprehensive income															8,014,347
Adjustment to initially apply FASB No. 158, net of taxes												524,978			524,978
Stock-based compensation								43,867							43,867
Stock options exercised								6,000							6,000
Tax benefit from stock options exercised								4,925							4,925

Balance, December 31, 2006	$	—	$	—	$	—	$	7,605,096	$	25,511,413	$	1,313,668		$	34,430,177

The accompanying notes are an integral part of the consolidated financial statements.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2006, 2005 and 2004


	2006			2005			2004
Cash flows from operating activities:
Net income	$	7,215,333		$	9,082,269		$	1,512,538
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		602,687			141,665			120,529
Deferred income taxes		21,675			(3,769,126	)		—
Interest expense converted into common stock		—			—			123,695
Stock based compensation expense		43,867			37,391			7,916
Net realized (gains) losses on investments		(519,835	)		(608,819	)		(276,520	)
Gain on sale of property and equipment		(3,543	)		—			—
Net amortization of premiums on investments		205,764			250,832			199,776
Excess tax benefit from stock options exercised		(4,925	)		—			—
Changes in assets and liabilities:
Premiums due from policyholders		(385,146	)		(297,251	)		(199,110	)
Amounts due from reinsurers		(596,217	)		3,385,789			(2,068,092	)
Prepaid reinsurance premiums		(191,725	)		(5,374	)		8,174,176
Accrued investment income		(44,474	)		(4,729	)		(99,610	)
Deferred policy acquisition costs		(142,765	)		(231,997	)		(2,566,091	)
Deferred equity offering expenses		—			—			173,710
Other assets		(20,251	)		(4,361	)		754
Losses and loss adjustment expenses		1,309,741			(105,773	)		5,094,524
Unearned premiums		1,025,862			761,609			1,134,026
Reinsurance funds withheld and premiums ceded payable		(976,027	)		(1,992,370	)		(5,207,917	)
Accrued expenses and other liabilities		763,459			105,196			828,670

Net cash provided by operating activities		8,303,480			6,744,951			6,952,974

Cash flows from investing activities:
Proceeds from sales and maturities of fixed maturity investments		13,130,310			23,869,886			16,138,756
Proceeds from sales of equity investments		3,308,845			1,927,660			2,538,936
Purchases of fixed maturity investments		(16,527,319	)		(29,099,962	)		(28,457,755	)
Purchases of equity investments		(3,883,545	)		(5,808,887	)		(4,583,690	)
Change in receivable from investments		—			738,820			(739,150	)
Issuance of note receivable from related party		(5,200	)		(130,000	)		—
Repayment of mortgage loans from related party		6,686			3,968			3,738
Purchase of property and equipment		(1,287,920	)		(376,109	)		(166,616	)

Net cash used in investing activities		(5,258,143	)		(8,874,624	)		(15,265,781	)

Cash flows from financing activities:
Proceeds from exercised stock options		6,000			—			5,007,257
Tax benefit from exercised stock options		4,925			—			—

Net cash provided by financing activities		10,925			—			5,007,257

Net (decrease) increase in cash and cash equivalents		3,056,262			(2,129,673	)		(3,305,550	)

Cash and cash equivalents, beginning of year		1,542,581			3,672,254			6,977,804

Cash and cash equivalents, end of year	$	4,598,843		$	1,542,581		$	3,672,254

Supplemental disclosure of cash flow information:
Federal income taxes paid	$	3,025,000		$	2,050,000		$	42,000

Interest paid	$	202,320		$	202,320		$	371,711

Supplemental disclosure of non-cash financing activities:
Conversion of surplus notes and accrued interest to common stock	$	—		$	—		$	2,497,740

The accompanying notes are an integral part of the consolidated financial statements.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Nature of operations

Fremont Michigan InsuraCorp, Inc. and subsidiary (collectively, the “Company”) includes Fremont Michigan InsuraCorp, Inc. (“FMIC”) and its wholly owned subsidiary Fremont Insurance Company (“FIC”). FIC is a Michigan licensed property and casualty insurance carrier operating exclusively in the State of Michigan and writing principally personal lines, commercial lines, farm and marine insurance policies through independent agents.

Conversion and demutualization

On October 12, 2004, FIC, formerly Fremont Mutual Insurance Company, converted from a mutual to a stock form of insurance company and subsequently on October 15, 2004, all of its outstanding capital stock was transferred to FMIC thereby becoming a wholly owned subsidiary of FMIC. Prior to the conversion and since 1876, Fremont Mutual Insurance Company conducted business as a Michigan domiciled mutual property and casualty insurer. FMIC was formed on November 18, 2003 for the purpose of acquiring all of the stock of FIC. On October 15, 2004 FMIC issued and sold 1,724,236 shares of its Common Stock at $5 per share (the “Conversion”). As part of the Conversion, surplus note holders converted approximately $2,498,000 of principal and accrued interest on surplus notes into common stock of FMIC. The following table presents (in thousands) the net value of the common stock issued as well as the net cash proceeds received as a result of the Conversion:


Gross value of common stock issued	$	8,621
Less: Offering costs		(1,116	)

Net value of common stock issued		7,505
Less: Surplus notes and accrued interest converted to common stock		(2,498	)

Net cash received	$	5,007

Principles of consolidation and presentation

The accompanying consolidated financial statements which include the accounts of FMIC since the Conversion and its wholly-owned subsidiary, FIC, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), which vary in certain respects from statutory accounting practices followed in reporting to insurance regulatory authorities. See Note 12—Statutory Insurance Accounting Practices for additional information regarding statutory accounting practices. All significant intercompany transactions have been eliminated.

Stock Split

On October 17, 2006, the Company’s Board of Directors approved a two-for-one stock split on its common stock which was accomplished through a stock dividend paid on November 17, 2006. All share and per share information has been retroactively adjusted to reflect the stock split.

Investments

At December 31, 2006 and 2005, all of the Company’s investments are classified as available-for-sale and are those investments that would be available to be sold in response to the Company’s liquidity needs, changes in market interest rates and asset-liability management strategies, among others. Available-for-sale investments are

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

recorded at fair value, with the corresponding unrealized appreciation or depreciation, net of deferred income taxes and any corresponding deferred tax asset valuation allowance, reported as a component of accumulated other comprehensive income or loss until realized.

Realized gains and losses on sales of investments are computed based on a specific identification basis and include write downs on available-for-sale investments considered to have other than temporary declines in market value.

Dividend and interest income are recognized when earned. Discount or premium on fixed maturities purchased at other than par value is amortized using the effective interest method.

Discount or premium on loan-backed investments is amortized using anticipated prepayments with significant changes in anticipated prepayments accounted for retrospectively. Prepayment assumptions for loan-backed investments were obtained from broker dealer survey values or internal estimates. These assumptions are consistent with the current interest rate environment.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and highly liquid short-term investments. The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents.

Revenue recognition

Insurance premium revenue is recognized on a pro rata basis over the respective terms of the policies in-force and unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of the policies in-force. Generally, premiums are collected in advance of providing risk coverage, minimizing the Company’s exposure to credit risk. Premiums due from policyholders are net of an allowance for doubtful accounts of $32,913 and $79,443 at December 31, 2006 and 2005, respectively.

Other income consists of premium installment charges which are recognized when earned and other miscellaneous income.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Other comprehensive income or loss

The Company presents other comprehensive income or loss as a component of stockholders’ equity on the consolidated statements of stockholders’ equity and comprehensive income. For the years ended December 31, 2006, 2005, and 2004 the components of other comprehensive income consisted of the following:


	2006			2005			2004
Unrealized gain on investments arising during the period	$	1,730,463		$	14,691		$	309,099
Deferred income tax (expense) benefit of unrealized gain (loss) on investments arising during the period		(588,357	)		(4,995	)		(105,094	)
Change in deferred tax valuation allowance		—			(196,685	)		105,094

Unrealized gain (loss) on investments arising during the period, net of deferred income taxes and valuation allowance		1,142,106			(186,989	)		309,099
Adjustment for pretax realized losses (gains) on investments included in income		(519,835	)		(608,819	)		(276,520	)
Deferred income tax (benefit) expense of realized losses (gains) included in income		176,744			206,998			94,017
Change in deferred tax valuation allowance		—			—			(94,017	)

Net unrealized gain (loss) on investments	$	799,015		$	(588,809	)	$	32,579

Changes, net of tax, in accumulated other comprehensive income (loss) are presented in the table below:


	Net Unrealized Gains (Losses) on Investments			Cumulative Adjustment to Initially Apply FAS 158, Net of Tax		Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2003	$	545,906		$	—	$	545,906
Period Change		32,579			—		32,579

Balance, December 31, 2004		578,485			—		578,485
Period Change		(588,809	)		—		(588,809	)

Balance, December 31, 2005		(10,324	)		—		(10,324	)
Period Change		799,014			524,978		1,323,992

Balance, December 31, 2006	$	788,690		$	524,978	$	1,313,668

Losses and loss adjustment expense reserves

Losses and loss adjustment expense (“LAE”) reserves represent the estimated liability for reported losses and loss adjustment expenses and actuarial estimates for incurred but not reported losses and loss adjustment expenses based upon the Company’s actual experience, assumptions and projections as to claims frequency, severity, inflationary trends and settlement payments. The reserve for losses and loss adjustment expenses is intended to cover the ultimate net cost of all losses and loss adjustment expenses incurred but unsettled through the balance sheet date. The reserves are reported gross of any amounts recoverable from reinsurers and are reduced for anticipated salvage and subrogation. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income currently. The liability for losses and loss adjustment expenses is necessarily an estimate and while it is believed to be adequate, the ultimate liability could exceed or be less than such estimate. The anticipated recoverable salvage and subrogation at December 31, 2006 and 2005 was approximately $208,000 and $223,000, respectively.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Reinsurance

The Company accounts for reinsurance contracts under the provisions of Statement of Financial Accounting Standards (“SFAS”), No. 113, “Accounting and Reporting for Reinsurance on Short-Duration and Long-Duration Contracts.” Net premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned premiums ceded to them are reported as assets. Reinsurance assumed from other companies, including assumed premiums written and earned and losses and LAE, is accounted for in the same manner as direct insurance written.

Property, equipment and depreciation

Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method. Estimated useful lives are: building—35 years, computer equipment including software—3 to 5 years and furniture, fixtures and equipment—5 to 7 years. Software is capitalized in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” and amortized on a straight-line method over the estimated useful life of the software, generally not exceeding 3 years. Maintenance, repairs and minor renewals are charged to expense as incurred. Depreciation expense was $602,687, $141,665 and $120,529 for the years ended December 31, 2006, 2005, and 2004, respectively. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Upon sale or retirement, the cost and related accumulated depreciation of assets disposed of are removed from the accounts; any resulting gain or loss is reflected in income.

Deferred policy acquisition costs

Policy acquisition costs, which consist of commissions net of ceding commissions and premium taxes, that vary with and are primarily related to the production of new and renewal business are deferred, subject to ultimate recoverability from future income, including investment income, and amortized to expense over the period in which the related premiums are earned.

Demutualization expenses

Demutualization expenses include the cost of printing and postage for communications with policyholders and the cost of engaging external accounting, actuarial, legal and other consultants to advise the Company in the demutualization process.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Stock-based compensation

The Company accounts for stock-based compensation in accordance with the provisions of SFAS No. 123R, “Accounting for Stock-Based Compensation”. The Company values stock options issued based upon an option-pricing model and recognizes the fair value as an expense over the period in which the options vest.

Federal income taxes

Deferred federal income tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amount of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized.

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.

Preparation of financial statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassification

Certain reclassifications have been made to the prior year balances to conform to the current year presentation.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123. This standard became effective for the Company as of January 1, 2006 and applies to all awards granted, modified, cancelled or repurchased after that date as well as the unvested portion of prior awards. The adoption did not have a material effect on the consolidated financial statements as the Company previously accounted for stock-based compensation using the fair value method, as prescribed by SFAS 123.

In June 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 will

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

be effective for the Company beginning January 1, 2007. Based on the Company’s initial analysis of FIN 48 management does not believe that FIN 48 will have a material impact on the consolidated financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (SAB 108). Due to diversity in practice among registrants, SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. The adoption of the provisions of SAB 108 on December 31, 2006 had no impact on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“Statement 157”). Statement 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Statement 157 applies under other accounting pronouncements that require fair value measurement in which the FASB concluded that fair value was the relevant measurement, but does not require any new fair value measurements. Statement 157 will be effective for the quarter ended March 31, 2008. The Company is currently evaluating the impact Statement 157 will have on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (“Statement 158”). Among other items, Statement 158 requires recognition of the overfunded or underfunded status of an entity’s defined benefit postretirement plan as an asset or liability in the financial statements, requires the measurement of defined benefit postretirement plan assets and obligations as of the end of the employer’s fiscal year, and requires recognition of the funded status of defined benefit postretirement plans in other comprehensive income. Statement 158 was adopted by the Company as of December 31, 2006. The initial recognition of the funded status of the Company’s defined benefit postretirement plan resulted in an increase in stockholders’ equity of $524,978, which was net of tax expense of $270,443. Statement 158 also requires that the funded status of a plan be measured as of the date of the year-end balance sheet date, with limited exceptions. The Company currently measures its funded status as of the date of the Company’s year-end balance sheet.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“Statement 159”). This statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value. Statement 159 will be effective for the quarter ended March 31, 2008. The Company is currently assessing the impact Statement 159 may have on the consolidated financial statements.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

2. Investments

The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments at December 31, 2006 and 2005 are as follows:


	2006
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	6,074,385	$	2,756	$	87,898	$	5,989,243
States and political subdivisions		13,414,841		37,133		47,155		13,404,819
Corporate securities		11,058,724		901		305,359		10,754,266
Mortgage-backed securities		14,965,481		69,226		223,769		14,810,938

		45,513,431		110,016		664,181		44,959,266

Preferred stocks		—		—		—		—
Common stocks		9,940,606		1,756,784		7,634		11,689,756

		9,940,606		1,756,784		7,634		11,689,756

Total	$	55,454,037	$	1,866,800	$	671,815	$	56,649,022


	2005
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	7,598,104	$	2,977	$	97,817	$	7,503,264
States and political subdivisions		7,645,905		35		97,858		7,548,082
Corporate securities		15,101,502		34,317		323,027		14,812,792
Mortgage-backed securities		12,016,345		3,358		239,412		11,780,291

		42,361,856		40,687		758,114		41,644,429

Preferred stocks		426,200		—		5,600		420,600
Common stocks		8,380,201		761,894		54,510		9,087,585

		8,806,401		761,894		60,110		9,508,185

Total	$	51,168,257	$	802,581	$	818,224	$	51,152,614

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

The cost or amortized cost and estimated fair value of fixed maturities at December 31, 2006, by contractual maturity, are shown below. Expected maturities on certain corporate and mortgage-backed investments may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	3,895,367	$	3,867,271
Due after one year through five years		9,136,950		8,973,527
Due after five years through ten years		14,317,570		14,130,056
Due after ten years		3,198,063		3,177,474
Mortgage-backed securities		14,965,481		14,810,938

	$	45,513,431	$	44,959,266

Net investment income for the years ended December 31, 2006, 2005 and 2004 is summarized as follows:


	Years Ended December 31,
	2006			2005			2004
Fixed maturities	$	1,895,827		$	1,658,852		$	1,373,166
Equity securities		136,503			183,883			146,637
Cash and cash equivalents		171,428			111,580			61,389

Gross investment income		2,203,758			1,954,315			1,581,192

Less: Investment expenses		(316,039	)		(265,462	)		(405,136	)

Net investment income	$	1,887,719		$	1,688,853		$	1,176,056

Net realized gains (losses) on investments for the years ended December 31, 2006, 2005 and 2004 are summarized as follows:


	Years Ended December 31,
	2006			2005			2004
Gross realized investment gains:
Fixed maturities	$	20,682		$	306,778		$	90,800
Equity securities		597,808			439,220			393,393

		618,490			745,998			484,193

Gross realized investment losses:
Fixed maturities		(60,352	)		(37,592	)		(56,553	)
Equity securities		(38,303	)		(99,587	)		(151,120	)

		(98,655	)		(137,179	)		(207,673	)

Net realized gains on investments	$	519,835		$	608,819		$	276,520

During the year ended December 31, 2005 other-than-temporary impairment losses on available-for-sale equity investments amounted to $98,774 which are included in net realized investment gains (losses) on investments in the consolidated statement of operations. There were no other-than-temporary impairment losses in 2006 or 2004.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Sales of available-for-sale fixed maturities resulted in the following during the years ended December 31, 2006, 2005 and 2004:


	2006		2005		2004
Proceeds	$	7,450,369	$	15,412,617	$	9,120,916

Gross gains	$	20,682	$	306,209	$	90,790

Gross losses	$	60,352	$	37,592	$	56,063

The Company engages an investment management consultant for the fixed maturity portfolio. Under the guidelines provided to the investment management consultant the fixed maturity portfolio has experienced a rebalancing during 2006, 2005 and 2004. The focus of the Company’s rebalancing is to improve credit quality, liquidity and diversification within the portfolio, to create a more stable income stream and to enhance long-term total return. During 2006, 2005 and 2004, special attention was given to portfolio duration in order to reduce market value fluctuations in a rising interest rate environment. Despite the Company’s intent and ability to hold fixed maturity investments until maturity, proceeds from the sale of fixed maturity investments increased during 2005 as a result of rebalancing the portfolio.

The following tables show the estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at December 31, 2006 and 2005.


	December 31, 2006
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	1,004,990	$	3,925	$	3,632,444	$	83,972	$	4,637,434	$	87,897
States and political subdivisions		6,131,773		41,048		2,116,552		6,107		8,248,325		47,155
Corporate securities		507,298		6,402		9,838,932		298,958		10,346,230		305,360
Mortgage-backed securities		756,813		652		9,347,753		223,117		10,104,566		223,769

		8,400,874		52,027		24,935,681		612,154		33,336,555		664,181

Preferred stocks		—		—		—		—		—		—
Common stocks		242,992		7,634		—		—		242,992		7,634

		242,992		7,634		—		—		242,992		7,634

Total	$	8,643,866	$	59,661	$	24,935,681	$	612,154	$	33,579,547	$	671,815

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

impairment, the Company’s experience indicates that they generally do not present as great a risk of impairment, as fair value often recovers over time. These investments have generally been adversely affected by the downturn in the financial markets and overall economic conditions. Management believes that the analysis of each of these investments support the view that these investments were not other-than-temporarily impaired.


	December 31, 2005
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	2,304,852	$	8,462	$	3,826,826	$	89,355	$	6,131,678	$	97,817
States and political subdivisions		7,024,158		97,858		—		—		7,024,158		97,858
Corporate securities		7,274,921		120,315		5,640,488		202,712		12,915,409		323,027
Mortgage-backed securities		7,232,543		119,397		4,382,779		120,015		11,615,322		239,412

		23,836,474		346,032		13,850,093		412,082		37,686,567		758,114

Preferred stocks		420,600		5,600		—		—		420,600		5,600
Common stocks		960,777		54,510		—		—		960,777		54,510

		1,381,377		60,110		—		—		1,381,377		60,110

Total	$	25,217,851	$	406,142	$	13,850,093	$	412,082	$	39,067,944	$	818,224

As of December 31, 2005, the portfolio included 49 fixed maturity investments and 5 equity investments in an unrealized loss position for less than 12 months and 37 fixed maturity investments in an unrealized loss position for more than 12 months, none of which were trading below 90% of cost or amortized cost. All of the fixed maturity investments in an unrealized loss position and assigned a rating by commercial credit rating companies are rated investment grade investments. While all of these investments are monitored for potential impairment, the Company’s experience indicates that they generally do not present as great a risk of impairment, as fair value often recovers over time. These investments have generally been adversely affected by the downturn in the financial markets and overall economic conditions. Management believes that the analysis of each of these investments support the view that these investments were not other-than-temporarily impaired.

At December 31, 2006, fixed maturities with a carrying value approximating $404,000 were on deposit with regulatory authorities, as required by law.

3. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Fixed maturities and equity securities

The fair values of available-for-sale fixed maturity and equity securities are based on quoted market prices, when available. If not available, fair values are based on values obtained from investment brokers.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Cash and cash equivalents

The carrying amount is a reasonable estimate of fair value.

Mortgage receivables

The carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited marketability of the mortgage notes.

Surplus notes

The carrying amount is a reasonable estimate of fair value due to the restrictive nature and limited marketability of the notes.


	2006				2005
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Fixed maturities	$	44,959,266	$	44,959,266	$	41,644,429	$	41,644,429
Equity securities		11,689,756		11,689,756		9,508,185		9,508,185
Mortgage loans		260,808		260,808		262,294		262,294
Cash and cash equivalents		4,598,843		4,598,843		1,542,481		1,542,481
Financial liability:
Surplus notes		2,890,288		2,890,288		2,890,288		2,890,288

4. Reinsurance

In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company determines the amount and scope of reinsurance coverage to purchase each year based on an evaluation of the risks accepted, consultation with reinsurance professionals and a review of market conditions, including availability and cost. The Company utilizes three primary categories of treaty reinsurance coverage, as well as facultative coverage, to reduce the impact of major losses. The treaty reinsurance includes multi-line excess of loss, catastrophic excess of loss and quota share coverages.

Multi-line excess of loss coverage

The excess of loss program is the Company’s primary reinsurance coverage. For all lines of business the Company’s retention on any one risk in 2006 and 2005 was $150,000 and in 2004 the retention was $125,000.

During 2006 and 2005 the property excess of loss coverage provided up to $2,850,000 over the $150,000 retention. During 2004 the property excess of loss coverage provided up to $2,375,000 over the $125,000 retention.

During 2006 and 2005 casualty and workers compensation excess of loss coverage provided up to $4,850,000 over the $150,000 retention. During 2004 casualty and workers compensation excess of loss coverage provided up to $4,875,000 over the $125,000 retention.

There is an annual aggregate deductible feature in the amount of $400,000 that applied to the multi-line contract in 2004.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

An additional workers compensation catastrophe excess of loss program provided an additional $5,000,000 in 2006, 2005 and 2004 of coverage to cover a catastrophic event.

Catastrophic coverage

The Company had 3 layers of catastrophic excess of loss reinsurance providing coverage for up to $22,000,000 in 2006 and 2005 and $20,000,000 in 2004 above a $1,000,000 retention. The Company had an automatic reinstatement provision after the first loss for each layer to provide coverage in the event of subsequent catastrophes during the year. Coverage would have lapsed after the second event, in which case the Company would have evaluated the need for a new contract for the remainder of a particular year. During 2006, 2005 and 2004 the coverage could be reinstated for a fee of 100% of the original premium.

Quota share coverage

The Company’s boiler and machinery quota share agreement is primarily an equipment breakdown endorsement to commercial policies. The agreement is a 100% quota share contract with Hartford Steam Boiler. The Company receives a 30% commission on the premium ceded.

During 2003, the Company utilized a multi line quota share agreement which provided coverage for virtually all of the Company’s business. The Company ceded 45% of its premiums and losses on all business except boiler and machinery to the reinsurers. The agreement contained a “loss corridor” provision. Reimbursement stops on losses when the loss and LAE ratio on the premium ceded is between 60% and 74% and resumes when the ratio is between 74% and 82.5%. A loss and LAE ratio that exceeds 82.5% will trigger a “drop down coverage” feature that will reimburse the Company for 100% of the losses between the loss ratios of 60% to 65%. Reimbursement stops between the loss ratios of 65% to 74%. Payment resumes again when the loss ratios are 74% to 85%. Losses in excess of 85% are 100% retained by the Company. The Company received a 36% commission on the ceded premium. The agreement is structured on a funds withheld basis and requires the Company to accrue interest at an annual rate of approximately 2.5%. During 2006, 2005 and 2004 the Company recorded interest expense of approximately $26,000, $106,000 and $150,000, respectively, on the funds withheld balance. The agreement provides that a profit commission will be retained by the Company upon commutation equal to the positive balance in the funds withheld account. During 2005 and 2004 the Company accrued profit commission based on the experience of the underlying business ceded under this agreement of $1,400,000 and $945,000, respectively. The profit commission reduced ceded written and earned premiums.

On December 31, 2003, the Company placed the agreement into runoff. Reinsurance coverage continued on those covered policies in force as of December 31, 2003, until the underlying policies expired during 2004. As a result, the underlying reinsurance assets and liabilities will runoff, and any net funds under the agreement, less a 3.5% risk charge to the reinsurers, would be retained by the Company.

The effect of the features in this agreement is to limit the reinsurers’ aggregate exposure to loss and thereby reduce the ultimate cost to the Company as the ceding company. These features also have the effect of reducing the amount of protection relative to the quota share amount of premiums ceded by the Company. While the Company does not receive pro-rata protection relative to the amount of premiums ceded, the amount of such protection is significant, as determined in accordance with guidance under GAAP.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

In addition to ceding a significant portion of its risks to the reinsurer, the agreement also allows the Company to reduce its financial leverage and to realize immediate reimbursement for related upfront acquisition costs, thus adding to its financial capacity. The following table illustrates the effects of the multi-line quota share agreement in effect during 2005 and 2004 on selected financial information of the Company (in thousands):


	As Reported		Amounts Excluding the Effects of the Reinsurance Agreement
	Twelve Months Ended December 31, 2005		Twelve Months Ended December 31, 2005
Net premiums written	$	39,512	$	38,112
Net premiums earned		38,756		37,356
Loss and LAE, net		20,704		19,341
Income before federal income taxes		7,930		7,999

Statutory surplus	$	25,994	$	26,063
Ratio of net premiums written to statutory surplus		1.52:1		1.46:1

	Twelve Months Ended December 31, 2004		Twelve Months Ended December 31, 2004
Net premiums written	$	36,504	$	35,424
Net premiums earned		27,196		34,385
Loss and LAE, net		17,039		21,207
Income before federal income taxes		1,591		4,690

Statutory surplus	$	20,270	$	23,369
Ratio of net premiums written to statutory surplus		1.80:1		1.52:1

Effective March 31, 2006, the Company entered into a commutation agreement with respect to the 2003 multi line quota share agreement. As a result of this commutation, the funds withheld account liability was reduced by approximately $1,053,000 offset by an increase to the loss and loss adjustment expense liability of the same amount. No gain or loss was realized as a result of this commutation.

Facultative

The Company utilizes facultative reinsurance to provide additional underwriting capacity, to mitigate the effect of individual losses and to reduce net liability on individual risks. Coverage is determined on each individual risk. In 2006, the Company obtained coverage ranging from $850,000 up to $4,000,000 for certain commercial properties it insured. In 2005, the Company obtained coverage for commercial properties it insured in excess of $1,000,000. During 2005 the range of coverage was from $100,000 up to $3,925,000. In 2004, the Company obtained coverage for commercial properties it insured in excess of $2,500,000. During 2004 the range of coverage was from $500,000 up to $5,000,000.

Although reinsurance agreements contractually obligate the Company’s reinsurers to reimburse the Company for their share of losses, they do not discharge the primary liability of the Company. The Company remains liable for the ceded amount of reserves for unpaid losses and loss adjustment expenses and ceded unearned premiums in the event the assuming insurance organizations are unable to meet their contractual obligations. As a result, the Company is subject to credit risk with respect to the obligations of its reinsurers. In order to minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors the economic characteristics of the reinsurers on an ongoing basis. All reinsurers are rated A- or better by A. M. Best Company. The Company has not experienced a collectibility problem with any reinsurer.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

The Company receives a ceding commission in conjunction with certain reinsurance activities. These ceding commissions are offset against direct commission expense and were $181,749, $124,274, and $72,302 in 2006, 2005 and 2004, respectively.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. At December 31, 2006, the Company had recoverables of $7,883,000. This balance was comprised of $853,000 for paid losses and $7,030,000 for unpaid losses ceded to the reinsurers. At December 31, 2005, the Company had recoverables of $7,287,000. This balance was comprised of $1,353,000 for paid losses and $5,934,000 for unpaid losses ceded to the reinsurers. The Company holds collateral in the form of letters of credit, trust accounts or funds withheld accounts for amounts recoverable from reinsurers that are not considered authorized insurers by the State of Michigan Office of Financial and Insurance Services. At December 31, 2006, the Company had 5 reinsurance recoverable amounts from reinsurers whose individual recoverable balance exceeded 5% of the total recoverable amount. The amount due from these 5 reinsurers accounts for 92% of the total recoverable.

The effect of reinsurance on premiums written and earned for the years ended December 31, 2006, 2005 and 2004, are as follows:


	2006						2005						2004
	Written			Earned			Written			Earned			Written			Earned
Direct	$	48,869,232		$	47,831,449		$	45,515,864		$	44,737,524		$	41,971,058		$	40,834,262
Assumed		60,809			72,730			100,197			116,928			160,193			162,963
Ceded		(8,666,906	)		(8,654,931	)		(6,103,973	)		(6,098,599	)		(5,627,058	)		(13,801,235	)

Net premiums	$	40,263,135		$	39,249,248		$	39,512,088		$	38,755,853		$	36,504,193		$	27,195,990

Losses and loss adjustment expenses reported on the statement of operations are net of ceded amounts of approximately $4,780,000, $1,372,000 and $8,935,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

5. Federal Income Taxes

Income tax expense is computed under the liability method, whereby deferred income taxes reflect the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and those for income tax purposes. A valuation allowance is required to be established against a deferred tax asset if it is “more likely than not” that the related tax benefits will not be realized.

The provision for federal income taxes consists of the following:


	Years Ended December 31,
	2006			2005			2004
Current	$	3,444,326		$	2,617,224		$	78,452
Deferred expense (benefit)		64,874			86,334			604,500
Change in valuation allowance		(43,199	)		(3,855,461	)		(604,500	)

	$	3,466,001		$	(1,151,903	)	$	78,452

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Actual federal income taxes vary from amounts computed by applying the current federal income tax rate of 34 percent to income before federal income taxes. For the years ended December 31, 2006, 2005 and 2004 the reasons for these differences and the tax effects thereof, are as follows:


	Years Ended December 31,
	2006			2005			2004
Expected tax expense	$	3,631,654		$	2,696,324		$	540,937
Change in valuation allowance		(43,199	)		(3,855,461	)		(604,500	)
Nontaxable investment income		(120,188	)		(83,364	)		(30,109	)
Nondeductible expenses, net		4,322			5,602			127,235
Provision to return variance		(6,588	)		85,627			45,138
Other, net		—			(631	)		(249	)

	$	3,466,001		$	(1,151,903	)	$	78,452

Amounts classified as ‘provision to return variance’ reflect adjustments to prior period deferred tax items used in calculating the tax provision so they are consistent with the final amounts reflected on the Company’s income tax return.

Deferred federal income tax assets and liabilities are recognized for the estimated future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company’s management reviews both positive and negative evidence, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code Section 382 (“Section 382”), future income projections and the overall prospects of our business. As of December 31, 2006, the Company has net operating loss carryforwards of approximately $7,748,000, which begin to expire in 2010 and fully expire in 2021, and alternative minimum tax credits of approximately $358,000, which may be carried forward indefinitely. As a result of the Conversion and demutualization discussed in Note 1 the aforementioned net operating losses are subject to certain “change in control” limitations under Section 382. The annual limitation on the utilization of the net operating losses is approximately $400,000. In addition to the net operating loss carryforwards, the Company’s alternative minimum tax credit carryforwards are also subject to the Section 382 limitation however these credit carryforwards have no expiration and can be carried forward indefinitely. Based on the annual Section 382 limitation of the utilization of net operating loss carryforwards management has determined that approximately $2,971,000 of net operating loss carryforwards will not be realized and therefore a full valuation allowance of approximately $1,010,000 will be maintained for the deferred tax asset associated with these amounts.

Based upon management’s assessment of all available evidence, including the Company’s cumulative net income for recent fiscal years, estimates of current and future profitability and the overall prospects of our business, it has been determined that as of December 31, 2006 it is more likely than not that sufficient taxable income will exist in the periods of reversal in order to realize the recorded net deferred tax asset.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

The following table shows the allocation of the change in the deferred tax valuation allowance for the years ended December 31, 2006 and 2005.


	Years Ended December 31,
	2006			2005			2004
Valuation allowance balance, January 1	$	(1,053,236	)	$	(4,712,012	)	$	(5,327,589	)
Change in valuation allowance allocated to:
Federal income tax benefit from operations		43,199			3,855,461			604,500
Unrealized gains/losses on investments allocated to other comprehensive income		—			(196,685	)		11,077

Valuation allowance balance, December 31	$	(1,010,037	)	$	(1,053,236	)	$	(4,712,012	)

The tax effects of temporary differences that give rise to deferred federal income tax assets and deferred federal income tax liabilities are as follows:


	As of December 31,
	2006			2005
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves	$	421,360		$	436,552
Unearned premium reserves		1,470,987			1,397,087
Realized losses on investments		—			37,323
Unrealized losses on investments		—			5,319
Postretirement benefits accrued		667,021			933,782
Net operating loss carryforward		2,634,446			2,742,271
Capital loss carryfoward		—			28,184
Alternative minimum tax credit carryforward		357,697			357,697
Other deferred tax assets		186,814			175,195

Total deferred federal income tax assets		5,738,325			6,113,410

Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs		(1,120,000	)		(1,067,663	)
Unrealized gains on investments		(406,295	)		—
Property and equipment		(107,254	)		(202,860	)
Other deferred tax liabilities		(24,026	)		(15,206	)

Total deferred federal income tax liabilities		(1,657,575	)		(1,285,729	)

Net deferred federal income tax asset		4,080,750			4,827,681
Valuation allowance		(1,010,037	)		(1,053,236	)

Deferred federal income taxes	$	3,070,713		$	3,774,445

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

6. Property and Equipment

At December 31, 2006 and 2005, property and equipment consisted of the following:


	As of December 31,
	2006			2005
Building and land	$	2,139,027		$	1,992,529
Computer equipment, including software		2,115,526			1,119,388
Furniture, fixtures and equipment		789,604			654,165

		5,044,157			3,766,082

Less: Accumulated depreciation		(3,272,834	)		(2,683,535	)

Total property and equipment, net	$	1,771,323		$	1,082,547

7. Deferred Policy Acquisition Costs

Deferred policy acquisition costs and the related amortization were as follows:


	Years Ended December 31,
	2006			2005			2004
Balance, beginning of year	$	3,092,618		$	2,860,621		$	294,530

Acquisition costs deferred		6,985,499			6,614,254			5,852,419
Amortization		(6,842,734	)		(6,382,257	)		(3,286,328	)

Balance, end of year	$	3,235,383		$	3,092,618		$	2,860,621

The Company assesses the recoverability of deferred policy acquisition costs against future expected underwriting income and reduces deferred policy acquisition costs if it appears that a premium deficiency may exist. There were no premium deficiencies at December 31, 2006, 2005 and 2004. During 2004, the Company received a 36% ceding commission on the ceded premiums under the multi line quota share reinsurance agreement which reduced the deferred commission costs.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

8. Loss and Loss Adjustment Expense Liability

The Company regularly updates its reserve estimates as new information becomes available and further events occur that may impact the resolution of unsettled claims. Changes in prior years’ reserve estimates are reflected in the results of operations in the year such changes are determined. Activity in the liability for loss and loss adjustment expenses is summarized as follows (in thousands):


	Years Ended December 31,
	2006			2005			2004
Balance, beginning of year	$	18,867		$	18,973		$	13,878
Less reinsurance balance recoverable		5,934			9,187			7,742

Net balance, beginning of year		12,933			9,786			6,136

Incurred related to:
Current year		22,790			23,059			17,705
Prior years		(5,224	)		(2,355	)		(666	)

Total incurred		17,566			20,704			17,039

Paid related to:
Current year		14,463			13,835			11,393
Prior years		2,889			3,722			1,996

Total paid		17,352			17,557			13,389

Net balance, end of year		13,147			12,933			9,786
Plus reinsurance balances recoverable		7,030			5,934			9,187

Balance, end of year	$	20,177		$	18,867		$	18,973

In 2006, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $5,224,000 which represents 40.4% of the net loss and LAE reserves as of the beginning of the year. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2006. The redundant development included $1,340,000 related to homeowners, $1,329,000 related to personal auto, $1,247,000 related to commercial multi-peril, $715,000 related to workers compensation, $379,000 related to farm while the remaining lines of business had redundant development of $214,000. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2006. The favorable development was concentrated in accident years 2003 through 2005 and is a result of downward development on both case and incurred but not reported reserves and loss adjusting expense reserves.

In 2005, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $2,355,000 which represents 24.1% of the net loss and LAE reserves as of the beginning of the year. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2005. As a result of the adverse development experienced during 2003 the Company has placed an emphasis on the claim reserving process to ensure that we are establishing adequate reserves reflecting our best estimate of the ultimate loss. The favorable development in 2005 was primarily in the homeowner and personal auto product lines. The homeowner’s line, which is the Company’s largest product line, experienced redundant development of approximately $1,904,000 primarily in the accident years of 2004, 2003 and 2002 as a result of lower than expected losses on both incurred but not reported and existing case reserves as of December 31, 2004. The personal auto line experienced redundant development of approximately $426,000 primarily in the 2004 accident year. The Company began writing personal auto policies in 1999. Given that this

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

is a newer product line for the Company our initial ultimate loss estimates on undeveloped years are based more on estimated industry loss ratios as opposed to our actual historical loss ratios. As the 2004 accident year continues to develop the Company has experienced redundant development on settled claims which has resulted in a decrease in the ultimate loss ratio as compared to the ultimate ratio used at December 31, 2004.

During 2005, the commercial segment experienced adverse development of approximately $253,000 driven by the workers compensation product line which had adverse development of $234,000. The Company strengthened its workers compensation reserves for accident years 2001 through 2004 as a result of adjusting the ultimate loss estimates so they are more in line with industry averages. Given the fact that workers’ compensation claims take a much longer time to be reported and settled coupled with the fact that the Company began writing workers’ compensation policies in 1997 the Company deemed industry loss ratios to be a more prudent estimate than loss ratios based on the Company’s historical development patterns since 1997. The remaining redundant development of $278,000 came from the marine segment’s 2004 and 2003 accident years.

In 2004, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $666,000 which represents 10.9% of net loss and LAE reserves as of the beginning of the year. The favorable development was concentrated in the commercial segment’s product lines of commercial multiple peril and workers compensation which experienced favorable development of $1,076,000 primarily in accident years 2000, 2002 and 2003. In 2003 the Company strengthened its reserves in the commercial segment because the Company’s actuarial projections indicated higher ultimate losses on prior accident years driven primarily by the volatility in claim development within the newer product lines in the commercial segment. Throughout 2004 the development on commercial losses was less than what was expected as the settlement of reported cases has been favorable. The homeowner and farm product lines experienced adverse development of $344,000 resulting from the normal claims review process, and not from changes in key assumptions or reserving methods.

9. Surplus Notes

During 1998, 64 parties, including agents, directors, employees and other private investors purchased surplus notes aggregating $4,057,000 from the Company. During 2002, additional surplus notes aggregating $350,000 were purchased from the Company by its employees. These notes, referred to as Series A notes, paid an annual interest rate of 8.5 percent with principal and any accrued unpaid interest due on June 30, 2003.

In December of 2002, the Company began issuing Series B notes with an annual interest rate of 7.0 percent with principal due on September 30, 2007. Interest only shall be paid annually on March 15. Repayment of any principal or interest is subject to written authorization by the Commissioner of Insurance of the State of Michigan and approval by the Company’s board of directors.

In December 2002, approximately $2,673,000 million of Series A notes were converted into Series B notes at the request of the holders. Also in December 2002, additional notes, aggregating approximately $1,020,000, were purchased by agents and other private investors. During 2003, approximately $641,000 of Series B Surplus Notes were issued. In addition, holders of $930,000 of the Series A Surplus Notes converted their notes into Series B Surplus Notes. The balance of the Series A Surplus Notes, which approximated $804,000, was repaid on June 30, 2003. In conjunction with the Conversion which was completed on October 15, 2004 approximately $2,374,000 of Series B Surplus Notes were converted into stock of the Company.

The outstanding balance at December 31, 2006 and 2005 of $2,890,000 included approximately $1,955,000 of surplus notes held by related parties consisting of non-employee directors, agents of the Company and an investment broker who provided services to the Company. Interest expense on surplus notes held by related parties was approximately $137,000 in 2006, $137,000 in 2005, and $223,000 in 2004.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

10. Employee Benefit Plans

Other postretirement plans

The Company provides certain postretirement health care benefits for retired employees. Prior to December 31, 2004, substantially all employees became eligible for these benefits upon reaching retirement age, as defined, while employed by the Company. In December 2004 the Company’s board of directors approved an amendment to the plan effective December 31, 2004 which significantly reduced the number of eligible participants in the plan, discontinued future eligibility for all other employees and reduced the level of health care benefits for future retirees determined to be eligible as of December 31, 2004. The plan amendment resulted in a reduction to the accumulated projected benefit obligation at December 31, 2004 of $2,003,943 of which $486,915 reduced the unrecognized transition obligation while the remaining credit balance of $1,517,028 represents the unrecognized reduction to prior service cost as a result of the plan amendment. The balance of the unrecognized reduction to prior service cost will be amortized over 17.7 years which represents the average future lifetime of retirees and fully eligible active participants at the date of the amendment.

As noted in Note 1 the Company adopted the provisions of Statement 158 as of December 31, 2006. The initial recognition of the funded status of the Company’s defined benefit postretirement plan resulted in an increase in shareholders’ equity of $524,978, which was net of tax expense of $270,443. The table below reflects the incremental effect of applying Statement 158 on individual line items in the consolidated balance sheet as of December 31, 2006:


	Before Application of Statement 158		Adjustments			After Application of Statement 158
Deferred tax asset	$	3,341,156	$	(270,443	)	$	3,070,713
Total assets		86,147,876		(270,443	)		85,877,433
Accrued expenses and other liabilities		7,662,502		(795,421	)		6,867,081
Total liabilities		52,242,677		(795,421	)		51,447,256
Accumulated other comprehensive income		788,690		524,978			1,313,668
Total shareholders’ equity		33,905,199		524,978			34,430,177
Total liabilities and shareholders’ equity		86,147,876		(270,443	)		85,877,433

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Changes in the accumulated benefit obligation were:


	Years Ended December 31,
	2006			2005			2004
Change in benefit obligation:
Benefit obligation, beginning of year	$	1,879,466		$	2,096,649		$	3,906,010
Service cost		10,158			20,846			255,624
Interest cost		100,385			117,639			222,938
Plan participants’ contributions		15,382			12,826			13,249
Plan amendment		—			—			(2,003,943	)
Actuarial (gain) loss		26,106			(304,913	)		(227,794	)
Benefits paid		(69,671	)		(63,581	)		(69,435	)

Benefit obligation, end of year		1,961,826			1,879,466			2,096,649

Fair value of plan assets at beginning and end of year		—			—			—

Funded status	$	(1,961,826	)		(1,879,466	)		(2,096,649	)

Unrecognized prior service cost (credit)					(1,431,346	)		(1,517,028	)
Unrecognized net actuarial loss					564,395			873,537

Accrued benefit cost				$	(2,746,417	)	$	(2,740,140	)

At December 31, 2006 the funded status of $1,961,826 is recognized in the accompanying balance sheet as accrued expenses and other liabilities. At December 31, 2005 the accrued benefit cost of $2,746,417 is included in accrued expenses and other liabilities in the accompanying balance sheet.

Gross amounts recognized in accumulated other comprehensive income consist of:


	Years Ended December 31,
	2006			2005		2004
Prior service cost (credit)	$	(1,345,664	)	$	—	$	—
Net actuarial loss		550,243			—		—

	$	(795,421	)	$	—	$	—

Components of net periodic benefit cost and the weighted average discount rate are below:


	Years Ended December 31,
	2006			2005			2004
Components of net periodic benefit cost:
Service cost	$	10,158		$	20,846		$	255,624
Interest cost		100,385			117,639			222,938
Amortization of prior service credit		(85,682	)		(85,682	)		48,692
Amortization of net actuarial loss		21,162			37,495			51,540

Net periodic benefit cost	$	46,023		$	90,298		$	578,794

Weighted-average assumptions as of December 31:
Discount rate		5.50	%		5.50	%		5.75	%

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

The estimated prior service credit and net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year is $85,682 and $20,293, respectively.

The Company uses a December 31 measurement date for its other postretirement plan. As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. At December 31, 2006, the Company’s expected future benefit payments are as follows:


2007	$	54,000
2008		60,000
2009		70,000
2010		77,000
2011		85,000
2012 - 2016		575,000

	$	921,000

For measurement purposes as of December 31, 2006, 2005 and 2004 the annual rate of increase in the per capita cost of covered health care benefits assumed for the subsequent year was 8.5%, 9.0% and 9.5%, respectively. Each year the rate was assumed to decrease by 0.5% per year until the ultimate rate of 5.5% was reached.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage-point change in assumed health care cost trend rates would have the following effects:


	1-Percentage- Point Increase		1-Percentage- Point Decrease
Effect on total service and interest cost components	$	41,766	$	(27,745	)
Effect on postretirement benefit obligation	$	285,788	$	(238,866	)

Defined contribution plan

The Company has a defined contribution 401(k) plan covering substantially all employees meeting certain eligibility requirements. The 401(k) plan provides for matching contributions and /or profit sharing contributions as defined by the Board of Directors. Company contributions approximated $117,000 in 2006, $103,000 in 2005, and $74,000 in 2004.

11. Lease Agreements

The Company leases various vehicles under non-cancelable operating lease agreements which began to expire in 2006 and continue to expire in 2007. Rental expense was approximately $48,000, $38,000 and $57,000 in 2006, 2005 and 2004, respectively.

Future minimum lease payments required under the vehicle leases as of December 31, 2006 are as follows:


For the year ended December 31,
2007	$	23,273
2008		5,910
2009		4,925

	$	34,108

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

12. Capital and Surplus and Related Restrictions

As of December 31, 2006 and 2005, approximately $85,660,000 and $75,715,000, respectively, of consolidated assets represent assets of FIC that are subject to regulation and may not be transferred to FMIC in the form of dividends, loans or advances without the prior approval of the Michigan Office of Financial and Insurance Services (“OFIS”). Dividends paid by FIC are subject to limitations imposed by the Michigan Insurance Code (“Code”). Under the Code, FIC may pay dividends only from statutory earnings and capital and surplus. In addition, FIC may not declare an “extraordinary” dividend to its shareholders without the prior approval of OFIS. An extraordinary dividend or distribution is defined as a dividend or distribution of cash or other property whose fair market value, together with that of other dividends and distributions made within the preceding 12 months, exceeds the greater of 10% of statutory capital and surplus as of December 31, of the preceding year or the statutory net income, excluding net realized investment gains, for the immediately preceding calendar year. Accordingly, FIC may pay dividends of approximately $6,725,000 in 2007 without prior approval. However, the OFIS has the authority to prohibit payment of any dividend.

Certain regulations that affect the insurance industry are promulgated by the National Association of Insurance Commissioners (“NAIC”), which is an association of state insurance commissioners, regulators and support staff that acts as a coordinating body for the state insurance regulatory process. The NAIC has established risk-based capital (“RBC”) requirements to assist regulators in monitoring the financial strength and stability of property and casualty insurers. Under the NAIC requirements, each insurer must maintain its total capital and surplus above a calculated minimum threshold or take corrective measures to achieve that threshold. The Company has calculated its RBC level based on these requirements and has determined that it passed the RBC test and has capital and surplus in excess of the minimum threshold.

FIC’s statutory capital and surplus at December 31, 2006 and 2005 and statutory net income (loss) for the years ended December 31, 2006, 2005 and 2004 are as follows:


	Years Ended December 31,
	2006		2005		2004
Statutory net income (loss)	$	7,071,075	$	5,175,165	$	(804,583	)

13. Contingencies

The Company participates in the Property and Casualty Guaranty Association (“Association”) of the State of Michigan which protects policyholders and claimants against losses due to insolvency of insurers. When an insolvency occurs, the Association is authorized to assess member companies up to the amount of the shortfall of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar year. Assessments to date have not been significant; however, in the opinion of management, while uncertain, the liability for future assessments will not materially affect the financial condition or results of operations of the Company.

14. Related Party Transactions

During 2005, the Company issued a $130,000 mortgage receivable to an agent of the Company. The note requires a monthly payment, including interest at 8%, of $1,097, which is based on a 15 year amortization. The

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

note includes a 5 year balloon payment, which becomes due June 2010. During 2006 and 2005 the agent earned $55,117 and $52,300, respectively, in regular and profit sharing commissions. The terms and conditions of the agency agreement between this agent and the Company are similar in all material respects to agency agreements with other agents of the Company.

During 2003, the Company issued a $140,000 mortgage receivable to an agent of the Company. The note requires a monthly payment, including interest at 6%, of $1,003, which is based on a 20 year amortization. The note includes a 5 year balloon payment, which becomes due January 2009. During 2006, 2005 and 2004, the agent earned $73,292, $72,800 and $74,700, respectively, in regular and profit sharing commissions. The terms and conditions of the agency agreement between this agent and the Company are similar in all material respects to agency agreements with other agents of the Company.

Three nonemployee directors of the Company are also owners of independent insurance agencies. These individuals are currently appointed as agents with and write insurance for the Company. The terms and conditions of the agency agreements between these agencies and the Company are similar in all material respects to agency agreements with other agents of the Company. The Company pays all agencies commissions on business produced. All agencies are also able to earn profit sharing commissions based on the profit margins of the business produced. Total regular and profit sharing commissions earned by these agencies approximated $484,000, $487,000 and $458,000 in 2006, 2005 and 2004, respectively. The commission rates, including profit sharing commission opportunity, are the same as other agents of the Company. The agencies are independent agents and also write with regional and national insurers that may be competitors of the Company.

A nonemployee director of the Company is a partner in a law firm. The Company has retained this law firm for certain legal matters in the past and plans to continue to do so in the future. Legal fees paid by the Company to the law firm were approximately $35,000 in 2006, $55,000 in 2005 and $261,000 in 2004.

Various agents of the Company participated in the surplus note offerings and held surplus notes at December 31, 2006 and 2005, as disclosed in Note 9—Surplus Notes. The terms and conditions of the agency agreements between the agencies and the Company are similar in all material respects to agency agreements with other agents of the Company. The Company pays the agencies commissions on business produced. The agencies are also able to earn profit sharing commissions based on the profit margins of the business produced. For the years ending December 31, 2006, 2005 and 2004 agents holding surplus notes earned regular and profit sharing commissions of approximately $223,000, $236,000 and $1,800,000, respectively.

Non-employee directors of the Company also participated in the surplus note offerings and held surplus notes at December 31, 2006 and 2005, as disclosed in Note 9—Surplus Notes. For the years ending December 31, 2006, 2005 and 2004, non-employee directors holding surplus notes received directors’ fees of $68,400, $54,900 and $47,100, respectively.

The Company also paid investment commissions to a firm controlled by an individual who held surplus notes at December 31, 2006 and 2005. Total investment commissions paid during the years ending December 31, 2006, 2005 and 2004 were approximately $30,000, $20,000 and $13,000, respectively.

15. Segment Information

The Company defines its operations as property and casualty insurance operations. The Company writes four major insurance lines exclusively in the State of Michigan: Personal Lines, Commercial Lines, Farm and Marine. The separate financial information of these four major insurance lines is consistent with the way results are regularly evaluated by management in deciding how to allocate resources and in assessing performance. All

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

revenues are generated from external customers and the Company does not have a significant reliance on any single major customer or agent.

The Company does not allocate assets, net investment income, net realized gains (losses) on investments, other income (expense), interest expense or demutualization expenses to its product lines. The accounting policies of the operating segments are the same as those described in Note 1—Summary of Significant Accounting Policies.

Segment data for the years ended December 31 are as follows:


	2006			2005			2004
Revenues:
Net premiums earned:
Personal lines	$	25,752,956		$	24,758,161		$	16,837,528
Commercial lines		7,666,666			8,163,707			6,453,723
Farm		4,222,485			4,304,746			2,912,113
Marine		1,607,141			1,529,239			992,626

Total net premiums earned		39,249,248			38,755,853			27,195,990

Expenses:
Loss and loss adjustment expenses:
Personal lines		12,700,566			12,368,229			12,539,184
Commercial lines		2,350,933			4,737,226			1,747,705
Farm		1,748,249			2,416,018			1,998,514
Marine		764,863			1,182,456			753,290

Total loss and loss adjustment expenses		17,564,611			20,703,929			17,038,693

Policy acquisition and other underwriting expenses:
Personal lines		8,923,387			7,990,471			5,857,835
Commercial lines		2,656,496			2,634,762			2,245,273
Farm		1,463,089			1,389,317			1,013,134
Marine		556,874			493,548			345,338

Total policy acquisition and other underwriting expenses		13,599,846			12,508,098			9,461,580

Underwriting gain (loss):
Personal lines		4,129,003			4,399,461			(1,559,491	)
Commercial lines		2,659,237			791,719			2,460,745
Farm		1,011,147			499,411			(99,535	)
Marine		285,404			(146,765	)		(106,002	)

Total underwriting gain		8,084,791			5,543,826			695,717

Net investment income		1,887,719			1,688,853			1,176,056
Net realized gains (losses) on investments		519,835			608,819			276,520
Other income		417,392			397,673			231,710
Interest expense		(228,403	)		(308,805	)		(486,963	)
Demutualization expenses		—			—			(302,050	)

Income before federal income taxes	$	10,681,334		$	7,930,366		$	1,590,990

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

16. Earnings Per Share

Basic earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted-average common shares outstanding and the weighted-average dilutive share equivalents outstanding. The computation of basic and diluted earnings per share is as follows:


	Year ended December 31, 2006		Year ended December 31, 2005		Period from October 16, 2004 through December 31, 2004
Numerator for basic and diluted earnings per share:
Net income	$	7,215,333	$	9,082,269	$	902,711

Denominator for basic earnings per share—weighted average shares outstanding		1,724,634		1,724,256		1,724,256
Dilutive effect of stock-based compensation plan		33,350		10,147		—

Denominator for diluted earnings per share		1,757,984		1,734,403		1,724,256

Basic earnings per share	$	4.18	$	5.27	$	0.52

Diluted earnings per share	$	4.10	$	5.24	$	0.52

Number of shares that are anti-dilutive		15,400		8,200		39,500

17. Stock-based Compensation

The Company has two stock-based compensation plans which are described below. The compensation cost for these plans that has been charged against income for the years ended December 31, 2006, 2005 and 2004 was $43,867, $37,391 and $7,916, respectively. The total income tax benefit recognized in the statement of operations for stock-based compensation was $14,915, $12,713 and $2,691 for the years ended December 31, 2006, 2005 and 2004, respectively.

The Company adopted the Fremont Michigan InsuraCorp, Inc. Stock-based Compensation Plan (the “2003 Plan”) in November of 2003 and the plan was subsequently approved by shareholders in May 2005. In February 2006 the Company adopted the Fremont Michigan InsuraCorp, Inc. Stock Incentive Plan of 2006 (the “2006 Plan”) and the plan was subsequently approved by shareholders in May 2006. Under both plans awards may include, among others, nonqualified stock options (“NQSOs”), restricted stock and stock appreciation rights.

Pursuant to the 2003 Plan, the Company is authorized to grant up to 86,210 shares. Pursuant to the 2006 Plan, the Company is authorized to grant up to 150,000 shares. Option awards under both plans are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards vest 20% per year and have a 10 year contractual term. The options may fully vest upon the death or disability of the optionee or a change in control of the Company as defined in the plans. Under both plans if awards should expire, become unexercisable or be forfeited for any reason without having been exercised or without becoming vested in full, the shares of common stock subject to those awards would be available for the grant of additional awards.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2006, 2005 and 2004. The expected

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

volatility in 2006 is based on historical volatility of the Company’s stock. The expected volatilities in 2005 and 2004 are based on historical volatility of similar publicly traded entities following a comparable period in their lives subsequent to their initial public offering. The expected term is an estimate based on expected behavior of the group of optionees. The risk free rate for the periods within the contractual life of the option is based on U.S. Treasury Strips in effect at the time of grant.


	Years Ended December 31,
	2006		2005		2004
Expected volatility	35.8	%	39.6	%	39.6	%
Expected dividend yield	0.0	%	0.0	%	0.0	%
Expected term (in years)	7		7		7
Risk-free rate	4.7	%	4.3	%	3.9	%

A summary of option activity under the plans as of December 31, 2006 and changes during the year then ended is presented below:


Options	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding—beginning of year	86,200		$	5.57
Granted	15,400			24.88
Exercised	(1,200	)		5.00
Forfeited	(3,000	)		5.00

Outstanding—end of year	97,400		$	8.65	8.3	$	1,641,020

Exercisable at end of year	30,140		$	5.33	7.9	$	607,964

The weighted-average grant-date fair value of options granted in 2006, 2005 and 2004 was $11.72, $5.29 and $2.41, respectively. The total intrinsic value of options exercised in 2006 was $17,370. No options were exercised during 2005 or 2004.

A summary of the status of the Company’s nonvested options as of December 31, 2006 and changes during the year ended December 31, 2006 is presented below:


Nonvested Options	Number of Options		Weighted Average Grant- Date Fair Value
Nonvested—beginning of year	70,900		2.81
Granted	15,400		11.72
Vested	(16,040	)	2.76
Forfeited	(3,000	)	2.41

Nonvested—end of year	67,260		4.87

As of December 31, 2006, there was $327,802 of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under both plans. That cost is expected to be recognized over a weighted average period of 4.1 years.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

18. Quarterly Financial Data (Unaudited)

An unaudited summary of the Company’s 2006 and 2005 quarterly performance is as follows:


	Year ended December 31, 2006
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Total revenue	$	10,388,079	$	10,182,689	$	10,475,486	$	11,027,940
Net income		1,661,249		1,420,421		781,184		3,352,479
Net income per share:
Basic (1)		0.97		0.83		0.46		1.94
Diluted (1)		0.95		0.81		0.45		1.90

	Year ended December 31, 2005
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
Total revenue	$	9,648,665	$	10,197,068	$	10,994,251	$	10,611,214
Net income		472,397		939,405		5,384,182		2,286,285
Net income per share:
Basic (1)		0.28		0.55		3.13		1.33
Diluted (1)		0.28		0.55		3.10		1.31

1—	Since the weighted average shares for the quarters are calculated independent of the weighted average shares for the year, quarterly net income per share may not total to annual net income per share.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Vice President of Finance, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President of Finance, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of the end of the fiscal period covered by this report on Form 10-K. Based upon that evaluation, each of our Chief Executive Officer and our Vice President of Finance concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to us required to be disclosed in our Exchange Act reports. In connection with our evaluation, no change was identified in our internal controls over financial reporting that occurred during the fourth quarter of 2006 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Beginning with our annual report on Form 10-K for 2007, it is expected that we will be subject to the provisions of Section 404 of the Sarbanes-Oxley Act that require an annual management assessment of our internal control over financial reporting. Beginning with our annual report on Form 10-K for 2008, it is expected that in addition to management’s assessment of our internal control over financial reporting we will also be subject to the related attestation by our independent registered public accounting firm.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by Item 10 is incorporated by reference to the sections of the Registrant’s definitive 2007 Proxy Statement to be filed on or about April 2, 2007 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held May 10, 2007 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended appearing under the headings: “Matter No. 1 Election of Fremont Directors (including biographical information regarding Nominees for Election as Class I Directors, Continuing Directors and Executive Officers Who are not Directors),” “Section 16(a) Beneficial Ownership Reporting Compliance;”and, “Audit Committee Report.”.

The Company’s Code of Ethics, which applies to its principal executive officer and principal financial officer, or persons performing similar functions, was filed as Exhibit 14 to the Company’s Form 10-K for the year ended December 31, 2005. The Company has posted its Code of Ethics on its website (www.fmic.com) and it is available in print to any stockholder upon request. As of December 31, 2006, no amendments or waivers had been made to our Code of Ethics as previously filed with the Securities and Exchange Commission. The Company intends to post any amendments to or any waivers from a provision of its Code of Ethics that applies to its principal executive officer and principal financial officer, or persons performing similar functions on its website.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to the sections entitled “Executive Compensation (including the tables),” “Potential Payments Upon Termination or Change In Control,” “Director Compensation,” “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Information” of the Registrant’s definitive 2007 Proxy Statement to be filed on or about April 2, 2007 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held May 10, 2007 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12 is incorporated by reference to the sections entitled “Security Ownership of Certain Beneficial Owners” and “Security Ownership of Management” of the Registrant’s definitive 2007 Proxy Statement to be filed on or about April 2, 2007 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held May 10, 2007 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

The Company has two equity compensation plans pursuant to which it has granted stock options to employees and non-employee directors. The Stock-Based Compensation Plan dated November 18, 2003 was approved by the shareholders on May 12, 2005 and the Stock Incentive Plan of 2006 was approved by the shareholders on May 11, 2006. The following table sets forth, with respect to the equity compensation plans, as of December 31, 2005, (a) the number of shares of common stock to be issued upon the exercise of outstanding options, (b) the weighted average exercise price of outstanding options, and (c) the number of shares remaining available for future issuance.


	Equity Compensation Plan Information			Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a)) (c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)
Equity compensation plans approved by security holders	97,400	$	8.65	137,610
Equity compensation plans not approved by security holders	—		—	—

Total	97,400	$	8.65	137,610

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is incorporated by reference to the section entitled “Corporate Governance—Director Independence” and “Certain Transactions with Executive Officers and Directors” of the Registrant’s definitive 2007 Proxy Statement to be filed on or about April 2, 2007 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held May 10, 2007 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information required by Item 14 is incorporated by reference to the section entitled “Independent Public Accountants” of the Registrant’s definitive 2007 Proxy Statement to be filed on or about April 2, 2007 in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held May 10, 2007 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1) The following consolidated financial statements are filed as a part of this report in Item 8.


Report of Independent Registered Public Accounting Firms
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Operations for Each of the Years in the Three-year Period Ended December 31, 2006
Consolidated Statements of Stockholders’ Equity for Each of the Years in the Three-year Period Ended December 31, 2006
Consolidated Statements of Cash Flows for Each of the Years in the Three-year Period Ended December 31, 2006
Notes to Consolidated Financial Statements

(2) The following consolidated financial statement schedules for the years 2006, 2005 and 2004 are submitted herewith:

Report of Independent Registered Public Accounting Firm

Financial Statement Schedules:


Schedule I		Summary of Investments—Other Than Investments in Related Parties
Schedule II		Condensed Financial Information of Parent Company
Schedule III		Supplementary Insurance Information
Schedule IV		Reinsurance
Schedule V		Allowance for Uncollectible Premiums and other Receivables
Schedule VI		Supplemental Insurance Information Concerning Property and Casualty Subsidiaries

(3) Exhibits:

The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index. Documents not accompanying this report are incorporated by reference as indicated on the Exhibit Index.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

FREMONT MICHIGAN INSURACORP, INC.


By:	/s/ RICHARD E. DUNNING	March 20, 2007
	Richard E. Dunning
	President, Chief Executive Officer and Director

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Richard E. Dunning and Kevin G. Kaastra, or either of them acting individually, his true and lawful attorney-in-fact and agent, each with full power of substitution, for him and in his name and in all capacities, to sign all amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact and agent, his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.


By:	/s/ RICHARD E. DUNNING Richard E. Dunning President, Chief Executive Officer and Director (principal executive officer)	March 20, 2007

By:	/s/ KEVIN G. KAASTRA Kevin G. Kaastra Vice President of Finance (principal financial and accounting officer)	March 20, 2007

By:	/s/ DONALD E. BRADFORD Donald E. Bradford Director	March 20, 2007

By:	/s/ MICHAEL A. DEKUIPER Michael A. DeKuiper Director	March 20, 2007

By:	/s/ JACK G. HENDON Jack G. Hendon Director	March 20, 2007

By:	/s/ MONICA C. HOLMES Monica C. Holmes Director	March 20, 2007

By:	/s/ WILLIAM L. JOHNSON William L. Johnson Director	March 20, 2007

By:	/s/ JACK A. SIEBERS Jack A. Siebers Director	March 20, 2007



By:	/s/ KENNETH J. SCHUITEMAN Kenneth J. Schuiteman Director	March 20, 2007

By:	/s/ DONALD VANSINGEL Donald VanSingel Chairman of the Board of Directors	March 20, 2007

By:	/s/ HAROLD L. WIBERG Harold L. Wiberg Director	March 20, 2007

By:	/s/ DONALD C. WILSON Donald C. Wilson Director	March 20, 2007

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Fremont Michigan Insuracorp, Inc.

Fremont, Michigan

The audits referred to in our report dated March 20, 2007 relating to the consolidated financial statements of Fremont Michigan InsuraCorp, Inc. and subsidiary for the two years ended December 31, 2006, which is contained in Item 8 of this Form 10-K included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based upon our audits.

In our opinion such financial statement schedules present fairly, in all material respects, the information set forth therein.

BDO Seidman, LLP

Grand Rapids, Michigan

March 20, 2007

Fremont Michigan InsuraCorp Inc. and Subsidiary

Schedule I—Summary of Investments—Other than

Investments in Related Parties as of December 31, 2006


Column A	Column B		Column C	Column D
Type of Investment	Cost		Market Value	Balance Sheet
Fixed maturities:
Bonds:
United States Government and government agencies and authorities	$	6,074,385	5,989,243	5,989,243
States, municipalities and political subdivisions		13,414,841	13,404,819	13,404,819
All other		26,024,205	25,565,204	25,565,204

Total fixed maturities		45,513,431	44,959,266	44,959,266

Equity securities:
Common stocks:
Public utilities		—	—	—
Banks, trust and insurance companies		—	—	—
Industrial, miscellaneous and all other		9,940,606	11,689,756	11,689,756
Nonredeemable preferred stock		—	—	—

Total equity securities		9,940,606	11,689,756	11,689,756

Total investments	$	55,454,037	56,649,022	56,649,022

Fremont Michigan InsuraCorp Inc.

Schedule II—Condensed Financial Information of Parent Company

Condensed Balance Sheet


	December 31,
	2006		2005
Assets
Investment in common stock of subsidiary (equity method)	$	34,167,056	$	25,572,970
Cash and cash equivalents		131,596		201,021
Other assets		131,525		62,069

Total assets	$	34,430,177	$	25,836,060

Liabilities and Stockholders’ Equity
Liabilities:	$	—	$	—

Stockholders’ Equity:
Preferred stock, no par value, authorized 4,500,000 shares, no shares issued and outstanding	$	—	$	—
Class A common stock, no par value, authorized 5,000,000 shares, 1,725,456 and 1,724,256 shares issued and outstanding at December 31, 2005 and 2005, respectively		—		—
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—		—
Additional paid-in capital		7,605,096		7,550,304
Retained earnings		25,511,413		18,296,080
Accumulated other comprehensive income (loss)		1,313,668		(10,324	)

Total stockholders’ equity		34,430,177		25,836,060

Total liabilities and stockholders’ equity	$	34,430,177	$	25,836,060

Fremont Michigan InsuraCorp Inc.

Schedule II—Condensed Financial Information of Parent Company

Condensed Statement of Earnings


	For the years ended December 31,
	2006			2005			2004
Revenue—net investment income	$	4,456		$	5,255		$	742
Expenses:—operating expenses		87,427			55,481			9

Loss before federal income tax benefit		(82,971	)		(50,226	)		733
Federal income tax benefit		28,210			17,077			—

Loss before equity in income of subsidiary		(54,761	)		(33,149	)		733
Equity in income of subsidiary		7,270,094			9,115,418			1,511,805

Net income	$	7,215,333		$	9,082,269		$	1,512,538

Fremont Michigan InsuraCorp Inc.

Schedule II—Condensed Financial Information of Parent Company

Condensed Statement of Cash Flows


	For the years ended December 31,
	2006			2005			2004
Net cash (used in) provided by operating activities	$	(80,350	)	$	(49,912	)	$	733

Cash flows from investing activities:		—			—			—

Cash flows from financing activities:
Proceeds from exercised stock options		6,000			—			—
Tax benefit from exercised stock options		4,925			—			—
Net proceeds from issuance of common stock		—			—			5,007,257
Capital contribution to subsidiary		—			—			(4,757,057	)

Net cash provided by financing activities		10,925			—			250,200

Net increase in cash and cash equivalents		(69,425	)		(49,912	)		250,933
Cash and cash equivalents at beginning of period		201,021			250,933			—

Cash and cash equivalents at end of period	$	131,596		$	201,021		$	250,933

Fremont Michigan InsuraCorp Inc. and Subsidiary

Schedule III—Supplementary Insurance Information


Column A	Column B		Column C	Column D	Column E	Column F
Segment	Deferred policy acquisition costs		Future policy benefits, losses, claims, and loss expenses	Unearned premiums	Other policy claims and benefits payable	Premium revenue
December 31, 2006
Personal lines	$	2,018,671	10,431,711	13,391,538	—	25,752,956
Commercial lines		689,446	7,044,987	4,573,678	—	7,666,666
Farm		393,812	1,608,805	2,612,489	—	4,222,485
Marine		133,454	1,091,052	885,314	—	1,607,141

Total	$	3,235,383	20,176,555	21,463,019	—	39,249,248

December 31, 2005
Personal lines	$	1,880,790	9,366,747	12,428,952	—	24,758,161
Commercial lines		709,866	6,416,920	4,691,054	—	8,163,707
Farm		377,582	2,089,816	2,495,202	—	4,304,746
Marine		124,380	993,331	821,949	—	1,529,239

Total	$	3,092,618	18,866,814	20,437,157	—	38,755,853

December 31, 2004
Personal lines	$	1,719,401	9,758,951	11,826,160	—	16,837,528
Commercial lines		688,302	6,953,673	4,734,186	—	6,453,723
Farm		348,158	1,771,791	2,394,656	—	2,912,113
Marine		104,760	488,172	720,546	—	992,626

Total	$	2,860,621	18,972,587	19,675,548	—	27,195,990


	Column G		Column H	Column I	Column J	Column K
	Net investment income		Benefits, claims, losses and settlement expenses	Amortization of DPAC	Other operating expenses	Premiums written
December 31, 2006
Personal lines			12,700,566	4,489,783	4,433,603	26,715,542
Commercial lines			2,350,933	1,336,611	1,319,886	7,537,315
Farm			1,748,249	736,150	726,939	4,339,772
Marine			764,863	280,190	276,684	1,670,506

Total	$	1,887,719	17,564,611	6,842,734	6,757,112	40,263,135

December 31, 2005
Personal lines			12,368,229	4,077,138	3,913,333	25,360,953
Commercial lines			4,737,226	1,344,387	1,290,375	8,115,201
Farm			2,416,018	708,899	680,418	4,405,291
Marine			1,182,456	251,833	241,715	1,630,643

Total	$	1,688,853	20,703,929	6,382,257	6,125,841	39,512,088

December 31, 2004
Personal lines			12,539,184	2,034,624	3,823,211	22,813,068
Commercial lines			1,747,705	779,860	1,465,413	8,221,546
Farm			1,998,514	351,896	661,238	4,090,629
Marine			753,290	119,948	225,390	1,378,950

Total	$	1,176,056	17,038,693	3,286,328	6,175,252	36,504,193

100

Fremont Michigan InsuraCorp Inc. and Subsidiary

For the years ended December 31, 2006, 2005 and 2004

Schedule IV—Reinsurance


Column A	Column B		Column C	Column D	Column E	Column F
Premiums Earned	Gross amount		Ceded to other companies	Assumed from other companies	Net amount	Percentage of amount assumed to net
For the year ended December 31, 2006	$	47,831,449	8,654,931	72,730	39,249,248	0.2	%
For the year ended December 31, 2005	$	44,737,524	6,098,599	116,928	38,755,853	0.3	%
For the year ended December 31, 2004	$	40,834,262	13,801,235	162,963	27,195,990	0.6	%

101

Fremont Michigan InsuraCorp Inc. and Subsidiary

For the years ended December 31, 2006, 2005 and 2004

Schedule V—Allowance for Uncollectible Premiums


Allowance for Uncollectible Premiums	2006			2005			2004
Balance, January 1	$	79,443		$	63,116		$	64,735
Additions		134,712			122,357			128,478
Deletions		(181,242	)		(106,030	)		(130,097	)

Balance, December 31	$	32,913		$	79,443		$	63,116

102

EXHIBIT INDEX


NUMBER		TITLE
3.1		Articles of Incorporation of Fremont Michigan InsuraCorp, Inc. (Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-112414 on Form S-1).

3.2		Bylaws of Fremont Michigan InsuraCorp, Inc. (Incorporated by reference to Exhibit 3.2 to Registration Statement No. 333-112414 on Form S-1)

4.1		See Articles of Incorporation, filed as Exhibit 3.1

4.2		Shareholder Rights Agreement dated November 1, 2004 by and between the Company and Registrar and Transfer Company, as Rights Agent (Incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 3, 2004).

4.3		Certificate of Adoption of Resolution Designating and Prescribing Rights, Preferences and Limitations of Junior Participating Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 3, 2004).

10.1		Stock-Based Compensation Plan dated November 18, 2003 (Incorporated by reference to Exhibit 10.1 to Registration Statement No. 333-112414 on Form S-1).

10.2		Employment Agreement between Richard E. Dunning and Fremont Michigan InsuraCorp, Inc. (Incorporated by reference to Exhibit 10.3 to Registration Statement No. 333-112414 on Form S-1).

10.3		Form of Employment Agreement for other officers (Incorporated by reference to Exhibit 10.8 to Registration Statement No. 333-112414 on Form S-1).

10.4		Form of Series B Surplus Notes (Incorporated by reference to Exhibit 10.4 to Registration Statement No. 333-112414 on Form S-1).

10.5		Form of Indemnity Agreement between Fremont Michigan InsuraCorp, Inc and its directors and officers (Incorporated by reference to Exhibit 10.5 to Registration Statement No. 333-112414 on Form S-1).

10.6		Form of Agency Agreement and Endorsement to Agency Agreement for Profit Sharing (Incorporated by reference to Exhibit 10.6 to Registration Statement No. 333-112414 on Form S-1).

10.7		Investment Management Agreement with Prime Advisors, Inc. (Incorporated by reference to Exhibit 10.7 to Registration Statement No. 333-112414 on Form S-1).

10.8		Stock Incentive Plan of 2006 (Incorporated by reference to Exhibit 10.8 to the Company’s Form 10-K for the year ended December 31, 2005).

10.9		Form of Change of Control Severance Agreement (Incorporated by reference to Exhibit 10.1 to the Registrant’s Form 8-K filed with the Securities and Exchange Commission on October 20, 2006).

14		Code of Ethics for Senior Financial Executives (Incorporated by reference to Exhibit 14 to the Company’s Form 10-K for the year ended December 31, 2005).

21		Subsidiaries of the registrant.

23.1		Consent of BDO Seidman, LLP

23.2		Consent of PricewaterhouseCoopers LLP

24		Power of Attorney (see Signatures of this Annual Report on Form 10-K and incorporated herein by reference).

31.1		Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Vice President and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification pursuant to 18 U.S.C. Section 1350.

103