Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

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

For the transition period from to

No. 000-50926

(Commission File Number)

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 No.)

933 E. Main St., Fremont, Michigan		49412
(Address of principal executive offices)		(Zip Code)

(231) 924-0300

(Registrant’s telephone number, including area code)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


		Number of Shares Outstanding as of April 30, 2010
COMMON STOCK (No Par Value)		1,759,762
(Title of Class)		(Outstanding Shares)

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statement of Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Reserved	28
Item 5.	Other Information	28
Item 6.	Exhibits	28

SIGNATURES		29

PART I—FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)


	March 31, 2010		December 31, 2009
Assets
Investments:
Fixed maturities available for sale, at fair value	$	55,383,354	$	56,483,580
Equity securities available for sale, at fair value		13,754,759		11,183,580
Mortgage loans on real estate from related parties		237,513		239,303

Total investments		69,375,626		67,906,463
Cash and cash equivalents		7,117,180		7,063,679
Premiums due from policyholders, net		10,295,517		10,087,998
Receivable from sale of investments		4,955,509		—
Amounts due from reinsurers		10,086,500		7,859,452
Prepaid reinsurance premiums		2,029,853		1,856,343
Accrued investment income		540,121		600,648
Deferred policy acquisition costs		3,749,623		3,913,551
Deferred federal income taxes		2,963,894		3,155,625
Property and equipment, net of accumulated depreciation		3,187,246		2,787,134
Other assets		28,945		33,175

	$	114,330,014	$	105,264,068

Liabilities and Stockholders’ Equity
Liabilities:
Losses and loss adjustment expenses	$	25,280,823	$	21,331,243
Unearned premiums		28,068,665		28,886,128
Reinsurance funds withheld and premiums ceded payable		75,998		96,697
Accrued expenses and other liabilities		13,278,137		8,905,213

Total liabilities		66,703,623		59,219,281

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, 1,759,762 and 1,749,032 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively		—		—
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—		—
Additional paid-in capital		9,330,083		9,037,405
Retained earnings		37,225,189		36,332,648
Accumulated other comprehensive income		1,071,119		674,734

Total stockholders’ equity		47,626,391		46,044,787

Total liabilities and stockholders’ equity	$	114,330,014	$	105,264,068

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

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Operations (Unaudited)

For the Three Months Ended March 31


	2010		2009
Revenues:
Net premiums earned	$	13,983,788	$	12,820,881
Net investment income		440,211		501,185
Net realized gains on investments		359,801		196,661
Other income, net		157,417		144,166

Total revenues		14,941,217		13,662,893

Expenses:
Losses and loss adjustment expenses, net		8,527,880		9,221,193
Policy acquisition and other underwriting expenses		4,923,146		4,111,674

Total expenses		13,451,026		13,332,867

Income before federal income tax expense		1,490,191		330,026
Federal income tax expense		460,586		51,918

Net income	$	1,029,605	$	278,108

Earnings per share
Basic	$	.59	$	.16
Diluted	$	.57	$	.16

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

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statement of Stockholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2010


	Common Stock Class A (Number of Shares)		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, December 31, 2009	1,749,032		$	9,037,405		$	36,332,648		$	674,734		$	46,044,787
Comprehensive income:
Net income							1,029,605						1,029,605
Net unrealized gains on investments, net of tax										410,112			410,112
Amortization of prior service credit, net of tax										(14,136	)		(14,136	)
Amortization of net actuarial loss, net of tax										409			409

Total comprehensive income													1,425,990
Common stock issued	10,730			241,255									241,255
Common stock repurchased	(3,090	)		(14,986	)		(66,683	)					(81,669	)
Dividends declared at $0.04 per share							(70,381	)					(70,381	)
Stock-based compensation				31,203									31,203
Stock options exercised	3,090			14,986									14,986
Tax benefit from stock options exercised				20,220									20,220

Balance, March 31, 2010	1,759,762		$	9,330,083		$	37,225,189		$	1,071,119		$	47,626,391

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

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31


	2010			2009
Cash flows from operating activities:
Net income	$	1,029,605		$	278,108
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		220,287			216,312
Deferred federal income taxes		(12,468	)		(45,148	)
Stock based compensation expense		31,203			31,754
Net realized gains on investments		(359,801	)		(196,661	)
Net amortization of premiums on investments		128,765			77,175
Excess tax benefit from stock options exercised		(20,220	)		—
Changes in assets and liabilities:
Premiums due from policyholders		(207,519	)		(192,589	)
Amounts due from reinsurers		(2,227,048	)		(1,183,998	)
Prepaid reinsurance premiums		(173,510	)		(84,348	)
Accrued investment income		60,527			71,092
Deferred policy acquisition costs		163,928			96,865
Other assets		4,230			23,701
Losses and loss adjustment expenses		3,949,580			860,325
Unearned premiums		(817,463	)		(1,014,441	)
Reinsurance balances payable		(20,699	)		(150,703	)
Accrued expenses and other liabilities		(593,732	)		220,763

Net cash provided by (used in) operating activities		1,155,665			(991,793	)

Cash flows from investing activities:
Proceeds from sales and maturities of fixed maturity investments		16,872,064			8,172,246
Proceeds from sales of equity investments		1,601,680			85,000
Purchases of fixed maturity investments		(15,496,881	)		(2,923,791	)
Purchases of equity investments		(3,595,399	)		(91,639	)
Change in net payable from investment purchases		10,570			—
Repayment of mortgage loans on real estate from related parties		1,790			2,760
Purchase of property and equipment, net		(620,399	)		(248,007	)

Net cash provided by (used in) investing activities		(1,226,575	)		4,996,569

Cash flows from financing activities:
Proceeds from issuance of common stock		256,241			179,842
Share repurchases of common stock		(81,669	)		(2,518	)
Dividends paid to stockholders		(70,381	)		(52,636	)
Tax benefit from exercised stock options		20,220			—

Net cash provided by financing activities		124,411			124,688

Net increase in cash and cash equivalents		53,501			4,129,464
Cash and cash equivalents, beginning of period		7,063,679			6,576,564

Cash and cash equivalents, end of period	$	7,117,180		$	10,706,028

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

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

1.	Basis of Presentation

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.

The accompanying unaudited consolidated financial statements which include the accounts of FMIC and its wholly-owned subsidiary, FIC, have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions have been eliminated.

The accompanying unaudited consolidated financial statements for the interim periods included herein are unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read with the annual consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The December 31, 2009 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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.

Certain 2009 amounts have been reclassified from the prior year financial statements to conform to the 2010 presentation.

2.	New Accounting Pronouncements

In June 2009, a new accounting standard was issued related to the accounting for transfers of financial assets, which updates accounting for securitizations and special-purpose entities. The new accounting standard is a revision of previously issued accounting standards related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, and will require additional information regarding financial asset transfers, including securitization transactions, and the presence of continuing exposure around the risks related to transferred financial assets. In addition, the new accounting standard removes the concept of a qualifying special-purpose entity and changes the requirements for derecognizing financial assets. The new accounting standard was effective for the Company on January 1, 2010. The implementation of this new accounting standard did not have a significant impact on our financial statements.

In June 2009, new consolidation guidance was issued which 1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments whether an enterprise is the primary beneficiary of a variable interest entity, and 3) requires additional disclosure about an enterprise’s involvement in variable interest entities. This guidance was effective for the Company on January 1, 2010. The implementation of this new guidance did not have an impact on our financial statements.

In January 2010, an update to the Accounting Standards Codification (ASC) was issued related to fair value measurements and disclosures. This ASC update provides for additional disclosure requirements to improve the transparency and comparability of fair value information in financial reporting. Specifically, the new guidance requires separate disclosure of the amounts of significant transfers in and out of Levels 1 and 2, as well as the reasons for the transfers, and separate disclosure for the purchases, sales, issuances and settlement activity in Level 3. In addition, this ASC update requires fair value measurement disclosure for each class of assets and liabilities, and disclosures about the input and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements in Levels 2 and 3. The new disclosures and clarifications of existing disclosures were adopted on January 1, 2010, except for the requirement to provide Level 3 activity detail which will become effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. Early adoption is permitted. These amendments do not require disclosures for earlier periods presented for comparative purposes at initial adoption. The updated disclosures are included in note 4 to the consolidated financial statements.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

3.	Investments

The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments at March 31, 2010 and December 31, 2009 are as follows:


	March 31, 2010
	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	$	5,851,588	$	41,410	$	16,834	$	5,876,164
States and political subdivisions		18,384,999		441,964		33,812		18,793,151
Corporate securities		15,236,656		202,246		25,849		15,413,053
Mortgage-backed securities		15,132,395		188,452		19,861		15,300,986

		54,605,638		874,072		96,356		55,383,354

Equity securities		13,753,385		1,082,873		1,081,499		13,754,759

Total	$	68,359,023	$	1,956,945	$	1,177,855	$	69,138,113


	December 31, 2009
	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	$	5,670,813	$	30,533	$	5,136	$	5,696,210
States and political subdivisions		23,790,222		473,278		76,596		24,186,904
Corporate securities		12,514,810		198,936		26,830		12,686,916
Mortgage-backed securities		13,846,261		154,329		87,040		13,913,550

		55,822,106		857,076		195,602		56,483,580

Equity securities		11,687,346		829,461		1,333,227		11,183,580

Total	$	67,509,452	$	1,686,537	$	1,528,829	$	67,667,160

The cost or amortized cost and estimated fair value of fixed maturities at March 31, 2010, 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.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


	Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	—	$	—
Due after one year through five years		22,166,173		22,473,011
Due after five years through ten years		16,505,218		16,798,334
Due after ten years		801,852		811,023
Mortgage-backed securities		15,132,395		15,300,986

	$	54,605,638	$	55,383,354

Net realized gains (losses) on investments for the three months ended March 31, are summarized as follows:


	2010			2009
Gross realized investment gains:
Fixed maturities	$	287,481		$	253,825
Equity securities		72,760			—

		360,241			253,825

Gross realized investment losses:
Fixed maturities		—			—
Equity securities		(440	)		(57,164	)

		(440	)		(57,164	)

Net realized gains on investments	$	359,801		$	196,661

Evaluating Investments for Other-than-Temporary Impairments

The tables below show the total value of securities that were in an unrealized loss position as of March 31, 2010 and December 31, 2009 including the length of time they have been in an unrealized loss position. As of March 31, 2010 and December 31, 2009, unrealized losses, as shown in the following tables, were 1.5% and 2.0%, respectively, of total invested assets including cash and cash equivalents.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


	March 31, 2010
	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	$	2,481,913	$	16,834	$	—	$	—	$	2,481,913	$	16,834
States and political subdivisions		2,057,779		33,812		—		—		2,057,779		33,812
Corporate securities		4,834,726		25,849		—		—		4,834,726		25,849
Mortgage-backed securities		3,511,359		19,861		—		—		3,511,359		19,861

		12,885,777		96,356		—		—		12,885,777		96,356

Equity securities		1,501,851		58,727		5,295,367		1,022,772		6,797,218		1,081,499

Total	$	14,387,628	$	155,083	$	5,295,367	$	1,022,772	$	19,682,995	$	1,177,855


	December 31, 2009
	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	$	2,960,523	$	5,136	$	—	$	—	$	2,960,523	$	5,136
States and political subdivisions		2,630,506		57,311		480,715		19,285		3,111,221		76,596
Corporate securities		3,689,734		26,830		—		—		3,689,734		26,830
Mortgage-backed securities		5,249,649		36,993		1,770,809		50,047		7,020,458		87,040

		14,530,412		126,270		2,251,524		69,332		16,781,936		195,602

Equity securities		103,878		5,771		6,197,433		1,327,456		6,301,311		1,333,227

Total	$	14,634,290	$	132,041	$	8,448,957	$	1,396,788	$	23,083,247	$	1,528,829

The following table shows the composition of the fixed maturity securities in unrealized loss positions at March 31, 2010 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.


NAIC Rating	Equivalent S&P Rating	Equivalent Moody’s Rating	Book Value		Fair Value		Unrealized Loss		Percent to Total
1	AAA/AA/A	Aaa/Aa/A	$	12,982,133	$	12,885,777	$	96,356	100.0	%
2	BBB	Baa		—		—		—	—
3	BB	Ba		—		—		—	—
4	B	B		—		—		—	—
5	CCC or lower	Caa or lower		—		—		—	—

			$	12,982,133	$	12,885,777	$	96,356	100.0	%

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

In reviewing its fixed maturity securities for other than temporary impairment, the Company takes into consideration the security’s market price history, the length of time that the security’s fair value has been below cost, 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 market conditions, and analyst expectations, to reach its conclusions.

Current accounting standards require that any credit-related impairment related to fixed maturity securities that we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net income, with the non-credit related impairment recognized in comprehensive income. Based on our analysis, our fixed maturity portfolio is of a high credit quality and we believe we will recover our amortized cost basis of our fixed maturity securities. The fixed maturity unrealized losses can primarily be attributed to changes in interest rates and corresponding spread widening as opposed to fundamental changes in the credit quality of the issuers of the securities. We continually monitor the credit quality of our fixed maturity investments to gauge the likelihood of principal and interest being collected.

In reviewing its equity securities, which include common stock and mutual funds, the Company takes into consideration the security’s market price history, the length of time that the security’s fair value has been below cost, the individual investments held within the mutual fund, most current audit opinion, industry and securities market conditions, and analyst expectations to reach its conclusions. In addition to analyzing each individual security that has a fair value below cost, the Company also considers its intent and ability to hold a security until its fair value is equal to or greater than its cost.

As of March 31, 2010, the portfolio included 25 fixed maturity securities and 25 equity securities in an unrealized loss position for less than 12 months and 12 equity securities in an unrealized loss position for more than 12 months. Of the fixed maturity securities, all 25 were trading above 95% of amortized cost. All of the fixed maturity securities in an unrealized loss position and assigned a rating by a commercial credit rating agency are rated investment grade securities.

As of March 31, 2010, the investment portfolio included 37 equity securities in an unrealized loss position. Of these 37 equity securities, 9 were trading between 75% and 85% of amortized cost, 9 were trading between 86% and 95% of amortized cost and the remaining 19 were trading above 95% of amortized cost.

As of December 31, 2009, the portfolio included 23 fixed maturity securities and 7 equity securities in an unrealized loss position for less than 12 months and 4 fixed maturity securities and 14 equity securities in an unrealized loss position for more than 12 months. Of the fixed maturity securities, all twenty-seven were trading above 95% of amortized cost. All of the fixed maturity securities in an unrealized loss position and assigned a rating by a commercial credit rating agency are rated investment grade securities.

As of December 31, 2009, the investment portfolio included 21 equity securities in an unrealized loss position. Of these twenty-one equity securities, 2 were trading under 75% of amortized cost, 7 were trading between 75% and 85% of amortized cost, 8 were trading between 86% and 95% of amortized cost and the remaining 4 were trading above 95% of amortized cost.

While all of these securities 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. The equity securities 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, in addition to the fact that the Company has both the intent and ability to hold these securities until their recovery, supports our view that these securities were not other-than-temporarily impaired.

4.	Fair Value Measurements

Investments

Our available-for-sale investment portfolio consists of fixed maturity and equity securities, and is recorded at fair value in the accompanying consolidated balance sheets. The change in the fair value of these investments, unless deemed to be other than temporarily impaired, is recorded as a component of other comprehensive income.

Accounting standards provide a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”). The hierarchy level assigned to each security in our available-for-sale portfolio is based on our assessment of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The three hierarchy levels are defined as follows:

Level 1

Valuations based on unadjusted quoted market prices in active markets for identical securities. The fair value of fixed maturity and equity securities included in the Level 1 category were based on quoted prices that are readily and regularly available in an active market. The Level 1 category includes publicly traded equity securities and U.S. Government Treasury and Agency securities.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Level 2

Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of fixed maturity securities in the Level 2 category were based on the market values obtained from an independent pricing service that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information. The independent pricing service also monitors market indicators, industry and economic events. For broker-quoted only securities, quotes are obtained from market makers or broker-dealers that the Company recognizes to be market participants. The Level 2 category includes corporate bonds, municipal bonds, and mortgage-backed securities.

Level 3

Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. The Company did not hold any available-for-sale investments on the measurement date that are classified in the Level 3 category.

If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial security’s hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.

The following tables present our available-for-sale investments measured at fair value on a recurring basis as of March 31, 2010 and December 31, 2009 classified by the valuation hierarchy (as discussed above):


	March 31, 2010
			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
Available-for-Sale Investments:
Fixed Maturity Securities
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	5,876,164	$	1,421,605	$	4,454,559	$	—
States and political subdivisions		18,793,151		—		18,793,151		—
Corporate securities		15,413,053		—		15,413,053		—
Mortgage-backed securities		15,300,986		—		15,300,986		—

		55,383,354		1,421,605		53,961,749		—

Equity Securities		13,754,759		13,754,759		—		—

Total	$	69,138,113	$	15,176,364	$	53,961,749	$	—

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)


	December 31, 2009
			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
Available-for-Sale Investments:
Fixed Maturity Securities
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	5,696,210	$	1,632,250	$	4,063,960	$	—
States and political subdivisions		24,186,904		—		24,186,904		—
Corporate securities		12,686,916		—		12,686,916		—
Mortgage-backed securities		13,913,550		—		13,913,550		—

		56,483,580		1,632,250		54,851,330		—

Equity Securities		11,183,580		11,183,580		—		—

Total	$	67,667,160	$	12,815,830	$	54,851,330	$	—

5.	Comprehensive Income

The Company’s comprehensive income for the three months ended March 31, are as follows:


	2010			2009
Net income	$	1,029,605		$	278,108
Other comprehensive income, net of tax:
Unrealized gains on investments		647,581			2,565
Reclassification adjustment for realized gains on investments included in net income		(237,469	)		(129,796	)
Amortization of prior service credit		(14,136	)		(14,137	)
Amortization of net actuarial loss		409			169

Other comprehensive income (loss), net of tax		396,385			(141,199	)

Comprehensive income	$	1,425,990		$	136,909

6.	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 has been 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 for the three months ended March 31 is as follows:


	2010		2009
Numerator for basic and diluted earnings per share:
Net income	$	1,029,605	$	278,108

Denominator:
Denominator for basic earnings per share – weighted average shares outstanding		1,758,284		1,744,533
Effect of dilutive stock options		40,203		34,020

Denominator for diluted earnings per share – adjusted weighted average shares outstanding		1,798,487		1,778,553

Basic earnings per share	$	0.59	$	0.16
Diluted earnings per share	$	0.57	$	0.16

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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

The Company evaluates product line profitability based on underwriting gain (loss). Certain expenses are allocated based on measurements including premiums, incurred losses or other departmental employee data. 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 on investments or other income to its product lines. In addition, the Company does not separately identify depreciation expense related to the building by product line as such disclosure would be impracticable.

Segment data for the three months ended March 31 are as follows:


	2010			2009
Net premiums earned:
Personal lines	$	10,373,001		$	9,351,382
Commercial lines		1,940,394			1,775,586
Farm		1,189,077			1,223,103
Marine		481,316			470,810

Total net premiums earned		13,983,788			12,820,881

Loss and loss adjustment expenses:
Personal lines		7,113,700			6,911,988
Commercial lines		1,040,337			1,113,710
Farm		323,132			1,028,381
Marine		50,711			167,114

Total loss and loss adjustment expenses		8,527,880			9,221,193

Policy acquisition and other underwriting expenses:
Personal lines		3,270,772			2,881,652
Commercial lines		1,060,693			651,601
Farm		448,322			439,755
Marine		143,359			138,666

Total policy acquisition and other underwriting expenses		4,923,146			4,111,674

Underwriting gain (loss):
Personal lines		(11,471	)		(442,258	)
Commercial lines		(160,636	)		10,275
Farm		417,623			(245,033	)
Marine		287,246			165,030

Total underwriting gain (loss)		532,762			(511,986	)
Net investment income		440,211			501,185
Net realized gains on investments		359,801			196,661
Other income, net		157,417			144,166

Income before federal income taxes	$	1,490,191		$	330,026

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

8.	Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities included the following:


	March 31, 2010		December 31, 2009
Commissions payable	$	2,240,642	$	3,062,449
Accrued salaries & employee benefits		767,052		1,114,020
Income taxes payable		372,318		569,485
Accumulated benefit obligation		1,839,464		1,819,308
Payable from investment purchases		4,966,411		13,002
Other		3,092,250		2,326,949

	$	13,278,137	$	8,905,213

9.	Other Postretirement Plan

The Company provides certain postretirement health care benefits for retired employees. The components of the net periodic benefit cost for the three months ended March 31 are as follows:


	2010			2009
Components of net periodic benefit cost:
Service cost	$	—		$	1,946
Interest cost		25,352			26,285
Amortization of unrecognized prior service credit		(21,420	)		(21,421	)
Amortization of unrecognized net actuarial loss		620			254

Net periodic benefit cost	$	4,552		$	7,064

As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. For the three months ended March 31, 2010, the Company has made contributions to the plan of approximately $13,000. During 2010, the Company expects to contribute a total of $77,000 to the plan to cover anticipated benefit payments.

10.

Reinsurance

The effect of reinsurance on premiums written and earned and losses and LAE incurred for the three months ended March 31, was as follows:


	2010						2009
	Written			Earned			Written			Earned
Direct	$	16,086,582		$	16,900,954		$	14,415,684		$	15,427,590
Assumed		13,440			16,531			14,538			17,073
Ceded		(3,100,663	)		(2,933,697	)		(2,687,408	)		(2,623,782	)

Net premiums	$	12,999,359		$	13,983,788		$	11,742,814		$	12,820,881


							2010			2009
Loss and LAE incurred							$	11,464,997		$	11,040,357
Reinsurance recoveries								(2,937,117	)		(1,819,164	)

Net loss and LAE incurred							$	8,527,880		$	9,221,193

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

11.

Federal Income Taxes

For the three months ended March 31, the provision for income taxes consists of the following:


	2010			2009
Current expense	$	473,054		$	97,066
Deferred benefit		(12,468	)		(45,148	)

Total	$	460,586		$	51,918

For the three months ended March 31, 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 due to the following:


	2010					2009
Income before federal income taxes	$	1,490,191				$	330,026

Tax at statutory rate		506,665		34.0	%		112,209		34.0	%
Tax effect of :
Nontaxable investment income		(56,727	)	(3.8	%)		(61,617	)	(18.7	%)
Nondeductible expenses		10,648		0.7	%		1,326		0.4	%

	$	460,586		30.9	%	$	51,918		15.7	%

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. 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 March 31, 2010 it is more likely than not that sufficient taxable income will exist in the periods of reversal in order to realize the net deferred tax asset. 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 valuation allowance of approximately $1,010,000 will be maintained for the deferred tax asset associated with these amounts.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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


	March 31, 2010			December 31, 2009
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves	$	423,345		$	390,239
Unearned premium reserves		1,855,360			1,893,838
Postretirement benefits accrued		625,418			618,565
Net operating loss carryforward		2,192,421			2,226,423
Alternative minimum tax credit carryforward		357,697			357,697
Other deferred tax assets		261,111			252,027

Total deferred federal income tax assets		5,715,352			5,738,789

Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs		(1,328,314	)		(1,364,651	)
Unrealized gains on investments		(264,891	)		(53,621	)
Property and equipment		(136,848	)		(141,626	)
Other deferred tax liabilities		(11,368	)		(13,229	)

Total deferred federal income tax liabilities		(1,741,421	)		(1,573,127	)

Net deferred federal income tax asset		3,973,931			4,165,662
Valuation allowance		(1,010,037	)		(1,010,037	)

Deferred federal income taxes	$	2,963,894		$	3,155,625

ITEM 2.

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

The following discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2009, particularly “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.

Fremont Michigan InsuraCorp, Inc. (the “Company” or 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 Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Company, which are made in good faith by the 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:

•

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

•

the effects of weather-related and other catastrophic events;

•

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

•

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

•

inflation;

•

the cost, availability and collectibility of reinsurance;

•

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

•

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;

•

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

•

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;

•

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

•

adverse litigation or arbitration results;

•

technological change;

•

the ability to carry out our business plans;

•

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;

•

the effect of Federal legislative or regulatory matters; and

•

the effect of Federal or state judicial rulings.

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.

Overview of Fremont Michigan InsuraCorp

Fremont Michigan InsuraCorp, Inc. is a holding company owning all of the outstanding shares of Fremont Insurance Company. Fremont Insurance Company is a Michigan licensed property and casualty insurer operating exclusively in the State of Michigan and writing principally personal lines, commercial lines, farm and marine insurance policies through independent agents. We were founded in 1876 and have served Michigan policyholders for over 134 years. We market policies through approximately 175 independent insurance agencies. Fremont Insurance Company has a financial strength rating of “A-” (Excellent) by A.M. Best. The Holding Company is subject to regulation by the Michigan Office of Financial and Insurance Regulation (“OFIR”) as its primary regulator because it is the holding company for Fremont Insurance Company. As of March 31, 2010, we had approximately 71,200 policies in force and assets of $114.3 million.

General

We use accounting principles that are in compliance with those generally accepted in the United States of America (GAAP). Management’s discussion and analysis covers the Company’s financial condition and results of operations for the three months ended March 31, 2010 and 2009. The Company’s fiscal year ends on December 31.

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. These policies are more fully described below as well as in our 2009 Annual Report on Form 10-K. There have been no material changes to these policies during the most recent quarter.

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 premiums 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.

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 March 31, 2010.

We have four business segments: personal, commercial, farm and marine. The following table shows the breakdown of our loss and LAE reserves between reported losses and IBNR losses by segment as of March 31, 2010 and December 31, 2009 (in thousands):


	March 31, 2010		December 31, 2009
Reported losses
Personal	$	10,968	$	8,443
Commercial		4,278		3,121
Farm		1,000		1,029
Marine		252		353

		16,498		12,946

IBNR losses
Personal		4,749		4,614
Commercial		3,287		3,030
Farm		419		416
Marine		328		325

		8,783		8,385

Total
Personal		15,717		13,057
Commercial		7,565		6,151
Farm		1,419		1,445
Marine		580		678

	$	25,281	$	21,331

The reserves are reported gross of any amounts recoverable from reinsurers and are reduced for anticipated salvage and subrogation. Anticipated salvage and subrogation as of March 31, 2010 and December 31, 2009, was approximately $131,000 and $151,000, respectively.

Investments. At March 31, 2010 and December 31, 2009, all of the Company’s investments are classified as available-for-sale and are 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, 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. When a fixed maturity security has a decline in value, where fair value is below amortized cost, an OTTI write-down is triggered in circumstances where (1) the Company has the intent to sell the security, (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security or if it is more-likely-than-not the Company will be required to sell the security before recovery, an OTTI write-down is recognized as a realized loss in the statement of operations equal to the difference between the security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not more-likely-than-not that the Company will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized as a realized loss in the statement of operations, and the amount related to all other factors, which is recognized in other comprehensive income.

When an equity security has a decline in value, where fair value is below cost, that is deemed to be other than temporary, the Company reduces the book value of such security to its current fair 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. 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 Regulation.

At March 31, 2010 and December 31, 2009, the Company’s recoverable from reinsurers was comprised of the following:


	March 31, 2010		December 31, 2009
Paid losses and LAE	$	583,045	$	1,041,969
Unpaid losses and LAE		9,503,455		6,817,483

Amounts due from reinsurers	$	10,086,500	$	7,859,452

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.

Description of Ratios Analyzed. In the analysis of our operating results that follows, we refer to various financial ratios and other measures that management uses to analyze and compare the underwriting results of our insurance operations. We calculate the loss and LAE ratio, policy acquisition and other underwriting expense ratio and combined ratio on a GAAP basis. As such, we calculate these ratios by using net premiums earned as the denominator. There have been no material changes to the calculation and use of these ratios during the most recent quarter. The Company also calculates underwriting gain (loss) on a GAAP basis. This measure equals the net premiums earned less loss and loss adjustment expenses as well as policy acquisition and other underwriting expenses. It is another measure used by management and insurance regulators to evaluate the underwriting performance of our insurance operations.

Results of Operations – Three Months Ended March 31, 2010 and 2009

Consolidated Results of Operations. The following table shows the underwriting gain or loss as well as other revenue and expense items included in our unaudited consolidated statements of income for the three months ended March 31, 2010 and 2009. 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.


	2010			2009			Change
	2010			2009			Dollar			Percentage
Underwriting gain (loss)
Personal		(11,471	)		(442,258	)	$	430,787		97.4	%
Commercial		(160,636	)		10,275			(170,911	)	(1663.4	%)
Farm		417,623			(245,033	)		662,656		270.4	%
Marine		287,246			165,030			122,216		74.1	%

Total underwriting gain (loss)		532,762			(511,986	)		1,044,748		204.1	%
Other revenue items
Net investment income		440,211			501,185			(60,974	)	(12.2	%)
Net realized gains on investments		359,801			196,661			163,140		83.0	%
Other income		157,417			144,166			13,251		9.2	%

Total other revenue items		957,429			842,012			115,417		13.7	%

Income before federal income taxes		1,490,191			330,026			1,160,165		351.5	%
Federal income tax expense		(460,586	)		(51,918	)		(408,668	)	787.1	%

Net income	$	1,029,605		$	278,108		$	751,497		270.2	%

Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the three months ended March 31, 2010 and 2009.


	2010			2009			Change			% Change
Direct premiums written	$	16,086,582		$	14,415,684		$	1,670,898		11.6	%

Net premiums written	$	12,999,359		$	11,742,814		$	1,256,545		10.7	%

Net premiums earned	$	13,983,788		$	12,820,881		$	1,162,907		9.1	%
Loss and LAE		8,527,880			9,221,193			(693,313	)	(7.5	%)
Policy acquisition and other underwriting expenses		4,923,146			4,111,674			811,472		19.7	%

Underwriting gain (loss)	$	532,762		$	(511,986	)	$	1,044,748		204.1	%

Loss and LAE ratio		61.0	%		71.9	%		(10.9	%)
Policy acquisition and other underwriting expense ratio		35.2	%		32.1	%		3.1	%
Combined ratio		96.2	%		104.0	%		(7.8	%)

Premiums. The property and casualty industry is affected by soft and hard market business cycles no different than most other industries. During a soft market price competition tends to increase as insurers are willing to reduce premium rates in order to maintain growth in premium volume. The soft market makes it more difficult to attract new business as well as retain exposures which are adequately priced. Although we recognize the need to remain competitive in the Michigan market during the current soft market the Company remains committed to its disciplined underwriting philosophy of only accepting risks which we feel are appropriately priced while declining risks which are under priced for the level of coverage provided.

Direct premiums written by major business segment for the three months ended March 31 are presented in the table below:


	2010		2009		$ Change			% Change
Direct Premiums Written:
Personal	$	11,730,604	$	10,284,215	$	1,446,389		14.1	%
Commercial		2,720,218		2,581,072		139,146		5.4	%
Farm		1,314,189		1,212,887		101,302		8.4	%
Marine		321,571		337,510		(15,939	)	(4.7	%)

	$	16,086,582	$	14,415,684	$	1,670,898		11.6	%

The market continues to be very competitive for target market personal lines and commercial lines business. While personal lines have seen some rate hardening, commercial lines continues to be soft. Despite these market conditions, we continue to be able to grow target market business. Direct premium written for the personal segment increased 14.1%, with personal auto up 16.7% and homeowners up 9.6%. New business for personal auto was up 1.1% as compared to the exceptional new business growth experienced in the first quarter of 2009, while renewals were up 19.9%. Homeowner new business premium was up 2.9% with renewal premiums increasing 11.1%.

Direct premium written for the commercial segment increased 5.4% driven by renewal premium which was up 18.8%. New business was down 5.5% as the 2009 new business commercial premiums included a large account with premium of $75,000. Farm direct premium written increased 8.4%, as a result of renewal premium growth of 13.1%. New business was down 30.8%, again as a result of a larger new business account, of approximately $90,000, which was included in the first quarter 2009 premiums. Direct premium written for the marine segment decreased 4.7%, with new business down 46.1% and renewal business up 1.5%.

Our results continue to reflect the emphasis we place on agency relationships, providing consistent pricing, underwriting and competitive product offerings, and ease of doing business with our Fremont Complete technology platform. Retention continues in the 90’s with policy count up 1.7% from December 2009.

Net premiums written by major business segment for the three months ended March 31 are presented in the table below:


	2010		2009		$ Change			% Change
Net Premiums Written:
Personal	$	9,663,918	$	8,618,199	$	1,045,719		12.1	%
Commercial		1,967,434		1,731,224		236,210		13.6	%
Farm		1,081,106		1,103,049		(21,943	)	(2.0	%)
Marine		286,901		290,342		(3,441	)	(1.2	%)

	$	12,999,359	$	11,742,814	$	1,256,545		10.7	%

The increase in net premiums written is due to growth in direct premiums written of $1,671,000 offset by an increase of $414,000 in ceded premiums written under the Company’s reinsurance agreements.

Net premiums earned by major business segment for the three months ended March 31 are presented in the table below:


	2010		2009		$ Change			% Change
Net Premiums Earned:
Personal	$	10,373,001	$	9,351,382	$	1,021,619		10.9	%
Commercial		1,940,394		1,775,586		164,808		9.3	%
Farm		1,189,077		1,223,103		(34,026	)	(2.8	%)
Marine		481,316		470,810		10,506		2.2	%

	$	13,983,788	$	12,820,881	$	1,162,907		9.1	%

The increase in net premiums earned is due to the overall increase in direct premiums earned of $1,473,000 offset by an increase of $310,000 in ceded premiums earned under the Company’s reinsurance agreements.

Loss and Loss Adjustment Expenses (LAE). The Company’s net loss and LAE, incurred claim count, average loss and LAE per claim and the loss and LAE ratios for the three months ended March 31 are shown in the tables below:


	2010			2009			$ Change			% Change
Loss and LAE:
Personal	$	7,113,700		$	6,911,988		$	201,712		2.9	%
Commercial		1,040,337			1,113,710			(73,373	)	(6.6	%)
Farm		323,132			1,028,381			(705,249	)	(68.6	%)
Marine		50,711			167,114			(116,403	)	(69.7	%)

	$	8,527,880		$	9,221,193		$	(693,313	)	(7.5	%)

Incurred Claim Count:
Personal		2,094			2,433			(339	)	(13.9	%)
Commercial		225			227			(2	)	(0.9	%)
Farm		75			150			(75	)	(50.0	%)
Marine		31			38			(7	)	(18.4	%)

		2,425			2,848			(423	)	(14.9	%)

Average Loss and LAE per Claim:
Personal	$	3,397		$	2,841		$	556		19.6	%
Commercial		4,624			4,906			(282	)	(5.8	%)
Farm		4,308			6,856			(2,548	)	(37.2	%)
Marine		1,636			4,398			(2,762	)	(62.8	%)

	$	3,517		$	3,238		$	279		8.6	%

Loss and LAE Ratio:
Personal		68.6	%		73.9	%
Commercial		53.6	%		62.7	%
Farm		27.2	%		84.1	%
Marine		10.5	%		35.5	%

		61.0	%		71.9	%

Overall, our loss experience during the first quarter of 2010 was much better compared to the first quarter of 2009 evidenced by the 10.9 percentage point decrease in our loss and LAE ratio. Our results and loss ratio during the first quarter of 2009 were negatively impacted by fire and winter weather related loss experience. Weather related losses during the first quarter of 2010 decreased 49.7% compared to the first quarter of 2009. The winter weather experienced in Michigan during the first quarter of 2010 was milder than the weather experienced in 2009.

The personal segment’s loss ratio dropped 5.3 percentage points to 68.6% for the first quarter 2010. The lower loss ratio was impacted by a decline in weather related losses, which were down 46.3%, offset by an increased loss ratio experienced in our personal auto line during the first quarter 2010. The commercial segment’s loss ratio decreased 9.1 percentage points to 53.6% for the first quarter of 2010. The lower loss ratio was impacted by fewer weather related losses, which were down 35.4%, as well as a lower loss ratio in the workers compensation line during the first quarter of 2010. The farm segment’s loss ratio declined 56.9 percentage points as a result of fewer fire losses and weather related losses during the 2010 quarter.

Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses for the three months ended March 31 were as follows:


	2010			2009			Change			% Change
Amortization of deferred policy acquisition costs	$	2,235,837		$	2,015,153		$	220,684		11.0	%
Other underwriting expenses		2,687,309			2,096,521			590,788		28.2	%

Total policy acquisition and other underwriting expenses	$	4,923,146		$	4,111,674		$	811,472		19.7	%

Net premiums earned	$	13,983,788		$	12,820,881		$	1,162,907		9.1	%

Expense ratio		35.2	%		32.1	%		3.1	%

Amortization of deferred policy acquisition costs (“DAC”) increased during the first quarter of 2010 as compared to the same period in 2009 as a result of increased earned premium volume. As a percentage of net premiums earned, DAC amortization increased

slightly from 15.7% to 16.0% as a result of increased agent commissions paid to our top performing agencies. Other underwriting expenses as a percentage of net premiums earned increased from 16.4% for the first quarter 2009 to 19.2% for the first quarter of 2010. The increase was driven by increased legal fees and salaries and benefits due to additional new hires.

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


	2010			2009			Change			% Change
Fixed maturities	$	472,130		$	567,440		$	(95,310	)	(16.8	%)
Equity securities		34,826			157			34,669		22082.2	%
Cash and cash equivalents		11,460			20,834			(9,374	)	(45.0	%)

Gross investment income		518,416			588,431			(70,015	)	(11.9	%)
Less: Investment expenses		(78,205	)		(87,246	)		(9,041	)	(10.4	%)

Net investment income	$	440,211		$	501,185		$	(60,974	)	(12.2	%)

Average invested assets (amortized cost basis)	$	75,263,075		$	68,587,357		$	6,675,718		9.7	%

Rate of return on average invested assets		2.3	%		2.9	%		(0.6	%)

Gross investment income from the fixed portfolio declined during the first quarter of 2010 compared to 2009 due primarily to a lower yield environment and a reduction in portfolio duration. During the first quarter of 2010, the Company had sales and maturities of fixed maturity securities of approximately $16.9 million which generated realized gains of $287,480. Funds from the sales and maturities were reinvested at lower yields, leading to lower investment income during the quarter. The fixed portfolio duration at March 31, 2010 was 4.26 which remains lower than in prior quarters in order to provide reduced market value volatility of the portfolio in the case of rates rising from current levels. The portfolio remains well-diversified and maintains a laddered maturity structure to provide flexibility in the event of changing bond-market conditions.

The increase in gross income from the equity portfolio is due to the Company increasing its holdings of dividend paying common stocks. During the second quarter 2009, the Company began adding to its equity portfolio via purchases of common stocks and mutual funds. The decline in income from cash and cash equivalents is a result a lower average cash balance during the first quarter of 2010 compared to the same period in the prior year.

The table below summarizes the net realized gains generated during the three month period ended March 31:


	2010		2009			Change		% Change
Net realized gains - fixed maturities	$	287,480	$	253,825		$	33,655	13.3	%
Net realized gains (losses) - equity securities		72,321		(57,164	)		129,485	226.5	%

Total net realized gains	$	359,801	$	196,661		$	163,140	83.0	%

During the quarter ended March 31, 2010, the Company had sales and maturities of fixed maturity securities of approximately $16.9 million which generated realized gains of $287,480. In addition, the Company had equity sales of approximately $1.6 million which generated realized gains of $72,321. During the quarter ended March 31, 2009, the Company sold approximately $5.5 million in fixed maturity securities which generated realized gains of $253,825. In addition, the Company rebalanced a portion of the equity portfolio in order to realign the sector allocation within the portfolio. The rebalancing resulted in net realized losses of $57,164.

Income Tax Expense. During the quarters ended March 31, 2010 and 2009, the Company recorded income tax expense of approximately $461,000 and $52,000, respectively. The increase is due to higher pre-tax income in the 2010 quarter compared to the prior year quarter. The effective tax rate for the quarter ended March 31, 2010 was 30.9% compared to 15.7% in the prior year quarter. The increase in the effective tax rate is due to increased income from underwriting during the first quarter 2010 as compared to the prior year quarter.

Liquidity and Capital Resources

The principal sources of funds for the 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 shareholder dividends. 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 (used in) operations was $1,156,000 and ($992,000) for the three months ended March 31, 2010 and 2009, respectively, an increase of $2,148,000. During the three months ended March 31, 2010 as compared to the same period in 2009, net premiums collected increased $1,435,000, net loss and LAE payments decreased $2,740,000, policy acquisition and other underwriting expenses paid increased $1,351,000 and federal income taxes paid increased $650,000. Other cash used in operations increased $26,000 during the three months ended March 31, 2010 compared to the same period in 2009.

During the three months ended March 31, 2010 and 2009, cash flow (used in) provided by investing activities was ($1,227,000) and $4,997,000, respectively. Net cash invested into the investment portfolio was $619,000 during the quarter ended March 31, 2010 while capital expenditures were approximately, $620,000. We continue to invest in our technology platform including our web-based rating software, Fremont Complete, as well as our back-end policy administration software.

Cash provided by financing activities was $124,000 and $125,000 for the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2010, financing activities consisted of the issuance of common stock which generated $256,000 in proceeds, share repurchases of approximately $82,000 and a cash dividend of $70,000 paid to stockholders.

The Company paid a quarterly cash dividend of $.04 per common share on March 31, 2010 which totaled approximately $70,000. The Board’s current intention is evaluate each quarter whether a cash dividend will be declared. The payment of future dividends will depend upon the availability of cash resources at the Holding Company, the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board of Directors.

During the quarter ended March 31, 2010, the Company repurchased 3,090 shares of our common stock under a repurchase plan which was previously announced on May 8, 2008. The shares were repurchased at a cost of approximately $82,000, or $26.43 per share. See Part II Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” for details of our share repurchase program.

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

Changes in Interest Rates

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 rates 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%	$	50,598	$	(4,785	)
1%		52,994		(2,389	)
0		55,383		—
-1%		57,765		2,382
-2%		60,140		4,757

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES.

The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Vice President of Finance, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures.

As required by Securities and Exchange Commission Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Vice President of Finance, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Vice President of Finance concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

There have not been any changes in our internal control over financial reporting, as defined by the Securities and Exchange Commission Rule 13a-15(f), during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

ITEM 1.

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 1A.

RISK FACTORS.

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

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. The Insurance Company may not pay an extraordinary dividend unless it notifies the Insurance Commissioner and he 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 ended December 31, 2010, the Insurance Company can pay a non-extraordinary dividend of up to $3,694,000 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 continues 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.

On November 25, 2008, the Company’s Board of Directors adopted the Agent Stock Purchase Plan (“Plan”). The Plan provides for the sale of up to 100,000 shares of the Company’s Class A Common Stock over the five year estimated term of the Plan. The Plan has been established by the Company to provide incentive to independent insurance agencies that sell products and services of its subsidiary, Fremont Insurance Company, by enabling them to participate in the Company’s long-term growth and success and to help align their success with the interests of the Company’s stockholders.

The Common Stock offered by the Company under this Plan will not have been registered with, or approved, by the United States Securities and Exchange Commission (“SEC”). The offering of the Common Stock under the Plan is based on an exemption from such registration as set forth in §4(2) of the Securities Act of 1933, as amended (“Act”), and Rule 506 of Regulation D issued under the Act. The offering is being made only to eligible agencies of the Insurance Company and eligible persons designated by those agencies who are “accredited investors” as defined under Regulation D issued under the Act and to not more than 35 eligible persons in any 12 month period who may not be accredited investors, but are “sophisticated” investors. Resales of the unregistered Class A Common Stock will require registration or the availability of an exemption to registration such as SEC Rule 144.

The Common Stock will be offered directly to participants through our officers, and we will not use a broker or a dealer. We will not pay commissions, discounts or any other payments to any person for services in connection with the offer or sale of shares under the Plan. Participants will not incur brokerage commissions or service charges. The Company intends to use the proceeds of this offering for general corporate purposes which include making investments in and advances to the Insurance Company, which in turn will use the proceeds for general corporate purposes.

The following table sets forth the sales of unregistered securities under the Plan during the quarter ended March 31, 2010:

Recent Sales of Unregistered Securities


Date of Sale	Number of Shares Sold	Offering Price		Total Consideration Received
March 8, 2010	9,211	$	22.16	$	204,116

The following table sets forth the repurchases of common stock for the quarter ended March 31, 2010:

Issuer Purchases of Equity Securities


	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans (1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans
Month ended January 31, 2010	3,090	$	26.43	3,090	38,660
Month ended February 28, 2010	—	$	—	—	38,660
Month ended March 31, 2010	—	$	—	—	38,660
Total	3,090	$	26.43	3,090

(1)

On May 8, 2008, the Company announced a share repurchase plan for up to 100,000 shares of common stock.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4.

RESERVED.

ITEM 5.

OTHER INFORMATION.

None

ITEM 6.

EXHIBITS.

(a)

Exhibits. The following documents are included as exhibits to this report on Form 10-Q. Documents not accompanying this report are incorporated by reference as indicated.


NUMBER		TITLE

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 of Finance under Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification pursuant to 18 U.S.C. Section 1350.

SIGNATURES

Pursuant to the requirements 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.

Date: May 7, 2010	By:	/s/ Richard E. Dunning
		Richard E. Dunning
		President and Chief Executive Officer

Date: May 7, 2010	By:	/s/ Kevin G. Kaastra
		Kevin G. Kaastra
		Vice President of Finance (principal financial and accounting officer)

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