Fremont Michigan InsuraCorp (FMMH) 10-Q 2006 Q3 Quarterly report

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 September 30, 2006

OR

¨ 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.	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 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 Securities Exchange Act of 1934).    Yes  ¨    No  x

State 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 November 3, 2006
COMMON STOCK (No Par Value)	862,728
(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	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Submission of Matters to a Vote of Security Holders	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
SIGNATURES		33

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)

	September 30, 2006		December 31, 2005
Assets
Investments:
Fixed maturities available for sale, at fair value	$	43,475,477	$	41,644,429
Equity securities available for sale, at fair value		10,809,029		9,508,185
Mortgage loans on real estate from related parties		262,731		262,294
Total investments		54,547,237		51,414,908
Cash and cash equivalents		4,475,410		1,542,581
Receivable from investments		997,249		—
Premiums due from policyholders, net		7,619,751		7,143,537
Amounts due from reinsurers		6,257,873		7,499,227
Accrued investment income		453,615		402,937
Deferred policy acquisition costs		3,243,275		3,092,618
Deferred federal income taxes		3,474,536		3,774,445
Property and equipment, net of accumulated depreciation		1,709,247		1,082,547
Other assets		151,115		7,827
	$	82,929,308	$	75,960,627
Liabilities and Stockholders’ Equity
Liabilities:
Losses and loss adjustment expenses	$	21,250,687	$	18,866,814
Unearned premiums		21,265,334		20,437,157
Reinsurance funds withheld and premiums ceded payable		19,730		1,026,340
Accrued expenses and other liabilities		7,345,186		6,903,968
Surplus notes		2,890,288		2,890,288
Total liabilities		52,771,225		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, 862,728 and 862,128 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		—		—
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—		—
Additional paid-in capital		7,596,519		7,550,304
Retained earnings		22,158,934		18,296,080
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of deferred federal income taxes		402,630		(10,324	)
Total stockholders’ equity		30,158,083		25,836,060
Total liabilities and stockholders’ equity	$	82,929,308	$	75,960,627

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

3

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Operations (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006		2005
Revenues:
Net premiums earned	$	9,908,832		$	10,513,429		$	29,140,172	$	28,935,596
Net investment income		459,670			372,203			1,305,136		1,219,438
Net realized gains (losses) on investments		(217	)		5,586			295,494		388,006
Other income, net		107,201			103,033			305,452		296,944
Total revenues		10,475,486			10,994,251			31,046,254		30,839,984
Expenses:
Losses and loss adjustment expenses, net		5,804,215			5,317,945			14,983,839		16,330,203
Policy acquisition and other underwriting expenses		3,463,918			3,237,258			10,132,178		9,796,168
Interest expense		50,580			77,111			177,823		232,152
Total expenses		9,318,713			8,632,314			25,293,840		26,358,523
Income before federal income tax expense		1,156,773			2,361,937			5,752,414		4,481,461
Federal income tax expense (benefit)		375,589			(3,022,245	)		1,889,560		(2,314,523	)
Net income	$	781,184		$	5,384,182		$	3,862,854	$	6,795,984
Net income per common share
Basic	$	.91		$	6.25		$	4.48	$	7.88
Diluted	$	.89		$	6.20		$	4.40	$	7.86

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

4

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statement of Stockholders’ Equity (Unaudited)

	Preferred Stock		Common Stock				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
			Class A		Class B
Balance, December 31, 2005	$	—	$	—	$	—	$	7,550,304	$	18,296,080	$	(10,324	)	$	25,836,060
Comprehensive income:
Net income										3,862,854					3,862,854
Net unrealized gains on investments, net of taxes												412,954			412,954
Total comprehensive income															4,275,808
Issuance of stock options								35,290							35,290
Stock options exercised								6,000							6,000
Tax benefit of stock options exercised								4,925							4,925
Balance, September 30, 2006	$	—	$	—	$	—	$	7,596,519	$	22,158,934	$	402,630		$	30,158,083

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

5

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,
	2006			2005
Cash flows from operating activities:
Net income	$	3,862,854		$	6,795,984
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		273,750			117,915
Deferred federal income taxes		87,175			(3,831,260	)
Stock based compensation expense		35,290			27,854
Net realized (gains) losses on investments		(295,494	)		(388,006	)
Gain on sale of property and equipment		(145	)		—
Net amortization of premiums on investments		157,319			188,237
Changes in assets and liabilities:
Premiums due from policyholders		(476,214	)		(379,780	)
Amounts due from reinsurers		1,241,354			2,596,851
Accrued investment income		(50,678	)		20,857
Deferred policy acquisition costs		(150,657	)		(33,046	)
Other assets		(143,288	)		(214	)
Losses and loss adjustment expenses		2,383,873			118,908
Unearned premiums		828,177			728,192
Reinsurance funds withheld and premiums ceded payable		(1,006,610	)		(1,656,742	)
Accrued expenses and other liabilities		441,218			664,708
Net cash provided by operating activities		7,187,924			4,970,458
Cash flows from investing activities:
Proceeds from sales and maturities of fixed maturity investments		6,424,750			17,582,412
Proceeds from sales of equity investments		2,779,562			1,426,295
Purchases of fixed maturity investments		(8,312,859	)		(18,845,645	)
Purchases of equity investments		(3,259,482	)		(4,277,037	)
Change in receivable from investments		(997,249	)		739,150
Repayment of mortgage loan on real estate from related party		4,763			1,954
Issuance of mortgage loan on real estate from related party		(5,200	)		(130,000	)
Proceeds from sale of property and equipment		3,400			—
Purchase of equipment, net		(903,705	)		(50,295	)
Net cash used in investing activities		(4,266,020	)		(3,553,166	)
Cash flows from financing activities:
Proceeds from issuance of common stock		6,000			—
Tax benefit from exercised stock options		4,925			—
Net cash provided by financing activities		10,925			—
Net change in cash and cash equivalents		2,932,829			1,417,292
Cash and cash equivalents, beginning of period		1,542,581			3,672,254
Cash and cash equivalents, end of period	$	4,475,410		$	5,089,546

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

6

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 company 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, 2005.

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

2. Recently Issued 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 123R.

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 be effective for the Company beginning January 1, 2007. The Company 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 Company does not believe SAB 108 will have a material 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

7

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

postretirement plans in other comprehensive income. Statement 158 is effective for fiscal years ending after December 15, 2006, and early application is encouraged. The Company is currently evaluating the impact Statement 158 will have on the consolidated financial statements.

3. Comprehensive Income or Loss

The Company’s comprehensive income (loss) for the three and nine months ended September 30, 2006 and 2005 is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Net income	$	781,184		$	5,384,182		$	3,862,854		$	6,795,984
Other comprehensive income:
Unrealized (loss) gain on investments arising during the period		1,190,924			(168,039	)		921,182			4,330
Deferred income tax benefit (expense) of unrealized (loss) gain on investments arising during the period		(404,914	)		57,133			(313,202	)		(1,472	)
Change in deferred tax valuation allowance		—			(125,268	)		—			(196,685	)
Unrealized (loss) gain on investments arising during the period, net of deferred income taxes and valuation allowance		786,010			(236,174	)		607,980			(193,827	)
Adjustment for pretax realized (gains) losses on investments included in net income (loss)		217			(5,585	)		(295,494	)		(388,006	)
Deferred income tax expense (benefit) of realized gains included in net income (loss)		(74	)		1,899			100,468			131,922
		786,153			(239,860	)		412,954			(449,911	)
Comprehensive income	$	1,567,337		$	5,144,322		$	4,275,808		$	6,346,073

8

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

4. Net Income Per Share

Basic net income per share has been calculated by dividing net income by the weighted-average common shares outstanding. Diluted net income per share has been calculated by dividing net income by the weighted-average common shares outstanding and the weighted-average share equivalents outstanding. The computation of basic and diluted net income per share for the three and nine months ended September 30 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Numerator for basic and diluted net income per share:
Net income	$	781,184	$	5,384,182	$	3,862,854	$	6,795,984
Denominator:
Denominator for basic net income per share – weighted average shares outstanding		862,278		862,128		862,179		862,128
Effect of dilutive stock options		18,043		5,746		15,882		2,770
Denominator for diluted net income per share �� adjusted weighted average shares outstanding		880,321		867,874		878,061		864,898
Basic net income per share	$	0.91	$	6.25	$	4.48	$	7.88
Diluted net income per share	$	0.89	$	6.20	$	4.40	$	7.86

9

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

5. 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 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) or interest expense to its product lines. In addition, the Company does not separately identify depreciation expense related to the building by product line and such disclosure would be impracticable.

Segment data for the three and nine months ended September 30 are as follows:

	Three Months Ended September 30,						Nine Months Ended June 30,
	2006			2005			2006			2005
Revenues:
Net premiums earned:
Personal lines	$	6,474,806		$	6,611,597		$	19,021,941		$	18,427,209
Commercial lines		1,953,861			2,324,390			5,804,093			6,192,810
Farm		1,063,356			1,155,574			3,152,749			3,213,086
Marine		416,809			421,868			1,161,389			1,102,491
Total net premiums earned		9,908,832			10,513,429			29,140,172			28,935,596
Expenses:
Loss and loss adjustment expenses:
Personal lines		4,102,573			3,087,689			10,331,810			10,010,966
Commercial lines		561,754			675,384			2,691,188			3,361,742
Farm		841,854			1,131,441			1,385,140			1,942,666
Marine		298,034			423,431			575,701			1,014,829
Total loss and loss adjustment expenses		5,804,215			5,317,945			14,983,839			16,330,203
Policy acquisition and other underwriting expenses:
Personal lines		2,263,437			2,031,790			6,614,021			6,238,546
Commercial lines		683,084			719,293			2,018,111			2,096,580
Farm		371,752			355,250			1,096,226			1,087,793
Marine		145,645			130,925			403,820			373,249
Total policy acquisition and other underwriting expenses		3,463,918			3,237,258			10,132,178			9,796,168
Underwriting gain (loss):
Personal lines		108,796			1,492,118			2,076,110			2,177,697
Commercial lines		709,023			929,713			1,094,794			734,488
Farm		(150,250	)		(331,117	)		671,383			182,627
Marine		(26,870	)		(132,488	)		181,868			(285,587	)
Total underwriting gain		640,699			1,958,226			4,024,155			2,809,225
Net investment income		459,670			372,203			1,305,136			1,219,438
Net realized gains (losses) on investments		(217	)		5,586			295,494			388,006
Other income, net		107,201			103,033			305,452			296,944
Interest expense		(50,580	)		(77,111	)		(177,823	)		(232,152	)
Income before federal income taxes	$	1,156,773		$	2,361,937		$	5,752,414		$	4,481,461

10

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

6. 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 and nine months ended September 30 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Components of net periodic benefit cost:
Service cost	$	2,540		$	5,212		$	7,619		$	15,635
Interest cost		25,096			29,410			75,289			88,229
Amortization of unrecognized prior service cost		(21,421	)		(21,421	)		(64,262	)		(64,262	)
Amortization of unrecognized net actuarial loss		5,291			9,374			15,872			28,121
Net periodic benefit cost	$	11,506		$	22,575		$	34,518		$	67,723

As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. For the nine months ended September 30, 2006 the Company has made contributions to the plan of approximately $63,000. During 2006, the Company expects to contribute a total of $67,000 to the plan to cover anticipated benefit payments.

The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) introduced a prescription drug benefit under Medicare as well as a federal subsidy to qualifying sponsors of retiree healthcare benefit plans. The Company has determined that the Act will not have a material impact on the postretirement benefit obligation. Therefore, the valuation of the unfunded postretirement benefit obligation and the determination of the net postretirement benefit cost included in these financial statements do not reflect the effects of the Act on the plan.

7. Reinsurance

Amounts ceded under the Company’s reinsurance agreements are as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2006		2005			2006		2005
Ceded premiums earned	$	2,185,002	$	942,436		$	6,389,883	$	4,448,289
Ceded loss and loss adjustment expense	$	901,951	$	(36,069	)	$	2,201,406	$	989,599

Effective March 31, 2006, the Company entered into a commutation agreement with respect to the 2003 multi-line net account quota share reinsurance 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.

11

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

8. Federal Income Taxes

The provision for income taxes for the three and nine months ended September 30 consists of the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006		2005
Current expense (benefit)	$	406,883		$	868,048		$	1,802,385	$	1,516,736
Deferred expense (benefit)		(31,294	)		(76,543	)		87,175		24,202
Deferred tax valuation allowance		—			(3,813,750	)		—		(3,855,461	)
Total	$	375,589		$	(3,022,245	)	$	1,889,560	$	(2,314,523	)

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:

	Three Months Ended September 30,										Nine Months Ended September 30,
	2006					2005					2006					2005
Income before federal income taxes	$	1,156,773				$	2,361,937				$	5,752,414				$	4,481,461
Tax at statutory rate	$	393,303		34.0	%	$	803,059		34.0	%	$	1,955,821		34.0	%	$	1,523,697		34.0	%
Tax effect of:
Nontaxable investment income		(21,538	)	(1.9	)%		(4,461	)	(0.2	)%		(68,662	)	(1.2	)%		(16,729	)	(0.4	)%
Nondeductible expenses, net		(2,501	)	(0.2	)%		1,386		0.1	%		2,939		0.1	%		3,969		0.1	%
Provision to return variance		(969	)	0.0	%		—		—			(969	)	(0.0	)%		35,627		0.8	%
Other, net		7,294		0.6	%		(8,479	)	(0.4	)%		431		0.0	%		(5,626	)	(0.1	)%
Valuation allowance		—		—			(3,813,750	)	(161.5	)%		—		—			(3,855,461	)	(86.0	)%
Federal income tax expense	$	375,589		32.5	%	$	(3,022,245	)	(128.0	)%	$	1,889,560		32.8	%	$	(2,314,523	)	(51.6	)%

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 September 30, 2006 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 $3,098,000 of net operating loss carryforwards will not be realized and therefore a full valuation allowance will be maintained for the deferred tax asset associated with these amounts.

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Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

At September 30, 2006 and December 31, 2005 the tax effects of temporary differences that give rise to deferred federal income tax assets and liabilities are as follows:

	September 30, 2006			December 31, 2005
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves	$	506,558		$	436,552
Unearned premium reserves		1,474,134			1,397,087
Realized losses on investments		—			37,323
Unrealized losses on investments		—			5,319
Postretirement benefits accrued		933,807			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		181,606			175,195
Total deferred federal income tax assets		6,088,248			6,113,410
Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs		(1,133,731	)		(1,067,663	)
Property and equipment		(211,672	)		(202,860	)
Unrealized gains on investments		(207,415	)		—
Other deferred tax liabilities		(7,658	)		(15,206	)
Total deferred federal income tax liabilities		(1,560,476	)		(1,285,729	)
Net deferred federal income tax asset		4,527,772			4,827,681
Valuation allowance		(1,053,236	)		(1,053,236	)
Net deferred tax asset	$	3,474,536		$	3,774,445

9. Subsequent Event

On October 17, 2006, the Company’s Board of Directors approved a two-for-one stock split on its common stock, to be accomplished through a stock dividend. Stockholders of record at the close of business on October 31, 2006 will receive one additional share for every outstanding share held on the record date. The additional shares will be payable on November 17, 2006. The Company has approximately 863,000 shares outstanding, and will have approximately 1,725,000 shares outstanding after the stock split. The accompanying consolidated financial statements as of September 30, 2006 do not reflect this stock split.

The pro forma net income per share giving retroactive effect to the stock split, are as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2006		2005		2006		2005
Basic net income per share - as reported	$	0.91	$	6.25	$	4.48	$	7.88
Basic net income per share - after stock split	$	0.46	$	3.13	$	2.24	$	3.94
Diluted net income per share - as reported	$	0.89	$	6.20	$	4.40	$	7.86
Diluted net income per share - after stock split	$	0.45	$	3.10	$	2.20	$	3.93

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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, 2005, 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 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, forecast, 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 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;

• the ability to carry out our business plans; and

• 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.

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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 130 years. We market policies through approximately 170 independent insurance agencies. 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. As of September 30, 2006, we had approximately 53,300 policies in force and assets of $82.9 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 iswww.fmic.com. Information on the Company’s website is not a part of this Form 10-Q. 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 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.”

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 and nine month periods ended September 30, 2006 and 2005. The Company’s fiscal year ends on December 31.

Critical Accounting Policies

General. We are required to make estimates and assumptions in certain circumstances that affect the amounts reported in our financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market trends, industry trends and other data we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions, and that reported results of operation will not be adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time.

The policies relating to liabilities for loss and loss adjustment expenses, investments, policy acquisition costs, reinsurance and income taxes are those we believe to be most sensitive to estimates and judgments. These policies are more fully described below. There have been no material changes to these policies during the most recent quarter.

Liabilities for Loss and Loss Adjustment Expenses (LAE). These liabilities are estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported to the Company. The amount of the reserve for reported claims is based primarily on a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each occurrence, and the insurance policy provisions relating to the type of loss. The amounts of loss reserves for incurred but unreported (“IBNR”) claims and loss adjustment expense are calculated by using historical and actuarial information by line of business as adjusted to current conditions. Inflation is implicitly provided for in the reserving function through analysis of costs, trends and comparisons of historical reserving results to the ultimate results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Reserves are estimates. We expect that these estimates will be more or less than the amounts ultimately paid when the claim is settled. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the current financial statements.

Loss reserving techniques, which rely on historical information as adjusted to reflect current conditions, have been consistently applied during the periods presented. Changes in the estimate of the liability for losses and LAE reflect actual payments and evaluations of new information and data since the last report. Because of the nature of insurance claims, there are uncertainties inherent in the estimates of the ultimate loss payment. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as uncertainties regarding future loss cost trends. The ultimate liability for unpaid losses and LAE will differ from the amount recorded at the last reported date.

The property and casualty insurance industry generally has incurred substantial aggregate losses from claims related to asbestos-related illnesses, environmental remediation, product and construction defect liability, mold and other uncertain exposures. However, the Company has not experienced significant losses from these types of claims.

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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 September 30, 2006 and December 31, 2005 (in thousands):

	September 30, 2006		December 31, 2005
Reported losses
Personal	$	6,680	$	5,497
Commercial		3,413		2,642
Farm		1,161		1,444
Marine		803		770
		12,057		10,353
IBNR losses
Personal		4,415		3,870
Commercial		3,910		3,775
Farm		646		646
Marine		223		223
		9,194		8,514
Total
Personal		11,095		9,367
Commercial		7,323		6,417
Farm		1,807		2,090
Marine		1,026		993
	$	21,251	$	18,867

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 September 30, 2006 and December 31, 2005, was approximately $315,000 and $223,000, respectively.

Investments.Our investments are classified as available for sale. Investments classified as available for sale are available to be sold in the future in response to the Company’s liquidity needs, changes in market interest rates, tax strategies and asset-liability management strategies, among other reasons. Available for sale investments are reported at fair value, with unrealized gains and losses reported in the accumulated other comprehensive income component of stockholders’ equity, net of deferred taxes and any corresponding deferred tax asset valuation allowance.

Other Than Temporary Impairments of Securities and Unrealized Losses on Investments. We review the status and market value changes of our investments 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, we consider, in addition to a security’s market price history, 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, analyst expectations, and our intent and ability to retain fixed maturity securities for a period of time sufficient to allow for anticipated recovery in market value, in their totality to reach our conclusions.

Additionally, our impairment evaluation and recognition for interests in mortgage-backed/asset-backed securities is conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. Under this guidance, impairment losses on investments must be recognized if the fair value of the investment is less than both its book value and the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the investment and its fair value, is included in earnings as a realized loss in the period the impairment arose. As a result of this evaluation process, there were no impairment losses recorded in mortgage-backed/asset-backed securities during the three and nine month periods ended September 30, 2006 and 2005.

During the nine months ended September 30, 2006 there were no investments that the Company determined to be other than temporarily impaired. During the nine months ended September 30, 2005 the Company recognized approximately $99,000 in realized losses due to two equity investments that the Company deemed to be other than temporarily impaired. At September��30, 2006 and December 31, 2005 gross unrealized losses on available for sale investments, which were not impaired, were approximately $736,000 and $818,000, respectively. Management views the unrealized losses as being temporary.

Policy Acquisition Costs. We defer certain policy acquisition costs, which vary with, and are directly related to, the production of business. In our case, these deferred costs consist of agent commissions net of ceding commissions and premium taxes. These costs are amortized over the effective period of the related insurance policies. The method followed in computing deferred policy

16

acquisition costs limits the amount of deferred costs to their estimated realizable value, which gives effect to the premiums earned, related investment income, loss and loss adjustment expense and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected to be loss and loss adjustment expense, may require accelerated amortization of deferred policy acquisition costs. Deferred policy acquisition costs at September 30, 2006 and December 31, 2005 were approximately $3,244,000 and $3,093,000, respectively.

Reinsurance. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. These balances are the amounts we expect to collect from our reinsurers for settled claims and for claims that are in the process of adjustment but have not been completely settled. Premiums paid for reinsurance contracts are recognized over the contract period during which the reinsurance coverage attaches to the underlying policy. Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and LAE are reported separately as assets, instead of being netted with the associated liabilities, because reinsurance does not relieve us of our legal liability to the claimants. Additionally, the same uncertainties associated with estimating unpaid loss and LAE affect the estimates for the ceded portion of these liabilities. We continually monitor the financial condition of our reinsurers.

At September 30, 2006 and December 31, 2005, the Company’s recoverable from reinsurers was comprised of the following:

	September 30, 2006		December 31, 2005
Paid losses and LAE	$	545,074	$	1,353,467
Unpaid losses and LAE		5,511,175		5,933,469
Unearned premium		201,624		212,291
Amounts due from reinsurers	$	6,257,873	$	7,499,227

The effect of reinsurance on premiums written and earned for the three and nine months ended September 30, 2006 and 2005 are as follows:

	Three Months Ended September 30,
	2006						2005
	Written			Earned			Written			Earned
Direct	$	13,539,226		$	12,074,769		$	12,805,962		$	11,424,788
Assumed		18,140			19,065			27,293			31,077
Ceded		(2,167,676	)		(2,185,002	)		(927,070	)		(942,436	)
Net premiums	$	11,389,690		$	9,908,832		$	11,906,185		$	10,513,429
	Nine Months Ended September 30,
	2006						2005
	Written			Earned			Written			Earned
Direct	$	36,313,997		$	35,476,064		$	34,047,970		$	33,300,676
Assumed		44,235			53,991			64,107			83,209
Ceded		(6,379,216	)		(6,389,883	)		(4,438,401	)		(4,448,289	)
Net premiums	$	29,979,016		$	29,140,172		$	29,673,676		$	28,935,596

Income Taxes. 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 September 30, 2006 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 $3,098,000 of net operating loss carryforwards will not be realized and therefore a full valuation allowance will be maintained for these amounts.

17

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 September 30, 2006 and 2005

The discussion that follows should be read in connection with the unaudited consolidated financial statements and notes thereto included elsewhere in this report.

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 statement of operations for the three months ended September 30, 2006 and 2005. 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
	2006			2005			Dollar			Percentage
Underwriting gain (loss)
Personal	$	108,796		$	1,492,118		$	(1,383,322	)	(92.7	)%
Commercial		709,023			929,713			(220,690	)	(23.7	)%
Farm		(150,250	)		(331,117	)		180,867		54.6	%
Marine		(26,870	)		(132,488	)		105,618		79.7	%
Total underwriting gain (loss)		640,699			1,958,226			(1,317,527	)	(67.3	)%
Other revenue (expense) items
Net investment income		459,670			372,203			87,467		23.5	%
Net realized gains (losses) on investments		(217	)		5,586			(5,803	)	(103.9	)%
Other income		107,201			103,033			4,168		4.0	%
Interest expense		(50,580	)		(77,111	)		(26,531	)	(34.4	)%
Total other revenue (expense) items		516,074			403,711			112,363		27.8	%
Income before federal income taxes		1,156,773			2,361,937			(1,205,164	)	(51.0	)%
Federal income taxes (benefit)		375,589			(3,022,245	)		3,397,834		112.4	%
Net income	$	781,184		$	5,384,182		$	(4,602,998	)	(85.5	)%

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Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the three months ended September 30, 2006 and 2005.

	2006			2005			Change			% Change
Direct premiums written	$	13,539,226		$	12,805,962		$	733,264		5.7	%
Net premiums written	$	11,389,690		$	11,906,185		$	(516,495	)	(4.3	)%
Net premiums earned	$	9,908,832		$	10,513,429		$	(604,597	)	(5.8	)%
Loss and LAE		5,804,215			5,317,945			486,270		9.1	%
Policy acquisition and other underwriting expenses		3,463,918			3,237,258			226,660		7.0	%
Underwriting gain (loss)	$	640,699		$	1,958,226		$	(1,317,527	)	(67.3	)%
Loss and LAE ratio		58.5	%		50.6	%		7.9	%
Policy acquisition and other underwriting expense ratio		35.0	%		30.8	%		4.2	%
Combined ratio		93.5	%		81.4	%		12.2	%

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 September 30 are presented in the table below:

	2006		2005		$ Change			% Change
Direct Premiums Written:
Personal	$	9,561,859	$	8,762,826	$	799,033		9.1	%
Commercial		2,083,655		2,156,745		(73,090	)	(3.4	)%
Farm		1,367,364		1,359,084		8,280		0.6	%
Marine		526,348		527,307		(959	)	(0.2	)%
	$	13,539,226	$	12,805,962	$	733,264		5.7	%

Direct premiums written for the personal segment increased 9.1%, primarily driven by significant new business growth in personal auto. New business growth for personal auto and home were up 77.6% and 18.8%, respectively. The significant increase in new business in personal auto is due to target market rate actions put into place on July 1, 2006 coupled with new business resulting from four agents rolling their personal auto books of business to the Company. Renewal premium growth for personal auto remained strong at 15.2%, with home renewal premiums up 1.2%. The market continues to remain soft for the commercial segment as this segment was down 3.4%, driven equally by decreases in both new business and renewals. Farm direct premium written was up 0.6%, with new business up 10.5% and renewal premiums flat for the quarter. Stiff competition and new writers coming into the state, along with the downturn of the Michigan economy contributed to the flat direct premiums written for the marine segment. While renewal premiums were up 9.0%, this was offset by a 24.1% decrease in new business premiums. Overall, direct premiums written were up 5.7%, with new business premiums up 22.1% and renewal premiums up 3.8% driven primarily by the strong performance of the personal auto segment.

Net premiums written by major business segment for the three months ended September 30 are presented in the table below:

	2006		2005		$ Change			% Change
Net Premiums Written:
Personal	$	7,911,482	$	7,944,906	$	(33,424	)	(0.4	)%
Commercial		1,802,478		2,120,805		(318,327	)	(15.0	)%
Farm		1,204,251		1,327,950		(123,699	)	(9.3	)%
Marine		471,479		512,524		(41,045	)	(8.0	)%
	$	11,389,690	$	11,906,185	$	(516,495	)	(4.3	)%

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Net premiums written decreased approximately $516,000. The decrease is primarily attributable to the fact that net premiums written for the quarter ended September 30, 2005 included approximately $1,000,000 related to the quota share reinsurance agreement which was placed into runoff on December 31, 2003. During the quarter ended September 30, 2005 the Company accrued $1,000,000 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 the quarter ended September 30, 2005 excluding the quota share impact would have been approximately $10,906,000 resulting in an increase of approximately $484,000 as compared to the quarter ended September 30, 2006. The change in net premiums written was affected by an increase of $733,000 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 $249,000.

Net premiums earned by major business segment for the three months ended September 30 are presented in the table below:

	2006		2005		$ Change			% Change
Net Premiums Earned:
Personal	$	6,474,806	$	6,611,597	$	(136,791	)	(2.1	)%
Commercial		1,953,861		2,324,390		(370,529	)	(15.9	)%
Farm		1,063,356		1,155,574		(92,218	)	(8.0	)%
Marine		416,809		421,868		(5,059	)	(1.2	)%
	$	9,908,832	$	10,513,429	$	(604,597	)	(5.8	)%

Net premiums earned decreased approximately $605,000. The decrease is primarily attributable to the fact that net premiums earned for the quarter ended September 30, 2005 included approximately $1,000,000 related to the quota share reinsurance agreement which was placed into runoff on December 31, 2003. During the quarter ended September 30, 2005 the Company accrued $1,000,000 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 the quarter ended September 30, 2005 excluding the quota share impact would have been approximately $9,513,000 resulting in an increase of approximately $396,000 as compared to the quarter ended September 30, 2006. The change in net premiums earned was affected by an increase of $650,000 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 $254,000.

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Loss and Loss Adjustment Expenses (LAE). The Company’s net loss and LAE expense, incurred claim count, average loss and LAE per claim and the loss and LAE ratios for the three months ended September 30 are shown in the tables below:

	2006			2005			$ Change			% Change
Loss and LAE:
Personal	$	4,102,573		$	3,087,689		$	1,014,884		32.9	%
Commercial		561,754			675,384			(113,630	)	(16.8	)%
Farm		841,854			1,131,441			(289,587	)	(25.6	)%
Marine		298,034			423,431			(125,397	)	(29.6	)%
	$	5,804,215		$	5,317,945		$	486,270		9.1	%
Incurred Claim Count:
Personal		1,635			1,367			268		19.6	%
Commercial		158			185			(27	)	(14.6	)%
Farm		173			141			32		22.7	%
Marine		96			112			(16	)	(14.3	)%
		2,062			1,805			257		14.2	%
Average Loss and LAE per Claim:
Personal	$	2,509		$	2,259		$	250		11.1	%
Commercial		3,555			3,651			(95	)	(2.6	)%
Farm		4,866			8,024			(3,158	)	(39.4	)%
Marine		3,105			3,781			(676	)	(17.9	)%
	$	2,815		$	2,946		$	(131	)	(4.5	)%
Loss and LAE Ratio:
Personal		63.4	%		46.7	%
Commercial		28.8	%		29.1	%
Farm		79.2	%		97.9	%
Marine		71.5	%		100.3	%
		58.5	%		50.6	%

Overall the Company experienced an increase in loss and LAE of $486,000 resulting in an increase in the loss and LAE ratio of 7.9 percentage points. The increase was driven primarily by weather related losses which occurred during the month of July. In mid July strong thunderstorms passed through Michigan resulting in wind and tree damage as well as widespread power outages. The thunderstorms resulted in an increase in losses and LAE of approximately $772,000 representing approximately 276 claims. The losses and LAE associated with these storms added 7.8 percentage points to the loss and LAE ratio for the three months ended September 30, 2006.

The personal segment experienced an increase in loss and LAE of approximately $1,015,000. Approximately $463,000 of the increase is due to the aforementioned July thunderstorm activity coupled with an increase in both the frequency and severity of personal auto claims during the quarter. Both of these factors contributed to the increase in the personal segment’s loss and LAE ratio. The commercial segment experienced a decline in its loss and LAE ratio due to a drop in frequency. The farm segment was also affected by the July storm activity which caused an increase in losses and LAE of $244,000. The decline in the farm segment’s loss and LAE ratio is due to higher than normal loss activity in the prior year quarter which included several large fire losses. The marine segment experienced both a decline in frequency and severity during the current quarter.

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Policy Acquisition and Other Underwriting Expenses.Policy acquisition and other underwriting expenses for the three months ended September 30 were as follows:

	2006			2005			Change			% Change
Amortization of deferred policy acquisition costs	$	1,735,887		$	1,501,544		$	234,343		15.6	%
Other underwriting expenses		1,728,031			1,735,714			(7,683	)	(0.4	)%
Total policy acquisition and other underwriting expenses	$	3,463,918		$	3,237,258		$	226,660		7.0	%
Net premiums earned	$	9,908,832		$	10,513,429		$	(604,597	)	(5.8	)%
Expense ratio		35.0	%		30.8	%		4.2	%

Amortization of deferred policy acquisition costs increased during the period in 2006 as compared to the same period in 2005 as a result of an increase in premiums earned and an increase in the premium tax component of deferred policy acquisition costs. Other underwriting expenses remained flat during the quarter as compared to the prior year quarter.

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 three months ended September 30 are as follows:

	2006			2005			Change			% Change
Fixed maturities	$	485,931		$	381,554		$	104,377		27.4	%
Equity securities		870			22,916			(22,046	)	(96.2	)%
Cash and cash equivalents		48,567			38,230			10,337		27.0	%
Gross investment income		535,368			442,700			92,668		20.9	%
Less: Investment expenses		75,698			70,497			5,201		7.4	%
Net investment income	$	459,670		$	372,203		$	87,467		23.5	%
Average invested assets (amortized cost basis)	$	57,868,158		$	50,258,736		$	7,609,422		15.1	%
Rate of return on average invested assets		3.2	%		3.0	%		0.2	%

Gross investment income from fixed maturities increased $104,000 due to a combination of higher invested assets and higher book yield earned on those assets. Fixed maturity invested assets were approximately 10% greater during the quarter ended September 30, 2006 as compared to same period in 2005, and therefore produced more investment income. Investment income was also positively impacted by higher book yields in the fixed maturity portfolio. Fixed maturities which were purchased several years ago at historically low interest rate levels have been maturing, and those proceeds have been invested in significantly higher-yielding securities. The tax equivalent book yield of the fixed maturity portfolio increased 42 basis points to 4.78% as of September 30, 2006 as compared to 4.36% as of September 30, 2005.

The decrease in investment income from the equity portfolio is largely driven by the shift within the portfolio from holding common and preferred stocks to holding mutual funds. Whereas common and preferred stocks typically provided quarterly dividend payments mutual funds do not provide dividend payments as frequently. The increase in investment income from cash and cash equivalents is due to higher interest rates coupled with the fact that the Company held a higher balance of cash and cash equivalents during the three months ended September 30, 2006 compared to the same period in 2005.

Investment expenses increased $5,000 during the three months ended September 30, 2006 as compared to the same period in 2005. The increase is a result of increased advisory fees due to the growth in invested assets. The average invested asset balance (amortized cost basis), including cash and cash equivalents, increased $7.6 million primarily as a result of cash provided by operations from October 2005 through September 2006 which was placed into the investment portfolio.

Interest Expense. Interest expense decreased from $77,000 to $51,000 for the three month period ended September 30, 2005 and 2006, respectively. The decrease is due to the fact that the Company is no longer incurring interest expense associated with the quota share funds withheld account balance. The quota share reinsurance contract, which was commuted as of March 31, 2006, was structured on a funds withheld basis and required the Company to accrue interest at an annual rate of 2.5%.

Income Tax Expense. During the three months ended September 30, 2006 the Company recorded income tax expense of approximately $376,000 resulting in an effective tax rate of 32.5%. The difference between the effective tax rate and the statutory tax rate of 34% is due primarily to non-taxable investment income. During the three months ended September 30, 2005 the Company

22

recorded an income tax benefit of approximately $3,022,000 resulting in an effective tax rate of 128.0%. Federal income taxes do not bear the usual relationship to pre-tax income as a result of the effects of the deferred tax asset valuation allowance. 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. The reversal of the valuation allowance is the reason for the unusually large federal income tax benefit reported for the three months ended September 30, 2005. The Company’s effective tax rate for the three months ended September 30, 2005 would have been 33.5% excluding the impact of the valuation allowance.

Results of Operations – Nine Months Ended September 30, 2006 and 2005

The discussion that follows should be read in connection with the unaudited consolidated financial statements and notes thereto included elsewhere in this report.

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 statement of operations for the nine months ended September 30, 2006 and 2005. 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
	2006			2005			Dollar			Percentage
Underwriting gain (loss)
Personal	$	2,076,110		$	2,177,697		$	(101,587	)	(4.7	)%
Commercial		1,094,794			734,488			360,306		49.1	%
Farm		671,383			182,627			488,756		267.6	%
Marine		181,868			(285,587	)		467,455		163.7	%
Total underwriting gain (loss)		4,024,155			2,809,225			1,214,930		43.2	%
Other revenue (expense) items
Net investment income		1,305,136			1,219,438			85,698		7.0	%
Net realized gains (losses) on investments		295,494			388,006			(92,512	)	(23.8	)%
Other income		305,452			296,944			8,508		2.9	%
Interest expense		(177,823	)		(232,152	)		(54,329	)	(23.4	)%
Total other revenue (expense) items		1,728,259			1,672,236			56,023		3.4	%
Income before federal income taxes		5,752,414			4,481,461			1,270,953		28.4	%
Federal income taxes (benefit)		1,889,560			(2,314,523	)		4,204,083		181.6	%
Net income	$	3,862,854		$	6,795,984		$	(2,933,130	)	(43.2	)%

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Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the nine months ended September 30, 2006 and 2005.

	2006			2005			Change			% Change
Direct premiums written	$	36,313,997		$	34,047,970		$	2,266,027		6.7	%
Net premiums written	$	29,979,016		$	29,673,676		$	305,340		1.0	%
Net premiums earned	$	29,140,172		$	28,935,596		$	204,576		0.7	%
Loss and LAE		14,983,839			16,330,203			(1,346,364	)	(8.2	)%
Policy acquisition and other underwriting expenses		10,132,178			9,796,168			336,010		3.4	%
Underwriting gain (loss)	$	4,024,155		$	2,809,225		$	1,214,930		43.2	%
Loss and LAE ratio		51.4	%		56.4	%		(5.0	)%
Policy acquisition and other underwriting expense ratio		34.8	%		33.9	%		0.9	%
Combined ratio		86.2	%		90.3	%		(4.1	)%

Premiums. Direct premiums written by major business segment for the nine months ended September 30 are presented in the table below:

	2006		2005		$ Change			% Change
Direct Premiums Written:
Personal	$	24,241,453	$	22,107,191	$	2,134,262		9.7	%
Commercial		6,688,664		6,777,408		(88,744	)	(1.3	)%
Farm		3,708,335		3,598,720		109,615		3.0	%
Marine		1,675,545		1,564,651		110,894		7.1	%
	$	36,313,997	$	34,047,970	$	2,266,027		6.7	%

Direct premiums written for the personal segment have increased 9.7%, with new business direct premium up 24.7% and renewal premiums up 7.5%. Direct premiums written for personal auto increased $1,832,000 or 21.9% during the nine month period as compared to the prior year period and continues to drive the growth in the personal segment. The Company expects continued growth in this product line as the Company continues to focus on adding personal auto policies to individuals with whom we already provide homeowner coverage. By providing both the homeowner and personal auto coverage, policyholders are able to take advantage of the multi-policy discount. Personal auto new business increased 46.9% while renewal business increased 17.9%. Direct premiums written for the homeowner product line which continues to be the largest product line increased $349,000 or 3.0% with new business increasing 8.2% and renewal business increasing 2.3%. The commercial segment has been most affected by the soft market conditions in Michigan. In the commercial segment the Company has been successful maintaining renewals which are up 5.3%, however new business is down 24.1%. While total direct premiums written for the commercial segment are down 1.3% to date the Company continues to experience growth in the Businessowners (“BOP”) product line which is a product line that the Company is targeting. Direct premiums written for the BOP product line are up $163,000 or 8.8%. Farm direct premiums written are up 3.0%, with renewals up 3.4% and new business down 1.2%. Direct premiums written for the marine segment are up 7.1%, driven by renewal premiums which are up 14.6% offset by a decrease in new business of 16.8%. Overall, direct premiums written are up 6.7% with new business premiums up 5.7% and renewal premiums up 6.9%. Total in force policy count continues to grow and is up 5.1% over the policy count as of September 30, 2005.

Beginning in April 2006 the Company rolled out its new web-based rating portal called Fremont Complete which allows our agents to quote and bind policies. BOP was the first product line available on Fremont Complete in April 2006 and personal auto was rolled out in September 2006. The Company continues to see more activity within Fremont Complete as it allows agents to efficiently quote and bind policies. The Company expects to be able to roll out the homeowners product line on Fremont Complete by the end of 2006.

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Net premiums written by major business segment for the nine months ended September 30 are presented in the table below:

	2006		2005		$ Change			% Change
Net Premiums Written:
Personal	$	19,674,166	$	18,922,295	$	751,871		4.0	%
Commercial		5,623,571		6,016,714		(393,143	)	(6.5	)%
Farm		3,209,394		3,297,943		(88,549	)	(2.7	)%
Marine		1,471,885		1,436,724		35,161		2.4	%
	$	29,979,016	$	29,673,676	$	305,340		1.0	%

Net premiums written increased $305,000 due to normal volume growth, offset by an increase in current year ceded premiums written coupled with the impact from the quota share agreement which occurred during the nine months ended September 30, 2005. As previously noted in the discussion and analysis for the quarter net premiums written for the nine months ended September 30, 2005 included approximately $1,000,000 related to the quota share reinsurance agreement which was placed into runoff on December 31, 2003. During the nine months ended September 30, 2005 the Company accrued $1,000,000 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 the nine months ended September 30, 2005 excluding the quota share impact would have been approximately $28,674,000 resulting in an increase of approximately $1,305,000 as compared to the nine months ended September 30, 2006. The change in net premiums written was affected by an increase of $2,266,000 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 $961,000.

Net premiums earned by major business segment for the nine months ended September 30 are presented in the table below:

	2006		2005		$ Change			% Change
Net Premiums Earned:
Personal	$	19,021,941	$	18,427,209	$	594,732		3.2	%
Commercial		5,804,093		6,192,810		(388,717	)	(6.3	)%
Farm		3,152,749		3,213,086		(60,337	)	(1.9	)%
Marine		1,161,389		1,102,491		58,898		5.3	%
	$	29,140,172	$	28,935,596	$	204,576		0.7	%

Net premiums earned increased $205,000 due to 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 the nine months ended September 30, 2005. As previously noted in the discussion and analysis for the quarter net premiums earned for the nine months ended September 30, 2005 included approximately $1,000,000 related to the quota share reinsurance agreement which was placed into runoff on December 31, 2003. During the nine months ended September 30, 2005 the Company accrued $1,000,000 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 the nine months ended September 30, 2005 excluding the quota share impact would have been approximately $27,936,000 resulting in an increase of approximately $1,204,000 as compared to the nine months ended September 30, 2006. The change in net premiums earned was affected by an increase of $2,175,000 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 $971,000.

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Loss and Loss Adjustment Expenses (LAE). The Company’s net loss and LAE expense, incurred claim count, average loss and LAE per claim and the loss and LAE ratios for the nine months ended September 30 are shown in the tables below:

	2006			2005			$ Change			% Change
Loss and LAE:
Personal	$	10,331,810		$	10,010,966		$	320,844		3.2	%
Commercial		2,691,188			3,361,742			(670,554	)	(19.9	)%
Farm		1,385,140			1,942,666			(557,526	)	(28.7	)%
Marine		575,701			1,014,829			(439,128	)	(43.3	)%
	$	14,983,839		$	16,330,203		$	(1,346,364	)	(8.2	)%
Incurred Claim Count:
Personal		3,752			3,168			584		18.4	%
Commercial		351			384			(33	)	(8.6	)%
Farm		302			264			38		14.4	%
Marine		142			150			(8	)	(5.3	)%
		4,547			3,966			581		14.6	%
Average Loss and LAE per Claim:
Personal	$	2,754		$	3,160		$	(406	)	(12.9	)%
Commercial		7,667			8,755			(1,087	)	(12.4	)%
Farm		4,587			7,359			(2,772	)	(37.7	)%
Marine		4,054			6,766			(2,711	)	(40.1	)%
	$	3,295		$	4,118		$	(822	)	(20.0	)%
Loss and LAE Ratio:
Personal		54.3	%		54.3	%
Commercial		46.4	%		54.3	%
Farm		43.9	%		60.5	%
Marine		49.6	%		92.0	%
		51.4	%		56.4	%

Loss and LAE have decreased $1,346,000 or 8.2% for the nine month period. The decline is due to a drop in claim severity across all segments despite an overall increase in claim frequency. The increase in frequency in the personal segment was due to the previously mentioned storm related activity which occurred in July 2006 coupled with increased frequency in the personal auto product line primarily from auto physical damage claims. The decline in loss and LAE ratio’s in all segments is driven by a decrease in severity coupled with the growth in net premiums earned.

Policy Acquisition and Other Underwriting Expenses.Policy acquisition and other underwriting expenses for the nine months ended September 30 were as follows:

	2006			2005			$ Change			% Change
Amortization of deferred policy acquisition costs	$	5,126,988		$	4,600,808		$	526,180		11.4	%
Other underwriting expenses		5,005,190			5,195,360			(190,170	)	(3.7	)%
Total policy acquisition and other underwriting expenses	$	10,132,178		$	9,796,168		$	336,010		3.4	%
Net premiums earned	$	29,140,172		$	28,935,596		$	204,576		0.7	%
Expense ratio		34.8	%		33.9	%		0.9	%

Amortization of deferred policy acquisition costs increased during the period in 2006 as compared to the same period in 2005 as a result of increased earned premium volume coupled with an increase in the premium tax component of deferred policy acquisition costs. Other underwriting expenses decreased 3.7% due primarily to premium tax refunds received during the period on prior year amended returns.

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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 nine months ended September 30 are as follows:

	2006			2005			Change			% Change
Fixed maturities	$	1,388,199		$	1,230,512		$	157,687		12.8	%
Equity securities		29,973			106,791			(76,818	)	(71.9	)%
Cash and cash equivalents		116,818			78,483			38,335		48.8	%
Gross investment income		1,534,990			1,415,786			119,204		8.4	%
Less: Investment expenses		229,854			196,348			33,506		17.1	%
Net investment income	$	1,305,136		$	1,219,438		$	85,698		7.0	%
Average invested assets (amortized cost basis)	$	55,692,367		$	48,408,460		$	7,283,907		15.0	%
Rate of return on average invested assets		3.1	%		3.4	%		(0.3	)%

The increase in investment income from the fixed maturity portfolio was due to growth in fixed maturity invested assets coupled with increasing interest rates. Fixed maturity invested assets increased approximately 10% during the nine months ended September 30, 2006 over the same time period in 2005. The book yield on the portfolio also increased during the nine months ended September 30, 2006 compared to the same period in 2005.

The decrease in investment income from the equity portfolio is largely driven by the shift within the portfolio from holding common and preferred stocks to holding mutual funds. Whereas common and preferred stocks typically provided quarterly dividend payments mutual funds do not provide dividend payments as frequently. The increase in investment income from cash and cash equivalents is due to higher interest rates coupled with the fact that the Company held a higher balance of cash and cash equivalents during the nine months ended September 30, 2006 compared to the same period in 2005.

Investment expenses increased $34,000 during the nine months ended September 30, 2006 as compared to the same period in 2005. The increase is a result of increased advisory fees due to the growth in invested assets coupled with an increase in operating expenses allocable to investment activities. The average invested asset balance (amortized cost basis), including cash and cash equivalents, increased $7.3 million primarily as a result of cash provided by operations from October 2005 through September 2006 which was placed into the investment portfolio.

During the nine months ended September 30, 2006 the Company realized net gains on the sale of equity securities of approximately $283,000 and $13,000 on the sale of fixed maturities. During the same period in 2005 the Company had a net realized gain of $119,000 on the sale of equity securities and $269,000 on the sale of fixed maturity securities. Realized gains from the sale of equities increased during the period as the Company continued to shift funds out of common and preferred stocks and into mutual funds. The decline in net realized gains on the fixed maturity portfolio is due to a drop in selling activity in the portfolio during the period. During the nine months ended September 30, 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 fixed maturity portfolio. This resulted in net realized gains on the sale of fixed maturity securities of $269,000 during the nine months ended September 30, 2005.

Interest Expense. Interest expense decreased from $232,000 to $178,000 for the nine month period ended September 30, 2005 and 2006, respectively. The decrease is due to the fact that the Company is no longer incurring interest expense associated with the quota share funds withheld account balance. The quota share reinsurance contract, which was commuted as of March 31, 2006, was structured on a funds withheld basis and required the Company to accrue interest at an annual rate of 2.5%.

Income Tax Expense. During the nine months ended September 30, 2006 the Company recorded income tax expense of approximately $1,890,000 resulting in an effective tax rate of 32.8%. The difference between the effective tax rate and the statutory tax rate of 34% is due to non-taxable investment income. During the nine months ended September 30, 2005 the Company recorded an income tax benefit of $2,315,000 resulting in an effective tax rate of 51.6%. Federal income taxes do not bear the usual relationship to pre-tax income as a result of the effects of the deferred tax asset valuation allowance. At 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. The reversal of the valuation allowance is the reason for the unusually large federal income tax benefit reported for the nine months ended September 30, 2005. The Company’s effective tax rate for the nine months ended September 30, 2005 would have been 34.4% excluding the impact of the valuation allowance.

27

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 surplus note service. 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 an investment portfolio that is 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 $7,188,000 and $4,970,000 for the nine months ended September 30, 2006 and 2005, respectively, an increase of $2,218,000. During the nine months ended September 30, 2006 as compared to the same period in 2005 net premiums collected increased $484,000, net loss and LAE payments decreased $1,182,000, policy acquisition and other underwriting expenses paid decreased $754,000, net cash used under the quota share funds withheld account decreased $1,316,000 and income taxes paid increased $1,511,000. Other cash used in operations increased $7,000 during the nine months ended September 30, 2006 compared to the same period in 2005.

Cash flow used in investing activities increased $713,000 during the nine months ended September 30, 2006 compared to 2005.

Our debt structure consists of Series B Surplus Notes which carry a 7 percent interest rate and mature on September 30, 2007. At September 30, 2006 and December 31, 2005, there were $2,890,000 Series B Surplus Notes outstanding.

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

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The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments at September 30, 2006 and December 31, 2005 are as follows:

	September 30, 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	$	7,850,193	$	5,329	$	94,326	$	7,761,196
States and political subdivisions		9,488,165		19,434		47,923		9,459,676
Corporate securities		12,087,470		529		341,260		11,746,739
Mortgage-backed securities		14,679,567		73,099		244,800		14,507,866
		44,105,395		98,391		728,309		43,475,477
Common stocks and mutual funds		9,569,066		1,247,902		7,939		10,809,029
Total	$	53,674,461	$	1,346,293	$	736,248	$	54,284,506
	December 31, 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 and mutual funds		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

At September 30, 2006, corporate securities accounted for 27% of our fixed maturity portfolio, mortgage backed securities were 33%, states and political subdivisions were 22% and U. S. government and government agency bonds were 18%. At September 30, 2006, 98% of our equity portfolio was comprised of mutual funds with the remaining 2% invested in common stocks. Small cap funds accounted for 27% of the equity portfolio, international funds were 25%, mid cap funds were 23% and large cap funds were 23%.

All securities are listed as available for sale. We evaluate securities for impairment on a regular basis and specifically determine on an individual security basis whether or not the decline in value is other than temporary. Equity securities with unrealized losses at September 30, 2006 were determined to have temporary declines in value generally due to geopolitical reasons or a reaction to their particular industry rather than fundamental reasons. Fixed maturity securities with unrealized losses at September 30, 2006 were also determined to have temporary declines in value as opposed to fundamental changes in the credit quality of the issuers of the securities. We believe it is more likely than not that those securities will appreciate in value.

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The following table summarizes the length of time securities with unrealized losses at September 30, 2006 have been in an unrealized loss position:

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimate d 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	$	3,628,352	$	15,002	$	2,782,462	$	79,323	$	6,410,814	$	94,325
States and political subdivisions		520,920		190		5,141,554		47,734		5,662,474		47,924
Corporate securities		1,478,662		23,324		9,860,165		317,936		11,338,827		341,260
Mortgage-backed securities		845,754		12,802		8,894,995		231,998		9,740,749		244,800
		6,473,688		51,318		26,679,176		676,991		33,152,864		728,309
Common stocks and mutual funds		237,626		7,939		—		—		237,626		7,939
Total	$	6,711,314	$	59,257	$	26,679,176	$	676,991	$	33,390,490	$	736,248

Changes in Interest Rates

Fluctuations in near-term interest rates could have an impact on our results of operations and cash flows due to rate sensitive investments we hold. Certain fixed maturity securities have call features that allow the issuer to pre-pay the obligation. In a declining interest rate environment, these securities may be called by their issuer and can only be replaced with similar securities bearing lower interest rates. In a rising interest rate environment, because of our strategy of holding these securities to maturity, our ability to invest in higher yielding securities would be limited.

Effects of Inflation

The effects of inflation are implicitly considered in estimating our reserves for unpaid losses and loss adjustment expenses and in the premium rate-making process. The actual effects of inflation on our results of operations cannot be accurately known until the ultimate settlement of claims. However, based upon the actual results reported to date, it is our opinion that our loss and LAE reserves, including reserves for losses that have been incurred but not yet reported, make adequate provision for the effects of inflation.

Contractual Obligations and Commitments

There were no material changes outside the ordinary course of our business in our contractual obligations during the nine months ended September 30, 2006.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 unrealized losses reflected in the balance sheet. As a result of the rising interest rate environment the portfolio duration has been reduced over the last 15 months in an effort to remove some of the interest rate risk present and minimize unrealized losses to the fixed maturity portfolio brought on by an increase in market-wide interest rates. Although the reduction in duration is expected to reduce the overall interest rate risk associated with our fixed maturity portfolio, it will also likely decrease future investment income. If interest rates continue to rise, however, unrealized losses in the fixed maturity portfolio are expected to be smaller because of the shortened duration position.

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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%	$	39,794	$	(3,681	)
1%		41,668		(1,807	)
0		43,475		—
-1%		45,215		1,740
-2%		46,887		3,412

Credit Risk.At September 30, 2006, all of our fixed maturity securities were rated by Moody’s as investment grade with an average credit quality rating of AA+ and an average duration of 3.92 years.

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 and mutual funds. 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 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.

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 pending litigation to be material.

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, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We do not intend to pay dividends in the foreseeable future and cannot assure our shareholders 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 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 ended December 31, 2006, the Insurance Company can pay a non-extraordinary dividend of up to $2,599,000 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.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

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

None

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
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).
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.
32.1	Certification pursuant to 18 U.S.C. Section 1350.

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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: November 13, 2006	By:	/s/ Richard E. Dunning
		Richard E. Dunning
		President and Chief Executive Officer
Date: November 13, 2006	By:	/s/ Kevin G. Kaastra
		Kevin G. Kaastra
		Vice President of Finance
		(principal financial and accounting officer)

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