Fremont Michigan InsuraCorp (FMMH) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2007

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., Fremont, Michigan	49412
(Address of principal executive offices)	(Zip Code)

(231) 924-0300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant 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

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

	Number of Shares Outstanding as of May 3, 2007
COMMON STOCK (No Par Value)	1,727,456
(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	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	24
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
SIGNATURES		26

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)

March 31, 2007 and December 31, 2006

	March 31, 2007		December 31, 2006
Assets
Investments:
Fixed maturities available for sale, at fair value	$	45,466,335	$	44,959,266
Equity securities available for sale, at fair value		12,079,095		11,689,756
Mortgage loans on real estate from related parties		259,065		260,808
Total investments		57,804,495		56,909,830
Cash and cash equivalents		3,256,846		4,598,843
Premiums due from policyholders, net		7,142,002		7,528,683
Amounts due from reinsurers		7,418,637		7,883,153
Prepaid reinsurance premiums		388,078		404,016
Accrued investment income		504,614		447,411
Deferred policy acquisition costs		2,957,853		3,235,383
Deferred federal income taxes		2,798,832		3,070,713
Property and equipment, net of accumulated depreciation		1,835,048		1,771,323
Other assets		127,166		28,078
	$	84,233,571	$	85,877,433
Liabilities and Stockholders’ Equity
Liabilities:
Losses and loss adjustment expenses	$	20,514,928	$	20,176,555
Unearned premiums		19,833,960		21,463,019
Reinsurance balances payable		31,957		50,313
Accrued expenses and other liabilities		5,391,100		6,867,081
Surplus notes		2,890,288		2,890,288
Total liabilities		48,662,233		51,447,256
Commitments and contingencies
Stockholders’ Equity
Preferred stock, no par value, authorized 4,500,000 shares, no shares issued and outstanding		—		—
Class A common stock, no par value, authorized 5,000,000 shares,
1,727,456 and 1,725,456 shares issued and outstanding at		—		—
March 31, 2007 and December 31, 2006, respectively
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—		—
Additional paid-in capital		7,660,890		7,605,096
Retained earnings		26,314,888		25,511,413
Accumulated other comprehensive income		1,595,560		1,313,668
Total stockholders’ equity		35,571,338		34,430,177
Total liabilities and stockholders’ equity	$	84,233,571	$	85,877,433

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

3

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Operations (Unaudited)

For the Three Months Ended March 31, 2007 and 2006

	2007		2006
Revenues:
Net premiums earned	$	10,265,293	$	9,553,595
Net investment income		491,407		419,768
Net realized gains on investments		27,979		318,503
Other income, net		104,406		96,213
Total revenues		10,889,085		10,388,079
Expenses:
Losses and loss adjustment expenses, net		5,830,670		4,534,193
Policy acquisition and other underwriting expenses		3,848,134		3,308,146
Interest expense		50,580		76,663
Total expenses		9,729,384		7,919,002
Income before federal income tax expense		1,159,701		2,469,077
Federal income tax expense		356,226		807,828
Net income	$	803,475	$	1,661,249
Earnings per share
Basic	$	.47	$	.96
Diluted	$	.46	$	.95

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)

For the Three Months Ended March 31, 2007

	Preferred Stock		Common Stock				Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
			Class A		Class B
Balance, December 31, 2006	$	—	$	—	$	—	$	7,605,096	$	25,511,413	$	1,313,668		$	34,430,177
Comprehensive income:
Net income										803,475					803,475
Net unrealized gains on investments, net of tax												292,681			292,681
Amortization of prior service credit, net of tax												(14,137	)		(14,137	)
Amortization of net actuarial loss, net of tax												3,348			3,348
Total comprehensive income															1,085,367
Stock-based compensation								34,238							34,238
Stock options exercised								10,000							10,000
Tax benefit from stock															—
options exercised								11,556							11,556
Balance, March 31, 2007	$	—	$	—	$	—	$	7,660,890	$	26,314,888	$	1,595,560		$	35,571,338

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)

For the Three Months Ended March 31, 2007 and 2006

	2007			2006
Cash flows from operating activities:
Net income	$	803,475		$	1,661,249
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		246,250			89,250
Deferred federal income taxes		126,664			31,421
Stock based compensation expense		34,238			11,763
Net realized gains on investments		(27,979	)		(318,503	)
Net amortization of premiums on investments		54,604			55,419
Excess tax benefit from stock options exercised		(11,556	)		—
Changes in assets and liabilities:
Premiums due from policyholders		386,681			688,859
Amounts due from reinsurers		464,516			1,021,292
Prepaid reinsurance premiums		15,938			8,337
Accrued investment income		(57,203	)		(34,634	)
Deferred policy acquisition costs		277,530			266,998
Other assets		(99,088	)		(987	)
Losses and loss adjustment expenses		338,373			100,174
Unearned premiums		(1,629,059	)		(2,017,177	)
Reinsurance balances payable		(18,356	)		(1,010,642	)
Accrued expenses and other liabilities		(1,480,772	)		(1,110,487	)
Net cash used in operating activities		(575,744	)		(557,668	)
Cash flows from investing activities:
Proceeds from sales and maturities of fixed maturity investments		1,197,809			6,025,840
Proceeds from sales of equity investments		74,256			2,521,295
Purchases of fixed maturity investments		(1,666,066	)		(6,407,839	)
Purchases of equity investments		(85,576	)		(1,499,504	)
Decrease in receivable from investments		—			(12	)
Repayment of mortgage loan on real estate from related party		1,743			—
Issuance of mortgage loan on real estate from related party		—			(3,571	)
Purchase of property and equipment, net		(309,975	)		(232,130	)
Net cash provided by (used in) investing activities		(787,809	)		404,079
Cash flows from financing activities:
Proceeds from exercised stock options		10,000			—
Tax benefit from exercised stock options		11,556			—
Net cash provided by financing activities		21,556			—
Net decrease in cash and cash equivalents		(1,341,997	)		(153,589	)
Cash and cash equivalents, beginning of period		4,598,843			1,542,581
Cash and cash equivalents, end of period	$	3,256,846		$	1,388,992

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 carrier operating exclusively in the State of Michigan and writing principally personal lines, commercial lines, farm and marine insurance policies through independent agents.

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

The accompanying unaudited consolidated financial statements for the interim periods included herein are unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read with the annual consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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. New Accounting Pronouncements

The Company adopted the Financial Accounting Standards Board’s (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), effective January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations. See Note 8 for further discussion of the Company’s adoption of FIN 48.

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

7

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

3. Comprehensive Income

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

	2007			2006
Net income	$	803,475		$	1,661,249
Other comprehensive income, net of tax:
Unrealized gains on investments		311,147			134,519
Reclassification adjustment for realized gains on investments included in net income		(18,466	)		(210,212	)
Amortization of prior service credit		(14,137	)		—
Amortization of net actuarial loss		3,348			—
Other comprehensive income (loss), net of tax		281,892			(75,693	)
Comprehensive income	$	1,085,367		$	1,585,556

4. Earnings Per Share

Basic earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding and the weighted-average dilutive share equivalents outstanding. The computation of basic and diluted net income per share for the three months ended March 31 is as follows:

	2007		2006
Numerator for basic and diluted earnings per share:
Net income	$	803,475	$	1,661,249
Denominator:
Denominator for basic earnings per share – weighted average shares outstanding		1,726,612		1,724,256
Effect of dilutive stock options		36,127		23,200
Denominator for diluted earnings per share – adjusted weighted average shares outstanding		1,762,739		1,747,456
Basic earnings per share	$	0.47	$	0.96
Diluted earnings per share	$	0.46	$	0.95

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 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 as such disclosure would be impracticable.

8

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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

	2007			2006
Revenues:
Net premiums earned:
Personal lines	$	6,955,775		$	6,198,978
Commercial lines		1,805,555			1,937,864
Farm		1,079,520			1,024,541
Marine		424,443			392,212
Total net premiums earned		10,265,293			9,553,595
Expenses:
Loss and loss adjustment expenses:
Personal lines		4,165,283			2,938,461
Commercial lines		1,098,391			1,366,839
Farm		512,646			222,396
Marine		54,350			6,497
Total loss and loss adjustment expenses		5,830,670			4,534,193
Policy acquisition and other underwriting expenses:
Personal lines		2,607,501			2,146,535
Commercial lines		676,845			671,029
Farm		404,678			354,770
Marine		159,110			135,812
Total policy acquisition and other underwriting expenses		3,848,134			3,308,146
Underwriting gain (loss):
Personal lines		182,991			1,113,982
Commercial lines		30,319			(100,004	)
Farm		162,196			447,375
Marine		210,983			249,903
Total underwriting gain		586,489			1,711,256
Net investment income		491,407			419,768
Net realized gains on investments		27,979			318,503
Other income, net		104,406			96,213
Interest expense		(50,580	)		(76,663	)
Income before federal income taxes	$	1,159,701		$	2,469,077

9

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 months ended March 31 are as follows:

	2007			2006
Components of net periodic benefit cost:
Service cost	$	2,895		$	2,540
Interest cost		26,231			25,096
Amortization of unrecognized prior service cost		(21,421	)		(21,420	)
Amortization of unrecognized net actuarial loss		5,073			5,290
Net periodic benefit cost	$	12,778		$	11,506

As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. For the three months ended March 31, 2007 the Company has made contributions to the plan of approximately $4,000. During 2007, the Company expects to contribute a total of $54,000 to the plan to cover anticipated benefit payments.

7. Reinsurance

The effect of reinsurance on premiums written and earned and losses and LAE incurred for the three months ended March 31, 2007 and 2006, was as follows:

	2007						2006
	Written			Earned			Written			Earned
Direct	$	10,962,905		$	12,588,519		$	9,552,875		$	11,563,921
Assumed		14,381			17,826			15,698			21,829
Ceded		(2,345,477	)		(2,341,052	)		(2,023,818	)		(2,032,155	)
Net premiums	$	8,631,809		$	10,265,293		$	7,544,755		$	9,553,595
							2007			2006
Loss and LAE incurred							$	6,010,837		$	5,014,360
Reinsurance recoveries								(180,167	)		(480,167	)
Net loss and LAE incurred							$	5,830,670		$	4,534,193

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.

10

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

8. Federal Income Taxes

The Company adopted the provisions of FIN 48 on January 1, 2007. The adoption of FIN 48 did not have a material effect on our consolidated financial position or results of operations. The Company evaluated all tax positions taken on its U.S. federal income tax return. No material uncertainties exist for any tax positions taken by the Company.

The Company files income tax returns in the U.S. federal jurisdiction. The Company is subject to U.S federal income tax examinations for all tax years from 1994 to the current year (with the exception of the 2002 tax year) due to the utilization of its net operating losses in current open tax years. The Company has not recently been examined by the Internal Revenue Service for any open tax year.

It is the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense.

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

	Three Months Ended March 31,
	2007		2006
Current expense	$	229,562	$	776,407
Deferred expense		126,664		31,421
Total	$	356,226	$	807,828

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 March 31,
	2007					2006
Income before federal income taxes	$	1,159,701				$	2,469,077
Tax at statutory rate		394,298		34.0	%		839,486		34.0	%
Tax effect of :
Nontaxable investment income		(40,342	)	(3.5	%)		(24,890	)	(1.0	%)
Nondeductible expenses, net		2,270		0.2	%		3,666		0.1	%
Other, net		—		—			(10,434	)	(0.4	%)
	$	356,226		30.7	%	$	807,828		32.7	%

Deferred federal income tax assets and liabilities are recognized for the estimated future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company’s management reviews both positive and negative evidence, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code Section 382 (“Section 382”), future income projections and the overall prospects of our business. Based upon management’s assessment of all available evidence, including the Company’s cumulative net income for recent fiscal years, estimates of current and future profitability and the overall prospects of our business, it has been determined that as of March 31, 2007 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.

11

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Based on the annual Section 382 limitation of the utilization of net operating loss carryforwards management has determined that approximately $2,971,000 of net operating loss carryforwards will not be realized and therefore a full valuation allowance will be maintained for the deferred tax asset associated with these amounts.

At March 31, 2007 and December 31, 2006 the tax effects of temporary differences that give rise to deferred federal income tax assets and liabilities are as follows:

	March 31, 2007			December 31, 2006
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves	$	442,997		$	421,360
Unearned premium reserves		1,377,499			1,470,987
Postretirement benefits accrued		677,186			667,021
Net operating loss carryforward		2,498,439			2,634,446
Alternative minimum tax credit carryforward		357,697			357,697
Other deferred tax assets		140,609			186,814
Total deferred federal income tax assets		5,494,427			5,738,325
Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs		(1,038,105	)		(1,120,000	)
Unrealized gains on investments		(557,070	)		(406,295	)
Property and equipment		(68,152	)		(107,254	)
Other deferred tax liabilities		(22,231	)		(24,026	)
Total deferred federal income tax liabilities		(1,685,558	)		(1,657,575	)
Net deferred federal income tax asset		3,808,869			4,080,750
Valuation allowance		(1,010,037	)		(1,010,037	)
Net deferred tax asset	$	2,798,832		$	3,070,713

12

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, 2006, particularly “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.

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

The forward-looking statements are subject to numerous assumptions, risks and uncertainties. We have identified several important factors that could cause actual results to differ materially from any results discussed, contemplated, projected, 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 fiscal, monetary and tax policies, interest rates and values of investments;

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

• inflation;

• the cost, availability and collectibility of reinsurance;

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

��

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

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

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

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

• adverse litigation or arbitration results;

• technological change;

• the ability to carry out our business plans; 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.

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 131 years. We market policies through approximately 170 independent insurance agencies. In October 2006, Fremont Insurance Company received an upgrade from A.M. Best with respect to its financial strength rating. The Insurance Company was upgraded to a “B++” rating (Good) by A.M. Best. 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 March 31, 2007, we had approximately 56,300 policies in force and assets of $84.2 million.

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General

We use accounting principles that are in compliance with those generally accepted in the United States of America (GAAP). Management’s discussion and analysis covers the Company’s financial condition and results of operations for the three months ended March 31, 2007 and 2006. The Company’s fiscal year ends on December 31.

Critical Accounting Policies and Estimates

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

We believe the critical accounting policies and estimates discussed below reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements. These may be further commented upon in applicable sections on Results of Operations and Liquidity and Capital Resources that follow. These policies are more fully described below as well as in our 2006 Annual Report on Form 10-K. There have been no material changes to these policies during the most recent quarter.

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

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

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

Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Each quarter we review, existing reserves, new claims, changes to existing case reserves, and paid losses with respect to the current and prior accident years. In connection with the determination of the reserves, we also consider other specific factors such as recent weather-related losses, trends in historical paid losses, and legal and judicial trends with respect to theories of liability. We review our loss reviews to ascertain whether new developments have occurred which would require adjustment to our ultimate loss estimates. The quarterly review also involves roundtable discussion involving the claims and accounting departments. Discussion is generally focused on claims involving liability and those claims that involve significant judgment. Because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on the Company’s results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.

Reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. Accordingly, the ultimate liability for unpaid losses and loss adjustment expenses will likely differ from the amount recorded at March 31, 2007.

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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 March 31, 2007 and December 31, 2006 (in thousands):

	March 31, 2007		December 31, 2006
Reported losses
Personal	$	6,672	$	6,094
Commercial		3,134		3,525
Farm		1,321		1,123
Marine		790		837
		11,917		11,579
IBNR losses
Personal		4,338		4,338
Commercial		3,520		3,520
Farm		486		486
Marine		254		254
		8,598		8,598
Total
Personal		11,010		10,432
Commercial		6,654		7,045
Farm		1,807		1,609
Marine		1,044		1,091
	$	20,515	$	20,177

The reserves are reported gross of any amounts recoverable from reinsurers and are reduced for anticipated salvage and subrogation. Anticipated salvage and subrogation as of March 31, 2007 and December 31, 2006, was approximately $134,000 and $208,000, respectively.

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

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

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

Reinsurance recoverables include balances due from reinsurance companies for paid and unpaid losses and LAE that will be recovered from reinsurers, based on contracts in force. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk with respect to the individual reinsurer that participates

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in its ceded programs to minimize its exposure to significant losses from reinsurer insolvencies. When necessary the Company holds collateral in the form of letters of credit or trust accounts for amounts recoverable from reinsurers that are not considered authorized insurers by the State of Michigan Office of Financial and Insurance Services.

At March 31, 2007 and December 31, 2006, the Company’s recoverable from reinsurers was comprised of the following:

	March 31, 2007		December 31, 2006
Paid losses and LAE	$	809,857	$	853,132
Unpaid losses and LAE		6,608,780		7,030,021
Amounts due from reinsurers	$	7,418,637	$	7,883,153

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

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

Results of Operations – Three Months Ended March 31, 2007 and 2006

Consolidated Results of Operations. The following table shows the underwriting gain or loss as well as other revenue and expense items included in our unaudited consolidated statements of income for the three months ended March 31, 2007 and 2006. 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
	2007			2006			Dollar			Percentage
Underwriting gain (loss)
Personal	$	182,991		$	1,113,982		$	(930,991	)	(83.6	%)
Commercial		30,319			(100,004	)		130,323		130.3	%
Farm		162,196			447,375			(285,179	)	(63.7	%)
Marine		210,983			249,903			(38,920	)	(15.6	%)
Total underwriting gain		586,489			1,711,256			(1,124,767	)	(65.7	%)
Other revenue (expense) items
Net investment income		491,407			419,768			71,639		17.1	%
Net realized gains on investments		27,979			318,503			(290,524	)	(91.2	%)
Other income		104,406			96,213			8,193		8.5	%
Interest expense		(50,580	)		(76,663	)		26,083		(34.0	%)
Total other revenue (expense) items		573,212			757,821			(184,609	)	(24.4	%)
Income before federal income taxes		1,159,701			2,469,077			(1,309,376	)	(53.0	%)
Federal income tax expense		(356,226	)		(807,828	)		451,602		(55.9	%)
Net income	$	803,475		$	1,661,249		$	(857,774	)	(51.6	%)

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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 March 31, 2007 and 2006.

	2007			2006			Change			% Change
Direct premiums written	$	10,962,905		$	9,552,875		$	1,410,030		14.8	%
Net premiums written	$	8,631,809		$	7,544,755		$	1,087,054		14.4	%
Net premiums earned	$	10,265,293		$	9,553,595		$	711,698		7.4	%
Loss and LAE		5,830,670			4,534,193			1,296,477		28.6	%
Policy acquisition and other underwriting expenses		3,848,134			3,308,146			539,988		16.3	%
Underwriting gain (loss)	$	586,489		$	1,711,256		$	(1,124,767	)	(65.7	%)
Loss and LAE ratio		56.8	%		47.5	%		9.3	%
Policy acquisition and other underwriting expense ratio		37.5	%		34.6	%		2.9	%
Combined ratio		94.3	%		82.1	%		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 March 31 are presented in the table below:

	2007		2006		$ Change			% Change
Direct Premiums Written:
Personal	$	7,553,226	$	6,097,335	$	1,455,891		23.9	%
Commercial		2,018,424		2,115,247		(96,823	)	(4.6	%)
Farm		1,057,575		1,047,755		9,820		0.9	%
Marine		333,680		292,538		41,142		14.1	%
	$	10,962,905	$	9,552,875	$	1,410,030		14.8	%

The Michigan market continues to remain soft in both personal and commercial lines. Except for commercial lines, all other segments were able to increase direct premium written during the first quarter of 2007. Direct premium written for the personal segment increased 23.9%, driven by the personal automobile segment, which was up 36.0% and the homeowner segment which was up 14.1%. The personal segment experienced increases in both new business premiums which were up 66.6% and renewal premiums which were up 14.9%. During the first quarter of 2007, the homeowner product line was added to our web-based rating platform, Fremont Complete, which contributed to the increase in homeowner new business of 61.1%. From a personal lines standpoint, the Company’s independent agents are now able to quote and issue homeowner and personal auto policies through Fremont Complete which is a significant driver behind the premium growth in the personal segment.

The commercial segment’s direct premium written decreased 4.6%. Of the Company’s four segments the commercial segment is most affected by the soft market. Although commercial new business premium was up 13.0% during the first quarter our renewal premiums decreased 7.1%. The drop in renewal premiums is driven by the fact that commercial rates continue to erode in the marketplace which presents a significant challenge to the Company in terms of profitably growing the commercial segment. In addition to the softening rate environment, the decline in commercial premium was also impacted by an audit premium reduction of over $60,000 due to decreased payroll on one of our larger commercial accounts. Farm direct premium written was up .9%, driven by an increase in renewal premiums of 1.2% offset by a reduction in new business premiums of 5.6%. Direct premium written for the marine segment increased 14.1%, with new business premiums up 15.3% and renewal premiums up 14.2%.

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

	2007		2006		$ Change			% Change
Net Premiums Written:
Personal	$	5,836,688	$	4,716,637	$	1,120,051		23.7	%
Commercial		1,626,866		1,716,146		(89,280	)	(5.2	%)
Farm		884,294		865,590		18,704		2.2	%
Marine		283,961		246,382		37,579		15.3	%
	$	8,631,809	$	7,544,755	$	1,087,054		14.4	%

The increase in net premiums written was impacted by an increase of approximately $1,410,000 due to the overall increase in direct premiums written offset by an increase of $323,000 in ceded premiums written under the Company’s reinsurance agreements.

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

	2007		2006		$ Change			% Change
Net Premiums Earned:
Personal	$	6,955,775	$	6,198,978	$	756,797		12.2	%
Commercial		1,805,555		1,937,864		(132,309	)	(6.8	%)
Farm		1,079,520		1,024,541		54,979		5.4	%
Marine		424,443		392,212		32,231		8.2	%
	$	10,265,293	$	9,553,595	$	711,698		7.4	%

The increase in net premiums earned was impacted by an increase of approximately $1,025,000 due to the overall increase in direct premiums earned offset by an increase of $313,000 in ceded premiums earned under the Company’s reinsurance agreements.

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

	2007			2006			$ Change			% Change
Loss and LAE:
Personal	$	4,165,283		$	2,938,461		$	1,226,822		41.8	%
Commercial		1,098,391			1,366,839			(268,448	)	(19.6	%)
Farm		512,646			222,396			290,250		130.5	%
Marine		54,350			6,497			47,853		736.5	%
	$	5,830,670		$	4,534,193		$	1,296,477		28.6	%
Incurred Claim Count:
Personal		1,650			1,371			279		20.4	%
Commercial		169			163			6		3.7	%
Farm		72			91			(19	)	(20.9	%)
Marine		33			29			4		13.8	%
		1,924			1,654			270		16.3	%
Average Loss and LAE per Claim:
Personal	$	2,524		$	2,143		$	381		17.8	%
Commercial		6,499			8,386			(1,886	)	(22.5	%)
Farm		7,120			2,444			4,676		191.3	%
Marine		1,647			224			1,423		635.1	%
	$	3,030		$	2,741		$	289		10.5	%
Loss and LAE Ratio:
Personal		59.9	%		47.4	%
Commercial		60.8	%		70.5	%
Farm		47.5	%		21.7	%
Marine		12.8	%		1.7	%
		56.8	%		47.5	%

The personal segment experienced an increase in incurred loss and loss adjusting expense as well as the loss and LAE ratio driven by increased severity in the homeowner product line coupled with increased claim frequency in the personal auto line. The homeowner line experienced increased loss severity driven by fire losses, snow and ice damage as well as water damage losses as a result of the colder winter weather. During the first quarter of 2007 Michigan experienced a more normalized winter weather pattern evidenced by consistent below-freezing temperatures and significant snow accumulation. As a result of the colder temperatures the Company experienced increased fire related losses attributable to insured’s increased utilization of home heating systems and candle burning. The colder temperatures also increased the severity of claims resulting from freezing pipes and the associated water damage. Snow and ice damage also increased due to the weather. During the first quarter of 2006 Michigan did not experience the consistent below freezing temperatures as those experienced in 2007 which resulted in lower claim severity in 2006. Fire, ice and snow and water damage related losses account for approximately $660,000 of the increase in loss and LAE for the personal segment. Loss and LAE from personal auto physical damage increased $452,000 due to increased frequency driven by volume growth in this line. The personal auto line’s direct premiums written increased 36% during the first quarter of 2007 as compared to 2006. The vast majority of the increase in the incurred claim count for the personal segment was from increased personal auto claims. The commercial segment experienced a decline in incurred loss and LAE as well as the loss and LAE ratio due to a drop in claim severity primarily in the businessowners product line. The farm segment experienced higher loss and LAE during the quarter due to an increase in losses attributable to the weather conditions experienced in the 2007 quarter.

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

	2007			2006			Change			% Change
Amortization of deferred policy acquisition costs	$	1,799,993		$	1,674,555		$	125,438		7.5	%
Other underwriting expenses		2,048,141			1,633,591			414,550		25.4	%
Total policy acquisition and other underwriting expenses	$	3,848,134		$	3,308,146		$	539,988		16.3	%
Net premiums earned	$	10,265,293		$	9,553,595		$	711,698		7.4	%
Expense ratio		37.5	%		34.6	%		2.9	%

Amortization of deferred policy acquisition costs increased during the first quarter of 2007 as compared to the same period in 2006 as a result of increased earned premium volume. The increase in other underwriting expenses was caused by increased compensation expense ($86,000), higher depreciation ($108,000) and increased legal and auditing fees ($90,000). Furthermore, in 2006 other underwriting expenses included approximately $172,000 in premium tax refunds on prior year amended returns. Compensation expense increased due to annual merit increases, an increase in compensation allocated to other underwriting expenses and increased expense associated with the vesting of stock options.

The increase in depreciation is due to the Company’s continued investment in its web-based rating platform – Fremont Complete. Fremont Complete is a significant technological step forward for the Company and provides a strong foundation for future growth. Not only does the rating platform enhance the ‘ease of doing business’ with our agency force it also provides a direct inter-phase between our independent agents’ management systems and the Company’s policy processing system.

As of December 31, 2006, the personal auto and businessowner product lines were available through Fremont Complete. During the first quarter of 2007 we rolled out our homeowner and mobilowner product lines and we are in the testing phase for rolling out our marine product line. Through March 31, 2007, we have invested over $1,386,000 in Fremont Complete. Feedback from our agency force has been very positive and we continue to experience growth in the product lines which are available through Fremont Complete. Moving forward we will continue to evaluate adding additional product lines to the web-based platform. The Company recognizes the fact that the additional depreciation of the development costs puts pressure on our expense ratio over the short term particularly during the current soft market. However, from a longer term perspective Fremont Complete provides a robust processing infrastructure which is necessary for the Company to achieve its long-term growth goals.

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

	2007			2006			Change			% Change
Fixed maturities	$	500,693		$	449,090		$	51,603		11.5	%
Equity securities		11,319			20,989			(9,670	)	(46.1	%)
Cash and cash equivalents		57,579			29,781			27,798		93.3	%
Gross investment income		569,591			499,860			69,731		14.0	%
Less: Investment expenses		(78,184	)		(80,092	)		(1,908	)	(2.4	%)
Net investment income	$	491,407		$	419,768		$	71,639		17.1	%
Average invested assets (amortized cost basis)	$	59,868,294		$	52,644,105		$	7,224,189		13.7	%
Rate of return on average invested assets		3.3	%		3.2	%		0.1	%

Gross investment income on a pre-tax basis from fixed maturities increased approximately $52,000 in the first quarter as a result of two factors. First, approximately two-thirds of the increase was due to growth in the invested assets from 2006 to 2007. The remainder of the increase was due to higher yields earned by the portfolio. The average portfolio yield increased in the first quarter of 2007 compared to the same period in 2006 as lower yielding securities which had been purchased in prior years matured, and the proceeds were reinvested into securities carrying higher yields. On an after-tax basis, the increase in gross investment income was greater than on a pre-tax basis because a larger portion of the portfolio assets are now invested in tax-exempt securities than in 2006. Yields on the portfolio can be calculated on a tax-equivalent basis to make direct comparisons between time periods with different tax-exempt allocations. The tax-equivalent portfolio yield was 4.93% at the end of the first quarter of 2007 as compared to 4.54% at the end of the first quarter of 2006. This increase is due to two factors mentioned above: maturing securities being reinvested at higher

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yields, and an increase in tax-exempt security holdings which carry higher tax-equivalent yields than taxable securities. 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. During the quarter ended March 31, 2006 the Company received dividends from common and preferred stocks it held during this time. Whereas during the quarter ended March 31, 2007 the Company only held mutual funds which typically do not pay dividends. Investment income from cash and cash equivalents was higher during the first quarter of 2007 due to higher yields and the fact that the Company increased its holding of shorter term cash equivalents in contemplation of paying off surplus notes in September 2007.

Investment expenses decreased slightly driven by a decline in compensation expense allocated to investment activities. As a result of the items above, the annualized rate of return on average invested assets increased to 3.3% during the first quarter of 2007 from 3.2% during the same period in 2006.

During the three months ended March 31, 2007 the Company recorded net realized gains from the equity portfolio of approximately $28,000. During the three months ended March 31, 2006 the Company realized a net gain on the sale of fixed maturity and equity securities of approximately $13,000 and $305,000, respectively, for a total net realized gain of approximately $318,000. Realized gains were higher during 2006 as a result of increased equity sales due to the Company’s strategy in 2006 to shift the equity portfolio from common and preferred stocks to mutual funds. This shift was substantially completed as of March 31, 2006. During 2007 there has not been significant selling activity within the portfolio.

Interest Expense. Interest expense decreased $26,000 during the three months ended March 31, 2007 as compared to the same period in 2006. The decrease is due to the fact that the Company is no longer incurring interest expense related to the funds withheld account balance associated with the previously commuted quota share reinsurance agreement. The quota share reinsurance contract, which was commuted on 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 March 31, 2007 and 2006 the Company recorded income tax expense of approximately $356,000 and $808,000, respectively. The decrease is due to a decline in pre-tax income in the 2007 period compared to the prior year period. The effective tax rate for the three months ended March 31, 2007 was 30.7% compared to 32.7% in the prior year period. The decrease in the effective tax rate is due increased tax-exempt interest income received during the first quarter of 2007 compared to 2006.

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 used in operations was $576,000 and $558,000 for the three months ended March 31, 2007 and 2006, respectively, an increase of $18,000. During the three months ended March 31, 2007 as compared to the same period in 2006, net premiums collected increased $699,000, net loss and LAE payments increased $580,000, policy acquisition and other underwriting expenses paid increased $310,000 and federal income taxes paid decreased $175,000. Other cash used in operations increased $2,000 during the three months ended March 31, 2007 compared to the same period in 2006.

During the three months ended March 31, 2007 cash flow used in investing activities was $788,000 while during the same period in 2006 cash flow provided by investing activities was $404,000. The shift in cash flow used in investing activities is due to lower selling activity within the investment portfolio in 2007 compared to 2006. During the 2006 period the Company was shifting the equity portfolio out of common and preferred stocks and into mutual funds.

Our debt structure consists of Series B Surplus Notes which carry a 7 percent interest rate and mature on September 30, 2007. At March 31, 2007 and December 31, 2006, there were $2,890,000 Series B Surplus Notes outstanding. The Company intends to repay the surplus notes at maturity with existing funds held in cash and cash equivalents coupled with cash generated from operations.

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 March 31, 2007 and December 31, 2006 are as follows:

	March 31, 2007
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	6,091,167	$	2,623	$	71,108	$	6,022,682
States and political subdivisions		13,385,118		18,444		47,222		13,356,340
Corporate securities		11,539,777		1,428		259,057		11,282,148
Mortgage-backed securities		14,911,022		76,317		182,174		14,805,165
		45,927,084		98,812		559,561		45,466,335
Equity securities - mutual funds		9,979,905		2,099,191		—		12,079,096
Total	$	55,906,989	$	2,198,003	$	559,561	$	57,545,431
	December 31, 2006
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	6,074,385	$	2,756	$	87,898	$	5,989,243
States and political subdivisions		13,414,841		37,133		47,155		13,404,819
Corporate securities		11,058,724		901		305,359		10,754,266
Mortgage-backed securities		14,965,481		69,226		223,769		14,810,938
		45,513,431		110,016		664,181		44,959,266
Equity securities - common stocks and mutual funds		9,940,606		1,756,784		7,634		11,689,756
Total	$	55,454,037	$	1,866,800	$	671,815	$	56,649,022

At March 31, 2007, corporate securities accounted for 25% of our fixed maturity portfolio, mortgage backed securities were 33%, states and political subdivisions were 29% and U. S. government and government agency bonds were 13%. At March 31, 2007, our equity portfolio, which consists entirely of mutual funds, was spread among the following mutual fund types: large-cap – 22%, mid-cap – 24%, small-cap – 28% and international – 27%.

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 March 31, 2007 were generally determined to have temporary declines in value due to geopolitical reasons or a reaction to their particular industry rather than fundamental reasons. Fixed maturity securities with unrealized losses at March 31, 2007 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 March 31, 2007 have been in an unrealized loss position:

	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	—	$	—	$	5,139,825	$	71,108	$	5,139,825	$	71,108
States and political subdivisions		6,120,408		34,903		2,106,296		12,319		8,226,704		47,222
Corporate securities		496,345		6,350		10,377,496		252,707		10,873,841		259,057
Mortgage-backed securities		1,689,790		8,653		8,457,436		173,521		10,147,226		182,174
		8,306,543		49,906		26,081,053		509,655		34,387,596		559,561
Common stocks and mutual funds		—		—		—		—		—		—
Total	$	8,306,543	$	49,906	$	26,081,053	$	509,655	$	34,387,596	$	559,561

Changes in Interest Rates

Fluctuations in near-term interest rates could have an impact on our results of operations and cash flows due to some 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 three months ended March 31, 2007.

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 12 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.

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.

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Change in Rate	Portfolio Value		Change in Value
	(In thousands)
2%	$	41,745	$	(3,721	)
1%		43,647		(1,819	)
0		45,466		—
-1%		47,203		1,737
-2%		48,857		3,391

Credit Risk. At March 31, 2007, 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 3.8 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, mutual funds and other equities. Our portfolio of equity securities is carried on the balance sheet at fair value. Therefore, an adverse change in market prices of these securities would result in losses.

ITEM 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 litigation to be material. However, given the uncertainties attendant to litigation, we cannot be sure that our results of operations and financial condition will not be materially adversely affected by any litigation.

ITEM 1A. RISK FACTORS.

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.

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, 2007, the Insurance Company can pay a non-extraordinary dividend of up to $3,367,000 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

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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.

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
31.1	Certification of President and Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Vice President of Finance under Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification pursuant to 18 U.S.C. Section 1350.

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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: May 9, 2007	By:	/s/ Richard E. Dunning
		Richard E. Dunning President and Chief Executive Officer
Date: May 9, 2007	By:	/s/ Kevin G. Kaastra
		Kevin G. Kaastra Vice President of Finance (principal financial and accounting officer)

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