Fremont Michigan InsuraCorp (FMMH) 10-Q 2007 Q3 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 September 30, 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 August 31, 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	29
Item 4.	Controls and Procedures	29
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	Submission of Matters to a Vote of Security Holders	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
SIGNATURES		32

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)

	September 30, 2007		December 31, 2006
Assets
Investments:
Fixed maturities available for sale, at fair value	$	46,602,694	$	44,959,266
Equity securities available for sale, at fair value		8,346,773		11,689,756
Mortgage loans on real estate from related parties		255,490		260,808
Total investments		55,204,957		56,909,830
Cash and cash equivalents		6,852,937		4,598,843
Premiums due from policyholders, net		8,186,900		7,528,683
Amounts due from reinsurers		8,164,790		7,883,153
Prepaid reinsurance premiums		1,619,975		404,016
Accrued investment income		518,490		447,411
Deferred policy acquisition costs		3,356,690		3,235,383
Deferred federal income taxes		3,097,493		3,070,713
Property and equipment, net of accumulated depreciation		1,993,249		1,771,323
Other assets		5,525		28,078
	$	89,001,006	$	85,877,433
Liabilities and Stockholders’ Equity
Liabilities:
Losses and loss adjustment expenses	$	22,015,170	$	20,176,555
Unearned premiums		22,794,870		21,463,019
Reinsurance balances payable		48,060		50,313
Accrued expenses and other liabilities		7,144,756		6,867,081
Surplus notes		—		2,890,288
Total liabilities		52,002,856		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 September 30, 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		7,700,209		7,605,096
Retained earnings		27,995,958		25,511,413
Accumulated other comprehensive income		1,301,983		1,313,668
Total stockholders’ equity		36,998,150		34,430,177
Total liabilities and stockholders’ equity	$	89,001,006	$	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)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007		2006			2007		2006
Revenues:
Net premiums earned	$	10,874,446	$	9,908,832		$	31,739,937	$	29,140,172
Net investment income		527,002		459,670			1,536,762		1,305,136
Net realized gains (losses) on investments		1,124,059		(217	)		1,446,031		295,494
Other income, net		122,449		107,201			338,153		305,452
Total revenues		12,647,956		10,475,486			35,060,883		31,046,254
Expenses:
Losses and loss adjustment expenses, net		7,768,458		5,804,215			19,685,075		14,983,839
Policy acquisition and other underwriting expenses		4,058,431		3,463,918			11,661,017		10,132,178
Interest expense		45,010		50,580			146,170		177,823
Total expenses		11,871,899		9,318,713			31,492,262		25,293,840
Income before federal income tax expense		776,057		1,156,773			3,568,621		5,752,414
Federal income tax expense		206,567		375,589			1,084,076		1,889,560
Net income	$	569,490	$	781,184		$	2,484,545	$	3,862,854
Earnings per share
Basic	$	.33	$	0.45		$	1.44	$	2.24
Diluted	$	.32	$	0.44		$	1.41	$	2.20

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, 2006	$	—	$	—	$	—	$	7,605,096	$	25,511,413	$	1,313,668		$	34,430,177
Comprehensive income:
Net income										2,484,545					2,484,545
Net unrealized gains on investments, net of tax												20,683			20,683
Amortization of prior service credit, net of tax												(42,413	)		(42,413	)
Amortization of net actuarial loss, net of tax												10,045			10,045
Total comprehensive income															2,472,860
Stock-based compensation								73,557							73,557
Stock options exercised								10,000							10,000
Tax benefit from stock options exercised								11,556							11,556
Balance, September 30, 2007	$	—	$	—	$	—	$	7,700,209	$	27,995,958	$	1,301,983		$	36,998,150

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,
	2007			2006
Cash flows from operating activities:
Net income	$	2,484,545		$	3,862,854
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		756,748			273,750
Deferred federal income taxes		(20,761	)		87,175
Stock based compensation expense		73,557			35,290
Net realized gains on investments		(1,443,197	)		(295,494	)
Gain on sale of property and equipment		(2,834	)		(145	)
Net amortization of premiums on investments		146,090			157,319
Excess tax benefit from stock options exercised		(11,556	)		—
Changes in assets and liabilities:
Premiums due from policyholders		(658,217	)		(476,214	)
Amounts due from reinsurers		(281,637	)		1,230,687
Prepaid reinsurance premiums		(1,215,959	)		10,667
Accrued investment income		(71,079	)		(50,678	)
Deferred policy acquisition costs		(121,307	)		(150,657	)
Other assets		22,553			(143,288	)
Losses and loss adjustment expenses		1,838,615			2,383,873
Unearned premiums		1,331,851			828,177
Reinsurance balances payable		(2,253	)		(1,006,610	)
Accrued expenses and other liabilities		240,189			441,218
Net cash provided by operating activities		3,065,348			7,187,924
Cash flows from investing activities:
Proceeds from sales and maturities of fixed maturity investments		14,305,490			6,424,750
Proceeds from sales of equity investments		6,459,229			2,779,562
Purchases of fixed maturity investments		(16,034,218	)		(8,312,859	)
Purchases of equity investments		(1,702,501	)		(3,259,482	)
Increase in receivable from investments		—			(997,249	)
Repayment of mortgage loan on real estate from related party		5,318			4,763
Issuance of mortgage loan on real estate from related party		—			(5,200	)
Proceeds from sale of property and equipment		3,601			3,400
Purchase of property and equipment, net		(979,441	)		(903,705	)
Net cash provided by (used in) investing activities		2,057,478			(4,266,020	)
Cash flows from financing activities:
Proceeds from exercised stock options		10,000			6,000
Tax benefit from exercised stock options		11,556			4,925
Repayment of surplus notes		(2,890,288	)		—
Net cash (used in) provided by financing activities		(2,868,732	)		10,925
Net increase in cash and cash equivalents		2,254,094			2,932,829
Cash and cash equivalents, beginning of period		4,598,843			1,542,581
Cash and cash equivalents, end of period	$	6,852,937		$	4,475,410

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. Recently Issued 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 and nine months ended September 30 is as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
Net income	$	569,490		$	781,184	$	2,484,545		$	3,862,854
Other comprehensive income, net of tax:
Unrealized gain on investments		501,685			786,010		975,063			607,980
Reclassification adjustment for realized (gain) loss on investments included in net income		(741,878	)		143		(954,380	)		(195,026	)
Amortization of prior service credit		(14,138	)		—		(42,413	)		—
Amortization of net actuarial loss		3,348			—		10,045			—
Other comprehensive income (loss), net of tax		(250,983	)		786,153		(11,685	)		412,954
Comprehensive income	$	318,507		$	1,567,337	$	2,472,860		$	4,275,808

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 share equivalents outstanding. The computation of basic and diluted earnings per share for the three and nine months ended September 30 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
Numerator for basic and diluted earnings per share:
Net income	$	569,490	$	781,184	$	2,484,545	$	3,862,854
Denominator:
Denominator for basic earnings per share – weighted average shares outstanding		1,727,456		1,724,556		1,727,177		1,724,358
Effect of dilutive stock options		38,895		36,086		40,601		31,764
Denominator for diluted earnings per share – adjusted weighted average shares outstanding		1,766,351		1,760,642		1,767,778		1,756,122
Basic earnings per share	$	0.33	$	0.45	$	1.44	$	2.24
Diluted earnings per share	$	0.32	$	0.44	$	1.41	$	2.20

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.

8

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Revenues:
Net premiums earned:
Personal lines	$	7,417,850		$	6,474,806		$	21,642,198		$	19,021,941
Commercial lines		1,936,517			1,953,861			5,596,570			5,804,093
Farm		1,081,548			1,063,356			3,257,431			3,152,749
Marine		438,531			416,809			1,243,738			1,161,389
Total net premiums earned		10,874,446			9,908,832			31,739,937			29,140,172
Expenses:
Loss and loss adjustment expenses:
Personal lines		6,315,228			4,102,573			14,758,573			10,331,810
Commercial lines		712,555			561,754			2,731,477			2,691,188
Farm		460,589			841,854			1,674,146			1,385,140
Marine		280,086			298,034			520,879			575,701
Total loss and loss adjustment expenses		7,768,458			5,804,215			19,685,075			14,983,839
Policy acquisition and other underwriting expenses:
Personal lines		2,768,375			2,263,437			7,951,183			6,614,021
Commercial lines		722,555			683,084			2,056,138			2,018,111
Farm		403,948			371,752			1,196,756			1,096,226
Marine		163,553			145,645			456,940			403,820
Total policy acquisition and other underwriting expenses		4,058,431			3,463,918			11,661,017			10,132,178
Underwriting gain (loss):
Personal lines		(1,665,753	)		108,796			(1,067,558	)		2,076,110
Commercial lines		501,407			709,023			808,955			1,094,794
Farm		217,011			(150,250	)		386,529			671,383
Marine		(5,108	)		(26,870	)		265,919			181,868
Total underwriting gain		(952,443	)		640,699			393,845			4,024,155
Net investment income		527,002			459,670			1,536,762			1,305,136
Net realized gains (losses) on investments		1,124,059			(217	)		1,446,031			295,494
Other income, net		122,449			107,201			338,153			305,452
Interest expense		(45,010	)		(50,580	)		(146,170	)		(177,823	)
Income before federal income taxes	$	776,057		$	1,156,773		$	3,568,621		$	5,752,414

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 and nine months ended September 30 are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Components of net periodic benefit cost:
Service cost	$	2,895		$	2,540		$	8,684		$	7,619
Interest cost		26,230			25,096			78,692			75,289
Amortization of unrecognized prior service cost		(21,421	)		(21,421	)		(64,262	)		(64,262	)
Amortization of unrecognized net actuarial loss		5,073			5,291			15,220			15,872
Net periodic benefit cost	$	12,777		$	11,506		$	38,334		$	34,518

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, 2007 the Company has made contributions to the plan of approximately $57,000. During 2007, the Company expects to contribute approximately $60,000 to the plan to cover anticipated benefit payments.

7. Reinsurance

The effect of reinsurance on premiums written and earned was as follows:

	Three Months Ended
	September 30, 2007						September 30, 2006
	Written			Earned			Written			Earned
Direct	$	14,892,593		$	13,374,527		$	13,539,226		$	12,074,769
Assumed		16,001			16,782			18,140			19,065
Ceded		(2,509,107	)		(2,516,863	)		(2,167,676	)		(2,185,002	)
Net premiums	$	12,399,487		$	10,874,446		$	11,389,690		$	9,908,832
	Nine Months Ended
	September 30, 2007						September 30, 2006
	Written			Earned			Written			Earned
Direct	$	40,391,546		$	39,061,376		$	36,313,997		$	35,476,064
Assumed		58,156			56,475			44,235			53,991
Ceded		(7,398,674	)		(7,377,914	)		(6,379,216	)		(6,389,883	)
Net premiums	$	33,051,028		$	31,739,937		$	29,979,016		$	29,140,172

The effect of reinsurance on incurred losses was as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Loss and LAE incurred	$	8,638,736		$	6,706,167		$	21,926,907		$	17,185,246
Reinsurance recoveries		(870,278	)		(901,952	)		(2,241,832	)		(2,201,407	)
Net loss and LAE incurred	$	7,768,458		$	5,804,215		$	19,685,075		$	14,983,839

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 and nine months ended September 30 consists of the following:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Current expense (benefit)	$	235,760		$	406,883		$	1,104,836		$	1,802,385
Deferred expense (benefit)		(29,193	)		(31,294	)		(20,760	)		87,175
Total	$	206,567		$	375,589		$	1,084,076		$	1,889,560

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,
	2007					2006					2007					2006
Income before federal income taxes	$	776,057				$	1,156,773				$	3,568,621				$	5,752,414
Tax at statutory rate		263,859		34.0	%		393,303		34.0	%		1,213,331		34.0	%		1,955,821		34.0	%
Tax effect of :
Nontaxable investment income		(58,485	)	(7.5	)%		(21,538	)	(1.9	)%		(136,996	)	(3.8	)%		(68,662	)	(1.2	)%
Nondeductible expenses, net		1,453		0.2	%		(2,501	)	(0.2	)%		4,727		0.1	%		2,939		0.1	%
Provision to return variance		3,275		0.4	%		(969	)	0.0	%		3,275		0.1	%		(969	)	(0.0	)%
Other, net		(3,535	)	(0.5	)%		7,294		0.6	%		(261	)	(0.0	)%		431		0.0	%
Federal income tax expense	$	206,567		26.6	%	$	375,589		32.5	%	$	1,084,076		30.4	%	$	1,889,560		32.8	%

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 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. 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, 2007 it is more likely than not that sufficient taxable income will exist in the periods of reversal in order to realize the remaining net deferred tax asset.

11

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

At September 30, 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:

	September 30, 2007			December 31, 2006
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves	$	440,503		$	421,360
Unearned premium reserves		1,584,834			1,470,987
Postretirement benefits accrued		682,026			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		166,074			186,814
Total deferred federal income tax assets		5,729,573			5,738,325
Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs		(1,177,774	)		(1,120,000	)
Unrealized gains on investments		(416,950	)		(406,295	)
Property and equipment		—			(107,254	)
Other deferred tax liabilities		(27,319	)		(24,026	)
Total deferred federal income tax liabilities		(1,622,043	)		(1,657,575	)
Net deferred federal income tax asset		4,107,530			4,080,750
Valuation allowance		(1,010,037	)		(1,010,037	)
Net deferred tax asset	$	3,097,493		$	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. Fremont Insurance Company has a financial strength rating of “B++” (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 September 30, 2007, we had approximately 59,300 policies in force and assets of $89.0 million.

13

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 months ended September 30, 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 unreported 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 reserves 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, underwriting 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 September 30, 2007.

14

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

	September 30, 2007		December 31, 2006
Reported losses
Personal	$	7,680	$	6,094
Commercial		3,179		3,525
Farm		1,107		1,123
Marine		845		837
		12,811		11,579
IBNR losses
Personal		4,926		4,338
Commercial		3,520		3,520
Farm		486		486
Marine		272		254
		9,204		8,598
Total
Personal		12,606		10,432
Commercial		6,699		7,045
Farm		1,593		1,609
Marine		1,117		1,091
	$	22,015	$	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 September 30, 2007 and December 31, 2006, was approximately $167,000 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, 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 each month, 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 market 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 previously 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

15

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 September 30, 2007 and December 31, 2006, the Company’s recoverable from reinsurers was comprised of the following:

	September 30, 2007		December 31, 2006
Paid losses and LAE	$	867,615	$	853,132
Unpaid losses and LAE		7,297,175		7,030,021
Amounts due from reinsurers	$	8,164,790	$	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 September 30, 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 September 30, 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	$	(1,665,753	)	$	108,796		$	(1,774,549	)	(1631.1	)%
Commercial		501,407			709,023			(207,616	)	(29.3	)%
Farm		217,011			(150,250	)		367,261		244.4	%
Marine		(5,108	)		(26,870	)		21,762		81.0	%
Total underwriting gain		(952,443	)		640,699			(1,593,142	)	(248.7	)%
Other revenue (expense) items
Net investment income		527,002			459,670			67,332		14.6	%
Net realized gains on investments		1,124,059			(217	)		1,124,276		NM
Other income		122,449			107,201			15,248		14.2	%
Interest expense		(45,010	)		(50,580	)		5,570		(11.0	)%
Total other revenue (expense) items		1,728,500			516,074			1,212,426		234.9	%
Income before federal income taxes		776,057			1,156,773			(380,716	)	(32.9	)%
Federal income tax expense		206,567			375,589			(169,022	)	(45.0	)%
Net income	$	569,490		$	781,184		$	(211,694	)	(27.1	)%

16

Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the three months ended September 30, 2007 and 2006.

	2007			2006			Change			% Change
Direct premiums written	$	14,892,593		$	13,539,226		$	1,353,367		10.0	%
Net premiums written	$	12,399,487		$	11,389,690		$	1,009,797		8.9	%
Net premiums earned	$	10,874,446		$	9,908,832		$	965,614		9.7	%
Loss and LAE		7,768,458			5,804,215			1,964,243		33.8	%
Policy acquisition and other underwriting expenses		4,058,431			3,463,918			594,513		17.2	%
Underwriting gain (loss)	$	(952,443	)	$	640,699		$	(1,593,142	)	(248.7	)%
Loss and LAE ratio		71.4	%		58.5	%		12.9	%
Policy acquisition and other underwriting expense ratio		37.3	%		35.0	%		2.3	%
Combined ratio		108.7	%		93.5	%		15.2	%

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:

	2007		2006		$ Change			% Change
Direct Premiums Written:
Personal	$	10,739,136	$	9,561,859	$	1,177,277		12.3	%
Commercial		2,256,858		2,083,655		173,203		8.3	%
Farm		1,343,949		1,367,364		(23,415	)	(1.7	)%
Marine		552,650		526,348		26,302		5.0	%
	$	14,892,593	$	13,539,226	$	1,353,367		10.0	%

Although the industry continues to experience soft market conditions we continue to generate solid top line growth in direct premiums written. During the three months ended September 30, 2007, we increased direct premiums written 10% with new business volume increasing 11.3% and renewal premium volume increasing 8.9%. Since June 30, 2007 our in-force policy count has increased 2.5%. Direct premiums written for the personal segment increased 12.3%, driven by personal auto which was up 29% coupled with a 2.7% increase in the homeowner’s line. New business growth for personal auto and home were up 3.8% and 14% respectively. Renewal premium growth for personal auto remained strong at 35.3% while home renewal premiums were flat for the quarter. Policy count continues to grow in both personal auto and home. During the three months ended September 30, 2007, the in-force policy count for personal auto increased 6.8% while homeowners increased 1.5%. The growth in personal auto is driven by increased utilization of the Company’s web-based rating platform—Fremont Complete, focus on our multi-policy strategy of identifying for our agents current target market homes to solicit the companion personal auto policy, agent incentive programs for new target market personal auto production as well as rate stability within the personal auto product line. Growth in the homeowner’s line was positively impacted by the ease of doing business within Fremont Complete.

The commercial segment was up 8.3% for the quarter driven by new business production which was up 15.4%. New commercial business growth is up primarily in the Company complementary products including commercial auto and workers compensation. Growth in these lines is driven by increased marketing efforts in soliciting low hazard monoline policies as well as offering multi policy discounts. Renewal premium was down 1.7%, however this was a dramatic improvement over the 8.2% decrease experienced during the previous quarter ended June 30, 2007. Much of the improvement in renewal premiums can be attributed to various underwriting initiatives focusing on reviewing the renewal with the agent and making any adjustments prior to issuing the renewal. Farm direct premiums written were down 1.7%, with new business up 9.6% and renewal premiums down 0.3%. Marine saw premiums increase 5%, driven by new business up 5.2% and renewal premiums up 3.7%. The marine product line was rolled out in Fremont Complete during the second quarter and as agents have become more familiar with the automation they are looking more to Fremont to place their marine business.

17

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

	2007		2006		$ Change			% Change
Net Premiums Written:
Personal	$	8,840,604	$	7,911,482	$	929,122		11.7	%
Commercial		1,882,879		1,802,478		80,401		4.5	%
Farm		1,182,472		1,204,251		(21,779	)	(1.8	)%
Marine		493,532		471,479		22,053		4.7	%
	$	12,399,487	$	11,389,690	$	1,009,797		8.9	%

The increase in net premiums written is due to the overall increase in direct premiums written of $1,353,000 offset by a net increase of $344,000 in ceded and assumed premiums written under the Company’s reinsurance agreements.

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

	2007		2006		$ Change			% Change
Net Premiums Earned:
Personal	$	7,417,850	$	6,474,806	$	943,044		14.6	%
Commercial		1,936,517		1,953,861		(17,344	)	(0.9	)%
Farm		1,081,548		1,063,356		18,192		1.7	%
Marine		438,531		416,809		21,722		5.2	%
	$	10,874,446	$	9,908,832	$	965,614		9.7	%

The increase in net premiums earned is due to the overall increase in direct premiums earned of $1,300,000 offset by a net increase of $334,000 in ceded and assumed premiums earned under the Company’s reinsurance agreements.

18

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 September 30 are shown in the tables below:

	2007			2006			$ Change			% Change
Loss and LAE:
Personal	$	6,315,228		$	4,102,573		$	2,212,655		53.9	%
Commercial		712,555			561,754			150,801		26.8	%
Farm		460,589			841,854			(381,265	)	(45.3	)%
Marine		280,086			298,034			(17,948	)	(6.0	)%
	$	7,768,458		$	5,804,215		$	1,964,243		33.8	%
Incurred Claim Count:
Personal		2,084			1,635			449		27.5	%
Commercial		207			158			49		31.0	%
Farm		149			173			(24	)	(13.9	)%
Marine		103			96			7		7.3	%
		2,543			2,062			481		23.3	%
Average Loss and LAE per Claim:
Personal	$	3,030		$	2,509		$	521		20.8	%
Commercial		3,442			3,555			(113	)	(3.2	)%
Farm		3,091			4,866			(1,775	)	(36.5	)%
Marine		2,719			3,105			(386	)	(12.4	)%
	$	3,055		$	2,815		$	240		8.5	%
Loss and LAE Ratio:
Personal		85.1	%		63.4	%
Commercial		36.8	%		28.8	%
Farm		42.6	%		79.2	%
Marine		63.9	%		71.5	%
		71.4	%		58.5	%

The increase in the personal segments loss and LAE was driven by higher losses in the homeowners and personal auto product lines. During the 2007 quarter, the Company experienced volatile weather activity in Michigan which included strong thunderstorms resulting in increased losses from wind, hail and lightening damage. Weather related losses increased approximately $803,000 during the three months ended September 30, 2007 as compared to the same period in 2006. The losses were concentrated in the personal segment product lines of homeowners and mobilowners. The Company also experienced increased losses in the personal auto line from both liability and personal injury protection claims as well as auto physical damage claims. The number of claims in the personal auto line is up 44%. The majority of the increase in personal auto claims is in auto physical damage which is typically a higher frequency but lower severity type of loss. The increase in the commercial segments incurred loss and LAE and the loss ratio was driven by higher claim severity primarily from fire related losses experienced during the quarter. The decline in losses and LAE in the farm segment is due to drop in both severity and frequency during the 2007 period as compared to 2006. The marine segment’s loss and LAE remained relatively constant as compared to the 2006 quarter. Typically, marine losses are at their highest levels during the quarter ended September 30 due to the increased boating activity during the summer months in Michigan.

19

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

	2007			2006			Change			% Change
Amortization of deferred policy acquisition costs	$	1,830,693		$	1,704,538		$	126,155		7.4	%
Other underwriting expenses		2,227,738			1,759,380			468,358		26.6	%
Total policy acquisition and other underwriting expenses	$	4,058,431		$	3,463,918		$	594,513		17.2	%
Net premiums earned	$	10,874,446		$	9,908,832		$	965,614		9.7	%
Expense ratio		37.3	%		35.0	%		2.3	%

Amortization of deferred policy acquisition costs increased during the third quarter of 2007 as compared to the same period in 2006 as a result of increased earned premium. The increase in other underwriting expenses was caused by increased compensation expense as a result of increased headcount ($73,000), higher depreciation associated with the Company’s web-based rating platform ($108,000), increased assessments from state mandated pools and associations ($173,000), increased survey and inspection fees driven by the growth in the personal auto line ($81,000) and higher marketing and advertising costs ($26,000).

The increase in depreciation is driven by 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.

At September 30, 2007, the following product lines were available through Fremont Complete: personal auto, businessowners, homeowners, mobilowners and marine. The Company has invested over $1,850,000 in Fremont Complete since development began in late 2005. We continue to receive positive feedback from our agency force. More importantly, we continue to experience growth in the product lines which are available through Fremont Complete. Moving forward we continue to evaluate adding additional product lines to the web-based platform. The Company anticipates adding commercial auto and workers compensation to Fremont Complete in early 2008. 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 September 30 are as follows:

	2007			2006			Change			% Change
Fixed maturities	$	477,490		$	485,931		$	(8,441	)	(1.7	)%
Equity securities		—			870			(870	)	(100.0	)%
Cash and cash equivalents		131,181			48,567			82,614		170.1	%
Gross investment income		608,671			535,368			73,303		13.7	%
Less: Investment expenses		(81,669	)		(75,698	)		5,971		7.9	%
Net investment income	$	527,002		$	459,670		$	67,332		14.6	%
Average invested assets (amortized cost basis)	$	61,027,187		$	57,868,158		$	3,159,029		5.5	%
Rate of return on average invested assets		3.5	%		3.2	%		0.3	%

In the third quarter of 2007, gross investment income from fixed maturities was approximately $8,000 lower than in the same period in 2006. However, income from cash and cash equivalents was approximately $83,000 higher in 2007. The increase in income from cash and cash equivalents was due to the fact that the Company had a larger portion of its invested assets placed in short-term securities over this time period. When income from cash and cash equivalents and fixed maturities are combined, gross investment income was 13.9% higher in the third quarter of 2007 as compared to the third quarter of 2006. The growth in invested assets, along with higher investment yields, has been responsible for the increase in gross investment income. At September 30, 2007 the fixed maturity portfolio had an effective duration of 4.86 years and a tax equivalent book yield of 5.31% compared to an effective duration of 4.34 years and a tax equivalent book yield of 5.12% at June 30, 2007.

20

Investment expenses increased 7.9% driven by increased advisory fees which are based on assets under management by the Company’s investment advisors. As a result of the items above, the annualized rate of return on average invested assets increased to 3.5% during the third quarter of 2007 from 3.2% during the same period in 2006.

The Company’s net realized gains (losses) for the three months ended September 30, 2007 and 2006 are as follows:

	2007			2006			Change			% Change
Fixed maturities	$	(22,284	)	$	(217	)	$	(22,067	)	NM
Equity securities		1,146,343			—			1,146,343		NM
Total net realized gains	$	1,124,059		$	(217	)	$	1,124,276		NM

During the three months ended September 30, 2007 the Company generated net realized gains from the equity portfolio of approximately $1,146,000 offset by realized losses of $22,000 from the fixed maturity portfolio for a combined net realized gain of $1,124,000. During the three months ended September 30, 2007, the Company sold approximately $4.6 million in equity securities which generated approximately $1.1 million in realized gains as noted in the table above. The sales were generated in order to reduce the level of equity risk in the portfolio, rebalance the equity portfolio and take advantage of the unrealized market value appreciation in the equity portfolio. The majority of the cash generated from the equity sales will be placed into the fixed portfolio.

Interest Expense. Interest expense decreased approximately $5,600 during the three months ended September 30, 2007 as compared to the same period in 2006. The decrease is due to the repayment of the surplus notes during September 2007.

Income Tax Expense. During the three months ended September 30, 2007 and 2006 the Company recorded income tax expense of approximately $207,000 and $376,000, 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 September 30, 2007 was 26.6% compared to 32.5% in the prior year period. The decrease in the effective tax rate is due to increased tax-exempt interest income received during the third quarter of 2007 compared to 2006.

21

Results of Operations – Nine Months Ended September 30, 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 nine months ended September 30, 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	$	(1,067,558	)	$	2,076,110		$	(3,143,668	)	(151.4	)%
Commercial		808,955			1,094,794			(285,839	)	(26.1	)%
Farm		386,529			671,383			(284,854	)	(42.4	)%
Marine		265,919			181,868			84,051		46.2	%
Total underwriting gain		393,845			4,024,155			(3,630,310	)	(90.2	)%
Other revenue (expense) items
Net investment income		1,536,762			1,305,136			231,626		17.7	%
Net realized gains (losses) on investments		1,446,031			295,494			1,150,537		389.4	%
Other income		338,153			305,452			32,701		10.7	%
Interest expense		(146,170	)		(177,823	)		31,653		(17.8	)%
Total other revenue (expense) items		3,174,776			1,728,259			1,446,517		83.7	%
Income before federal income taxes		3,568,621			5,752,414			(2,183,793	)	(38.0	)%
Federal income tax expense		1,084,076			1,889,560			(805,484	)	(42.6	)%
Net income	$	2,484,545		$	3,862,854		$	(1,378,309	)	(35.7	)%

Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the nine months ended September 30, 2007 and 2006.

	2007			2006			Change			% Change
Direct premiums written	$	40,391,546		$	36,313,997		$	4,077,549		11.2	%
Net premiums written	$	33,051,028		$	29,979,016		$	3,072,012		10.2	%
Net premiums earned	$	31,739,937		$	29,140,172		$	2,599,765		8.9	%
Loss and LAE		19,685,075			14,983,839			4,701,236		31.4	%
Policy acquisition and other underwriting expenses		11,661,017			10,132,178			1,528,839		15.1	%
Underwriting gain (loss)	$	393,845		$	4,024,155		$	(3,630,310	)	(90.2	)%
Loss and LAE ratio		62.0	%		51.4	%		10.6	%
Policy acquisition and other underwriting expense ratio		36.7	%		34.8	%		1.9	%
Combined ratio		98.7	%		86.2	%		12.5	%

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.

22

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

	2007		2006		Change		% Change
Direct Premiums Written:
Personal	$	28,067,317	$	24,241,453	$	3,825,864	15.8	%
Commercial		6,782,433		6,688,664		93,769	1.4	%
Farm		3,773,372		3,708,335		65,037	1.8	%
Marine		1,768,424		1,675,545		92,879	5.5	%
	$	40,391,546	$	36,313,997	$	4,077,549	11.2	%

Despite the soft market, we continue to generate solid growth in direct premiums written evidenced by an 11.2% increase in premium volume for the first nine months of 2007. New business volume is up 27.7% while renewal volume grew 8.2%. All segments are showing positive growth year to date. The growth is driven by the relationships we have cultivated with our agency force and our ability to provide them with a consistent and stable market for their preferred business. Total in-force policy count continues to grow and is up 8.2% over the in-force policy count as of December 31, 2006.

Within the personal segment, personal auto continues to lead the way in terms of growth and is up 30.7% through September 30, 2007. Personal auto new premium volume is up 30.1% while renewal volume is up 30.8%. Homeowner new and renewal business are up 33.9% and 1.9%, respectively. One of the main contributing factors to the strong growth in new business for both personal auto and homeowners is the Company’s web-based rating platform – Fremont Complete. From a personal lines standpoint, the Company’s independent agents are now able to quote and issue personal auto and homeowner policies through Fremont Complete which is a significant driver behind the premium growth in the personal segment.

The commercial segment, which is most affected by soft market conditions, experienced growth of 1.4%. New business increased 27.5%; however, renewal business was down 5.9% which is a reflection of the competitiveness of the soft market, especially on property driven accounts which is the majority of the Company’s commercial business. In addition, as noted in the first quarter, there was a $60,000 audit premium reduction on one of our larger accounts due to decreased payroll which negatively impacted our commercial renewal premiums during the nine month period ended September 30, 2007.

Farm direct premiums are up 1.8%, driven by an increase of 14.3% in new business premiums and a 1.7% increase in renewal premiums. Direct premiums written for marine business are up 5.5%, driven by renewal premiums which are up 5.7%, with new business down 0.8%. New business growth in the marine segment remains a challenge given the lagging Michigan economy and the impact that has on individuals’ discretionary spending on larger ticket items such as boats.

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

	2007		2006		Change		% Change
Net Premiums Written:
Personal	$	22,603,195	$	19,674,166	$	2,929,029	14.9	%
Commercial		5,624,319		5,623,571		748	0.0	%
Farm		3,269,361		3,209,394		59,967	1.9	%
Marine		1,554,153		1,471,885		82,268	5.6	%
	$	33,051,028	$	29,979,016	$	3,072,012	10.2	%

The increase in net premiums written is due to the overall increase in direct premiums written of 4,078,000 offset by an increase of $1,006,000 in ceded and assumed premiums written under the Company’s reinsurance agreements.

23

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

	2007		2006		Change			% Change
Net Premiums Earned:
Personal	$	21,642,198	$	19,021,941	$	2,620,257		13.8	%
Commercial		5,596,570		5,804,093		(207,523	)	(3.6	)%
Farm		3,257,431		3,152,749		104,682		3.3	%
Marine		1,243,738		1,161,389		82,349		7.1	%
	$	31,739,937	$	29,140,172	$	2,599,765		8.9	%

The increase in net premiums earned is due to the overall increase in direct premiums earned of $3,585,000 offset by an increase of $986,000 in ceded and assumed premiums earned under the Company’s reinsurance agreements.

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

	2007			2006			Change			% Change
Loss and LAE:
Personal	$	14,758,573		$	10,331,810		$	4,426,763		42.8	%
Commercial		2,731,477			2,691,188			40,289		1.5	%
Farm		1,674,146			1,385,140			289,006		20.9	%
Marine		520,879			575,701			(54,822	)	(9.5	)%
	$	19,685,075		$	14,983,839		$	4,701,236		31.4	%
Incurred Claim Count:
Personal		4,752			3,752			1,000		26.7	%
Commercial		420			351			69		19.7	%
Farm		262			302			(40	)	(13.2	)%
Marine		165			142			23		16.2	%
		5,599			4,547			1,052		23.1	%
Average Loss and LAE per Claim:
Personal	$	3,106		$	2,754		$	352		12.8	%
Commercial		6,504			7,667			(1,163	)	(15.2	)%
Farm		6,390			4,587			1,803		39.3	%
Marine		3,157			4,054			(897	)	(22.1	)%
	$	3,516		$	3,295		$	221		6.7	%
Loss and LAE Ratio:
Personal		68.2	%		54.3	%
Commercial		48.8	%		46.4	%
Farm		51.4	%		43.9	%
Marine		41.9	%		49.6	%
		62.0	%		51.4	%

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. Incurred losses for homeowners and personal auto increased $2,601,000 and $1,344,000, respectively, during the nine months ended September 30, 2007 compared to 2006. The homeowner line experienced increased loss severity as a result of weather related losses including wind, hail and lightening damages sustained during the second and third quarters as well as snow, ice and water damage losses as a result of the colder winter weather experienced during the first quarter 2007. Weather related losses increased approximately $1,794,000 during the nine months ended September 30, 2007 as compared to the same period in 2006. In addition, the Company experienced an increase in fire related losses during the nine month period in 2007 as compared to 2006. Weather patterns experienced during the first nine months of 2007 reflected more traditional weather activity typically experienced in Michigan. Although the Company did experience summer storm activity in 2006 it was not near the extent of storm activity experienced in 2007. Furthermore, during the first quarter of 2007 Michigan experienced a more normalized winter weather pattern evidenced by consistent below-freezing

24

temperatures and significant snow accumulation. 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. Loss and LAE from personal auto increased due to increased frequency driven by volume growth in this line. The personal auto line’s direct premiums written increased 30.7% during the first nine months of 2007 as compared to 2006. Furthermore, the majority of the increase in the incurred claim count for the personal segment was from increased personal auto claims particularly auto physical damage.

The commercial segment experienced a small increase in incurred loss and LAE as well as the loss and LAE ratio. Despite experiencing an increase in the number of claims as well as fire related losses during the nine months ended September 30, 2007 claim severity actually declined. Contributing to the drop in claim severity was a decrease in incurred loss and LAE in the workers compensation line of approximately $254,000 during the 2007 period compared to 2006. The farm segment experienced higher loss and LAE during the nine month period due to an increase in losses attributable to the previously mentioned weather conditions and fire losses experienced in the 2007 period. The marine segment experienced a slight drop in loss and LAE as well as the loss and LAE ratio. Despite an increase in the number of marine claims incurred during the nine months ended September 30, 2007 the severity of the claims reported actually declined in 2007.

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

	2007			2006			Change			% Change
Amortization of deferred policy acquisition costs	$	5,463,897		$	5,095,639		$	368,258		7.2	%
Other underwriting expenses		6,197,120			5,036,539			1,160,581		23.0	%
Total policy acquisition and other underwriting expenses	$	11,661,017		$	10,132,178		$	1,528,839		15.1	%
Net premiums earned	$	31,739,937		$	29,140,172		$	2,599,765		8.9	%
Expense ratio		36.7	%		34.8	%		1.9	%

Amortization of deferred policy acquisition costs increased during the nine months ended September 30, 2007 as compared to the same period in 2006 as a result of increased net earned premium volume. The increase in other underwriting expenses was caused by increased compensation expense ($225,000), higher depreciation associated with the Company’s web-based rating platform ($337,000), increased assessments from state mandated pools and associations ($195,000), increased survey and inspection fees driven by the growth in the personal auto line ($123,000). Furthermore, in 2006 other underwriting expenses were lower by approximately $272,000 due to premium tax refunds received on prior year amended returns.

Compensation expense increased due to an increase in headcount, 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 interface between our independent agents’ management systems and the Company’s policy processing system. Expenses associated with surveys and inspections, which are up 29%, are increasing due to the growth in the personal auto line which is up 30.7% through September 30, 2007. The increase in the overall expense ratio from 34.8% to 36.7% is driven primarily by increased depreciation which added 1.0 percentage point and increase in assessments from state mandated pools and associations which added 0.6 percentage points to the 2007 expense ratio.

25

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 nine months ended September 30 are as follows:

	2007			2006			Change			% Change
Fixed maturities	$	1,518,076		$	1,388,199		$	129,877		9.4	%
Equity securities		20,089			29,973			(9,884	)	(33.0	)%
Cash and cash equivalents		234,819			116,818			118,001		101.0	%
Gross investment income		1,772,984			1,534,990			237,994		15.5	%
Less: Investment expenses		(236,222	)		(229,854	)		6,368		2.8	%
Net investment income	$	1,536,762		$	1,305,136		$	231,626		17.7	%
Average invested assets (amortized cost basis)	$	60,572,630		$	55,692,367		$	4,880,263		8.8	%
Rate of return on average invested assets		3.4	%		3.1	%		0.3	%

For the nine months ended September 30, 2007, gross investment income from fixed maturities increased 9.4% over 2006, while income from cash and cash equivalents increased 101%. The increase in income from cash and cash equivalents was due to the fact that the Company had a larger portion of its invested assets placed in short-term securities over this time period. When income from cash and cash equivalents are combined with fixed maturities, gross investment income was 16.5% higher in the 2007 period as compared to 2006. Growth in invested assets, along with higher investment yields, has been responsible for the increase in gross investment income. At September 30, 2007 the fixed maturity portfolio had an effective duration of 4.86 years and a tax equivalent book yield of 5.31% compared to an effective duration of 3.96 years and a tax equivalent book yield of 4.87% at December 31, 2006.

Investment income from equity securities decreased approximately $9,800. 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 nine months ended September 30, 2006 the Company received dividends from common and preferred stocks it held during this time. During the nine months ended September 30, 2007 the Company only held mutual funds which typically do not pay dividends in the same manner as common and preferred stock. As a result of the items above, the annualized rate of return on average invested assets increased to 3.4% during 2007 from 3.1% during the same period in 2006.

The Company’s net realized gains (losses) for the nine months ended September 30, 2007 and 2006 are as follows:

	2007			2006		Change			% Change
Fixed maturities	$	(234,988	)	$	12,749	$	(247,737	)	(1943.2	)%
Equity securities		1,681,019			282,745		1,398,274		494.5	%
Total net realized gains	$	1,446,031		$	295,494	$	1,150,537		389.4	%

During the nine months ended September 30, 2007 the Company generated net realized gains from the equity portfolio of approximately $1,681,000 offset by realized losses of $235,000 from the fixed maturity portfolio for a combined net realized gain of $1,446,000. During the nine months ended September 30, 2007, the Company sold approximately $6.4 million in equity securities which generated the $1,681,000 in realized gains. The sales were generated in order to reduce the level of equity risk in the portfolio, rebalance the equity portfolio and take advantage of the unrealized market value appreciation in the equity portfolio. The majority of the cash generated from the equity sales will be placed into the fixed portfolio.

During 2007, the Company increased its holdings in tax exempt municipals in order to take advantage of the higher tax equivalent yields in that sector. This was accomplished by selling both corporate securities and other tax exempt municipals which had lower yields. The shift resulted in net realized losses of $235,000. At September 30, 2007 the fixed maturity portfolio had an effective duration of 4.86 years and a tax equivalent book yield of 5.31% compared to an effective duration of 4.34 years and a tax equivalent book yield of 5.12% at June 30, 2007.

Interest Expense. Interest expense decreased $32,000 during the nine months ended September 30, 2007 as compared to the same period in 2006. Approximately $26,000 of 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%. The remaining decline is due to the payoff of the surplus notes which occurred during September 2007.

Income Tax Expense. During the nine months ended September 30, 2007 and 2006 the Company recorded income tax expense of approximately $1,084,000 and $1,890,000 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 nine months ended September 30, 2007 was 30.4% compared to 32.8% in the prior year period. The decrease in the effective tax rate is due to increased tax-exempt interest income received during the second quarter of 2007 compared to 2006.

26

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 $3,065,000 and $7,188,000 for the nine months ended September 30, 2007 and 2006, respectively, a decrease of $4,123,000. During the nine months ended September 30, 2007 as compared to the same period in 2006, net premiums collected increased $1,819,000, net loss and LAE payments increased $5,639,000, policy acquisition and other underwriting expenses paid increased $965,000 and federal income taxes paid decreased $554,000. Other cash provided by operations increased $108,000 during the nine months ended September 30, 2007 compared to the same period in 2006.

During the nine months ended September 30, 2007 cash flow provided by investing activities was $2,057,000 while during the same period in 2006 cash flow used in investing activities was $4,266,000. The shift in cash flow provided by investing activities is due to the increased selling activity within the investment portfolio in 2007 compared to 2006 offset by increased expenditures for equipment and software.

Our debt structure consisted of approximately $2,890,000 of Series B Surplus Notes which carried a 7 percent interest rate. The notes matured and were repaid in September 2007.

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

The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments at September 30, 2007 and December 31, 2006 are as follows:

	September 30, 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	$	4,175,860	$	3,132	$	35,765	$	4,143,227
States and political subdivisions		22,552,763		201,607		68,181		22,686,189
Corporate securities		7,944,186		—		186,763		7,757,423
Mortgage-backed securities		12,188,271		35,394		207,810		12,015,855
		46,861,080		240,133		498,519		46,602,694
Equity securities – mutual funds		6,862,064		1,484,709		—		8,346,773
Total	$	53,723,144	$	1,724,842	$	498,519	$	54,949,467

27

	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 September 30, 2007, corporate securities accounted for 17% of our fixed maturity portfolio, mortgage backed securities were 26%, states and political subdivisions (tax-exempt municipals) were 49% and U. S. government and government agency bonds were 8%. At September 30, 2007, our equity portfolio, which consists entirely of mutual funds, was spread among the following mutual fund types: large-cap – 30%, mid-cap – 28%, small-cap – 18%, specialty – 4% and international – 20%.

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, 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 September 30, 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. Furthermore, the Company has both the intent and ability to hold such securities until maturity.

The following table summarizes the length of time securities with unrealized losses at September 30, 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	$	1,360,564	$	765	$	2,370,779	$	35,000	$	3,731,343	$	35,765
States and political subdivisions		6,626,150		43,803		2,086,272		24,378		8,712,422		68,181
Corporate securities		404,989		1,371		7,352,434		185,392		7,757,423		186,763
Mortgage-backed securities		1,733,575		12,750		6,728,753		195,060		8,462,328		207,810
		10,125,278		58,689		18,538,238		439,830		28,663,516		498,519
Common stocks and mutual funds		—		—		—		—		—		—
Total	$	10,125,278	$	58,689	$	18,538,238	$	439,830	$	28,663,516	$	498,519

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.

28

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, 2007. In September 2007 the Company’s surplus notes which totaled approximately $2,890,000 matured and were repaid.

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.

The following table shows the effects of a change in interest rate on the fair value of our fixed maturity investment portfolio. We have assumed an immediate increase or decrease of 1% or 2% in interest rates. You should not consider this assumption or the values shown in the table to be a prediction of actual future results.

Change in Rate	Portfolio Value		Change in Value
	(In thousands)
2%	$	41,686	$	(4,917	)
1%		44,162		(2,441	)
0		46,603		—
-1%		49,008		2,405
-2%		51,378		4,775

Credit Risk. At September 30, 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 effective duration of 4.86 years.

While sub-prime mortgage headlines continue to be a top story in the news, it is important to stress that these loans make up less than 15% of the mortgage-backed market. Sub-prime loans are made to borrowers with extremely low credit scores (FICO <620) and high loan-to-value ratios. These loans typically have rates well above “prime” rates (+200-300 basis points over current conventional mortgage loans). Compounding the problem, many sub-prime loans originated off of floating rate indices and are being reset at levels significantly higher than their original rates.

Given the Company’s propensity for high credit quality, our portfolio does not hold any investments in this lower-tier sub-set of the mortgage-backed market. Instead, we hold higher-quality pools that are well-diversified, avoiding any regional concentrations. As added protection, the majority of the securities held within the portfolio are agency-backed issues.

Equity Risk. Equity price risk is the risk that we will incur economic losses due to adverse changes in equity prices. The Company believes that by holding mutual funds as opposed to common or preferred stocks it has mitigated its equity risk exposure due to the diversification of the 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

29

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 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
3.1 (a)	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).
3.1 (b)	Certificate of Amendment to the Articles of Incorporation of Fremont Michigan InsuraCorp, Inc. (Incorporated by reference to Exhibit 3.1(b) to the Company’s Form 10-Q for the period ending June 20, 2007).

30

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.

31

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, 2007	By:	/s/ Richard E. Dunning
		Richard E. Dunning
		President and Chief Executive Officer
Date: November 13, 2007	By:	/s/ Kevin G. Kaastra
		Kevin G. Kaastra
		Vice President of Finance
		(principal financial and accounting officer)

32