Fremont Michigan InsuraCorp (FMMH) 10-Q 2011 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2011

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

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

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

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

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

	Number of Shares Outstanding as of May 2, 2011
COMMON STOCK (No Par Value)	1,785,047
(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	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Reserved	27
Item 5.	Other Information	27
Item 6.	Exhibits	27
SIGNATURES		28

2

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)

	March 31, 2011		December 31, 2010
Assets
Investments:
Fixed maturities available for sale, at fair value	$	58,249,181	$	57,686,802
Equity securities available for sale, at fair value		19,874,427		18,121,044
Mortgage loans on real estate from related parties		230,015		231,942
Total investments		78,353,623		76,039,788
Cash and cash equivalents		6,619,288		6,364,648
Premiums due from policyholders, net		12,102,661		11,556,272
Amounts due from reinsurers		11,988,645		11,197,774
Prepaid reinsurance premiums		2,668,818		2,568,638
Accrued investment income		530,602		552,678
Income taxes recoverable		121,485		698,672
Deferred policy acquisition costs		4,260,493		4,369,900
Deferred federal income taxes		2,602,930		2,913,698
Property and equipment, net of accumulated depreciation		3,400,981		3,513,902
Other assets		75,960		83,088
	$	122,725,486	$	119,859,058
Liabilities and Stockholders’ Equity
Liabilities:
Losses and loss adjustment expenses	$	29,551,568	$	29,344,160
Unearned premiums		32,184,138		32,579,456
Reinsurance funds withheld and premiums ceded payable		233,433		75,263
Accrued expenses and other liabilities		9,820,106		8,877,625
Total liabilities		71,789,245		70,876,504
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, 1,785,047 and 1,779,674 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		—		—
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—		—
Additional paid-in capital		9,986,276		9,813,362
Retained earnings		39,585,170		38,388,455
Accumulated other comprehensive income		1,364,795		780,737
Total stockholders’ equity		50,936,241		48,982,554
Total liabilities and stockholders’ equity	$	122,725,486	$	119,859,058

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

3

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Operations (Unaudited)

For the Three Months Ended March 31

	2011		2010
Revenues:
Net premiums earned	$	15,912,231	$	13,983,788
Net investment income		279,476		440,211
Net realized gains on investments		363,305		359,801
Other income, net		191,990		157,417
Total revenues		16,747,002		14,941,217
Expenses:
Losses and loss adjustment expenses, net		9,599,671		8,527,880
Policy acquisition and other underwriting expenses		5,292,140		4,923,146
Total expenses		14,891,811		13,451,026
Income before federal income tax expense		1,855,191		1,490,191
Federal income tax expense		587,075		460,586
Net income	$	1,268,116	$	1,029,605
Earnings per share
Basic	$	.71	$	.59
Diluted	$	.70	$	.57

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

4

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statement of Stockholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2011

	Common Stock Class A (Number of Shares)		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income			Total
Balance, December 31, 2010		1,779,674	$	9,813,362	$	38,388,455		$	780,737		$	48,982,554
Comprehensive income:
Net income						1,268,116						1,268,116
Net unrealized gains on investments, net of tax									595,094			595,094
Amortization of prior service credit, net of tax									(14,138	)		(14,138	)
Amortization of net actuarial loss, net of tax									3,102			3,102
Total comprehensive income												1,852,174
Common stock issued		5,373		132,504								132,504
Dividends declared at $0.04 per share						(71,401	)					(71,401	)
Stock-based compensation				40,410								40,410
Balance, March 31, 2011		1,785,047	$	9,986,276	$	39,585,170		$	1,364,795		$	50,936,241

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

5

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31

	2011			2010
Cash flows from operating activities:
Net income	$	1,268,116		$	1,029,605
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		259,011			220,287
Deferred federal income taxes		9,889			(12,468	)
Stock based compensation expense		40,410			31,203
Net realized gains on investments		(363,305	)		(359,801	)
Net amortization of premiums on investments		293,710			128,765
Excess tax benefit from stock options exercised		—			(20,220	)
Changes in assets and liabilities:
Premiums due from policyholders		(546,389	)		(207,519	)
Amounts due from reinsurers		(790,871	)		(2,227,048	)
Prepaid reinsurance premiums		(100,180	)		(173,510	)
Accrued investment income		22,076			60,527
Income taxes recoverable		577,187			—
Deferred policy acquisition costs		109,407			163,928
Other assets		(6,984	)		4,230
Losses and loss adjustment expenses		207,408			3,949,580
Unearned premiums		(395,318	)		(817,463	)
Reinsurance balances payable		158,170			(20,699	)
Accrued expenses and other liabilities		214,677			(593,732	)
Net cash provided by operating activities		957,014			1,155,665
Cash flows from investing activities:
Proceeds from sales and maturities of fixed maturity investments		3,239,955			16,872,064
Proceeds from sales of equity investments		4,005,297			1,601,680
Purchases of fixed maturity investments		(4,134,102	)		(15,496,881	)
Purchases of equity investments		(4,455,659	)		(3,595,399	)
Change in net payable from investment purchases		725,195			10,570
Repayment of mortgage loans on real estate from related parties		1,927			1,790
Purchase of property and equipment, net		(146,090	)		(620,399	)
Net cash used in investing activities		(763,477	)		(1,226,575	)
Cash flows from financing activities:
Proceeds from issuance of common stock		132,504			256,241
Share repurchases of common stock		—			(81,669	)
Dividends paid to stockholders		(71,401	)		(70,381	)
Tax benefit from exercised stock options		—			20,220
Net cash provided by financing activities		61,103			124,411
Net increase in cash and cash equivalents		254,640			53,501
Cash and cash equivalents, beginning of period		6,364,648			7,063,679
Cash and cash equivalents, end of period	$	6,619,288		$	7,117,180

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 and farm 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, 2010. The December 31, 2010 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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

2. New Accounting Pronouncements

Adopted Accounting Standards

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

Prospective Accounting Standards

In October 2010, updated guidance was issued to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance is not expected to have an impact on our financial statements.

3. Investments

The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments at March 31, 2011 and December 31, 2010 are as follows:

7

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

	March 31, 2011
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	7,448,487	$	23,564	$	124,760	$	7,347,291
States and political subdivisions		20,887,950		187,867		480,276		20,595,541
Corporate securities		17,578,512		105,658		291,552		17,392,618
Mortgage-backed securities		12,950,855		88,796		125,920		12,913,731
		58,865,804		405,885		1,022,508		58,249,181
Equity securities		17,638,861		2,453,778		218,212		19,874,427
Total	$	76,504,665	$	2,859,663	$	1,240,720	$	78,123,608
	December 31, 2010
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	7,472,982	$	28,944	$	104,882	$	7,397,044
States and political subdivisions		20,115,479		175,824		536,708		19,754,595
Corporate securities		15,767,158		119,232		260,057		15,626,333
Mortgage-backed securities		14,896,617		108,342		96,129		14,908,830
		58,252,236		432,342		997,776		57,686,802
Equity securities		16,838,326		1,767,563		484,845		18,121,044
Total	$	75,090,562	$	2,199,905	$	1,482,621	$	75,807,846

The cost or amortized cost and estimated fair value of fixed maturities at March 31, 2011, by contractual maturity, are shown below. Expected maturities on certain corporate and mortgage-backed investments may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Cost or Amortized Cost		Estimated Fair Value
Due in one year or less	$	1,830,664	$	1,853,272
Due after one year through five years		19,440,104		19,479,066
Due after five years through ten years		22,754,701		22,182,296
Due after ten years		1,889,479		1,820,816
Mortgage-backed securities		12,950,856		12,913,731
	$	58,865,804	$	58,249,181

8

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Evaluating Investments for Other-than-Temporary Impairments

The Company reviews the status and market value changes of its investment portfolio on at least a quarterly basis during the year, and any provisions for other-than-temporary impairments in the portfolio’s value are evaluated and established at each quarterly balance sheet date. The following tables are used as part of our impairment analysis.

The tables below show the total value of securities that were in an unrealized loss position as of March 31, 2011 and December 31, 2010 including the length of time they have been in an unrealized loss position. As of March 31, 2011 and December 31, 2010, unrealized losses, as shown in the following tables, were 1.5% and 1.8%, respectively, of total invested assets including cash and cash equivalents.

	March 31, 2011
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	5,507,237	$	124,760	$	—	$	—	$	5,507,237	$	124,760
States and political subdivisions		13,032,848		480,276		—		—		13,032,848		480,276
Corporate securities		9,696,267		291,552		—		—		9,696,267		291,552
Mortgage-backed securities		8,383,968		125,920		—		—		8,383,968		125,920
		36,620,320		1,022,508		—		—		36,620,320		1,022,508
Equity securities		1,447,526		85,573		2,496,520		132,639		3,944,046		218,212
Total	$	38,067,846	$	1,108,081	$	2,496,520	$	132,639	$	40,564,366	$	1,240,720
	December 31, 2010
	Less than 12 Months				12 Months or More				Total
	Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses		Estimated Fair Value		Gross Unrealized Losses
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	5,541,392	$	104,882	$	—	$	—	$	5,541,392	$	104,882
States and political subdivisions		13,026,682		536,708		—		—		13,026,682		536,708
Corporate securities		8,071,331		260,057		—		—		8,071,331		260,057
Mortgage-backed securities		8,980,215		96,129		—		—		8,980,215		96,129
		35,619,620		997,776		—		—		35,619,620		997,776
Equity securities		1,585,866		71,112		4,339,739		413,733		5,925,605		484,845
Total	$	37,205,486	$	1,068,888	$	4,339,739	$	413,733	$	41,545,225	$	1,482,621

The following table shows the composition of the fixed maturity securities in unrealized loss positions at March 31, 2011 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.

9

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

NAIC Rating	Equivalent S&P Rating	Equivalent Moody's Rating	Book Value		Fair Value		Unrealized Loss		Percent to Total
1	AAA/AA/A	Aaa/Aa/A	$	36,887,711	$	35,872,508	$	1,015,203		99.3	%
2	BBB	Baa		725,302		718,112	$	7,190		0.7	%
3	BB	Ba		—		—		—		—
4	B	B		29,815		29,700	$	115		0.0	%
5	CCC or lower	Caa or lower		—		—		—		—
			$	37,642,828	$	36,620,320	$	1,022,508		100.0	%

In reviewing its fixed maturity securities for other than temporary impairment, the Company takes into consideration the security’s market price history, the length of time that the security’s fair value has been below cost, the issuer’s operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities market conditions, and analyst expectations, to reach its conclusions.

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

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

As of March 31, 2011, the investment portfolio included 70 fixed maturity securities and 40 equity securities in an unrealized loss position for less than 12 months and 5 equity securities in an unrealized loss position for more than 12 months. Of the fixed maturity securities, 11 were trading between 91% and 95% and the remaining 59 were trading above 95% of amortized cost. One fixed maturity security in an unrealized loss position is rated below investment grade. This security is trading above 95% of amortized cost. All remaining fixed maturity securities in an unrealized loss position and assigned a rating by a commercial credit rating agency are rated investment grade securities.

As of March 31, 2011, the investment portfolio included 45 equity securities in an unrealized loss position. Of these forty-five equity securities, 3 were trading below 75% of amortize cost, 1 was trading between 75% and 85% of amortized cost, 11 were trading between 86% and 95% of amortized cost and the remaining 30 were trading above 95% of amortized cost.

As of December 31, 2010, the investment portfolio included 64 fixed maturity securities and 32 equity securities in an unrealized loss position for less than 12 months and 9 equity securities in an unrealized loss position for more than 12 months. Of the fixed maturity securities, 11 were trading between 91% and 95% of cost and 53 were trading above 95% of amortized cost. All of the fixed maturity securities in an unrealized loss position and assigned a rating by a commercial credit rating agency are rated investment grade securities.

As of December 31, 2010, the investment portfolio included 41 equity securities in an unrealized loss position. Of these forty-one equity securities, 1 was trading under 75% of amortized cost, 3 were trading between 75% and 85% of amortized cost, 17 were trading between 86% and 95% of amortized cost and the remaining 20 were trading above 95% of amortized cost.

While all of these securities are monitored for potential impairment, the Company’s experience indicates that they generally do not present as great a risk of impairment, as fair value often recovers over time. The equity securities have generally been adversely affected by the downturn in the financial markets and overall economic conditions. Management believes that the analysis of each of these securities, in addition to the fact that the Company has both the intent and ability to hold these securities until their recovery, supports our view that these securities were not other-than-temporarily impaired.

10

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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

	2011			2010
Gross realized investment gains:
Fixed maturities	$	18,866		$	287,481
Equity securities		407,095			72,760
		425,961			360,241
Gross realized investment losses:
Fixed maturities		(5,733	)		—
Equity securities		(56,923	)		(440	)
		(62,656	)		(440	)
Net realized gains on investments	$	363,305		$	359,801

4. Fair Value Measurements

Investments

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

We are permitted to elect to measure financial instruments and certain other items at fair value, with the change in fair value recorded in earnings. We elected not to measure any eligible items using the fair value option.

Accounting standards define fair value as the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date, and establishes a framework to make the measurement of fair value more consistent and comparable. In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”).

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

Level 1

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

Level 2

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

Level 3

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

11

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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

The following tables present our available-for-sale investments measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010 classified by the valuation hierarchy (as discussed above):

	March 31, 2011
			Fair Value Measurements Using
	Total		Level 1		Level 2		Level 3
Available-for-Sale Investments:
Fixed Maturity Securities
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	7,347,292	$	4,417,319	$	2,929,973	$	—
States and political subdivisions		20,595,541		—		20,595,541		—
Corporate securities		17,101,979		—		17,101,979		—
Mortgage-backed securities		13,204,369		—		13,204,369		—
		58,249,181		4,417,319		53,831,862		—
Equity Securities		19,874,427		19,874,427		—		—
Total	$	78,123,608	$	24,291,746	$	53,831,862	$	—
	December 31, 2010
			Fair Value Measurements Using
	Total		Le vel 1		Level 2		Level 3
Available-for-Sale Investments:
Fixed Maturity Securities
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	7,397,044	$	4,441,453	$	2,955,591	$	—
States and political subdivisions		19,754,595		—		19,754,595		—
Corporate securities		15,626,333		—		15,626,333		—
Mortgage-backed securities		14,908,830		—		14,908,830		—
		57,686,802		4,441,453		53,245,349		—
Equity Securities		18,121,044		18,121,044		—		—
Total	$	75,807,846	$	22,562,497	$	53,245,349	$	—

5. Comprehensive Income

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

12

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

	2011			2010
Net income	$	1,268,116		$	1,029,605
Other comprehensive income, net of tax:
Unrealized gains on investments		834,875			647,581
Reclassification adjustment for realized gains on investments included in net income		(239,781	)		(237,469	)
Amortization of prior service credit		(14,138	)		(14,136	)
Amortization of net actuarial loss		3,102			409
Other comprehensive income (loss), net of tax		584,058			396,385
Comprehensive income	$	1,852,174		$	1,425,990

6. Earnings Per Share

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

	2011		2010
Numerator for basic and diluted earnings per share:
Net income	$	1,268,116	$	1,029,605
Denominator:
Denominator for basic earnings per share – weighted average shares outstanding		1,781,262		1,758,284
Effect of dilutive stock options		41,453		40,203
Denominator for diluted earnings per share – adjusted weighted average shares outstanding		1,822,715		1,798,487
Basic earnings per share	$	0.71	$	0.59
Diluted earnings per share	$	0.70	$	0.57

7. Segment Information

The Company defines its operations as property and casualty insurance operations. Up until December 31, 2010, the Company classified its insurance products into four major lines: personal, commercial, farm and marine. The categorization of our products into the four major insurance lines was consistent with the way results were regularly evaluated by management in deciding how to allocate resources and in assessing performance. Effective January 1, 2011, the Company reorganized its internal underwriting operations which consolidated the marine products into personal lines. As such, beginning January 1, 2011, the Company now classifies its insurance products into three major lines: personal, commercial and farm. The separate financial information of these three major insurance lines is consistent with the way results are evaluated by management in deciding how to allocate resources and in assessing performance. As a result of this change, all prior period data has been restated to reflect the consolidation of the marine line into personal lines.

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

The Company evaluates product line profitability based on underwriting gain (loss). Certain expenses are allocated based on measurements including premiums, incurred losses or other departmental employee data. Underwriting gain (loss) by product line would change if different methods were applied.

The Company does not allocate assets, net investment income, net realized gains on investments or other income to its product lines. In addition, the Company does not separately identify depreciation expense related to the building by product line as such disclosure would be impracticable.

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Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

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

	2011		2010
Net premiums earned:
Personal lines	$	12,428,116	$	10,854,317
Commercial lines		2,235,179		1,940,394
Farm		1,248,936		1,189,077
Total net premiums earned		15,912,231		13,983,788
Loss and loss adjustment expenses:
Personal lines		7,954,264		7,164,411
Commercial lines		985,440		1,040,337
Farm		659,967		323,132
Total loss and loss adjustment expenses		9,599,671		8,527,880
Policy acquisition and other underwriting expenses:
Personal lines		3,690,422		3,414,131
Commercial lines		1,143,187		1,060,693
Farm		458,531		448,322
Total policy acquisition and other underwriting expenses		5,292,140		4,923,146
Underwriting gain:
Personal lines		783,430		275,775
Commercial lines		106,552		(160,636	)
Farm		130,438		417,623
Total underwriting gain		1,020,420		532,762
Net investment income		279,476		440,211
Net realized gains on investments		363,305		359,801
Other income, net		191,990		157,417
Income before federal income taxes	$	1,855,191	$	1,490,191

8. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities included the following:

	March 31, 2011		December 31, 2010
Commissions payable	$	2,501,551	$	2,886,243
Advance premiums		1,340,370		840,901
Accrued salaries & employee benefits		585,008		995,806
Postretirement health care benefit obligation		2,180,307		2,152,865
Payable from investment purchases		840,665		129,582
State mandated pool assessments		1,641,258		1,187,992
Other		730,947		684,236
	$	9,820,106	$	8,877,625

9. Other Postretirement Plan

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

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Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

	2011			2010
Components of net periodic benefit cost:
Service cost	$	—		$	—
Interest cost		27,355			25,352
Amortization of unrecognized prior service credit		(21,421	)		(21,420	)
Amortization of unrecognized net actuarial loss		4,700			620
Net periodic benefit cost	$	10,634		$	4,552

As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. For the three months ended March 31, 2011, the Company has made contributions to the plan of approximately $12,000. During 2011, the Company expects to contribute a total of $81,000 to the plan to cover anticipated benefit payments.

10. Reinsurance

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

	2011						2010
	Written			Earned			Written			Earned
Direct	$	18,818,589		$	19,207,730		$	16,086,582		$	16,900,954
Assumed		21,420			27,595			13,440			16,531
Ceded		(3,545,414	)		(3,323,094	)		(3,100,663	)		(2,933,697	)
Net premiums	$	15,294,595		$	15,912,231		$	12,999,359		$	13,983,788
							2011			2010
Loss and LAE incurred							$	11,342,831		$	11,464,997
Reinsurance recoveries								(1,743,160	)		(2,937,117	)
Net loss and LAE incurred							$	9,599,671		$	8,527,880

11. Federal Income Taxes

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

	2011		2010
Current expense	$	577,186	$	473,054
Deferred expense (benefit)		9,889		(12,468	)
Total	$	587,075	$	460,586

For the three months ended March 31, actual federal income taxes vary from amounts computed by applying the current federal income tax rate of 34 percent to income before federal income taxes due to the following:

	2011					2010
Income before federal income taxes	$	1,855,191				$	1,490,191
Tax at statutory rate		630,765		34.0	%		506,665		34.0	%
Tax effect of:
Nontaxable investment income		(55,921	)	(3.0	%)		(56,727	)	(3.8	%)
Nondeductible expenses		12,231		0.7	%		10,648		0.7	%
	$	587,075		31.7	%	$	460,586		30.9	%

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Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Deferred federal income tax assets and liabilities are recognized for the estimated future tax consequences attributable to the difference between financial statement carrying amounts of existing assets and liabilities, and their respective tax bases. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company’s management reviews both positive and negative evidence, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code Section 382 (“Section 382”), future income projections and the overall prospects of our business. Based upon management’s assessment of all available evidence, including the Company’s cumulative net income for recent fiscal years, estimates of current and future profitability and the overall prospects of our business, it has been determined that as of March 31, 2011 it is more likely than not that sufficient taxable income will exist in the periods of reversal in order to realize the net deferred tax asset. Based on the annual Section 382 limitation of the utilization of net operating loss carryforwards management has determined that approximately $2,605,000 of net operating loss carryforwards will not be realized and therefore a valuation allowance of approximately $886,000 will be maintained for the deferred tax asset associated with these amounts.

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

	March 31, 2011			December 31, 2010
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves	$	533,335		$	539,107
Unearned premium reserves		2,101,280			2,109,316
Postretirement benefits accrued		741,304			731,974
Net operating loss carryforward		1,931,948			1,965,950
Alternative minimum tax credit carryforward		357,697			357,697
Other deferred tax assets		335,027			306,672
Total deferred federal income tax assets		6,000,591			6,010,716
Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs		(1,510,756	)		(1,524,469	)
Unrealized gains on investments		(550,441	)		(243,876	)
Property and equipment		(447,945	)		(440,186	)
Other deferred tax liabilities		(2,948	)		(2,916	)
Total deferred federal income tax liabilities		(2,512,090	)		(2,211,447	)
Net deferred federal income tax asset		3,488,501			3,799,269
Valuation allowance		(885,571	)		(885,571	)
Deferred federal income taxes	$	2,602,930		$	2,913,698

12. Subsequent Event

On April 18, 2011 the Company announced that it entered into a definitive agreement to be acquired by Auto Club Insurance Association for $36.15 per share. Under the terms of the agreement, Company shareholders will receive $36.15 per share in cash. Completion of the transaction, which is expected to occur in the third quarter of 2011, is subject to the approval of Company shareholders, customary closing conditions and regulatory approvals. A copy of the press release announcing the transaction was filed as an exhibit to the Company’s Current Report on Form 8-K, filed with Securities and Exchange Commission on April 18, 2011. A copy of the Agreement and Plan of Merger was filed as an exhibit to the Company’s Current Report on Form 8-K, filed on April 21, 2011.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and the Notes thereto included elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, 2010, particularly “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report.

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

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

• the failure of the Company to close its pending Agreement and Plan of Merger with Auto Club Insurance Association;

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

• the effects of weather-related and other catastrophic events;

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

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

• inflation;

• the cost, availability and collectibility of reinsurance;

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

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

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

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

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

• adverse litigation or arbitration results;

• technological change;

• the ability to carry out our business plans;

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

• the effect of Federal legislative or regulatory matters; and

• the effect of Federal or state judicial rulings.

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

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

Overview of Fremont Michigan InsuraCorp

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

17

because it is the holding company for Fremont Insurance Company. As of March 31, 2011, we had approximately 75,900 policies in force and assets of $122.7 million.

General

We use accounting principles that are in compliance with those generally accepted in the United States of America (GAAP). Management’s discussion and analysis covers the Company’s financial condition and results of operations for the three months ended March 31, 2011 and 2010. 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 2010 Annual Report on Form 10-K. There have been no material changes to these policies during the most recent quarter.

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

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

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

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

Reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. Accordingly, the ultimate liability for unpaid losses and loss adjustment expenses will likely differ from the amount recorded at March 31, 2011.

18

We have three business segments: personal, commercial and farm. The following table shows the breakdown of our loss and LAE reserves between reported losses and IBNR losses by segment as of March 31, 2011 and December 31, 2010 (in thousands):

	March 31, 2011		December 31, 2010
Reported losses
Personal	$	15,201	$	14,376
Commercial		2,519		3,182
Farm		1,327		1,772
		19,047		19,330
IBNR losses
Personal		6,355		6,290
Commercial		3,835		3,435
Farm		315		289
		10,505		10,014
Total
Personal		21,556		20,666
Commercial		6,354		6,617
Farm		1,642		2,061
	$	29,552	$	29,344

The reserves are reported gross of any amounts recoverable from reinsurers and are reduced for anticipated salvage and subrogation. Anticipated salvage and subrogation as of March 31, 2011 and December 31, 2010, was approximately $33,000 and $79,000, respectively.

Investments.At March 31, 2011 and December 31, 2010, all of the Company’s investments are classified as available-for-sale and are investments that would be available to be sold in response to the Company’s liquidity needs, changes in market interest rates and asset-liability management strategies, among others. Available-for-sale investments are recorded at fair value, with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported as a component of accumulated other comprehensive income or loss until realized.

The Company reviews the status and market value changes of its investment portfolio on at least a quarterly basis during the year, and any provisions for other-than-temporary impairments in the portfolio’s value are evaluated and established at each quarterly balance sheet date. When a fixed maturity security has a decline in value, where fair value is below amortized cost, an OTTI write-down is triggered in circumstances where (1) the Company has the intent to sell the security, (2) it is more-likely-than-not that the Company will be required to sell the security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the security. If the Company intends to sell the security or if it is more-likely-than-not the Company will be required to sell the security before recovery, an OTTI write-down is recognized as a realized loss in the statement of operations equal to the difference between the security’s amortized cost and its fair value. If the Company does not intend to sell the security or it is not more-likely-than-not that the Company will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing the credit loss, which is recognized as a realized loss in the statement of operations, and the amount related to all other factors, which is recognized in other comprehensive income.

When an equity security has a decline in value, where fair value is below cost, that is deemed to be other than temporary, the Company reduces the book value of such security to its current fair value, recognizing the decline as a realized loss in the statement of operations. Any future increases in the market value of investments written down are reflected as changes in unrealized gains as part of accumulated other comprehensive income within stockholders’ equity.

In reviewing its fixed maturity securities for other than temporary impairment, the Company takes into consideration the security’s market price history, the length of time that the security’s fair value has been below cost, the issuer’s operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audit opinion, industry and securities market conditions, and analyst expectations, to reach its conclusions.

In reviewing its equity securities, which include common stock and mutual funds, the Company takes into consideration the security’s market price history, the length of time that the security’s fair value has been below cost, the individual investments held

19

within the mutual fund, most current audit opinion, industry and securities market conditions, and analyst expectations to reach its conclusions. In addition to analyzing each individual security that has a fair value below cost, the Company also considers its intent and ability to hold a security until its fair value is equal to or greater than its cost.

Reinsurance.Net premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned premiums ceded to them are reported as assets. Reinsurance assumed from other companies, including assumed premiums written and earned and losses and LAE, is accounted for in the same manner as direct insurance written.

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

At March 31, 2011 and December 31, 2010, the Company’s recoverable from reinsurers was comprised of the following:

	March 31, 2011		December 31, 2010
Paid losses and LAE	$	1,503,387	$	1,081,212
Unpaid losses and LAE		10,485,258		10,116,562
Amounts due from reinsurers	$	11,988,645	$	11,197,774

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.

20

Results of Operations – Three Months Ended March 31, 2011 and 2010

Consolidated Results of Operations. The following table shows the underwriting gain or loss as well as other revenue and expense items included in our unaudited consolidated statements of income for the three months ended March 31, 2011 and 2010. 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
	2011			2010			Dollar			Percentage
Underwriting gain (loss)
Personal		783,430			275,775		$	507,655			184.1	%
Commercial		106,552			(160,636	)		267,188			166.3	%
Farm		130,438			417,623			(287,185	)		(68.8	%)
Total underwriting gain		1,020,420			532,762			487,658			91.5	%
Other revenue items
Net investment income		279,476			440,211			(160,735	)		(36.5	%)
Net realized gains on investments		363,305			359,801			3,504			1.0	%
Other income		191,990			157,417			34,573			22.0	%
Total other revenue items		834,771			957,429			(122,658	)		(12.8	%)
Income before federal income taxes		1,855,191			1,490,191			365,000			24.5	%
Federal income tax expense		(587,075	)		(460,586	)		(126,489	)		27.5	%
Net income	$	1,268,116		$	1,029,605		$	238,511			23.2	%

Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the three months ended March 31, 2011 and 2010.

	2011			2010			Change			% Change
Direct premiums written	$	18,818,589		$	16,086,582		$	2,732,007			17.0	%
Net premiums written	$	15,294,595		$	12,999,359		$	2,295,236			17.7	%
Net premiums earned	$	15,912,231		$	13,983,788		$	1,928,443			13.8	%
Loss and LAE		9,599,671			8,527,880			1,071,791			12.6	%
Policy acquisition and other underwriting expenses		5,292,140			4,923,146			368,994			7.5	%
Underwriting gain (loss)	$	1,020,420		$	532,762		$	487,658			91.5	%
Loss and LAE ratio		60.3	%		61.0	%		(0.7	%)
Policy acquisition and other underwriting expense ratio		33.3	%		35.2	%		(1.9	%)
Combined ratio		93.6	%		96.2	%		(2.6	%)

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

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

	2011		2010		$ Change		% Change
Direct Premiums Written:
Personal	$	13,698,581	$	12,052,175	$	1,646,406		13.7	%
Commercial		3,695,404		2,720,218		975,186		35.8	%
Farm		1,424,604		1,314,189		110,415		8.4	%
	$	18,818,589	$	16,086,582	$	2,732,007		17.0	%

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The market continues to be very competitive for target market personal lines and commercial lines business. While personal lines have seen some rate hardening, commercial lines continues to be soft. Despite these market conditions, we continue to be able to grow target market business. Direct premium written for the personal segment increased 13.7%, with personal auto up 19.9% and homeowners up 6.8%. Personal auto renewal business is up 23.3% and is the main driver of growth as new business growth is relatively flat at 0.4%. Renewal business growth is a result of rate increases taken over the last 12 months coupled with our retention ratio which is in the low nineties. Growth in our homeowner’s line is a result of renewal premium which is up 11.3% offset by a decline in new business which is down 14.8%.

Direct premium written for the commercial segment increased 35.8% driven by both new and renewal premium growth. New commercial business is up 64.3% while renewal business is up 20.0%. In August 2010, we launched a new commercial package web-based rating platform that has significantly increased the ease of quoting and issuing commercial business. The new rating platform along with a strong emphasis from marketing on commercial growth is driving additional commercial business. Farm direct written premium was up 8.4%, driven by new and renewal premiums which were up 9.7% and 6.7% respectively.

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

	2011		2010		$ Change		% Change
Net Premiums Written:
Personal	$	11,307,507	$	9,950,819	$	1,356,688		13.6	%
Commercial		2,781,324		1,967,434		813,890		41.4	%
Farm		1,205,764		1,081,106		124,658		11.5	%
	$	15,294,595	$	12,999,359	$	2,295,236		17.7	%

The increase in net premiums written is due to growth in direct premiums written of $2,732,000 offset by an increase of $437,000 in ceded premiums written under the Company’s reinsurance agreements.

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

	2011		2010		$ Change		% Change
Net Premiums Earned:
Personal	$	12,428,116	$	10,854,317	$	1,573,799		14.5	%
Commercial		2,235,179		1,940,394		294,785		15.2	%
Farm		1,248,936		1,189,077		59,859		5.0	%
	$	15,912,231	$	13,983,788	$	1,928,443		13.8	%

The increase in net premiums earned is due to the overall increase in direct premiums earned of $2,306,000 offset by an increase of $378,000 in ceded premiums earned under the Company’s reinsurance agreements.

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

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	2011			2010			$ Change			% Change
Loss and LAE:
Personal	$	7,954,264		$	7,164,411		$	789,853			11.0	%
Commercial		985,440			1,040,337			(54,897	)		(5.3	%)
Farm		659,967			323,132			336,835			104.2	%
	$	9,599,671		$	8,527,880		$	1,071,791			12.6	%
Incurred Claim Count:
Personal		2,544			2,125			419			19.7	%
Commercial		298			225			73			32.4	%
Farm		105			75			30			40.0	%
		2,947			2,425			522			21.5	%
Average Loss and LAE per Claim:
Personal	$	3,127		$	3,371		$	(244	)		(7.2	%)
Commercial		3,307			4,624			(1,317	)		(28.5	%)
Farm		6,285			4,308			1,977			45.9	%
	$	3,257		$	3,517		$	(260	)		(7.4	%)
Loss and LAE Ratio:
Personal		64.0	%		66.0	%
Commercial		44.1	%		53.6	%
Farm		52.8	%		27.2	%
		60.3	%		61.0	%

The loss ratio for the personal segment decreased 2 percentage points to 64% during the first quarter of 2011 compared to 2010. The loss ratio for personal auto decreased from 69.1% in the 2010 quarter to 64.2% in the first quarter of 2011. The decrease in the loss ratio for personal auto was primarily a result of a decline in severity from casualty related losses partially offset by an increase in auto physical damage claim frequency and severity. The loss ratio for homeowners increased to 74.8% in the first quarter of 2011, up from 69.6% in the first quarter of 2010. The increase in the homeowner’s loss ratio was a result of increased weather related claims from wind, freezing and water damage.

The commercial segment’s loss ratio decreased 9.5 percentage points to 44.1% for the first quarter of 2011. The lower loss ratio was impacted by a decrease in both fire and weather related losses. The farm segment’s loss ratio increased to 52.8% from 27.2% as a result of increased fire and weather related losses during the 2011 quarter.

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

	2011			2010			Change			% Change
Amortization of deferred policy acquisition costs	$	2,484,265		$	2,235,837		$	248,428			11.1	%
Other underwriting expenses		2,807,875			2,687,309			120,566			4.5	%
Total policy acquisition and other underwriting expenses	$	5,292,140		$	4,923,146		$	368,994			7.5	%
Net premiums earned	$	15,912,231		$	13,983,788		$	1,928,443			13.8	%
Expense ratio		33.3	%		35.2	%		(1.9	%)

Amortization of deferred policy acquisition costs (“DAC”) increased during the first quarter of 2011 as compared to the same period in 2010 as a result of increased earned premium volume. As a percentage of net premiums earned, DAC amortization decreased slightly from 16.0% to 15.6% as a result of continued growth in our personal auto book of business which is a lower commission product. Other underwriting expenses as a percentage of net premiums earned decreased from 19.2% for the first quarter 2010 to 17.6% for the 2011 first quarter. The decrease is a result of continued growth in net premiums earned and a modest increase in other underwriting expenses.

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

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	2011			2010			Change			% Change
Fixed maturities	$	305,612		$	472,130		$	(166,518	)		(35.3	%)
Equity securities		86,035			34,826			51,209			147.0	%
Cash and cash equivalents		6,571			11,460			(4,889	)		(42.7	%)
Gross investment income		398,218			518,416			(120,198	)		(23.2	%)
Less: Investment expenses		(118,742	)		(78,205	)		40,537			51.8	%
Net investment income	$	279,476		$	440,211		$	(160,735	)		(36.5	%)
Average invested assets (amortized cost basis)	$	82,520,561		$	75,263,075		$	7,257,486			9.6	%
Rate of return on average invested assets		1.4	%		2.3	%		(0.9	%)

Gross investment income from the fixed portfolio was lower in the first quarter of 2011 than in same period in 2010 as a result of realized gains from the sale of securities in 2010. While bond yields remained low through much of 2010, a significant number of appreciated securities were sold and gains were realized from these transactions. During 2011 investment income is expected to be lower than 2010, because the book yield of the portfolio declined as a result of the sales. As interest rates moved higher over the first quarter of 2011, the portfolio tax-equivalent book yield increased from 3.01% to 3.05%.

Portfolio duration was 4.68 at March 31, 2011, below the 5.12 duration of the Barclays Aggregate Index. The shorter portfolio duration compared to the Aggregate Index should result in lower price volatility from interest rate movements. The bulk of the portfolio consists of bonds maturing in less than 10 years. Average credit quality of the portfolio remains at AA. Tax-exempt municipal bonds and taxable corporate bonds make up 30% and 26% of the portfolio, respectively.

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

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

	2011		2010		Change			% Change
Net realized gains - fixed maturities	$	13,133	$	287,481	$	(274,348	)		(95.4	%)
Net realized gains - equity securities		350,172		72,320		277,852			384.2	%
Total net realized gains	$	363,305	$	359,801	$	3,504			1.0	%

During the quarter ended March 31, 2011, the Company had sales and maturities of fixed maturity securities of approximately $3.3 million which generated realized gains of $13,133. In addition, the Company had equity sales of approximately $4.0 million which generated realized gains of $350,172. During the quarter ended March 31, 2010, the Company had sales and maturities of fixed maturity securities of approximately $16.9 million which generated realized gains of $287,481. In addition, the Company had equity sales of approximately $1.6 million which generated realized gains of $72,320.

Income Tax Expense. During the quarters ended March 31, 2011 and 2010, the Company recorded income tax expense of approximately $587,000 and $461,000, respectively. The increase is due to higher pre-tax income in the 2011 quarter compared to the prior year quarter. The effective tax rate for the quarter ended March 31, 2011 was 31.6% compared to 30.9% in the prior year quarter. The increase in the effective tax rate is due to increased income from underwriting during the first quarter 2011 as compared to the prior year quarter.

Liquidity and Capital Resources

The principal sources of funds for the Company are insurance premiums, investment income and proceeds from the maturity and sale of invested assets. Funds are primarily used for the payment of claims, commissions, salaries and employee benefits, other operating expenses and shareholder dividends. Our short and long term liquidity requirements vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and because of the potential for large losses, either individually or in the aggregate.

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

Cash flow provided by operations was $957,000 and 1,156,000 for the three months ended March 31, 2011 and 2010, respectively, a decrease of $199,000. During the three months ended March 31, 2011 as compared to the same period in 2010, net premiums collected increased $2,345,000, net loss and LAE payments increased $3,378,000, policy acquisition and other underwriting expenses paid decreased $195,000 and federal income taxes paid decreased $650,000. Other cash provided by operations decreased $11,000 during the three months ended March 31, 2011 compared to the same period in 2010.

During the three months ended March 31, 2011 and 2010, cash flow used in investing activities was $763,000 and $1,227,000, respectively. Net cash invested into the investment portfolio was $1,345,000 during the quarter ended March 31, 2011 while capital expenditures were approximately $146,000. We continue to invest in our technology platform including our web-based rating software, Fremont Complete, as well as our back-end policy administration software.

Cash provided by financing activities was $61,000 and $124,000 for the three months ended March 31, 2011 and 2010, respectively. During the three months ended March 31, 2011, financing activities consisted of the issuance of common stock which generated $132,000 in proceeds and a cash dividend of $71,000 paid to stockholders.

The Company paid a quarterly cash dividend of $.04 per common share on March 31, 2011 which totaled approximately $71,000. The Board’s current intention is evaluate each quarter whether a cash dividend will be declared. The payment of future dividends will depend upon the availability of cash resources at the Holding Company, the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board of Directors.

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

Changes in Interest Rates

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

Change in Rate	Portfolio Value		Change in Value
	(In thousands)
2%	$	53,072	$	(5,177	)
1%		55,575		(2,674	)
0		58,249		—
-1%		61,095		2,846
-2%		64,112		5,863

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES.

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

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

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

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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

ITEM 1A. RISK FACTORS.

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 except as noted below.

The Failure to Complete the Pending Merger of the Company Could have a Materially Adverse Impact.

On April 15, 2011, we entered into a definitive agreement to be acquired by Auto Club Insurance Association (the “Merger”). The consummation of the Merger is subject to the terms and conditions of the Agreement and Plan of Merger, including, but not limited to, the approval of the Company’s shareholders and certain required regulatory approvals. There can be no assurance that the Company’s shareholders will approve the Merger or that the other conditions to the completion of the Merger will be satisfied. If the Merger is not completed for any reason, the price of the Company’s common stock will likely decline to the extent that the market price of the common stock reflects market assumptions that the Merger will be completed. Additionally, the Company is subject to additional risks in connection with the Merger, including: (1) the occurrence of an event, change or circumstance that could give rise to the payment of a termination fee to Auto Club Insurance Association pursuant to the terms of the Agreement and Plan of Merger, (2) the outcome of any legal proceedings that may be instituted against the Company and others relating to the transactions contemplated by the Agreement and Plan of Merger, (3) the failure of the Merger to close for any reason, (4) the restrictions imposed on the Company’s business and operations pursuant to the affirmative and negative covenants set forth in the Agreement and Plan of Merger and the potential impact of such covenants on the Company’s business, (5) the risk that the proposed transaction will divert management’s attention resulting in a potential disruption of the Company’s current business plan, (6) potential difficulties in employee retention arising from the Merger, (7) the effect of the announcement of the Merger on the Company’s business relationships, operating results and business generally and (8) the amount of fees, expenses and charges incurred by the Company in connection with the Merger.

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

The Holding Company’s principal source of cash available for payment of dividends is dividends from the Insurance Company. The payment of dividends by the Insurance Company is subject to limitations imposed by the Michigan Insurance Code. The Insurance Company may not pay an extraordinary dividend unless it notifies the Insurance Commissioner and he does not disapprove the payment. An extraordinary dividend includes any dividend which, when taken together with other dividends paid within the preceding 12 months, exceeds the greater of 10% of the Insurance Company’s statutory policyholders’ surplus as of December 31 of the immediately preceding year or its statutory net income, excluding realized capital gains, for the 12-month period ending December 31 of the immediately preceding year. During the year ended December 31, 2011, the Insurance Company can pay a non-extraordinary dividend of up to $3,219,000 without prior approval from the Insurance Commissioner. In order to pay any dividends, the Insurance Company must be in a position to satisfy the requirement that the Company continues to be safe, reliable and entitled to public confidence. Also, in the absence of approval of the Insurance Commissioner, dividends may only be paid from statutory earned surplus. Also, dividends may not exceed the amount of the Insurance Company’s statutory capital stock account in any one year unless it meets certain other requirements.

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

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

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

In conjunction with the Company’s announcement on April 18, 2011 that it had agreed to be acquired by Auto Club Insurance Association, the Company terminated the Agent Stock Purchase Plan effective April 15, 2011.

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The following table sets forth the sales of unregistered securities under the Plan during the quarter ended March 31, 2011:

Recent Sales of Unregistered Securities

Date of Sale	Number of Shares Sold		Offering Price		Total Consideration Received
March 7, 2011		3,382	$	24.02	$	81,236

The following table sets forth the repurchases of common stock for the quarter ended March 31, 2011:

Issuer Purchases of Equity Securities

	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans (1)		Maximum Number of Shares that May Yet Be Purchased Under the Plans
Month ended January 31, 2011								35,886
Month ended February 28, 2011		—	$	—		—		35,886
Month ended March 31, 2011		—	$	—		—		35,886
Total		—				—

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None

ITEM 4. RESERVED.

ITEM 5. OTHER INFORMATION.

None

ITEM 6. EXHIBITS.

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FREMONT MICHIGAN INSURACORP, INC.
Date: May 16, 2011	By:	/s/ Richard E. Dunning
		Richard E. Dunning
		President and Chief Executive Officer
Date: May 16, 2011	By:	/s/ Kevin G. Kaastra
		Kevin G. Kaastra
		Vice President of Finance (principal financial and accounting officer)

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