FREMONT MICHIGAN INSURACORP INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2004

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

For the transition period from to

No. 000-50926

(Commission File Number)

FREMONT MICHIGAN INSURACORP, INC.

(Exact name of Registrant as specified in its charter)


Michigan		42-1609947
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(231) 924-0300

(Registrant’s telephone number, including area code)

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 ¨ No x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ NO x

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


		Number of Shares Outstanding as of September 20, 2004
COMMON STOCK (No Par Value)		10
(Title of Class)		(Outstanding Shares)

FORWARD-LOOKING STATEMENTS

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

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

•

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

•

the effects of weather-related and other catastrophic events;

•

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

•

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

•

inflation;

•

the cost, availability and collectibility of reinsurance;

•

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

•

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

•

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

•

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

•

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

•

adverse litigation or arbitration results;

•

the ability to carry out our business plans; and

•

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

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

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

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Fremont Mutual Insurance Company

Balance Sheets (Unaudited)

June 30, 2004 and December 31, 2003


	June 30, 2004			December 31, 2003
Assets

Investments:
Available-for-sale:
Fixed maturities, at fair value	$	28,111,245		$	25,044,458
Equity securities, at fair value		5,208,255			2,759,918

Total investments		33,319,500			27,804,376

Cash and cash equivalents		2,805,058			6,977,804
Premiums due from policyholders, net		6,421,904			6,647,176
Amounts due from reinsurers		12,269,658			16,985,726
Accrued investment income		346,765			298,598
Property and equipment, net of accumulated depreciation		794,861			802,016
Deferred policy acquisition costs		2,056,042			294,530
Deferred equity offering costs		335,818			173,710
Note receivable from related party		138,159			140,000
Other assets		4,613			3,890

	$	58,492,378		$	60,127,826

Liabilities and Policyholders’ Surplus

Liabilities:
Losses and loss adjustment expenses	$	16,435,475		$	13,878,063
Unearned premiums		17,667,581			18,541,522
Surplus notes		5,264,333			5,264,333
Premiums ceded payable		5,001,799			8,226,627
Accrued expenses and other liabilities		5,934,474			5,970,102

Total liabilities		50,303,662			51,880,647

Commitments and contingencies

Policyholders’ surplus:
Unassigned surplus		8,260,715			7,701,273
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments		(71,999	)		545,906

Total policyholders’ surplus		8,188,716			8,247,179

Total liabilities and policyholders’ surplus	$	58,492,378		$	60,127,826

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

Fremont Mutual Insurance Company

Statements of Operations (Unaudited)

For the Six Months Ended June 30, 2004 and 2003


	2004			2003
Net premiums written	$	16,802,015		$	8,061,807

Revenues:
Net premiums earned		11,281,681			8,450,359
Net investment income		410,191			479,600
Net realized (losses) gains on investments		(8,372	)		7,739
Other income, net		101,805			111,532

Total revenues		11,785,305			9,049,230

Expenses:
Losses and loss adjustment expenses, net		7,177,050			5,482,376
Policy acquisition and other underwriting expenses		3,644,374			3,065,967
Interest expense		273,212			267,441
Demutualization expenses		41,227			—

Total expenses		11,135,863			8,815,784

Income before federal income tax expense		649,442			233,446
Federal income tax expense		90,000			31,000

Net income	$	559,442		$	202,446

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

Fremont Mutual Insurance Company

Statements of Operations (Unaudited)

For the Quarter Ended June 30, 2004 and 2003


	2004			2003
Net premiums written	$	9,900,488		$	4,645,018

Revenues:
Net premiums earned		6,194,533			4,161,669
Net investment income		241,062			228,533
Net realized (losses) gains on investments		(5	)		20,315
Other income, net		69,160			57,236

Total revenues		6,504,750			4,467,753

Expenses:
Losses and loss adjustment expenses, net		3,259,773			2,628,246
Policy acquisition and other underwriting expenses		2,078,537			1,562,328
Interest expense		132,693			165,965
Demutualization expenses		22,602			—

Total expenses		5,493,605			4,356,539

Income before federal income tax expense		1,011,145			111,214
Federal income tax expense		90,000			31,000

Net income	$	921,145		$	80,214

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

Fremont Mutual Insurance Company

Statements of Policyholders’ Surplus (Unaudited)

For the Six Months Ended June 30, 2004


	Unassigned Surplus		Accumulated Other Comprehensive Income (Loss)			Total Policyholders’ Surplus
Balance, December 31, 2003	$	7,701,273	$	545,906		$	8,247,179

Comprehensive income (loss)
Net income		559,442		—			559,442
Net unrealized depreciation on investment securities		—		(617,905	)		(617,905	)

Total comprehensive loss							(58,463	)

Balance, June 30, 2004	$	8,260,715	$	(71,999	)	$	8,188,716

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

Fremont Mutual Insurance Company

Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30, 2004 and 2003


	2004			2003
Cash flows from operating activities:
Net income	$	559,442		$	202,446
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		78,610			78,611
Net realized losses (gains) on investments		8,372			(7,739	)
Net amortization of premiums on investments		104,443			45,853
Changes in assets and liabilities:
Premiums due from policyholders		225,272			219,826
Amounts due from reinsurers		4,716,068			(882,318	)
Accrued investment income		(48,167	)		(162,734	)
Deferred policy acquisition costs		(1,761,512	)		292,289
Federal income taxes recoverable		—			45,396
Deferred equity offering expenses		(162,108	)		—
Other assets		(723	)		59,200
Losses and loss adjustment expenses		2,557,412			1,784,315
Unearned premiums		(820,452	)		(647,519	)
Premiums ceded payable		(3,278,317	)		5,124,248
Accrued expenses and other liabilities		(35,628	)		(506,559	)

Net cash provided by operating activities		2,142,712			5,645,315

Cash flows from investing activities:
Proceeds from sales and maturities of securities		4,899,275			5,484,526
Purchases of securities		(11,145,119	)		(13,953,825	)
Repayment of note receivable from related party		1,841			—
Issuance of note receivable from related party		—			(50,000	)
Purchase of equipment, net		(71,455	)		(5	)

Net cash used in investing activities		(6,315,458	)		(8,519,304	)

Cash flows from financing activities:
Repayment of surplus notes		—			(804,000	)
Issuance of surplus notes		—			586,702

Net cash used in financing activities		—			(217,298	)

Net decrease in cash and cash equivalents		(4,172,746	)		(3,091,287	)

Cash and cash equivalents, beginning of period		6,977,804			6,210,696

Cash and cash equivalents, end of period	$	2,805,058		$	3,119,409

Supplemental disclosure of cash flow information:
Federal income taxes received (paid)	$	—		$	45,396

Surplus note interest paid	$	361,147		$	398,678

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

Fremont Mutual Insurance Company

Notes to Financial Statements (Unaudited)