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 March 31, 2005

¨	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 x No ¨

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 May 6, 2005
COMMON STOCK (No Par Value)		862,128
(Title of Class)		(Outstanding Shares)

FORWARD-LOOKING STATEMENTS

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

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

•

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

•

the effects of weather-related and other catastrophic events;

•

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

•

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

•

inflation;

•

the cost, availability and collectibility of reinsurance;

•

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

•

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

•

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

•

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

•

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

•

adverse litigation or arbitration results;

•

the ability to carry out our business plans; and

•

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

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

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

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Balance Sheets (Unaudited)

March 31, 2005 and December 31, 2004


	March 31, 2005			December 31, 2004
Assets

Investments:
Fixed maturities available for sale, at fair value	$	37,019,861		$	37,205,694
Equity securities available for sale, at fair value		6,862,977			5,071,758

Total investments		43,882,838			42,277,452
Cash and cash equivalents		1,225,381			3,672,254
Receivable from sale of investments		—			739,150
Premiums due from policyholders, net		6,273,587			6,846,286
Amounts due from reinsurers		9,997,143			10,879,642
Accrued investment income		370,857			398,208
Property and equipment, net of accumulated depreciation		828,683			848,103
Deferred policy acquisition costs		2,543,360			2,860,621
Note receivable from related party		135,292			136,262
Other assets		2,120			3,136

	$	65,259,261		$	68,661,114

Liabilities and Stockholders’ Equity

Liabilities:
Losses and loss adjustment expenses	$	19,352,386		$	18,972,587
Unearned premiums		17,710,766			19,675,548
Reinsurance funds withheld and premiums ceded payable		2,561,166			3,018,710
Accrued expenses and other liabilities		5,823,172			6,798,772
Surplus notes		2,890,288			2,890,288

Total liabilities		48,337,778			51,355,905

Commitments and contingencies

Stockholders’ Equity
Preferred stock, no par value, authorized 4,500,000 shares, no shares issued and outstanding		—			—
Class A common stock, no par value, authorized 5,000,000 shares, 862,128 shares issued and outstanding		—			—
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—			—
Additional paid-in capital		7,522,413			7,512,913
Retained earnings		9,686,208			9,213,811
Accumulated other comprehensive income:
Net unrealized (losses) gains on investments		(287,138	)		578,485

Total stockholders’ equity		16,921,483			17,305,209

Total liabilities and stockholders’ equity	$	65,259,261		$	68,661,114

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

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Operations (Unaudited)

For the Three Months Ended March 31, 2005 and 2004


	2005		2004
Revenues:
Net premiums earned	$	9,110,678	$	5,087,148
Net investment income		374,467		169,129
Net realized gains (losses) on investments		20,309		(8,367	)
Other income, net		95,255		92,151

Total revenues		9,600,709		5,340,061

Expenses:
Losses and loss adjustment expenses, net		5,808,993		3,917,277
Policy acquisition and other underwriting expenses		3,005,163		1,625,343
Interest expense		77,606		140,519
Demutualization expenses		—		18,625

Total expenses		8,891,762		5,701,764

Income (loss) before federal income tax expense		708,947		(361,703	)
Federal income tax expense		236,550		—

Net income (loss)	$	472,397	$	(361,703	)

Net income per common share
Basic	$	.55
Diluted	$	.55

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

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statement of Stockholders’ Equity (Unaudited)

For the Three Months Ended March 31, 2005


	Preferred Stock	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
	Preferred Stock	Class A	Class B	Additional Paid-in Capital		Retained Earnings					Total
Balance, December 31, 2004	$—	$—	$—	$	7,512,913	$	9,213,811	$	578,485		$	17,305,209
Comprehensive income:
Net income							472,397					472,397
Net unrealized losses on investments, net of taxes									(865,623	)		(865,623	)

Total comprehensive income												(393,226	)
Issuance of stock options					9,500							9,500

Balance, March 31, 2005	$—	$—	$—	$	7,522,413	$	9,686,208	$	(287,138	)	$	16,921,483

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

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31, 2005 and 2004


	2005			2004
Cash flows from operating activities:
Net income (loss)	$	472,397		$	(361,703	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation		39,305			39,305
Stock based compensation expense		9,500			—
Net realized (gains) losses on investments		(20,309	)		8,367
Net amortization of premiums on investments		58,813			50,466
Changes in assets and liabilities:
Premiums due from policyholders		572,699			632,762
Amounts due from reinsurers		882,499			1,993,750
Accrued investment income		27,351			21,210
Deferred policy acquisition costs		317,261			(841,848	)
Deferred equity offering expenses		—			(97,984	)
Other assets		1,016			(812	)
Losses and loss adjustment expenses		379,799			3,270,402
Unearned premiums		(1,964,782	)		(1,951,370	)
Reinsurance funds withheld and premiums ceded payable		(457,544	)		(1,622,829	)
Accrued expenses and other liabilities		(975,600	)		(1,168,015	)

Net cash used in operating activities		(657,595	)		(28,299	)

Cash flows from investing activities:
Proceeds from sales and maturities of fixed maturity investments		3,433,168			3,371,570
Proceeds from sales of equity investments		838,970			96,605
Purchases of fixed maturity investments		(4,011,987	)		(6,044,777	)
Purchases of equity investments		(2,769,664	)		(2,531,857	)
Decrease in receivable from investments		739,150			—
Repayment of note receivable from related party		970			914
Purchase of equipment, net		(19,885	)		(59,585	)

Net cash used in investing activities		(1,789,278	)		(5,167,130	)

Cash flows from financing activities:		—			—

Net decrease in cash and cash equivalents		(2,446,873	)		(5,195,429	)
Cash and cash equivalents, beginning of period		3,672,254			6,977,804

Cash and cash equivalents, end of period	$	1,225,381		$	1,782,375

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

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

1.	Basis of Presentation

Fremont Michigan InsuraCorp, Inc. and subsidiary (collectively, the “Company”) includes Fremont Michigan InsuraCorp, Inc. (“FMIC”) and its wholly owned subsidiary Fremont Insurance Company (“FIC”). FIC is a Michigan licensed property and casualty insurance carrier operating exclusively in the State of Michigan and writing principally personal lines, commercial lines, farm and marine insurance policies through independent agents.

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

The accompanying unaudited consolidated financial statements for the interim periods included herein are unaudited; however, such information reflects all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year. The accompanying unaudited consolidated financial statements should be read with the annual consolidated financial statements and notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

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

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

Conversion and Demutualization

On October 12, 2004, FIC, formerly Fremont Mutual Insurance Company, converted from a mutual to a stock form of insurance company and subsequently on October 15, 2004, all of its outstanding capital stock was transferred to FMIC thereby becoming a wholly owned subsidiary of FMIC. Prior to the conversion and since 1876, Fremont Mutual Insurance Company conducted business as a Michigan domiciled mutual property and casualty insurer. FMIC was formed on November 18, 2003 for the purpose of acquiring all of the stock of FIC. On October 15, 2004 FMIC issued and sold 862,118 shares of its Common Stock at $10 per share (the “Conversion”). As part of the Conversion, surplus note holders converted approximately $2,498,000 of principal and accrued interest on surplus notes into common stock of FMIC.

2.	New Accounting Pronouncement

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS 123R”). This standard requires expensing of stock options and other share-based payments and supersedes SFAS No. 123. This standard is effective for the Company as of January 1, 2006 and will apply to all awards granted, modified, cancelled or repurchased after that date as well as the unvested portion of prior awards. The Company will adopt the standard as of the effective date and believes it will not have a material effect on the consolidated financial statements as the Company already values stock options issued based upon a fair value method and recognizes the fair value as an expense over the period in which the options vest.

Fremont Michigan InsuraCorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

3.	Comprehensive Income or Loss

The Company’s comprehensive (loss) income for the three months ended March 31, 2005 and 2004 is as follows:


	2005			2004
Net income (loss)	$	472,397		$	(361,703	)
Other comprehensive income:
Unrealized (loss) gain on investments arising during the period		(845,314	)		552,917