FREMONT MICHIGAN INSURACORP INC - FORM 10-K

Attached files

file	filename
EX-32 - CERTIFICATION - FREMONT MICHIGAN INSURACORP INC	dex32.htm
EX-21 - SUBSIDIARIES OF THE REGISTRANT - FREMONT MICHIGAN INSURACORP INC	dex21.htm
EX-31.2 - CERTIFICATION - FREMONT MICHIGAN INSURACORP INC	dex312.htm
EX-31.1 - CERTIFICATION - FREMONT MICHIGAN INSURACORP INC	dex311.htm
EX-23.1 - CONSENT OF BDO USA, LLP - FREMONT MICHIGAN INSURACORP INC	dex231.htm
EX-10.12 - EMPLOYMENT AGREEMENT - FREMONT MICHIGAN INSURACORP INC	dex1012.htm
EX-10.11 - EMPLOYMENT AGREEMENT - FREMONT MICHIGAN INSURACORP INC	dex1011.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-K

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

For the fiscal year ended: December 31, 2010

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

For the transition period from: to

Commission file number: 000-50926

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 Number)

933 E. Main St., Fremont, Michigan 49412

(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (231) 924-0300

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Act). Yes ¨ No x

The aggregate market value of the voting common stock held by non-affiliates was $38,832,317 based on the closing sales price of $21.99 per share on June 30, 2010 as reported by the OTC Bulletin Board.

The number of shares outstanding of the registrant’s common stock, no par value, was 1,785,047 shares as of March 10, 2011.

TABLE OF CONTENTS


FORWARD-LOOKING STATEMENTS		3

PART I
ITEM 1.	BUSINESS	4
ITEM 1A.	RISK FACTORS	23
ITEM 2.	PROPERTIES	33
ITEM 3.	LEGAL PROCEEDINGS	33
ITEM 4.	RESERVED	33

PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	34
ITEM 6.	SELECTED FINANCIAL DATA	36
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	37
ITEM 7A.	QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK	57
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	58
	REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	58
	CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2010 AND 2009	59
	CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008	60
	CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008	61
	CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008	62
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	63
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	91
ITEM 9A(T).	CONTROLS AND PROCEDURES	91
ITEM 9B.	OTHER INFORMATION	91

PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	92
ITEM 11.	EXECUTIVE COMPENSATION	96
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	107
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	109
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES	111

PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES	112
SIGNATURES		113
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		115
SCHEDULE I—SUMMARY OF INVESTMENTS—OTHER THAN INVESTMENTS IN RELATED PARTIES AS OF DECEMBER 31, 2010		116
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY		117
SCHEDULE III—SUPPLEMENTARY INSURANCE INFORMATION		120
SCHEDULE IV—REINSURANCE		121
SCHEDULE V—ALLOWANCE FOR UNCOLLECTIBLE PREMIUMS		122
EXHIBIT INDEX		123
LIST OF SUBSIDIARIES
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
CERTIFICATIONS OF PERIODIC REPORTS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

FORWARD-LOOKING STATEMENTS

Fremont Michigan InsuraCorp, Inc. (the “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 Annual Report on Form 10-K and the exhibits), in its reports to shareholders and in other communications by the 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, 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:

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

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the effects of weather-related and other catastrophic events;

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

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

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inflation;

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the cost, availability and collectability of reinsurance;

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

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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;

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

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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;

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

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adverse litigation or arbitration results;

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technological change;

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the ability to carry out our business plans;

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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;

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the effect of Federal legislative or regulatory matters; and

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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 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

ITEM 1. BUSINESS

OVERVIEW OF BUSINESS

The Insurance Company is a property and casualty insurance company that provides insurance products to individuals, farms and small businesses in Michigan. We were founded in 1876 and have served Michigan policyholders for over 134 years. We have 75 employees. We market our policies through approximately 172 independent insurance agencies. We have four business segments: personal, commercial, farm and marine. As of December 31, 2010, we had approximately 75,000 policies in force and assets of $120 million.

The Company’s executive offices are located at 933 E. Main Street, Fremont, Michigan 49412-9753, and the telephone number is (231) 924-0300. Our website address is www.fmic.com. Information on the Company’s website is not a part of this Form 10-K. The Company makes available free of charge on its website, or provides a link to, the Company’s Forms 3, 4, 5, 10-K, 10-Q and 8-K filed and any amendments to these Forms, that have been filed with the SEC as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to the SEC. To access these filings, go to the Company’s website, “www.fmic.com” and click on “Our Company/Investor Relations”, then click on “All SEC Filings.”

BUSINESS STRATEGIES

Our principal strategies for the future include:

Leveraging Technology

A key to success in continuing sustainable profitable growth is the emphasis on and delivery of enhanced smart underwriting business rules which complements existing agent knowledge and allows for straight through processing. An advanced, next generation technology platform will allow our agency force to efficiently quote, bind and issue both personal and commercial policies. We have had excellent success with our Fremont Complete platform which is our web-based rating platform. As of the end of 2010, agents are able to quote, bind and issue personal and commercial policies. Emphasis will continue to be placed on a single unified platform that will enable our agents to manage their policies from a billing, claims and documentation environment.

Ensuring Rate Adequacy

Ensuring that products are appropriately priced is paramount for the Company to grow profitably. As we grow, so does our database of information which allows us to pinpoint those risks and characteristics that afford us the greatest profit potential. Rates and rate adequacy are continually monitored, analyzed and adjusted as market conditions and results warrant. The Company is committed to matching price to the exposure.

Increasing our Commercial Business

Our strategy remains to increase our market presence in commercial lines and to provide balance to our insurance portfolio. We continue to target small to middle market business focusing on main street accounts. Our continued endorsement with the Michigan Retailers Association strengthens this position. Our success in growing commercial lines is created by focusing on strong commercial based independent agents. Also, our web-based rating technology provides an “ease of doing business” as our agents can rate, underwrite and issue business through our Fremont Complete platform. We continue to focus on enhancements to our Fremont Complete platform which include rolling out several new endorsements and products to better position the Company in the commercial markets.

Retaining and Attracting Agencies Committed to Profitable Growth

We are committed to our independent agency distribution system. The agents with whom we partner are an extension of the Company and are encouraged to participate as equity owners. Therefore, we are very selective in appointing and retaining agencies that represent the Company. In order for the Company to be successful we must ensure that the interests of the agency are aligned with the interest of the Company. We are committed to retaining agencies that produce long term profitable growth. Each year we perform a review of our agency force to determine if changes are needed or if there are geographic regions that we feel warrant representation by a new or existing agency.

Diversification of Risk

The Company has emphasized risk diversification for the last decade particularly the diversification of risk related to the geographic concentration of insured property. This process is annually modeled and the results are a decision factor for new agency appointments and pricing. We are now licensed in Wisconsin and Indiana. Licensing in other surrounding states at agent request and also for risk diversification is in process. The first state will be Wisconsin for planned service from bordering Upper Michigan agents followed by Indiana.

Reducing our Ratio of Expenses to Net Premiums Earned

We are committed to improving profitability and our competitiveness by reducing our operating expenses. We will accomplish this by continuing to grow net premiums earned, weeding out operational inefficiencies through expanded use of technology, and ensuring that all products are appropriately priced.

Maintaining our Focus on Customer Service

Insurance is a service business and customer service is one of the basic ‘blocking and tackling’ strategies that we have to get right in order to be successful. While we service many ‘customers’, we work very hard to make sure that our policyholders and our agents receive the best customer service possible. We want our customers to have a pleasant experience when dealing with the Company. This ‘experience’ can be enhanced through technology by making information easily accessible through the web and by simply making sure that when our customers call they can expect to speak to a ‘live’ person, whether it is a customer service representative, a claim associate or an underwriter. We compete with many larger insurance companies in Michigan. What sets us apart from them is the relationship we have with our agents and the service we provide to our policyholders. We will continue to seek out ways to exceed our customers’ expectations.

Marketing

The Company’s marketing strategy begins with the qualification of the agency force. Currently, we are represented by 172 of the best agencies in the state who understand and appreciate the symbiotic relationship between the Company, agency and customer. This critical key is reflected in the Company’s continued profitability and growth. We support the agency’s efforts by providing dynamic products, exceptional service and competitive pricing. The “Pure Michigan” travel bureau campaign has been incorporated into our multi-channel marketing campaign. The Pure Michigan logo and tag line has been incorporated into our print, radio, television, social media, website, direct mail and our newest release for the general public, MichiganBoatQuote.com. From this website, a consumer can now secure an approximate premium for their boat. This information is sent directly to the associated agency, who then has the responsibility of concluding the transaction. This is in its infancy stage and we will look to measure its success mid-summer.

SEGMENT INFORMATION

The Company defines its operations as property and casualty insurance operations. The Company writes four major insurance lines exclusively in the State of Michigan: Personal Lines, Commercial Lines, Farm and Marine. All revenues are generated from external customers and the Company does not have a significant reliance on any single major customer or agency.

The Company evaluates its product lines based on underwriting profitability. Certain expenses are allocated based on measurements including premiums, incurred losses or other departmental employee data. Underwriting profit by product line would change if different methods were applied. The Company does not allocate assets, net investment income, net realized gains (losses) on investments or other income (expense) to its product lines.

Segment data for the years ended December 31, 2010, 2009 and 2008 is included in the footnotes to the financial statements which are included herein under Part II, Item 8—Financial Statements and Supplementary Data.

PRODUCTS

We offer a variety of property and casualty insurance products primarily designed to meet the insurance needs of property owners and small to mid sized businesses located in Michigan. The four primary segments of our business are personal, commercial, farm and marine. The following table presents the direct written premiums by major product line within each segment for the periods indicated:


	Year Ended December 31,
	2010		2009		2008
	(In thousands)
Direct premiums written:
Personal lines:
Homeowners	$	21,438	$	19,755	$	18,228
Mobilowners		1,499		1,491		1,514
Personal auto		31,004		25,707		22,255
Dwelling		1,410		1,487		1,486

		55,351		48,440		43,483
Commercial lines:
Business owners		2,872		2,760		2,611
Commercial package		4,980		4,226		4,796
Commercial auto		1,937		1,515		1,021
Workers compensation		2,238		2,157		1,623

		12,027		10,658		10,051
Farm		5,876		5,662		5,257
Marine		2,065		2,096		2,092

Total	$	75,319	$	66,856	$	60,883

Personal Lines. Personal lines policies include homeowners, mobilowners, dwelling fire and personal auto.

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Homeowners. The policy is a multiple line insurance contract providing protection for both property and liability exposures for homeowners, condominium owners and renters on a replacement cost or actual cash value basis. Target areas in this line include home values between $100,000 and $500,000. Personal umbrella coverage can also be added. Personal umbrella is a form of excess liability insurance available to individuals protecting them against claims in excess of their limits on their primary policies or for claims not covered by their underlying policies. In order to be eligible, both an individual’s personal auto and home must be written with Fremont.

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Mobilowners. This is a similar product to homeowners providing coverage for mobile home owners. Units are insured for replacement cost, actual cash value or stated amount depending on the age of the mobile home. Personal umbrella coverage can also be added.

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Personal Auto. This is our fastest premium growth line and provides individuals with protection for their personal auto(s). For liability protection, coverage options include Residual Bodily Injury, Property Damage, Personal Injury Protection, Uninsured and Underinsured Motorists. For physical

damage, coverage options include Comprehensive and Collision. For Personal Injury Protection, losses above certain thresholds are automatically reinsured by the Michigan Catastrophic Claim Association (MCCA). Personal umbrella coverage can also be added.

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Dwelling. This is a fire and wind coverage for owner occupied residences that do not qualify for a Homeowner policy or for residences that are non-owner occupied and rented to others. To be written, other supporting coverage must be written with Fremont and a residence must have no more than four units and be owned by individuals. Liability coverage for the owner is not included but may be added by endorsement.

Commercial Lines. Commercial lines consist of products designed to serve primarily small to medium business operations. They are:

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Business Owners (BOP). The policy is a multiple line insurance contract providing protection for both property and liability exposures for small business owners. Additional coverages can be added including equipment breakdown, employment practices liability, inland marine and umbrella liability. BOP risks are classified by the five categories listed below with each class having its own eligibility criteria primarily based on sales volume and property values.

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Bed & Breakfast/Condominiums. As the category name implies, insurance is provided for Bed & Breakfast owners and for condominium owner associations.

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Mercantile. This applies for buildings principally occupied for retail mercantile purposes (buying and selling of merchandise) and the contents of these operations.

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Offices. This applies to office buildings, building owners personal property or tenant personal property.

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Service. This applies to buildings occupied principally for service operations and the contents of these operations including mini storage businesses.

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Wholesale. As the category name implies, this covers wholesalers such as baked goods, plumbing supplies and clothing distributors.

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Commercial Package (CPP). The CPP policy is designed to insure a broader range of commercial operations with more specialized business coverage needs than the BOP provides. Examples of these types of businesses are manufacturing risks, contractors and restaurants. The policies are usually larger and generate higher premiums. Additional coverages can be added including equipment breakdown, employment practices liability, inland marine and umbrella liability.

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Commercial Auto (CA). CA covers vehicles owned by a business or used in businesses and owned by individuals. This includes vehicles ranging from passenger cars to tractor-trailer rigs and earth moving equipment. Our targeted market is passenger cars, service vehicles (usually a pickup truck owned by a contractor and driven to the job site) and light, local delivery vehicles. Long haul truckers are ineligible. Additional umbrella liability coverage can be added.

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Workers Compensation. Workers compensation provides coverage to a worker if he or she is injured while on the job for an employer, whether or not the employer has been negligent and is governed by state law. This product complements our Farm and Commercial offerings and affords us the ability to write all of the customer’s property and casualty insurance needs.

Farm Line. The Insurance Company originated as a “farm fire” insurance provider and continues to be a strong provider of coverage for the agricultural industry in Michigan. This segment’s products include: farmowners for fully operating farms, country estate for the hobby or part time farmer, and farm for non-owner occupied farms. Farmowners and country estate policies are comprehensive policies offering protection similar to our homeowner’s policy but also offer the option to cover the insured’s farm buildings, farm personal property (livestock, machinery, etc.), and provide farm liability protection. The farm policy is primarily a fire, wind and liability product designed for non-owner-occupied farms.

Marine. This line is composed of the boat owner’s program (usually smaller and less expensive boats) and the yacht program. The boat owner’s policy is designed for boats 32 feet long or less with values of $125,000 or less. Boats that exceed the length or value criteria for the boat owner’s policy are insured under the yacht program.

Product Pricing. Product pricing and the development of premium rates for all lines is performed under the direction of the Senior Vice President of Personal Lines and Product Management. Each product line goes through a rate review at least once a year with the exception of personal and commercial auto which are reviewed twice a year. That being said, it is not uncommon for us to perform an interim rate change if we feel market conditions and loss experience necessitates a rate change. Rate needs are analyzed on both an accident and calendar year basis and take into consideration the Company’s competitive position within each agent’s geographic territory, catastrophe loads, large loss impacts in addition to actual loss, expense and premium numbers. Each rate review is subject to a rigorous review process which involves all members of senior management. All rates are reviewed with senior management prior to implementation.

MARKETING

We market our property and casualty insurance products exclusively in Michigan through approximately 172 independent agencies. The company has maintained it strategic plans to expand in the northern and western regions of the state, but maintains a respectable presence in other areas. Our agency force has been selected from over 1,200 independent agencies within the State of Michigan. One of our keys to success is our selectivity of our agents. Our company standards are clearly communicated to our agents; they include a strong commitment to ethics, professionalism, honesty and accountability. The company is fortunate to have a top rated agency force. Each year the Company receives in excess of 50 appointment requests from agencies in Michigan and less than 10% actually receive an appointment. Our agent/company partnership philosophy has produced relationships focused on the common good of the Company, agency and policyholder. Our commitment to the agent force, in addition to our diverse product lineup has continued to solidify our position in the Michigan market.

Another key to the Company’s success is identifying and procuring profitable business. Profitable business is a direct result of exercising discipline in the underwriting process. The Company continues to focus on underwriting discipline, even when it means declining new business. This commitment to maintaining our discipline has provided stability and profitability, which is evident in our results. These underwriting responsibilities are shared with the Company and agent.

The Company remains committed to the independent agency force which is our source for future growth. We have established an agency network which is geographically spread across the state of Michigan. Our objective is to be ranked among the top four insurers within each agency. Our independent agencies represent other insurance companies and are established businesses in their local communities in which they operate. Our agencies generally market and write the full range of our products. We believe our relationships with our agencies are very good.

We depend upon our agency force to produce new business and to provide customer service. Policy retention is an important component of agency relations. Our network of independent agencies also serves as an important source of information about the needs of our policyholders. This information is used to develop new products and new product features. Semi-annually the Company holds an agency council meeting. Agency council is comprised of the Company’s top performing agents from communities throughout the State of Michigan. During these meetings information is received and distributed on new products and business strategies that are being planned by the Company. Agency council serves as a sounding board for management and our agents.

We compensate agencies through a fixed base commission with an opportunity for profit sharing, depending on the profitability of the business we receive from the agency. Our agencies are monitored and supported by the

Vice President of Marketing and three experienced marketing representatives. Three personal lines underwriters and two commercial lines underwriters also support agency relations with direct calling efforts. Claim representatives also make direct contact with agencies while handling claims. The Company is very focused on developing strong relationships with our agency force and agency visits are an integral component of agency relations. Each agency visit is documented within a proprietary Agency Visit Log which serves as a customer relationship management tool used by all employees.

We continue to focus on our branding efforts. We compete against many larger companies that have sizeable advertising budgets so we are very conscious of where and how we invest our branding and advertising dollars. During 2010, we were able to continue our partnership with the Pure Michigan^® campaign which promotes Michigan businesses. We have used the Pure Michigan^® logo in billboard, radio and television advertising in 2010 and have received very positive feedback from our customers. We have also continue to capitalize on the role of marketing partnerships such as the Company’s alliance with the Michigan Retailers Association (MRA). We are the endorsed property and casualty insurance carrier for MRA’s members.

Moving towards the social media blitz we have launched a Facebook, Linked-In and Twitter campaign. The Facebook page provides true functionality. The general public has access to our general product information, agency locator, tips and resources as well as providing them the opportunity to secure a real-time boat quote. To attract our existing customer base, we now allow complete access to manage their account. This allows them to interact with their accounts to view declaration pages, claims information, account information and submit payments via electronic check, debit and credit card. The Linked-In account also provides the general public the same information, but due to the vendor’s limitations our customer base is not provided the same functionality found on the Facebook page. Twitter has been used several times recently by publishing articles regarding winter risk management activities and an article on 10 ways to save money in 2011. This has been a convenient tool which allows the Company to immediately broadcast pertinent information.

UNDERWRITING

We underwrite each policy application by evaluating each risk with consistently applied standards. We maintain information on all aspects of our business that is regularly reviewed to determine product line profitability. We employ seven underwriters who specialize in personal lines, commercial lines, marine, and farm. The underwriters are supported by an experienced group of underwriting assistants and processors. This group handles initial screening of applications, running of reports, and policy issuance.

We have, in the past, relied heavily on underwriting information gathered from outside sources. Motor Vehicle Reports are obtained from the State of Michigan on all auto and marine applications. An exchange of claims information is available through two independent firms or through inquiry to the prior insurer and is accessed for all applicable applications. We believe the financial stability and responsibility of the insured has emerged as a reliable indicator of future loss potential. Extensive independent analysis has been done to support this correlation in the industry. In the commercial lines, financial stability has always been an acceptable underwriting criteria and the Insurance Company obtains either a Dun & Bradstreet report or other financial information on every policy application. In personal lines, an Insurance Score is obtained on every submission and insureds are tiered to receive the appropriate premium for their score. An Insurance Score is a numerical score from 200 to 900, with a higher number being a better score, which is based on information in a person’s credit report maintained by one of the national credit reporting firms. The Insurance Company’s pricing is targeted to attract policyholders with above average Insurance Scores. Insured’s with an Insurance Score of 700 or more or a strong Dun & Bradstreet report are part of the Insurance Company’s target market in all lines. Although we target insureds with Insurance Scores of 700 and above, we have policies in effect where the relevant Insurance Scores are less than our target. In 2005, the Michigan Office of Financial and Insurance Regulation issued proposed rules to ban the use of a credit based insurance score, but the implementation of the rules were stayed through litigation. On July 8, 2010, the Michigan Supreme Court declared the proposed rules invalid and permanently enjoined enforcement. A further discussion on the use of credit based insurance scores is included under the heading “Insurance Scoring” in the “Regulation” section of Part 1, Item 1.

We also rely on photographs, inspections, and engineering reports. Agents are required to obtain photos on all new property business. The underwriter decides if additional engineering is necessary. A follow-up inspection may be made by us or subcontracted to an outside firm. If a loss occurs, the adjuster completes a risk evaluation form and sends it to underwriting for review. The Insurance Company’s agents have rating software available to them for use as pricing indicators. This software is a useful tool, but the ultimate underwriting decision is made by the Insurance Company.

CLAIMS

As of December 31, 2010, the Insurance Company’s claims department includes its management team consisting of the Senior Vice President of Administration, Vice President of Claims who is a licensed attorney, two claims managers, one of which is a licensed attorney; additional department members include fourteen adjusters and two support staff. Claims are normally received from our independent agencies; more than half of which are received by electronic filing. Typically claims are assigned to an in-house adjuster who investigates and settles the claim. To a lesser extent, we assign claims to independent adjusters for limited purposes to assist in-house adjusters, and on occasion, independent adjusters are utilized for full assignments, including catastrophe events exceeding in-house capacity, or to adjust losses in remote locations outside of our in-house territories. Remote and independent adjusters report all information to the home office electronically. The majority of paper claim files are imaged and maintained electronically at the home office.

Claim reserve and settlement authority levels are established for adjusters and managers based upon level of experience. We have specialized teams to handle claims in the following segments: personal and commercial auto casualty and property, workers comp, commercial and personal lines property, including farm, and marine. The claims department is responsible for investigating all claims, obtaining necessary documentation, estimating the loss reserves, and resolving the claims. The Company takes a proactive approach to liability and defense cost management. The Company’s management team oversees subrogation recovery, coverage-related issues and litigation, including supervision of outside defense counsel and special projects. With the assistance of the claims management team, the company’s expeditious claims investigation protocol creates opportunities for exploration of an early negotiated resolution, where warranted, thereby avoiding protracted litigation and unnecessary legal expense. Additionally, claims management provides valuable instruction for claims adjusters, as well as legal advice in connection with the drafting and revision of our policy and application forms.

The Company’s claims department has completed several technology initiatives in recent years. We now have the ability to issue payments electronically to claimants and vendors. We continue to enhance the information and reports available to our agents. The Company implemented an electronic first notice of loss so that agents can submit a notice of loss to the Company and inquire about the status of a claim electronically from their agency management system. This new feature allows the agent to notify the Company quicker in the event of a loss and allows our adjusters to get in touch with the policyholder in a shorter time frame. We are currently designing a web-based electronic first notice of loss that an insured can initiate on-line. We have implemented electronic reporting to comply with federal and state reporting regulations. The Company continues to focus on eliminating paper and enhancing inquiry capabilities which are expected to yield increased operating efficiency for the Company and its agency force. We have investigated and identified an improved claims processing software package that will greatly enhance the efficiency of our claims adjusters and provide improved management reporting capabilities. We expect that the implementation of this software will begin in 2011.

TECHNOLOGY

The Company transacts a major share of its business using technology wherever possible and, in recent years, has made significant investments in information technology platforms, integrated systems and internet-based applications. These investments have generated positive results for the Company.

The focus of our ongoing information technology effort is:

•

to leverage existing and newer automation technologies that bring about greater efficiencies through integration for the Company, the agency force and our customers;

•

to deliver on a newer, robust business rule policy administration platform which removes redundancies while promoting straight through processing;

•

to adopt recent software development processes and technology which attracts our customers and positions the Company to broaden it’s product offerings; and

•

to take advantage of investments made by our independent agent partners and to leverage those to the complement of both parties.

We have been rewarded by our agent partners and customers with national award recognition and increased growth and profitability. Continued investment in our technology platform will provide us the opportunity to further lower expenses thereby increasing productivity and eliminating redundancies which inherently grow over time. This will further reduce technology expense and simplify information technology management.

We have also taken proactive steps to protect information. A core part of our disaster recovery and business continuity plan includes periodic and yearly recovery from a remote site. In addition, a number of security enhancements have been made to further protect Company data. Periodic audits by both internal and external sources contribute to the ongoing awareness by the Company of its responsibility in data protection.

REINSURANCE

General. A reinsurance transaction occurs when an insurance company transfers (cedes) a portion of its exposure on business written by it to a reinsurer which assumes that risk for a premium. Consistent with insurance industry practice, we reinsure a portion of our exposure and pay to reinsurers a portion of the premiums received on all policies reinsured. Insurance is ceded principally to reduce net liability on individual risks, to mitigate the effect of individual loss occurrences (including catastrophe losses), to stabilize underwriting results, and to increase our underwriting capacity.

Reinsurance can be facultative reinsurance or treaty reinsurance. Under facultative reinsurance, each risk or portion of a risk is reinsured individually. Under treaty reinsurance, an agreed-upon portion of business written is automatically reinsured. Treaty reinsurance can also be classified as quota share reinsurance, pro-rata insurance or excess of loss reinsurance. Under quota share reinsurance and pro-rata insurance, the ceding company cedes a percentage of its insurance liability to the reinsurer in exchange for a like percentage of premiums, less a ceding commission, and, in turn, will recover from the reinsurer the reinsurer’s share of losses and loss adjustment expenses incurred on those risks. Under excess of loss reinsurance, an insurer limits its liability to all or a particular portion of the amount in excess of a predetermined deductible or retention. Regardless of type, reinsurance does not legally discharge the ceding insurer from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the ceding company to the extent of the coverage ceded.

Our Reinsurance Coverage. We utilize three primary categories of treaty reinsurance coverage to reduce the impact of major losses. These include multi-lines excess of loss coverage, catastrophe excess of loss coverage, and quota share coverage. We determine the amount and scope of reinsurance coverage to purchase each year based on our evaluation of the risks accepted, consultation with reinsurance professionals and a review of market conditions, including availability and cost. During the years ended December 31, 2010, 2009 and 2008 we ceded to reinsurers $13.3 million, $11.3 million and $10.7 million of earned premiums, respectively.

Multi- Lines Excess of Loss Coverage. The multi-lines excess of loss program is the Company’s primary reinsurance coverage. The excess of loss program is designed to help stabilize financial results, limit exposure on

larger risks, and increase our underwriting capacity. The largest exposure retained by us on any one risk in 2010 was $175,000. The 2010 property coverage for this program provided up to $2,825,000 over the $175,000 retention per risk. The 2010 casualty coverage for this program provided up to $5,825,000 over the $175,000 retention. Our 2010 workers compensation reinsurance provided up to $11,825,000 coverage above the $175,000 retention.

Catastrophic Excess of Loss Coverage. Catastrophic reinsurance protects us from significant aggregate loss exposure arising from a single event such as windstorm, hail, tornado, hurricane, earthquake, blizzard, freezing temperatures, and other extraordinary events. The contract is designed to help stabilize underwriting results and to mitigate the effect of individual loss occurrences. In 2010, we had three layers of catastrophic excess of loss reinsurance providing coverage for up to $24,750,000 above the $1,250,000 retention. We had an automatic reinstatement provision after the first loss for each layer to provide coverage in the event of subsequent catastrophes during the year. Coverage would lapse after the second event, in which case we would evaluate the need for a new contract for the remainder of the year. The 2010 reinstatement fees were 100% of the initial premium.

Quota Share Coverage. The Company utilizes quota share reinsurance for its boiler and machinery coverage which is primarily an equipment breakdown endorsement to commercial and farm policies. The contracts are 100% quota share and the Company receives a ceding commission ranging from 32% to 35% on the premiums ceded. The agreements also include profit sharing provisions based on the profitability of the underlying underwriting performance of the business ceded. The Company also utilizes quota share reinsurance for its employment practices liability coverage which is an endorsement to commercial policies. The agreement is 100% quota share and the Company receives ceding commission of 35% on the premiums ceded.

Facultative. We utilize facultative reinsurance to provide additional underwriting capacity, to mitigate the effect of individual losses and to reduce net liability on individual risks. Coverage is determined on each individual risk. In 2010, the Company obtained coverage ranging from $100,000 up to $59,000,000 for certain commercial and farm properties it insured.

Michigan Catastrophic Claim Association. The Insurance Company is a member of the Michigan Catastrophic Claim Association, or MCCA, a statutorily created non-profit association which provides mandatory reinsurance to its members. Michigan is the only state that offers unlimited personal injury protection benefits which are offered through no-fault auto insurance policies. The reinsurance provided by the MCCA indemnifies its members for 100% of the losses sustained under personal injury protection policies issued by the members in excess of specified retention amounts. From July 1, 2009 through June 30, 2010, the retention was $460,000 and from July 1, 2010 through June 30, 2011 the retention is $480,000. The MCCA must provide this reinsurance and the Insurance Company, like all insurance companies that write automobile insurance in Michigan, must accept and pay for the reinsurance.

Our Reinsurers. The financial stability of our reinsurers is an important consideration. The insolvency or inability of any reinsurer to meet its obligations to us could have a material adverse effect on our results of operations or financial condition. As of December 31, 2010, our largest reinsurers based on a percentage of ceded premiums written are set forth in the following table. Except for the reinsurers listed below, no other individual reinsurer accounted for more than 5% of total ceded premiums written.


Reinsurer	Ceded Premiums Written		Percentage of Total			A.M. Best Rating
	(000’s)
Michigan Catastrophic Claims Association	$	5,717		42.9	%		(1)
QBE Reinsurance Corp		1,540		11.5	%		A
TOA Re Insurance Company of America		1,209		9.1	%		A
Axis Reinsurance Company		1,088		8.2	%		A
Hartford Steam Boiler		1,015		7.6	%		A+
Other		2,765		20.7	%		A- or better

Total	$	13,334		100.0	%

(1)	The MCCA does not receive an A.M. Best rating.

The following table sets forth individual balances of loss and loss adjustment expenses recoverable from reinsurers on both paid and unpaid claims as of December 31, 2010. Except for the reinsurers listed below, no other individual reinsurer accounted for more than 5% of total loss and LAE recoverable from reinsurers.


Reinsurer	Loss and loss adjustment expenses recoverable		Percentage of Total Recoverable			A.M. Best Rating
	(000’s)
QBE Reinsurance Corp	$	2,778		24.8	%		A
TOA Re Insurance Company of America		2,351		21.0	%		A
Axis Reinsurance Company		1,912		17.1	%		A
Michigan Catastrophic Claims Association		1,507		13.5	%		(1)
Hannover Ruckversicherungs—AG		1,191		10.6	%		A
Dorinco Reinsurance Co.		956		8.5	%		A-
Other		503		4.5	%		A- or better

Total	$	11,198		100.0	%

(1)	The MCCA does not receive an A.M. Best rating.

INVESTMENTS

All of our investments are classified as available for sale and are carried at fair market value. Our return on invested assets is an important component of our operating results. Our investment objectives are to:

•

Maximize current yield;

•

Maintain adequate liquidity for insurance operations;

•

Maintain safety of principal through a balance of high quality and diversified investments;

•

Maintain daily oversight to minimize risk;

•

Minimize fluctuations in market valuations due to increasing interest rates by monitoring duration;

•

Meet regulatory requirements; and

•

Increase surplus and shareholders’ equity through appreciation.

The investment committee, appointed by the Insurance Company’s board of directors, sets our investment policy. The investment committee meets at least twice each year to review the investment portfolio, asset allocation, performance, and liquidity. The Company utilizes outside professional investment management firms for its fixed maturity and equity securities. The firm that manages the fixed maturity portfolio specializes in management of insurance company investment portfolios. Professional asset management was deemed practical to allow for constant review of the portfolio and specialized focus. During 2009, the Company engaged a professional management firm to manage a portion of its equity portfolio.

See Note 1—Summary of Significant Accounting Policies to the consolidated financial statements included under Item 8 of this Form 10-K for a description of the Company’s fair value measurement approach to its investment portfolio.

The following table sets forth information concerning the composition of the Company’s investment portfolio at December 31:


	December 31, 2010
	Amortized Cost		Fair Value		Carrying Value		Percent of Carrying Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	7,472,982	$	7,397,044	$	7,397,044		9.8	%
States and political subdivisions		20,115,479		19,754,595		19,754,595		26.0	%
Corporate securities		15,767,158		15,626,333		15,626,333		20.6	%
Mortgage-backed securities		14,896,617		14,908,830		14,908,830		19.7	%

Total fixed maturities		58,252,236		57,686,802		57,686,802		76.1	%
Equity securities		16,838,326		18,121,044		18,121,044		23.9	%

Total investments	$	75,090,562	$	75,807,846	$	75,807,846		100.0	%

At December 31, 2010, our fixed maturity portfolio had a fair value of approximately $58 million. All of the fixed maturity investments are rated by Moody’s as investment grade with an average credit quality rating of AA and an average duration of 4.6 years. The market value of our investments may fluctuate in response to changes in interest rates. In addition, we may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

At December 31, 2010, our equity portfolio included both mutual funds (29%) and stocks (71%). The mutual funds, as a percentage of total equities were spread among the following mutual fund types: large-cap—5%, mid-cap—4%, small-cap—14%, and international—6%. Sector allocation for stocks is as follows: basic materials 5%, bond equivalent 11%, communications 1%, consumer cyclical 6%, consumer non-cyclical 4%, energy 11%, financial 7%, healthcare 4%, industrials 6%, technology 8%, and utilities 8%.


	December 31, 2009
	Amortized Cost		Fair Value		Carrying Value		Percent of Carrying Value
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies	$	5,670,813	$	5,696,210	$	5,696,210		8.4	%
States and political subdivisions		23,790,222		24,186,904		24,186,904		35.7	%
Corporate securities		12,514,810		12,686,916		12,686,916		18.8	%
Mortgage-backed securities		13,846,261		13,913,550		13,913,550		20.6	%

Total fixed maturities		55,822,106		56,483,580		56,483,580		83.5	%
Equity securities		11,687,346		11,183,580		11,183,580		16.5	%

Total investments	$	67,509,452	$	67,667,160	$	67,667,160		100.0	%

At December 31, 2009, our fixed maturity portfolio had a fair value of approximately $56 million. All of the fixed maturity investments are rated by Moody’s as investment grade with an average credit quality rating of AA and an average duration of 4.8 years. As a result, the market value of our investments may fluctuate in response to changes in interest rates. In addition, we may experience investment losses to the extent our liquidity needs require the disposition of fixed maturity securities in unfavorable interest rate environments.

At December 31, 2009, our equity portfolio included both mutual funds (61%) and stocks (39%). The mutual funds, as a percentage of total equities were spread among the following mutual fund types: large-cap— 15%, mid-cap—17%, small-cap—15%, specialty—2%, and international—12%. Sector allocation for stocks is as follows: basic materials 4%, bond equivalent 2%, communications 1%, consumer cyclical 3%, consumer non-cyclical 3%, energy 7%, financial 4%, healthcare 3%, industrials 3%, technology 7%, and utilities 2%.

The following table shows the rating distribution of the Company’s fixed maturity portfolio by rating as a percentage of fair value as of December 31, 2010:


	As of December 31, 2010
Rating (Moody’s, S&P, Fitch)	Fair Value		Percent of Fair Value
“AAA”	$	22,305,875		38.7	%
“AA”		19,754,595		34.2	%
“AA-”		15,535,151		26.9	%
No Rating		91,181		0.2	%

Total Fixed maturities	$	57,686,802		100.0	%

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

The following two tables show the estimated fair value and gross unrealized losses, aggregated by investment category and length of time that individual investments have been in a continuous unrealized loss position at December 31, 2010 and 2009.


	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		4,338,739		413,733		5,924,605		484,845

Total	$	37,205,486	$	1,068,888	$	4,338,739	$	413,733	$	41,544,225	$	1,482,621

As of December 31, 2010, the 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. 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.


	December 31, 2009
	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	$	2,960,523	$	5,136	$	—	$	—	$	2,960,523	$	5,136
States and political subdivisions		2,630,506		57,311		480,715		19,285		3,111,221		76,596
Corporate securities		3,689,734		26,830		—		—		3,689,734		26,830
Mortgage-backed securities		5,249,649		36,993		1,770,809		50,047		7,020,458		87,040

		14,530,412		126,270		2,251,524		69,332		16,781,936		195,602

Equity Securities		103,878		5,771		6,197,433		1,327,456		6,301,311		1,333,227

Total	$	14,634,290	$	132,041	$	8,448,957	$	1,396,788	$	23,083,247	$	1,528,829

As of December 31, 2009, the portfolio included 23 fixed maturity securities and 7 equity securities in an unrealized loss position for less than 12 months and 4 fixed maturity securities and 14 equity securities in an unrealized loss position for more than 12 months. Of the fixed maturity securities, all twenty-seven were trading at or 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, 2009, the investment portfolio included 21 equity securities in an unrealized loss position. Of these twenty-one equity securities, 2 were trading under 75% of amortized cost, 7 were trading between 75% and 85% of amortized cost, 8 were trading between 86% and 95% of amortized cost and the remaining 4 were trading above 95% of amortized cost. 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.

The following table presents the maturity profile of our fixed maturity investments as of December 31, 2010 and 2009. As noted above the average duration of the portfolio at December 31, 2010 was 4.6 years compared to 4.8 years at December 31, 2009. Actual maturities of mortgaged-backed securities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment rates are influenced by a number of factors that cannot be predicted with certainty, including: the relative sensitivity of the underlying mortgages or other collateral to changes in interest rates; a variety of economic, geographic and other factors; and the repayment priority of the securities in the overall securitization structures. These securities are presented separately in the maturity schedule due to the inherent risk associated with prepayment.


	December 31, 2010
	Amortized Cost		Fair Value		Percent of Fair Value
Due in one year or less	$	1,439,746	$	1,446,360		2.5	%
Due after one year through five years		18,002,701		18,101,091		31.4	%
Due after five years through 10 years		22,860,231		22,250,735		38.6	%
Due after 10 years		1,052,940		979,785		1.7	%
Mortgage-backed securities		14,896,618		14,908,831		25.8	%

Total	$	58,252,236	$	57,686,802		100.0	%


	December 31, 2009
	Amortized Cost		Fair Value		Percent of Fair Value
Due in one year or less	$	2,800,704	$	2,805,607		5.0	%
Due after one year through five years		16,998,991		17,329,332		30.7	%
Due after five years through 10 years		20,282,342		20,577,659		36.4	%
Due after 10 years		1,893,808		1,857,432		3.3	%
Mortgage-backed securities		13,846,261		13,913,550		24.6	%

Total	$	55,822,106	$	56,483,580		100.0	%

Management of Market Risk. We are subject to various market risk exposures, including interest rate risk and equity price risk. Our primary risk exposure is to changes in interest rates. We manage market risk through our investment committee and through the use of an outside professional investment management firm. We are vulnerable to interest rate changes because, like other insurance companies, we invest primarily in fixed maturity securities, which are interest-sensitive assets. Mortgage-backed securities, which make up approximately 25.8% of our investment portfolio, are particularly susceptible to interest rate changes. We invest primarily in classes of mortgage-backed securities that are less vulnerable to prepayment risk and, as a result, somewhat less sensitive to interest rate risk than other mortgage-backed securities.

The value of our equity securities is dependent upon general conditions in the securities markets and the business and financial performance of the individual companies in the portfolio. Values are typically based on future economic prospects as perceived by investors in the equity markets.

Effect of Interest Rate Changes. 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. The other financial instruments, which include cash, premiums due from reinsurers and accrued investment income, do not produce a significant difference in fair value when included in the market risk due to their short-term nature.


Change in Rate	Portfolio Value		Change in Value
	(In thousands)
2%	$	52,471	$	(5,216	)
1%		55,035		(2,652	)
0		57,687		—
-1%		60,426		2,739
-2%		63,254		5,567

A.M. BEST RATING

A.M. Best, which rates insurance companies based on factors of concern to policyholders, has assigned Fremont Insurance Company a financial strength rating (FSR) of “A-” (Excellent) with a stable outlook. A.M. Best assigns “A-” ratings to companies that, in its opinion, have demonstrated an excellent ability to meet their ongoing insurance obligations. An “A-” rating is the fourth highest rating of the 16 A.M. Best rating categories.

In evaluating our financial and operating performance, A.M. Best reviews our profitability, leverage and liquidity, as well as our book of business, the adequacy and soundness of our reinsurance, the quality and estimated market value of our assets, the adequacy of our loss reserves, the adequacy of our surplus, our capital structure, the experience and competency of our management team, and our market presence. A.M. Best ratings are not directed toward the protection of investors. As such, our A.M. Best rating should not be relied upon as a basis for an investment decision to buy our common stock.

COMPETITION

The property and casualty insurance market is highly competitive. We compete against other Michigan-based insurance carriers as well as major regional and national carriers. The national carriers we compete with on a regular basis are Citizens Insurance Company of America, State Farm Mutual Automobile Insurance Company and the Allstate Corporation. Regional companies that are important competitors include Auto Owners Insurance Group, Allied Insurance, Farm Bureau Mutual Insurance Company of Michigan, Frankenmuth Mutual Insurance Company and Hastings Mutual Insurance Company. Smaller state competitors would include Michigan Insurance Company, Pioneer State Mutual Insurance Company and Wolverine Mutual Insurance Company. Some of these competitors are larger and have much greater financial, technical and operating resources than we have. Our ability to compete successfully depends upon a number of factors, many of which are out of our control, such as market conditions, our A.M. Best rating, and regulatory conditions. We compete primarily based upon the following factors:

•

the price and quality of our insurance products;

•

the quality and speed of our service and claims response;

•

our financial strength;

•

our A.M. Best rating;

•

our sales and marketing capability; and

•

our technical expertise.

REGULATION

General. Insurance companies are subject to supervision and regulation in the states in which they transact business relating to numerous aspects of their business and financial condition. The primary purpose of this supervision and regulation is the protection of policyholders. The extent of the regulation varies, but generally derives from state statutes that delegate regulatory, supervisory and administrative authority to state insurance departments.

We are licensed to write insurance in Michigan, Wisconsin and Indiana. The Company received its certificates of authority to write insurance in Wisconsin and Indiana during the first quarter of 2010. As of December 31, 2010, we have not yet appointed any agents or written any insurance in these two states. In Michigan, we are subject to supervision and regulation by the Michigan Office of Financial and Insurance Regulation (“OFIR”). OFIR requires the filing of annual, quarterly and other reports relating to the financial condition of insurance companies doing business in Michigan. The authority of the OFIR includes, among other things:

•

establishing standards of solvency which must be met and maintained by insurers;

•

requiring certain methods of accounting;

•

classifying assets as admissible for purposes of determining statutory surplus;

•

licensing of insurers and their agents to do business;

•

establishing guidelines for the nature of and limitations on investments by insurers;

•

reviewing premium rates for various lines of insurance;

•

approval of policy forms;

•

reviewing the provisions which insurers must make for current losses and future liabilities;

•

reviewing transactions involving a change in control;

•

restrictions on payments of dividends to shareholders;

•

restrictions on transactions between insurers and their affiliates; and

•

reviewing claims, advertising and marketing practices.

Examinations. Examinations are regularly conducted by the OFIR every three to five years. In April 2008, OFIR completed an examination of the Insurance Company as of December 31, 2006. The examination did not result in any material adjustments to the Insurance Company’s financial position. In addition, there have been no substantive qualitative matters indicated that would have had an adverse impact on the Insurance Company’s operations.

NAIC Risk-Based Capital Requirements. In addition to state-imposed insurance laws and regulations, the OFIR administers the risk based capital standards adopted by the National Association of Insurance Commissioners (“NAIC”) that require insurance companies to calculate and report information under a risk-based formula that attempts to measure statutory capital and surplus needs based on the risks in a company’s mix of products and investment portfolio. Under the formula, we first determine our risk-based capital level by taking into account risks with respect to our assets and underwriting risks relating to our liabilities and obligations. We

then compare our “total adjusted capital” to the base level. Our “total adjusted capital” is determined by subtracting our liabilities from our assets in accordance with rules established by the OFIR.

The following table highlights the ramifications of the various ranges of non-compliance. The ratios represent the relationship of a company’s total adjusted capital to its authorized control level risk-based capital.


Ratio and Category		Action
2.0 or more		None - In compliance

1.5-1.99: Company Action		Company must submit a comprehensive plan to the regulatory authority discussing proposed corrective actions to improve its capital position

1.0-1.49: Regulatory Action		Regulatory authority will perform a special examination of the company and issue an order specifying corrective actions that must be taken

0.7-0.99: Authorized Control		Regulatory authority may take any action it deems necessary, including placing the company under regulatory control

Less than 0.7: Mandatory Control		Regulatory authority is required to place the company under regulatory control

The Insurance Company has always exceeded the required levels of capital for compliance and has always been in compliance. There can be no assurance, however, that the capital requirements applicable to our business will not increase in the future. As of December 31, 2010, our risk-based capital authorized control level was $3,466,209 and our total adjusted capital was $42,193,594, yielding a ratio of 12.2.

IRIS Requirements. The NAIC has also developed a set of financial ratios, referred to as the Insurance Regulatory Information System (“IRIS”) for use by state insurance regulators in monitoring the financial condition of insurance companies. The NAIC has established an acceptable range of values for each of the IRIS financial ratios. Generally, an insurance company will become the subject of increased scrutiny when four or more of its IRIS ratio results fall outside the range deemed acceptable by the NAIC. The nature of increased regulatory scrutiny resulting from IRIS ratio results that are outside the acceptable range is subject to the judgment of the applicable state insurance department, but generally will result in accelerated review of annual and quarterly filings. Depending on the nature and severity of the underlying cause of the IRIS ratio results being outside the acceptable range, increased regulatory scrutiny could range from increased but informal regulatory oversight to placing a company under regulatory control.

NAIC values


		IRIS Ratios					Our Results
		Over		Under			2010
1	Gross Premiums Written to Surplus		900		—			179
2	Net Premiums Written to Surplus		300		—			147
3	Change in Net Premiums Written		33		(33	)		12
4	Surplus Aid to Surplus		15		—			0
5	Two-Year Overall Operating Ratio		100		—			94
6	Investment Yield		6.5		3			1.9	(*)
7	Gross Change in Surplus		50		(10	)		7
8	Change in Adjusted Surplus		25		(10	)		7
9	Adjusted Liabilities to Liquid Assets		100		—			55
10	Gross Agents’ Balances to Surplus		40		—			1
11	One-Year Reserve Development to Surplus		20		—			(3	)
12	Two-Year Reserve Development to Surplus		20		—			(7	)
13	Estimated Current Reserve Deficiency to Surplus		25		—			(9	)

(1)	“*” denotes results outside of the usual range

(2)	“—” denotes no lower limit on the range

As of December 31, 2010, all of the Company’s ratios were within the acceptable range except for the investment yield ratio. The Company’s investment yield ratio of 1.9 was below the lower end of the IRIS ratio due to the fact that interest rates remained at very low levels in 2010 compared to historic averages and the fact that the portfolio duration was decreased in order to lower market value volatility in the event of future rising interest rates.

Guaranty Fund. We participate in the Property and Casualty Guaranty Association of the State of Michigan (“PCGA”), which protects policyholders and claimants against losses due to insolvency of insurers. When an insurer becomes insolvent, the Association is authorized to assess member companies up to the amount of the shortfall of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar year. We recognize a liability for insurance related assessments when an assessment has been imposed or information available indicates it is probable that an assessment will be imposed, or an event obligating us to pay an imposed or probable assessment has occurred and the amount of the assessment can be reasonably estimated. We incurred approximately $15,000 in assessments related to the PCGA in 2008. There were no assessments during 2010 or 2009.

Michigan Catastrophic Claim Association. Michigan’s no-fault law requires insurers to provide unlimited medical coverage to automobile accident victims. The cost of providing the unlimited medical coverage has somewhat offset the savings typically associated with a non-monetary threshold. In response, the Michigan Catastrophic Claim Association (“MCCA”), which is an unincorporated nonprofit association created by Michigan law, was established to spread the costs of medical coverage to all policyholders. The MCCA essentially acts as a reinsurer for all Michigan automobile insurers, reimbursing them for amounts paid on personal injury protection claims above a retention level. From July 1, 2009 through June 30, 2010, the MCCA retention was $460,000 and from July 1, 2010 through June 30, 2011 the retention is $480,000. This limit will increase incrementally to $500,000 by July 1, 2011. Every insurer engaged in writing automobile personal injury protection insurance coverage in Michigan is required to be a member of MCCA. Personal injury protection is included in automobile insurance. Member companies cede premiums which are based on the number of vehicles for which coverage is written, to cover the losses reported by all member companies. Although the MCCA acts in the same manner as a reinsurer, it is not an insurance company and is not rated by A.M. Best.

Michigan Basic Property Insurance Association. The Michigan Basic Property Insurance Association (“MBPIA”) provides basic insurance to property-owners who cannot obtain insurance through insurance carriers in the normal course of business due to a high-risk exposure. The MBPIA assesses insurance carriers in Michigan for continuation of the association based on the amount of losses incurred by the association and the amount of net written premium of the carrier related to property insurance. There was no assessment in 2010. The assessment was approximately $105,000 and $77,000 in 2009 and 2008, respectively.

Michigan No-Fault Automobile Insurance. Under a pure no-fault automobile insurance system, responsibility for an automobile accident is not at issue. Each policyholder’s own insurance company pays for his or her medical expenses and lost wages, regardless of who caused the accident, and the individuals relinquish the right to sue to recover damages. The objective of such a system is to eliminate the delays and costs of court disputes associated with the tort system, encourage prompt payment of compensation, and return a larger percentage of insurance premium dollars to accident victims. Michigan has a modified no-fault system that limits lawsuits relating to automobile accidents. For example, a suit for damages is permitted under Michigan’s no-fault law when an injured person has suffered death, permanent serious disfigurement, or serious impairment of a body function. Damages are assessed on the basis of comparative fault, except that damages will not be assessed in favor of a party who is more than 50% at fault.

The Michigan Essential Insurance Act. The Michigan Essential Insurance Act (“MEIA”) requires an insurer to insure every applicant for automobile and homeowner insurance that meets the minimum requirements and the insurer’s underwriting rules. The underwriting rules must be applied uniformly to all applicants and policyholders. Each insurer must file its underwriting rules with the Insurance Commissioner. In addition, the

MEIA limits rating criteria that insurers may employ, requires insurers to develop a “secondary” or merit rating plan under which premium surcharges are levied on poor drivers, establishes a joint underwriting association to provide insurance to individuals who cannot obtain coverage in the insurance market, and regulates other types of coverage and informational requirements.

Insurance Scoring. The financial stability of an insured, in all lines of business, has always been a strong consideration in underwriting and pricing. The Company currently uses insurance scoring (similar to a credit score) as a pricing tool in its homeowners, mobilowners, personal auto, marine and farm lines of business. Numerous studies have verified the validity of insurance scoring as a predictor of future losses.

On January 12, 2005, the Governor of Michigan and the Commissioner of OFIR issued proposed rules to reduce base insurance rates and ban the use of insurance credit scores as a rating factor or as a basis to refuse to insure or limit coverage on personal insurance. The Insurance Institute of Michigan (“IIM”), of which the Company is a member, mounted a legal challenge to the ban and filed a suit in Barry County Circuit Court seeking relief from the proposed ban. On April 25, 2005 the Barry County Circuit Court issued a final order in the matter of IIM, et al v. OFIR in favor of the IIM and allowing the use of insurance credit scores for underwriting and pricing. The Circuit Court declared that the proposed rules were illegal, invalid and unenforceable. It further ordered that OFIR was permanently enjoined from enforcing these rules. The Commissioner of OFIR appealed this ruling to the Michigan Court of Appeals. On September 22, 2008, the Michigan Court of Appeals vacated the judgment of the Barry County Circuit Court and ruled that the administrative rules to ban the use of credit-based insurance scoring were valid. IIM appealed the decision of the Michigan Court of Appeals to the Michigan Supreme Court. On July 8, 2010, the Michigan Supreme Court issued its opinion in the matter of IIM, et al v OFIR vacating the judgment of the Michigan Court of Appeals and reinstated the Barry County Circuit Court’s order declaring the OFIS rules invalid and permanently enjoining their enforcement.

Holding Company Regulation. Most states, including Michigan, have enacted legislation that regulates insurance holding company systems. Each insurance company in a holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurers within the system. These laws permit OFIR and any other relevant insurance departments to examine the Insurance Company and the Company at any time, to require disclosure of material transactions between them and to require prior approval of transactions, such as extraordinary dividends from the Insurance Company to the Company. All transactions between companies within a holding company system must be fair and equitable to the insurance company. Under Michigan law, the maximum amount of dividends that may be paid by an insurer to its stockholders during any twelve-month period without approval of OFIR is the greater of 10% of the insurer’s surplus as reported on the most recent annual statement filed with OFIR or the net income, excluding realized capital gains, of the insurer for the twelve-month period covered by such annual statement.

Change in Control. The Michigan Insurance Code requires that the Insurance Commissioner receive prior notice and approve of a change of control in either the Insurance Company or the Company. The Insurance Code contains a complete definition of “control.” In simplified terms, a person, corporation or other entity would obtain “control” of the Insurance Company or the Company if they possessed, had a right to acquire possession or had the power to direct any other person acquiring possession, directly or indirectly, of 10% or more of the voting securities of either company. To obtain approval for a change of control, the proposed acquirer must file an application with the Insurance Commissioner containing detailed information such as the identity and background of the acquirer and its affiliates, the sources and amount of funds to be used to effect the acquisition, and financial information regarding the proposed acquirer.

Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002, or the SOA. The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced

penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (the SEC) under the Securities Exchange Act of 1934 (the Exchange Act).

The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules, and mandates further studies of specified issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. The SOA addresses, among other matters:

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audit committees, including the independence of members, communications with auditors and selection and oversight of auditors;

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certification of financial statements by the chief executive officer and the chief financial officer;

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disclosure of off-balance sheet transactions;

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a prohibition on personal loans to directors and officers;

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expedited filing requirements for Form 4 statements of changes of beneficial ownership of securities required to be filed by officers, directors and 10% shareholders;

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disclosure of whether or not a company has adopted a code of ethics; and

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various increased criminal penalties for violations of securities laws.

Under the current rules we are subject to the provisions of Section 404 of the Sarbanes-Oxley Act that require an annual management assessment of our internal control over financial reporting.

ITEM 1A.

RISK FACTORS

The Company’s financial performance is dependent upon its own specific business characteristics, however, risk factors do exist which could result in a significant or material adverse effect on our results of operations or financial condition and a corresponding decline in the market price of our common stock. Risk factors include, but may not be limited to, the following:

Our financial results could be affected by the cyclical patterns of the soft and hard market in the property and casualty industry.

The financial performance of the property and casualty industry tends to fluctuate in patterns of soft markets followed by hard markets. The Company’s strategy is to focus on disciplined underwriting and avoid riding the cycle of soft and hard markets. However, if the marketplace puts pressure on pricing we may not be able to implement rate increases which could have a negative effect on our financial performance.

Because we concentrate all of our business in Michigan, its weather will affect our results.

All insurance policies we write are generated in Michigan, with a significant portion in four counties: Kent, Muskegon, Newaygo and Oakland. Companies with a more diversified geographic portfolio would not be as exposed to Michigan weather as we are.

Catastrophe and natural peril losses may hurt our financial condition.

By their nature, catastrophe losses are unpredictable in their number and severity. They can be caused by various severe weather events, including snow storms, ice storms, freezing temperatures, tornadoes, wild fires, wind and hail. The extent of net losses from catastrophes depends upon three factors:

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the total amount of insured exposure in the area affected by the event,

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the severity of the event, and

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the amount and structure of our reinsurance coverage.

We obtain reinsurance to aid in paying catastrophe loss claims, but we may experience operating losses in years when catastrophe claims are higher than expected. Natural perils such as freezing rain, snow storms, wind storms and tornadoes, which may occur frequently but not rise to the level of a catastrophe, may cause us to lose money because they are not classified as a catastrophe under our reinsurance program. If our reinsurance pays catastrophe loss claims, we may still incur substantial expense to reinstate the coverage used.

If we underestimated the amount of our required loss reserves, our results may suffer.

We maintain reserves to cover our estimated liability for losses and loss adjustment expenses (“LAE”) with respect to reported and unreported claims incurred. Reserves are estimates involving actuarial and statistical projections at a given point in time of what we expect to be the cost of the ultimate settlement and administration of claims based on facts and circumstances then known, actual and historical information, predictions of future events, estimates of future trends in claims severity and judicial theories of liability, legislative activity and other variable factors, such as inflation, investment returns, and price increases because of local shortages. The Company’s overall reserving practice provides for ongoing claims evaluation and adjustment (if necessary) based on the development of related data and other relevant information pertaining to such claims. Loss and LAE reserves, including reserves for claims that have been incurred but not yet reported, are analyzed regularly and we adjust our reserves based on such reviews. We believe our reserves are adequate. However, establishing appropriate reserves is an uncertain process. There is no guarantee that our ultimate losses will not exceed our reserves. To the extent that reserves prove to be inadequate in the future, we would have to increase reserves, which would reduce our earnings and could have a material adverse effect on the Company’s results of operations and financial condition.

We face strong competition from large companies, which may reduce our earnings and profits.

We principally insure against property and casualty losses. This segment of the market is highly competitive. We compete against other Michigan-based insurance carriers as well as major regional and national carriers. The national carriers we compete with on a regular basis are Citizens Insurance Company of America, State Farm Mutual Automobile Insurance Company and the Allstate Corporation. Regional companies that are important competitors include Auto Owners Insurance Group, Allied Insurance, Farm Bureau Mutual Insurance Company of Michigan, Frankenmuth Mutual Insurance Company and Hastings Mutual Insurance Company. Smaller state competitors would include Michigan Insurance Company, Pioneer State Mutual Insurance Company and Wolverine Mutual Insurance Company. Many of our competitors have substantially greater financial, technical and operating resources than we do. As a result, many of our lines of insurance are subject to strong price competition and heavy advertising by larger companies, which could result in loss of business and adversely affect our earnings.

Our reliance on independent insurance agencies to sell our products as well as their ability to sell products of our competitors could adversely affect the sale of our products.

We market our property and casualty insurance products exclusively in Michigan through approximately 172 independent agencies. Our independent insurance agencies represent other insurance companies, including

our competitors, which also compete for the service and allegiance of these agencies. If a significant number of the independent agencies shift profitable accounts from us to our competitors, it could adversely affect our business.

We rely on internet based systems for the application, underwriting and processing for the majority of our products, and disruptions or frustrations with our business platforms could adversely affect us.

We rely on internet systems for the application, underwriting and processing for the majority of our products, and we may increasingly rely on internet applications for our operations. In some instances, our agents are required to access separate business platforms to execute the sale of our insurance. Should internet disruptions occur, or frustration with our business platforms or distribution initiatives develop among our independent agents, the resulting loss of business could materially and adversely affect our future business volume and results of operations.

Our business success and profitability depend, in part, on effective information technology systems and on continuing to develop and implement improvements in technology.

We depend in large part on our technology systems for conducting business and processing claims, and thus our business success is dependent on maintaining the effectiveness of existing technology systems and on continuing to develop and enhance technology systems that support our business processes and strategic initiatives in a cost and resource efficient manner. Some system development projects are long-term in nature, may negatively impact our expense ratio as we invest in the projects and may cost more than we expect to complete. In addition, system development projects may not deliver the benefits we expect once they are complete, or may be replaced or become obsolete more quickly than expected, which could result in accelerated recognition of expenses. If we do not effectively and efficiently manage and upgrade our technology, or if the costs of doing so are higher than we expect, our ability to provide competitive services in a cost effective manner and our ability to implement our strategic initiatives could be adversely impacted.

If we experience difficulties with technology and data security our ability to conduct our business could be negatively impacted.

While technology can streamline business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. Our business is highly dependent upon the ability of our agents and employees to perform business functions in an efficient and uninterrupted fashion. A shut-down or inability to access our facility, a power outage or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other business functions. Computer viruses, hackers and other external hazards could expose our data systems to security breaches. These increased risks, and expanding regulatory requirements regarding data security, could expose us to data loss, monetary and reputational damages and significant increases in compliance costs. As a result, our ability to conduct our business might be adversely affected.

A downgrade in our A.M. Best rating could hurt our premium volume.

Ratings assigned by A.M. Best Company, Inc. influence the competitive position of insurance companies. Their ratings are based upon factors of concern to policyholders and are not directed toward the protection of investors. Our current rating is “A-” (Excellent). Our business is sensitive to those ratings. If we were to experience a rating downgrade, our independent agents could be inclined to place their customers with higher-rated insurance carriers, which could result in a loss of premium volume and could have a material adverse effect on us. In addition, a downgrade in our A.M. Best rating could make it more difficult or costly to obtain reinsurance.

If we are unable to obtain adequate reinsurance coverage at reasonable rates in the future, we may be unable to manage our underwriting risks and operate our business profitably.

Reinsurance is the practice of transferring part of the liabilities and the premiums under an insurance policy to another insurance company. Like other insurance companies, we use reinsurance arrangements to limit and manage the amount of risk we retain and to stabilize our underwriting results. Reinsurance can be facultative reinsurance or treaty reinsurance. Under facultative reinsurance, each risk or portion of a risk is reinsured individually. Under treaty reinsurance, an agreed-upon portion of business written is automatically reinsured. Treaty reinsurance can also be classified as quota share reinsurance, pro-rata insurance or excess of loss reinsurance. Under quota share reinsurance and pro-rata insurance, the ceding company cedes a percentage of its insurance liability to the reinsurer in exchange for a like percentage of premiums, less a ceding commission, and, in turn, will recover from the reinsurer the reinsurer’s share of losses and loss adjustment expenses incurred on those risks. Under excess of loss reinsurance, an insurer limits its liability to all or a particular portion of the amount in excess of a predetermined deductible or retention. Regardless of type, reinsurance does not legally discharge the ceding insurer from primary liability for the full amount due under the reinsured policies. However, the assuming reinsurer is obligated to reimburse the ceding company to the extent of the coverage ceded. The availability and cost of reinsurance are subject to prevailing market conditions and may vary significantly over time. Reinsurance rates are not regulated and reinsurers are able to quickly raise their rates in response to changing market conditions. On the other hand, the Insurance Company’s rates are regulated, and it could take us years to obtain regulatory approval and collect rate increases based on the rising costs of reinsurance. There is no assurance that regulators would approve a rate increase based on these costs. Reinsurance may not be available to us in the future at commercially reasonable rates. If it is not available at reasonable rates, we may be unable to manage our underwriting risks and operate our business profitably.

If our reinsurers do not fulfill their financial obligations to us it may jeopardize our earnings and financial condition.

We are subject to loss and credit risk relating to the reinsurers we deal with because buying reinsurance does not relieve us of our liability to policyholders. The insolvency or inability of any reinsurer to meet its obligations may have a material adverse effect on the business, results of operations and financial condition of the Insurance Company.

If we do not have adequate reinsurance coverage, our earnings and financial condition would be in jeopardy.

It is possible that the losses we experience on risks we have reinsured will exceed the coverage limits on the reinsurance. If the amount of our reinsurance is not sufficient, our insurance losses would increase which could jeopardize our earnings and financial condition

Changes in prevailing interest rates may reduce our revenues, cash flows and shareholders’ equity.

We have invested a significant portion of our investment portfolio in fixed maturity securities. In recent years, we have earned our investment income primarily from interest income on this portfolio. Lower interest rates could reduce the return on our portfolio and the amount of this income if we must reinvest at rates below those we have on securities currently in the portfolio. The reduced investment income could also reduce our cash flows. In addition, in a declining interest rate environment, we may lower our credit quality standards in order to maintain yield on the investment portfolio, which would negatively impact the quality of our investment portfolio. A decline in the quality of our portfolio could result in realized losses on securities, creating additional volatility in our statement of operations. Higher interest rates could reduce the market value of our fixed income investments resulting in a reduction to stockholders’ equity.

We could be forced to sell investments to meet our liquidity requirements.

We believe that we maintain adequate amounts of cash and short-term investments to pay claims, and do not expect to sell securities prematurely for such purposes. We may, however, decide to sell securities as a result of changes in interest rates, credit quality, the rate of repayment or other similar factors. A significant increase in market interest rates could result in a situation in which we are required to sell securities at depressed prices to fund payments to our insureds. Since we carry debt securities at fair value, we expect that these securities would be sold with no material impact on our net equity. However, if these securities are sold, future net investment income may be reduced if we are unable to reinvest in securities with similar or better yields.

Declining debt and equity markets could adversely affect our investment portfolio.

A declining market could stress the values of investments of all firms and could cause the investment ratings of the issuers of debt or equity to decline. Therefore, a declining market could negatively impact the credit quality of our investment portfolio as adverse equity markets also affect issuers of securities held by us. Declines in the quality of the portfolio could cause additional realized losses on securities, thus causing volatility in our statement of operations.

The Sarbanes-Oxley Act of 2002 may have a material adverse effect on our business.

The Sarbanes-Oxley Act of 2002 requires new corporate governance standards, increased disclosures, expanded insider accountability, broadened sanctions and increased oversight by the Board and its committees. It also requires higher standards for the composition of the audit committee, heightens auditor independence, and limits non-audit services we can obtain from our outside auditor. Our costs for legal compliance may also increase.

Regulatory changes could adversely affect our business.

The Michigan Office of Financial and Insurance Regulation (“OFIR”) regulates numerous aspects of our business and financial condition, which include:

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approving premium rates;

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establishing standards of solvency;

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licensing our agents and us;

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regulating the types and amounts of our investments;

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regulating the reserves we must establish for our current losses and future liabilities; and

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approving our policy forms.

The regulation and supervision are primarily for the protection of policyholders and not for the benefit of shareholders.

The insurance regulatory structure has been subject to increased scrutiny in recent years by federal and state legislative bodies and state regulatory authorities. Future legislation or regulatory changes could adversely affect our business and results of operations. Adverse legislative and regulatory activity, which increases our costs, adversely affects our capital or constrains our ability to adequately price insurance coverage, may occur in the future. In recent years, insurers have been under pressure from state insurance regulators, legislatures and special interest groups to reduce, freeze or set rates at levels that may not correspond with current underlying costs.

Regulators may limit our use of credit-based insurance scoring, adversely affecting our ability to effectively price our products.

We use credit-based insurance scoring as one means to price our products. Insurance companies have been criticized for using credit-based insurance scoring as a means to improve underwriting results. There are many

variations of credit-based insurance scoring formulas and projections used by insurance companies. We use a form of credit- based insurance scoring which projects a numerical score ranging from 200 to 900 (“Insurance Score”), with the higher number indicating a better score, based on information in a person’s credit report maintained by one of the several national credit reporting firms. An Insurance Score, like a credit score, is based on various factors such as payment history, collections, credit utilization and bankruptcies. The score is used to predict how often you are likely to file claims, and how expensive those claims will be.

Other reform legislation or regulatory action by OFIR could limit the effective use of this underwriting measure.

We believe that a higher Insurance Score indicates a lower expected risk of loss. If regulators were to restrict or prohibit our use of insurance scoring, it could impede us from effectively pricing our products.

Assessments and other surcharges for guaranty funds, second-injury funds and other mandatory pooling arrangements may reduce our profitability.

We participate in the Michigan Property and Casualty Guaranty Association (“MPCGA”), which protects policyholders and claimants against losses due to insolvency of insurers. When insolvency occurs, the MPCGA is authorized to assess member companies up to the amount of the shortfalls of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar year. We recognize a liability for insurance related assessments when an assessment has been imposed or information available indicates it is probable that an assessment will be imposed, or an event obligating us to pay an imposed or probable assessment has occurred and the amount of the assessment can be reasonably estimated.

The Michigan Basic Property Insurance Association (“MBPIA”) provides basic insurance to property-owners who cannot obtain insurance through insurance carriers in the normal course of business due to a high-risk exposure. The MBPIA assesses insurance carriers in Michigan a fee for continuation of the association based on the amount of losses incurred by the association and the amount of net written premium of the carrier related to property insurance.

We cannot predict with certainty the amount of future assessments for these programs. Significant assessments could have a material adverse effect on our financial condition and results of operations and mandatory shared-market mechanisms or changes in them could reduce our profitability in any given period or limit our ability to grow our business.

Michigan’s regulatory environment restricts our ability to exclude potentially unprofitable risks.

Michigan’s laws and regulations, specifically the Michigan Essential Insurance Act (“MEIA”), limit our ability to cancel or refuse to renew personal automobile and homeowner policies and subject program withdrawals to prior approval by OFIS. The MEIA requires an insurer to insure every applicant for insurance that meets the minimum requirements and the insurer’s underwriting rules. The underwriting rules must be applied uniformly to all applicants and policyholders. Each insurer must file its underwriting rules with OFIR. In addition, MEIA limits rating criteria that insurers may employ, requires insurers to develop a “secondary” or merit rating plan under which premium surcharges are levied on poor drivers, establishes a joint underwriting association to provide insurance to individuals who cannot obtain coverage in the insurance market, and regulates other types of coverage and informational requirements.

Inflation could increase the cost of claims resolutions and hurt our profitability.

Changes in the severity of claims have an impact on the profitability of our business. Changes in bodily injury claim severity are driven primarily by inflation in the medical sector of the economy. Changes in auto physical damage claim severity are driven primarily by inflation in auto repair costs, auto parts prices and used car prices. Changes in homeowners insurance claims severity are driven by inflation in the construction industry, in building materials and in home furnishings and other economic and environmental factors. However, changes in the level of the severity of claims that we pay do not necessarily match or track with changes in the rate of inflation in these various sectors of the economy.

Acts of terrorism may adversely impact our financial results.

We are continuing to examine the potential exposure of our operations to acts of terrorism. In the event that a terrorist act occurs, we do not anticipate material direct losses from claims by our insureds, but our reinsurers may suffer significant losses that could adversely affect our reinsurers’ ability to provide adequate reinsurance coverage and our ability to obtain cost effective reinsurance coverage.

Federal regulation of insurers may have a material effect on our operations.

Federal laws and regulations, including those that may be enacted in the wake of the recent or future financial and credit crises, may have adverse affects on our business, potentially including a change from a state-based system of regulation to a system of federal regulation, the repeal of the McCarran Ferguson Act, and/or measures under the Dodd-Frank Act that establish the Federal Insurance Office and provide for a determination that a non-bank financial company presents systemic risk and therefore should be subject to heightened supervision by the Federal Reserve Board. Adoption or implementation of any of these measures may restrict our ability to conduct our insurance business, govern our corporate affairs or increase our cost of doing business. This regulation could include the ability to impose regulation and market conduct rules. Such federal regulation, if adopted and applicable to us, could impose significant burdens on us, potentially materially and adversely affecting our results of operations by reducing our revenues, increasing compliance costs and duplicating state regulation.

Even if we are not directly subject to regulation by the federal government, significant financial sector regulatory reform could have a significant impact on us. For example, regulatory reform could have an unexpected impact on our rights as a creditor or on our competitive position. Some legislative proposals may impose assessments on property and casualty insurance companies and related entities to pay for the resolution of other financial institution failures or insolvencies. Such costs could be material to us and difficult for us to estimate. Other potential changes in federal legislation, regulation and administrative policies, including the potential changes in federal taxation, could also significantly harm the insurance industry, including us.

The Gramm-Leach-Bliley Act of 1999 allows banks to affiliate with insurers, which may increase the number and financial strength of our competitors.

The Gramm-Leach-Bliley Act of 1999 permits mergers that combine commercial banks, insurers and securities firms under one holding company. Until passage of the Gramm-Leach-Bliley Act of 1999, the Glass Steagall Act of 1933 had limited the ability of banks to engage in securities-related businesses and the Bank Holding Company Act of 1956 had restricted banks from being affiliated with insurers. With the passage of the Gramm-Leach-Bliley Act of 1999, bank holding companies may acquire insurers and insurance holding companies may acquire banks. In addition, grandfathered unitary thrift holding companies may engage in activities that are not financial in nature. The ability of banks to affiliate with insurers may materially and adversely affect our product lines by substantially increasing the number, size and financial strength of potential competitors.

Anti-takeover provisions in our articles of incorporation and bylaws may discourage takeover attempts and prevent or frustrate attempts to replace or remove our management, which could limit your opportunity to receive a high value for your stock if another company seeks to acquire us.

Our articles of incorporation and bylaws contain provisions that have the effect of discouraging or preventing takeover attempts not supported by our Board of Directors. In addition, these provisions may also prevent or frustrate attempts to replace or remove our management. Management entrenchment may also have the effect of discouraging potential purchasers from making takeover offers. Examples of these provisions include, among other things:

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Staggered three-year terms for the members of the board of directors;

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Super-majority provisions for amendment of our articles of incorporation or bylaws;

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Provisions allowing the directors to issue preferred stock with voting rights;

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Provisions that require the board of directors, before it approves, adopts or recommends any offer of any person to make a tender or exchange offer for any stock of the Company, to merge or consolidate the Company with any other entity, or to purchase or acquire all or substantially all of the Company’s assets, to evaluate the offer and determined that it would be in compliance with all applicable laws and that the offer is in the best interests of the Company and its shareholders; and

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The shareholder rights plan.

In addition, the Michigan Insurance Code provides that no person may acquire control (ownership of 10% of the voting power is presumed control) without approval of the Commissioner of OFIR (“Insurance Commissioner”).

Takeover attempts generally include offering shareholders a premium for their stock. Therefore, preventing a takeover attempt may cause you to lose an opportunity to sell your shares at a premium.

The current financial crisis has resulted in unprecedented levels of market volatility. Governmental initiatives intended to alleviate the crisis that have been adopted may not be effective and, in any event, may be accompanied by other initiatives, including new capital requirements or other regulations, that could materially affect our results of operations, financial condition and liquidity in ways that we cannot predict.

Markets in the United States and elsewhere have been experiencing extreme volatility and disruption for the past 3 years, due in part to the financial stresses affecting the liquidity of the banking system and the financial markets generally. These circumstances have also exerted downward pressure on stock prices and reduced access to the debt markets. This unprecedented market volatility and general decline in the equity markets has directly and materially affected our results of operations and our investment portfolio.

Legislation has been passed in an attempt to stabilize the financial markets. This legislation includes a provision to grant the U.S. Treasury Department the authority to, among other things, purchase up to $700 billion of mortgage-backed and other securities from financial institutions. This legislation or similar proposals, as well as companion actions such as monetary or fiscal actions of the U.S. Federal Reserve Board or comparable authorities in other countries, may fail to stabilize the financial markets. This legislation and other proposals or actions may also have other adverse consequences, including material effects on interest rates and foreign exchange rates, which could materially affect our investments, results of operations and liquidity in ways that we cannot predict. Further legislative activity or the failure to effectively implement existing or future legislation and related proposals or actions could also result in material adverse effects, notably increased constraints on the liquidity available in the banking system and financial markets and increased pressure on stock prices, any of which could materially and adversely affect our results of operations, financial condition and liquidity. In the event of future material deterioration in business conditions, we may need to raise additional capital or consider other transactions to manage our capital position or our liquidity.

In addition, we are subject to extensive laws and regulations that are administered and enforced by a number of different governmental authorities and non-governmental self-regulatory agencies, including state insurance regulators, state securities administrators, the Securities and Exchange Commission, the U.S. Department of Justice and state attorneys general. In light of the current financial crisis, some of these authorities are or may in the future consider enhanced or new regulatory requirements intended to prevent future crises or otherwise assure the stability of institutions under their supervision. These authorities may also seek to exercise their supervisory or enforcement authority in new or more robust ways. All of these possibilities, if they occurred, could affect the way we conduct our business and manage our capital, and may require us to satisfy increased capital requirements, any of which in turn could materially affect our results of operations, financial condition and liquidity.

The markets in the United States and elsewhere have been experiencing extreme and unprecedented volatility and disruption. We are exposed to significant financial and capital markets risk, including changes in interest rates and equity prices. Our exposure to interest rate risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates, in the absence of other countervailing changes, will increase the net unrealized loss position of our investment portfolio. If significant, declines in equity prices and changes in U.S. interest rates could have a material adverse effect on our consolidated results of operations, financial condition or liquidity. In addition, in the conduct of our business, there could be scenarios where in order to fulfill our obligations and to raise incremental liquidity, we would need to sell assets at a loss due to the unrealized loss position in our overall investment portfolio and the lack of liquidity in the credit markets.

Losses due to defaults by others, including issuers of investment securities or reinsurance and derivative instrument counterparties, could adversely affect the value of our investments, results of operations, financial condition or cash flows.

Issuers or borrowers whose securities or loans we hold, customers, reinsurers, clearing agents, exchanges, clearing houses and other financial intermediaries and guarantors may default on their obligations to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. Such defaults could have a material adverse effect on our results of operations, financial condition and cash flows.

Our investment portfolio includes investment securities in the financial services sector that have experienced defaults recently. Further defaults could have a material adverse effect on our results of operations,

financial condition or cash flows. The Company is not exposed to any credit concentration risk of a single issuer greater than 10% of the Company’s stockholders’ equity other than U.S. government and U.S. government agencies backed by the full faith and credit of the U.S. government. However, if issuers or borrowers, whose securities or loans we hold, are acquired, merge or otherwise consolidate with other issuers or borrowers whose securities or loans we hold, the Company’s credit concentration risk could increase above the 10% threshold, for a period of time, until the Company is able to sell securities to get back in compliance with the established investment credit policies.

The amount of statutory capital that we have and the amount of statutory capital that we must hold to maintain our financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of our control, including equity market and credit market conditions and changes in rating agency models.

We conduct our business through our licensed insurance company subsidiary. Accounting standards and statutory capital and reserve requirements for this entity are prescribed by the applicable insurance regulators and the National Association of Insurance Commissioners (“NAIC”). The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) formulas for property and casualty companies. The RBC formula for property and casualty companies adjusts statutory surplus levels for certain underwriting, asset, credit and off-balance sheet risks.

In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors—the amount of statutory income or losses generated by our insurance subsidiary (which itself is sensitive to equity market and credit market conditions), the amount of additional capital our insurance subsidiary must hold to support business growth, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio, the value of certain derivative instruments that do not get hedge accounting, changes in interest rates and changes to the NAIC RBC formulas. Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of our insurance company subsidiary. In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current rating.

To the extent that our statutory surplus is deemed to be insufficient to maintain a particular rating by one or more rating agencies, we may seek to raise additional capital through public or private equity or debt financing. Alternatively, if we were not to raise additional capital in such a scenario, either at our discretion or because we were unable to do so, our financial strength and credit ratings might be downgraded by one or more rating agencies.

We may experience a downgrade in our financial strength or credit ratings, which may make our products less attractive, which would have an adverse effect on our business, results of operations, financial condition and liquidity.

Financial strength and credit ratings are an important factor in establishing the competitive position of insurance companies. Rating agencies assign ratings based upon several factors. While most of the factors relate to the rated company, some of the factors relate to the views of the rating agency, general economic conditions, and circumstances outside the rated company’s control. In addition, rating agencies may employ different models and formulas to assess the financial strength of a rated company, and from time to time rating agencies have, in their discretion, altered these models. Changes to the models, general economic conditions, or circumstances outside our control could impact a rating agency’s judgment of its rating and the rating it assigns us. We cannot predict what actions rating agencies may take, or what actions we may be required to take in response to the actions of rating agencies, which may adversely affect us.

Our financial strength ratings, which are intended to measure our ability to meet policyholder obligations, are an important factor affecting public confidence in most of our products and, as a result, our competitiveness.

A downgrade, or an announced potential downgrade in the rating of our financial strength or of our insurance subsidiary could affect our competitive position in the insurance industry and make it more difficult for us to market our products, as potential customers may select companies with higher financial strength ratings.

The Company is Affected by General Economic Conditions in the State of Michigan.

The Company is affected by general economic conditions in the U.S., although most directly within Michigan. A further economic downturn or continued weak business environment within Michigan could negatively impact household and corporate incomes. This impact may lead to decreased demand for both loan and deposit products and increase the number of customers who fail to pay interest or principal on their loans.

Other factors not currently anticipated by management may also materially and adversely affect our financial position and results of operations. We do not undertake, and expressly disclaim, any obligation to update or alter our statements, whether as a result of new information, future events or otherwise, except as required by applicable law.

ITEM 2. PROPERTIES

We own our office, located at 933 E. Main Street, Fremont, Michigan, which is a 30,000 square foot brick veneer building constructed in 1981. There is no mortgage indebtedness on the building. Management believes that the building is sufficient for the needs of the Company, both now and in the foreseeable future.

ITEM 3. 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 4.

RESERVED

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Quotes on our common stock are published on the OTC Market Group—OTCQB under the symbol “FMMH”. We consider our common stock to be thinly traded, therefore, any reported bid or ask price may not reflect a true market-based valuation. The following table sets forth the high and low bid prices of our common stock as reported on the OTCQB and our quarterly dividends declared during the periods indicated. These bid quotations are inter-dealer prices without retail mark-up or mark-down or commissions and may not necessarily represent actual transactions.


	High		Low		Dividends
December 31, 2010
First Quarter	$	26.50	$	22.50	$	0.04
Second Quarter	$	22.95	$	20.00	$	0.04
Third Quarter	$	20.51	$	19.98	$	0.04
Fourth Quarter	$	28.45	$	21.00	$	0.04

December 31, 2009
First Quarter	$	15.85	$	12.36	$	0.03
Second Quarter	$	15.00	$	13.10	$	0.03
Third Quarter	$	20.25	$	14.75	$	0.03
Fourth Quarter	$	26.25	$	18.50	$	0.04

Any payment of dividends in the future on the common stock is subject to determination and declaration by the Company’s Board of Directors, who will take into consideration the Company’s financial condition, results of operations and future prospects. The 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. Information regarding restrictions and limitations on the payment of cash dividends can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the “Liquidity and Capital Resources” section.

As of March 10, 2011, the Company had 102 shareholders of record. For purposes of this determination, Cede & Co., the nominee for the Depositary Trust Company which holds all but 48,014 shares of the Company’s outstanding shares, is treated as one holder.

Information relating to securities authorized for issuance under equity compensation plans is set forth under Part III, Item 12 of this report and is incorporated herein by reference.

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 sales price is 90% of fair market value of the shares on the purchase date. The Plan has been 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 will not have 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 is being 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 will be offered directly to participants through our officers, and we will not use a broker or a dealer. We will not pay commissions, discounts or any other payments to any person for services in connection with the offer or sale of shares under the Plan. Participants will not incur 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.

The following table sets forth the sales of unregistered securities under the Plan during the year ended December 31, 2010:


Recent Sales of Unregistered Securities
Date of Sale	Number of Shares Sold		Offering Price		Total Consideration Received
March 5, 2010		9,211	$	22.16	$	204,116
June 5, 2010		4,886	$	19.43	$	94,935
September 7, 2010		4,885	$	18.71	$	91,398
December 6, 2010		6,107	$	23.51	$	143,576

The following table reflects the fact that there were no repurchases of common stock for the quarter ended December 31, 2010:


Issuer Purchases of Equity Securities
Period	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
October 1, 2010—October 31, 2010			$	—		—		35,886
November 1, 2010—November 30, 2010		—	$	—		—		35,886
December 1, 2010—December 31, 2010		—	$	—		—		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 6. SELECTED FINANCIAL DATA.

The following table sets forth selected financial data for the Company. You should read this data in conjunction with the Company’s consolidated financial statements and accompanying notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this report.


	For the years ended December 31,
	2010		2009		2008			2007		2006
	(In thousands)
Income Statement Data:
Direct premium written	$	75,319	$	66,856	$	60,882		$	53,956	$	48,869
Net premium written		62,119		55,657		50,025			44,004		40,263
Net premium earned		59,057		53,532		47,503			42,774		39,249
Net investment income		1,633		1,965		2,213			2,165		1,888
Net realized investment gain (loss)		3,677		806		(127	)		1,978		520
Other income, net		670		644		615			471		417

Total revenue		65,037		56,947		50,204			47,388		42,074

Net loss and loss adjustment expense		42,934		33,844		29,019			24,424		17,565
Policy acquisition and other underwriting expense		18,696		17,040		15,847			15,897		13,600
Interest expense		—		—		—			146		228

Total expenses		61,630		50,884		44,866			40,467		31,393

Income before federal income tax expense		3,407		6,063		5,338			6,921		10,681
Federal income tax expense		965		1,818		1,577			2,037		3,466

Net income	$	2,442	$	4,245	$	3,761		$	4,884	$	7,215

Selected Balance Sheet Data:
Total investments	$	76,040	$	67,906	$	58,766		$	59,088	$	56,910
Total assets	$	119,859	$	105,264	$	94,118		$	88,044	$	85,877
Total liabilities	$	70,876	$	59,219	$	54,803		$	48,618	$	51,447
Stockholders’ equity	$	48,983	$	46,045	$	39,315		$	39,426	$	34,430
Other Data:
Net loss and LAE ratio (1)		72.7		63.2		61.1			57.1		44.8
Expense ratio (2)		31.7		31.8		33.4			37.2		34.6
GAAP combined ratio (3)		104.4		95.0		94.5			94.3		79.4
Statutory surplus	$	42,194	$	39,435	$	33,169		$	33,777	$	33,670
Statutory premiums to surplus ratio (4)		1.47		1.41		1.51			1.30		1.20
Per Share Data:
Basic earnings per share	$	1.38	$	2.43	$	2.12		$	2.75		4.06
Diluted earnings per share	$	1.35	$	2.38	$	2.08		$	2.69		3.98

(1)	The net loss and loss adjustment expense (LAE) ratio is the net loss and LAE in relation to net premium earned.

(2)	The expense ratio is the policy acquisition and other underwriting expenses in relation to net premium earned.

(3)	The sum of net losses, loss adjustment expenses and policy acquisition and other underwriting expenses divided by net premiums earned. A combined ratio of less than 100% means a company is making an underwriting profit.

(4)	The ratio of net premiums written divided by ending statutory surplus.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following presents management’s discussion and analysis of our financial condition and results of operations as of the dates and for the periods indicated. You should read this discussion in conjunction with the consolidated financial statements and notes thereto included in this report, and the narrative under the “Business” heading contained in Item 1 of this report. The following discussion contains forward-looking information that involves risks and uncertainties. Actual results could differ significantly from these forward-looking statements. See “Forward-Looking Statements”.

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. Information about the significant accounting policies we use in the preparation of our financial statements is included in Note 1—Significant Accounting Policies to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.

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 premium 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.

Methods Used to Estimate Loss & Loss Adjustment Expense Reserves. We applied the following general methods in projecting loss and loss adjustment expense reserves:

•

Incurred loss development

•

Paid loss development

•

Bornhuetter-Ferguson incurred loss development

•

Bornhuetter-Ferguson paid loss development

Description of Ultimate Loss Estimation Methods. The incurred loss development method relies on the assumption that, at any given state of maturity, ultimate losses can be predicted by multiplying cumulative reported losses (paid losses plus case reserves) by a cumulative development factor. The validity of the results of this method depends on the stability of claim reporting and settlement rates, as well as the consistency of case reserve levels. Case reserves do not have to be adequately stated for this method to be effective; they only need to have a fairly consistent level of adequacy at all stages of maturity. Historical “age-to-age” loss development factors were calculated to measure the relative development of an accident year from one maturity point to the next. We then selected appropriate age-to-age loss development factors based on these historical factors and used the selected factors to project the ultimate losses.

The paid loss development method is mechanically identical to the incurred loss development method described above. The paid method does not rely on case reserves or claim reporting patterns in making projections. The validity of the results from using this development approach can be affected by many conditions, such as internal claim department processing changes, a shift between single and multiple claim payments, legal changes, or variations in a company’s mix of business from year to year. Also, since the percentage of losses paid for immature years is often low, development factors are volatile. A small variation in the number of claims paid can have a leveraging effect that can lead to significant changes in estimated ultimates. Therefore, ultimate values for immature accident years are often based on alternative estimation techniques.

The Bornhuetter-Ferguson expected loss projection method based on incurred loss data relies on the assumption that remaining unreported losses are a function of the total expected losses rather than a function of currently reported losses. The expected losses used in this analysis were selected judgmentally. The expected losses are multiplied by the unreported percentage to produce expected unreported losses. The unreported percentage is calculated as one minus the reciprocal of the selected incurred loss development factors. Finally, the expected unreported losses are added to the current reported losses to produce ultimate losses.

The calculations underlying the Bornhuetter-Ferguson expected loss projection method based on paid loss data are similar to the incurred Bornhuetter-Ferguson calculations with the exception that paid losses and unpaid percentages replace reported losses and unreported percentages.

The Bornhuetter-Ferguson method is most useful as an alternative to other models for immature accident years. For these immature years, the amounts reported or paid may be small and unstable and therefore not

predictive of future development. Therefore, future development is assumed to follow an expected pattern that is supported by more stable historical data or by emerging trends. This method is also useful when changing reporting patterns or payment patterns distort the historical development of losses. As noted below, the Company tends to rely more heavily on the incurred Bornhuetter-Ferguson method for its most recent accident years due to the smaller size of each line of business and the instability in incurred and paid amounts.

In estimating our loss reserves for the personal and commercial auto liability lines of business and the general liability line of business we relied on the incurred Bornhuetter-Ferguson method for accident years 2008 to 2010 and the incurred loss development for accident years prior to 2008. In estimating our loss reserves for the multi-peril lines of business (homeowners, farmowners and commercial) we relied on the incurred Bornhuetter-Ferguson method for the 2010 accident year and the incurred loss development for accident years prior to 2010. For the property lines of business including special property and personal and commercial auto physical damage we relied on the incurred loss development method for all accident years. For the workers’ compensation line of business we relied on an average of the incurred and paid Bornhuetter-Ferguson methods for accident years 2007 to 2010 and the paid loss development method for all prior years.

Each month, we review our loss reserves to ascertain whether new developments have occurred which would require adjustment to our ultimate loss estimates. The review involves roundtable discussion involving the claims, accounting and underwriting departments. Discussion is generally focused on claims involving liability and those claims that involve significant judgment. Because the establishment of loss reserves is an inherently uncertain process, we cannot be certain that ultimate losses will not exceed the established loss reserves and have a material adverse effect on the Company’s results of operations and financial condition. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the operating results of the period during which such adjustments are made.

Reserves are estimates because there are uncertainties inherent in the determination of ultimate losses. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as create uncertainties regarding future loss cost trends. Accordingly, the ultimate liability for unpaid losses and loss adjustment expenses will likely differ from the amount recorded at December 31, 2010.

The following table shows the breakdown of our gross loss reserves between reported losses and IBNR losses by segment (in thousands):


	December 31,
	2010		2009
Reported losses
Personal	$	13,455	$	8,443
Commercial		3,182		3,121
Farm		1,772		1,029
Marine		921		353

		19,330		12,946

IBNR losses
Personal		5,903		4,614
Commercial		3,435		3,030
Farm		289		416
Marine		387		325

		10,014		8,385

Total
Personal		19,358		13,057
Commercial		6,617		6,151
Farm		2,061		1,445
Marine		1,308		678

	$	29,344	$	21,331

The following table shows the activity in the loss and LAE reserve balances of the Company for the years ended December 31, 2010, 2009 and 2008, prepared in accordance with accounting principles generally accepted in the United States of America.


	Years ended December 31,
	2010			2009			2008
	(In thousands)
Balance, beginning of year	$	21,331		$	21,370		$	18,059
Less reinsurance balance recoverable		6,817			6,118			5,601

Net balance, beginning of year		14,514			15,252			12,458
Incurred related to:
Current year		44,648			36,180			31,741
Prior years		(1,714	)		(2,336	)		(2,722	)

Total incurred		42,934			33,844			29,019
Paid related to:
Current year		31,921			26,752			21,111
Prior years		6,299			7,830			5,114

Total paid		38,220			34,582			26,225

Net balance, end of year		19,228			14,514			15,252
Plus reinsurance balance recoverable		10,116			6,817			6,118

Balance, end of year	$	29,344		$	21,331		$	21,370

In 2010, the Company experienced favorable development of $1,714,000 on loss and loss adjustment expense (LAE) reserves for prior accident years. In the personal segment, homeowners had redundant development of $917,000 while personal auto experienced adverse development of $486,000 and other personal segment products had redundant development of $62,000. The adverse development in personal auto was concentrated in accident years 2007, 2008 and 2009. In the commercial segment, commercial multi-peril had redundant development of $830,000 while workers compensation had redundant development of $281,000. Commercial auto experienced adverse development of $173,000. The farm segment experienced redundant development of $156,000 while the marine segment had redundant development of $127,000. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2010.

In 2009, the Company experienced favorable development of $2,336,000 on loss and loss adjustment expense (LAE) reserves for prior accident years. In the personal segment, homeowners had redundant development of $760,000, personal auto experienced redundant development of $853,000 and other personal segment products had redundant development of $8,000. In the commercial segment, commercial multi-peril had redundant development of $660,000 offset by adverse development in workers compensation of $129,000. The development experienced in the workers compensation line was concentrated in accident years 2003, 2005 and 2007. The farm segment experienced redundant development of $63,000 while the marine segment had redundant development of $121,000.

In 2008, the Company experienced favorable development on losses and LAE reserves for prior accident years of $2,722,000. The redundant development included $814,000 related to homeowners, $864,000 related to commercial multi-peril, $336,000 related to workers compensation, $179,000 related to farm, $204,000 relating to general liability while the remaining lines of business had redundant development of $325,000. The favorable development was concentrated in accident years 2005 through 2007 and is a result of downward development on both case and incurred but not reported reserves and loss adjusting expense reserves. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2008.

The following table shows the development of our reserves for unpaid losses and LAE on a GAAP basis for each of the years ended December 31, from 2000 to 2010. The line in the table titled “Net liability for loss and LAE,” shows the initial reserves at the balance sheet date, including losses and LAE incurred but not reported. The portion of the table titled “Cumulative net paid as of,” shows the cumulative amounts subsequently paid as of successive years with respect to the reserve shown at the top of the table. The portion of the table titled “Re-estimated net liability as of:” shows the re-estimated amount of the previously reported liability for loss and LAE based on experience as of the end of each succeeding year. The estimates of liability for loss and LAE change as more information becomes available about the frequency and severity of claims for individual years. A redundancy (or deficiency) exists when the re-estimated amount of liability at each December 31 is less (or greater) than the prior liability estimate. The “Net cumulative redundancy (deficiency)” depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years and does not present accident year loss development. The portion of the table titled “Gross liability end of year” shows the impact of reinsurance for the years shown, reconciling the net reserves in the upper portion of the table to gross reserves. In evaluating the re-estimated liability and cumulative redundancy (deficiency), it should be noted that each data point includes the effects of changes in amounts for prior periods. Conditions and trends that have affected development of the liability in the past may not necessarily exist in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.


	2000			2001			2002			2003		2004		2005		2006		2007		2008		2009		2010
Gross liability for loss & LAE—end of year	$	7,830		$	11,061		$	8,677		$	13,878	$	18,973	$	18,867	$	20,177	$	18,059	$	21,370	$	21,331	$	29,344
Reinsurance recoverables		3,611			5,434			4,302			7,742		9,187		5,934		7,030		5,601		6,118		6,817		10,116

Net liability for loss & LAE—end of year	$	4,219		$	5,627		$	4,375		$	6,136	$	9,786	$	12,933	$	13,147	$	12,458	$	15,252	$	14,514	$	19,228

Net liability for loss & LAE	$	4,219		$	5,627		$	4,375		$	6,136	$	9,786	$	12,933	$	13,147	$	12,458	$	15,252	$	14,514	$	19,228

Cumulative net paid as of:
One year later		3,798			3,815			3,000			1,996		3,722		2,889		4,145		5,114		7,830		6,119
Two years later		4,973			5,156			3,807			3,007		2,905		3,895		5,448		6,322		9,208
Three years later		5,778			5,552			4,415			2,617		3,295		4,368		5,932		6,708
Four years later		5,928			5,570			4,373			2,796		3,339		4,613		6,013
Five years later		5,884			5,484			4,595			2,810		3,395		4,619
Six years later		5,819			5,705			4,597			2,855		3,383
Seven years later		5,860			5,704			4,634			2,862
Eight years later		5,860			5,722			4,637
Nine years later		5,862			5,717
Ten years later		5,862

Re-estimated net liability as of:
One year later		5,384			5,315			5,462			5,470		7,431		7,709		9,015		9,737		12,916		12,800
Two years later		5,747			6,083			5,547			4,786		4,910		6,349		7,270		8,729		12,024
Three years later		6,191			6,318			5,385			3,538		4,189		5,374		7,043		8,282
Four years later		6,245			6,233			4,917			3,371		3,951		5,341		6,837
Five years later		6,159			5,909			4,852			3,263		3,934		5,269
Six years later		6,099			5,883			4,843			3,320		3,845
Seven years later		6,062			5,880			4,890			3,270
Eight years later		6,061			5,915			4,860
Nine years later		6,091			5,915
Ten years later		6,091

Net cumulative redundancy (deficiency)	$	(1,872	)	$	(288	)	$	(485	)	$	2,866	$	5,941	$	7,664		6,310		4,176		3,228		1,714

Gross re-estimated liability—latest	$	13,516		$	11,789		$	11,106		$	10,081	$	9,903	$	9,199	$	9,356	$	10,659	$	15,091	$	17,142
Re-estimated reinsurance recoverables		7,425			5,874			6,246			6,811		6,058		3,930		2,519		2,377		3,067		4,342

Net re-estimated liability—latest	$	6,091		$	5,915		$	4,860		$	3,270	$	3,845	$	5,269	$	6,837	$	8,282	$	12,024	$	12,800

Gross cumulative (deficiency) redundancy	$	(5,686	)	$	(728	)	$	(2,429	)	$	3,797	$	9,070	$	9,668	$	10,821	$	7,400	$	6,279	$	4,189

Investments. At December 31, 2010 and 2009, all of the Company’s investments are classified as available-for-sale and are those investments that would be available to be sold in response to the Company’s liquidity needs, changes in market interest rates and asset-liability management strategies, among others. Available-for-sale investments are recorded at fair value, with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported as a component of accumulated other comprehensive income or loss until realized.

The Company reviews the status and market value changes of its investment portfolio 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 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.

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.

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.

Results of Operations—Fiscal Years Ended December 31, 2010 and 2009

Consolidated Results of Operations. The following table shows the underwriting gain or loss as well as other revenue and expense items included in our consolidated statements of income for the years ended December 31, 2010 and 2009. 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
	2010			2009			Dollar			Percentage
Underwriting gain
Personal	$	(2,535,579	)	$	2,133,848		$	(4,669,427	)		(218.8	%)
Commercial		(195,269	)		(339,178	)		143,909			42.4	%
Farm		40,765			803,263			(762,498	)		(94.9	%)
Marine		116,073			49,907			66,166			132.6	%

Total underwriting (loss) gain		(2,574,010	)		2,647,840			(5,221,850	)		(197.2	%)
Other revenue (expense) items
Net investment income		1,632,940			1,964,735			(331,795	)		(16.9	%)
Net realized gains on investments		3,677,250			806,501			2,870,749			356.0	%
Other income		670,344			643,865			26,479			4.1	%

Total other revenue (expense) items		5,980,534			3,415,101			2,565,433			75.1	%

Income before federal income taxes		3,406,524			6,062,941			(2,656,417	)		(43.8	%)
Federal income tax expense		(964,984	)		(1,818,127	)		853,143			(46.9	%)

Net income	$	2,441,540		$	4,244,814		$	(1,803,274	)		(42.5	%)

Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the years ended December 31, 2010 and 2009.


	2010			2009			Change			% Change
Direct premiums written	$	75,318,525		$	66,856,297		$	8,462,228			12.7	%

Net premiums written	$	62,118,983		$	55,657,148		$	6,461,835			11.6	%

Net premiums earned	$	59,056,470		$	53,531,831		$	5,524,639			10.3	%
Loss and LAE		42,933,886			33,843,539			9,090,347			26.9	%
Policy acquisition and other underwriting expenses		18,696,594			17,040,452			1,656,142			9.7	%

Underwriting (loss) gain	$	(2,574,010	)	$	2,647,840		$	(5,221,850	)		(197.2	%)

Loss and LAE ratio		72.7	%		63.2	%		9.5	%
Policy acquisition and other underwriting expense ratio		31.7	%		31.8	%		(0.1	%)
Combined ratio		104.4	%		95.0	%		9.4	%

Premiums. Direct premiums written by major business segment for the years ended December 31 was as follows:


	2010		2009		$ Change			% Change
Personal	$	55,350,577	$	48,440,158	$	6,910,419			14.3	%
Commercial		12,026,922		10,658,501		1,368,421			12.8	%
Farm		5,875,728		5,661,987		213,741			3.8	%
Marine		2,065,298		2,095,651		(30,353	)		(1.4	%)

	$	75,318,525	$	66,856,297	$	8,462,228			12.7	%

While the market continued to remain soft in 2010, the Company was again able to outperform our peers in the ability to grow our business. We continued to solidify our relationships with our agents and were ranked as the third best carrier in the state to do business with by our agents. Our Fremont Insurance Pure Michigan association continues to pay significant dividends with brand awareness by Michigan consumers. Direct premiums written were up 12.7%, with new business up 17.2% and renewal business up 11.9%. Direct premiums written for personal auto ended up 20.6% with new business up 16.5% and renewal business up 21.4%. Results were driven by the ease of placing personal auto business with Fremont through our award winning, web-based rating platform—Fremont Complete, rate increases, account rounding of current Fremont homeowner business, and a continuation of a solid renewal retention ratio in the low 90s. Direct premiums written for our homeowners product, which is the other major product line in the personal segment, were up 7.9%. This was driven by new and renewal business which were up 11.2% and 7.4%, respectively. Overall, the personal segment’s direct premiums written were up 14.3%, with new business up 14.3% and renewals up 14.3%, as well. In-force policy count increased 7.7% for the personal segment.

While property driven commercial accounts continue to be among the hardest hit by the soft market, the Company was able to grow our commercial segment’s direct premiums written by 12.8%. All four products within our commercial segment experienced growth in direct premiums written in 2010: commercial auto up 25.3%, commercial package (CPP) up 18.8%, businessowners (BOP) up 4.7% and workers compensation up 3.7%, even with the cancellation of a $300,000 account in the fourth quarter. In August of 2010, we added the CPP product to our web based rating application system, which made it easier for agents to quote and bind target market business with Fremont. The commercial segments policy count continues to increase and was up 10.7% in 2010.

Farm direct premiums written were up 3.8% driven by renewals which were up 6.4%. New business was down 18.8% but this was due to a large farm account written last year as new business which was then renewed

in 2010. Direct premium written for the marine business was down 1.4%. New and renewal premiums were down 0.7% and 1.9%, respectively, as competition coupled with the challenging economy facing Michigan made it difficult to grow this segment in 2010. In-force count for farm and marine were flat.

Net premiums written by business segment for the years ended December 31 were as follows:


	2010		2009		$ Change			% Change
Personal	$	46,312,357	$	41,160,490	$	5,151,867			12.5	%
Commercial		8,868,591		7,449,675		1,418,916			19.0	%
Farm		5,018,194		5,146,744		(128,550	)		(2.5	%)
Marine		1,919,841		1,900,239		19,602			1.0	%

	$	62,118,983	$	55,657,148	$	6,461,835			11.6	%

The increase in net premiums written is due to the overall increase in direct premiums written of $8,462,000 offset by an increase of $2,000,000 in ceded premiums written under the Company’s reinsurance agreements.

Net premiums earned by major business segment for the years ended December 31 was as follows:


	2010		2009		$ Change			% Change
Personal	$	43,945,938	$	39,387,044	$	4,558,894			11.6	%
Commercial		8,251,480		7,209,804		1,041,676			14.4	%
Farm		4,924,623		5,039,075		(114,452	)		(2.3	%)
Marine		1,934,429		1,895,908		38,521			2.0	%

	$	59,056,470	$	53,531,831	$	5,524,639			10.3	%

The increase in net premiums earned is due to the overall increase in direct premiums earned of $7,052,000 offset by an increase of $1,527,000 in ceded premiums earned under the Company’s reinsurance agreements.

Loss and Loss Adjustment Expenses (LAE). The Company’s net loss and LAE by major business segment as well as the loss and LAE ratio’s are shown in the tables below:


	2010			2009			$ Change			% Change
Loss and LAE:
Personal	$	33,853,063		$	26,079,141		$	7,773,922			29.8	%
Commercial		4,679,029			4,092,210			586,819			14.3	%
Farm		3,190,637			2,547,121			643,516			25.3	%
Marine		1,211,157			1,125,067			86,090			7.7	%

	$	42,933,886		$	33,843,539		$	9,090,347			26.9	%

Incurred Claim Count:
Personal		8,734			8,031			703			8.8	%
Commercial		796			678			118			17.4	%
Farm		409			409			0			0.0	%
Marine		204			218			(14	)		(6.4	%)

		10,143			9,336			807			8.6	%

Average Loss and LAE per Claim:
Personal	$	3,876		$	3,247		$	629			19.4	%
Commercial		5,878			6,036			(158	)		(2.6	%)
Farm		7,801			6,228			1,573			25.3	%
Marine		5,937			5,161			776			15.0	%

	$	4,233		$	3,625		$	608			16.8	%

Loss and LAE Ratio:
Personal		77.0	%		66.2	%
Commercial		56.7	%		56.8	%
Farm		64.8	%		50.5	%
Marine		62.6	%		59.3	%

		72.7	%		63.2	%

In 2010, the personal segment’s loss and LAE ratio increased 10.8 percentage points to 77.0%. The increase in the loss ratio was primarily due to a higher loss ratio in our personal auto product line as well as an increase in weather related losses. In 2010, personal auto generated a loss and LAE ratio of 87.6% compared to 66.7% in 2009. The increase is due to a jump in loss severity in personal auto casualty related losses. Homeowners experienced a loss ratio of 69.7% in 2010 compared to 68.7% in 2009. The increase was a result of weather related losses arising from storms which occurred in April and October of 2010.

The commercial segment’s loss and LAE ratio remained static as compared to 2009. Within the commercial segment, our workers compensation and businessowners product lines saw an improvement in their loss ratio in 2010 while the commercial auto and commercial package product lines had higher loss ratios in 2010. Commercial package was negatively affected by an increase in fire losses during 2010 while commercial auto experienced an increase in loss severity in 2010.

The farm segment’s loss and LAE ratio increased to 64.8% in 2010 from 50.5% in 2009 as a result of weather related losses sustained in 2010 as compared to 2009. The same storms which occurred in April and October 2010 that affected the personal segment also affected our farm segment. The marine segment’s loss and LAE ratio increased to 62.6% in 2010 from 59.3% in 2009 due to increased loss severity in 2010 as compared to 2009.

Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses for the years ended December 31 were as follows:


	2010			2009			Change			% Change
Amortization of deferred policy acquisition costs	$	9,324,606		$	8,425,001		$	899,605			10.7	%
Other underwriting expenses		9,371,988			8,615,451			756,537			8.8	%

Total policy acquisition and other underwriting expenses	$	18,696,594		$	17,040,452		$	1,656,142			9.7	%

Net premiums earned	$	59,056,470		$	53,531,831		$	5,524,639			10.3	%

Expense ratio		31.7	%		31.8	%		(0.1	%)

Amortization of deferred policy acquisition costs (“DAC”) increased 10.7% in 2010 as compared to 2009. The increase is a result of growth in earned premium volume. As a percentage of net premiums earned, DAC amortization was 15.8% in 2010 compared to 15.7% in 2009. Other underwriting expenses increased 8.8% in 2010 compared to 2009. As a percentage of net premiums earned, other underwriting expenses decreased to 15.9% in 2010 from 16.1% in 2009. The decline is due to spreading our operating expenses over a larger base of net premiums earned.

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


	2010			2009			Change			% Change
Fixed maturities	$	1,730,405		$	2,106,186		$	(375,781	)		(17.8	%)
Equity securities		274,495			102,731			171,764			167.2	%
Cash and cash equivalents		41,769			143,234			(101,465	)		(70.8	%)

Gross investment income		2,046,669			2,352,151			(305,482	)		(13.0	%)
Less: Investment expenses		(413,729	)		(387,416	)		26,313			6.8	%

Net investment income	$	1,632,940		$	1,964,735		$	(331,795	)		(16.9	%)

Average invested assets (amortized cost basis)	$	78,249,794		$	71,967,445		$	6,282,349			8.7	%

Rate of return on average invested assets		2.1	%		2.7	%		(0.6	%)

Gross investment income from the fixed portfolio was lower in 2010 than in 2009 as a result of the realized gains from the sale of securities. The low interest rates which persisted throughout most of 2010 provided an opportunity to sell appreciated securities and realize over $2.3 million in immediate gains. The proceeds from sales were then reinvested into the lower interest rate environment, reducing the portfolio tax-equivalent book yield from 4.24% to 3.01% in 2010 and leading to the lower investment income.

Portfolio duration declined slightly to 4.64 in 2010, down from 4.79 at the end of 2009, and below the 4.98 duration of the Barclays Aggregate Index. The tax-exempt municipal allocation dropped from 38% to 29%; the corporate, Treasury, and mortgage-backed allocations increased modestly. These changes increased the portfolio liquidity and reduced exposure to state and local governments, which continues to face budget pressures and negative sentiment.

Cash and cash equivalents also produced lower income in 2010, as the Federal Reserve kept short-term interest rates anchored near zero for all of 2010. In addition, interest income from cash and cash equivalents in 2009 was affected by approximately $73,000 in interest received as a result of a settlement of a claim. Investment expenses are up as a result of an increase in general expenses associated with investment activities including management fees based on invested assets.

Net realized gains from the portfolio for the years ended December 31 are as follows:


	2010		2009		Change		% Change
Net realized gains—fixed maturities	$	2,315,203	$	795,364	$	1,519,839		191.1	%
Net realized gains—equity securities		1,362,047		11,137		1,350,910		12129.9	%

Total net realized gains	$	3,677,250	$	806,501	$	2,870,749		356.0	%

In 2010, the Company took the opportunity to realize the appreciation that had occurred throughout the year in both its fixed and equity portfolio. During 2010, the Company sold approximately $60.4 million in fixed maturity securities and approximately $15.3 million in equity securities generating gains noted in the table above. In 2009, the Company sold approximately $22.5 million in fixed maturity securities which generated realized gains of $795,000. Sales within the equity portfolio generated realized gains of $11,000 on sales of $1,280,000 in 2009.

Other Income, Net. Other income, net which includes premium installment charges, fees for non-sufficient fund checks, late payment fees and other miscellaneous income items increased 4.1% to $670,000 in 2010 compared to $644,000 in 2009. The increase was driven by premium volume growth in 2010.

Federal Income Tax. During the years ended December 31, 2010 and 2009, the Company recorded income tax expense of approximately $965,000 and $1,818,000, respectively. The decrease is due to a decline in pre-tax income in 2010 compared to 2009. The effective tax rate for 2010 was 28.3% compared to 30.0% in 2009. The effective tax rate differs from the statutory federal tax rate of 34% due primarily to nontaxable investment income.

Results of Operations—Fiscal Years Ended December 31, 2009 and 2008

Consolidated Results of Operations. The following table shows the underwriting gain or loss as well as other revenue and expense items included in our consolidated statements of income for the years ended December 31, 2009 and 2008. 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.


	2009			2008			Dollar			Percentage
Underwriting gain
Personal	$	2,133,848		$	(806,725	)	$	2,940,573			364.5	%
Commercial		(339,178	)		2,744,138			(3,083,316	)		(112.4	%)
Farm		803,263			560,365			242,898			43.3	%
Marine		49,907			138,659			(88,752	)		(64.0	%)

Total underwriting gain		2,647,840			2,636,437			11,403			0.4	%
Other revenue (expense) items
Net investment income		1,964,735			2,212,972			(248,237	)		(11.2	%)
Net realized gains (losses) on investments		806,501			(126,735	)		933,236			736.4	%
Other income		643,865			614,828			29,037			4.7	%

Total other revenue (expense) items		3,415,101			2,701,065			714,036			26.4	%

Income before federal income taxes		6,062,941			5,337,502			725,439			13.6	%
Federal income tax expense		(1,818,127	)		(1,576,914	)		(241,213	)		15.3	%

Net income	$	4,244,814		$	3,760,588		$	484,226			12.9	%

Underwriting Results. The following table shows the components of the Company’s underwriting gain or loss for the years ended December 31, 2009 and 2008.


	2009			2008			Change			% Change
Direct premiums written	$	66,856,297		$	60,882,499		$	5,973,798			9.8	%

Net premiums written	$	55,657,148		$	50,025,098		$	5,632,050			11.3	%

Net premiums earned	$	53,531,831		$	47,503,121		$	6,028,710			12.7	%
Loss and LAE		33,843,539			29,019,298			4,824,241			16.6	%
Policy acquisition and other underwriting expenses		17,040,452			15,847,386			1,193,066			7.5	%

Underwriting gain	$	2,647,840		$	2,636,437		$	11,403			0.4	%

Loss and LAE ratio		63.2	%		61.1	%		2.1	%
Policy acquisition and other underwriting expense ratio		31.8	%		33.4	%		(1.6	%)
Combined ratio		95.0	%		94.5	%		0.5	%

Premiums. Direct premiums written by major business segment for the years ended December 31 was as follows:


	2009		2008		$ Change		% Change
Personal	$	48,440,158	$	43,482,202	$	4,957,956		11.4	%
Commercial		10,658,501		10,050,862		607,639		6.0	%
Farm		5,661,987		5,257,007		404,980		7.7	%
Marine		2,095,651		2,092,428		3,223		0.2	%

	$	66,856,297	$	60,882,499	$	5,973,798		9.8	%

During 2009, we continued to expand our market share in Michigan evidenced by a 9.8% increase in direct premiums written. The growth that we experienced in 2009 as well as over the last several years is a direct result of our continued focus on developing mutually beneficial relationships with our independent agents. We believe that we have the best and most profitable agencies representing us in the State of Michigan. The independent agent is on the front line when it comes to sending a policy to the Company. We continue to be very clear with our agents on the type of business that we want to write and we can be very selective in the type of business that we will accept from them. A component of that relationship is our ability to provide the agents with a consistent, competitive and stable market for their preferred business. In addition to strong agency relationships, our growth has also been positively affected by our Fremont Insurance Pure Michigan campaign which began in early 2009. The Pure Michigan campaign included print, billboard and television advertising. The campaign has increased Fremont Insurance’s brand awareness with Michigan consumers. We have found that Michigan consumers are more apt to do business with and in our case buy insurance from a carrier that is headquartered and solely focused on the Michigan consumer. We will continue to promote the fact that Fremont Insurance is Pure Michigan as we move into 2010.

Direct written premium was up 9.8%, with new business up 5.5% and renewal business up 10.7%. Personal auto continues to contribute to these results as planned. Direct premiums written for personal auto increased 15.5% with new business up 18.2% and renewal business up 15.0%. Growth in personal auto is driven by the ease of placing business with Fremont through our award winning web-based rating platform, Fremont Complete, coupled with several book of business transfers, account rounding of current homeowner business and a strong renewal retention ratio which is in the low 90s. Direct premiums written for the homeowners product was up 6.6%. Homeowner’s growth was driven by renewals which were up 8.1% offset by a decline in new business which was down 2.0%. Overall, personal lines direct premiums written was up 11.4%, with new business up 8.7% and renewals up 11.9%. In-force policy count increased 7.3% for the personal lines segment.

While the commercial segment, especially property driven accounts, continues to be hit hardest by the soft market, we were able to grow 6.0%. Growth was driven by commercial auto, up 26.7%, and workers compensation, up 32.9%. Contributing to the growth in workers compensation was a large premium audit charge to our largest account which was recorded in the fourth quarter. Businessowners (BOP) was up 0.1% while commercial multi-peril (CPP) was down 0.8%. Commercial in-force policy count continues to increase and was up 4.0% in 2009. We continue to focus on expanding our commercial segment. The current market conditions make this a challenge however we continue to write business which we feel is appropriately priced for the risk assumed. In 2010, we plan to add the commercial multi-peril product to our web based application system, which will make it easier for agents to quote and bind target market business with Fremont. Our experience has been that once our agents have the ability to quote and bind policies through Fremont Complete it makes the process much more efficient for them which leads to premium growth for us. In January 2010, we also added a seasoned commercial underwriter with over 30 years of industry experienced. We believe that by expanding our commercial book of business we can better diversify our risk profile.

Farm direct premiums written were up 7.7% driven by new business which was up 43.1% and renewals which were up 2.5%. The new business increase was impacted by a larger farm written during the first quarter of

2009. Direct premium written for the marine segment was basically flat (up 0.2%). Renewal premiums were up 4.8%, with new business premium down 21.7%. The flat marine volume is due to a competitive market place coupled with the Michigan economy. The farm in-force count was up slightly, at 0.7% and marine was down 0.7%.

Net premiums written by business segment for the years ended December 31 were as follows:


	2009		2008		$ Change			% Change
Personal	$	41,160,490	$	35,486,111	$	5,674,379			16.0	%
Commercial		7,449,675		8,109,475		(659,800	)		(8.1	%)
Farm		5,146,744		4,592,638		554,106			12.1	%
Marine		1,900,239		1,836,874		63,365			3.4	%

	$	55,657,148	$	50,025,098	$	5,632,050			11.3	%

The increase in net premiums written is due to the overall increase in direct premiums written of $5,974,000 offset by an increase of $342,000 in ceded premiums written under the Company’s reinsurance agreements. The commercial segment experienced a decline in net premiums written due to increased premiums ceded under our treaty reinsurance programs as a result of increased reinsurance costs associated with commercial products.

Net premiums earned by major business segment for the years ended December 31 was as follows:


	2009		2008		$ Change			% Change
Personal	$	39,387,044	$	33,452,206	$	5,934,838			17.7	%
Commercial		7,209,804		7,711,397		(501,593	)		(6.5	%)
Farm		5,039,075		4,541,837		497,238			10.9	%
Marine		1,895,908		1,797,681		98,227			5.5	%

	$	53,531,831	$	47,503,121	$	6,028,710			12.7	%

The increase in net premiums earned is due to the overall increase in direct premiums earned of $6,435,000 offset by an increase of $406,000 in ceded premiums earned under the Company’s reinsurance agreements. The commercial segment experienced a decline in net premiums earned due to increased premiums ceded under our treaty reinsurance programs as a result of increased reinsurance costs associated with commercial products.

Loss and Loss Adjustment Expenses (LAE). The Company’s net loss and LAE by major business segment as well as the loss and LAE ratio’s are shown in the tables below:


	2009			2008			$ Change			% Change
Loss and LAE:
Personal	$	26,079,141		$	23,099,032		$	2,980,109			12.9	%
Commercial		4,092,210			2,394,681			1,697,529			70.9	%
Farm		2,547,121			2,466,282			80,839			3.3	%
Marine		1,125,067			1,059,303			65,764			6.2	%

	$	33,843,539		$	29,019,298		$	4,824,241			16.6	%

Incurred Claim Count:
Personal		8,031			7,413			618			8.3	%
Commercial		678			580			98			16.9	%
Farm		409			443			(34	)		(7.7	%)
Marine		218			213			5			2.3	%

		9,336			8,649			687			7.9	%

Average Loss and LAE per Claim:
Personal	$	3,247		$	3,116		$	131			4.2	%
Commercial		6,036			4,129			1,907			46.2	%
Farm		6,228			5,567			661			11.9	%
Marine		5,161			4,973			188			3.8	%

	$	3,625		$	3,355		$	270			8.0	%

Loss and LAE Ratio:
Personal		66.2	%		69.1	%
Commercial		56.8	%		31.1	%
Farm		50.5	%		54.3	%
Marine		59.3	%		58.9	%

		63.2	%		61.1	%

In 2009, the personal segment’s loss ratio dropped 2.9 percentage points to 66.2% compared to 69.1% in 2008. Items affecting the lower loss ratio include continued growth in net premiums earned, a decrease in loss severity in the personal auto line, redundant development on prior accident year losses in both the personal auto and homeowners lines offset by an increase in fire related losses experienced in 2009. During 2009, the personal segment’s net premium earned grew by 17.7% while incurred losses and LAE increased only 12.9%. The homeowners line contributed $1,753,000 to the increase in incurred losses and LAE for 2009 and was caused by increased fire related losses and to a lesser extent an increase in losses related to winter weather experienced during the first quarter of 2009.

In 2009, the commercial segment’s loss ratio increased to 56.8%. The loss ratio in 2009 was negatively affected by increased losses in commercial multi-peril, increased reinsurance costs resulting in lower net premiums earned for the commercial segment and increased incurred losses in the workers compensation line. These factors were partially offset by redundant loss development in all commercial product lines except for workers compensation. The increase in commercial multi-peril losses was driven by an increase in fire related losses in 2009.

The farm segment’s loss and LAE ratio dropped 3.8 percentage points as a result of lower weather related losses and a drop in claim frequency in 2009 as compared to 2008. The marine segment’s loss and LAE ratio increased 0.4 percentage points due to increased loss severity in 2009 as compared to 2008 offset by redundant development on prior accident year losses.

Policy Acquisition and Other Underwriting Expenses. Policy acquisition and other underwriting expenses for the years ended December 31 were as follows:


	2009			2008			Change			% Change
Amortization of deferred policy acquisition costs	$	8,425,001		$	7,822,850		$	602,151			7.7	%
Other underwriting expenses		8,615,451			8,024,536			590,915			7.4	%

Total policy acquisition and other underwriting expenses	$	17,040,452		$	15,847,386		$	1,193,066			7.5	%

Net premiums earned	$	53,531,831		$	47,503,121		$	6,028,710			12.7	%

Expense ratio		31.8	%		33.4	%		(1.6	%)

Amortization of deferred policy acquisition costs (“DAC”) increased 7.7% in 2009 as compared to 2008. The increase is a result of growth in earned premium volume. As a percentage of net premiums earned, DAC amortization decreased from 16.5% to 15.7% due to increased volume of personal automobile premium which pays a lower commission than other products as well as increased ceding commission. Other underwriting expenses increased $591,000 or 7.4% in 2009 compared to 2008. As a percentage of net premiums earned, other underwriting expenses decreased to 16.1% in 2009 compared to 16.9% in 2008. The decline is due to lower assessments from state mandated pools and associations, a decrease in depreciation expense and continued growth in net premiums earned.


	2009			2008			Change			% Change
Fixed maturities	$	2,106,186		$	2,345,680		$	(239,494	)		(10.2	%)
Equity securities		102,731			65,137			37,594			57.7	%
Cash and cash equivalents		143,234			132,028			11,206			8.5	%

Gross investment income		2,352,151			2,542,845			(190,694	)		(7.5	%)
Less: Investment expenses		(387,416	)		(329,873	)		57,543			17.4	%

Net investment income	$	1,964,735		$	2,212,972		$	(248,237	)		(11.2	%)

Average invested assets (amortized cost basis)	$	71,967,445		$	65,563,774		$	6,403,671			9.8	%

Rate of return on average invested assets		2.7	%		3.4	%		(0.7	%)

Gross investment income from the fixed portfolio declined during 2009 compared to 2008. As interest rates remained at very low levels in 2009 compared to historic averages, the portfolio duration was decreased in order to lower market value volatility in the event of future rising interest rates. The average portfolio duration was 4.42 in 2009, compared to 5.10 in 2008. With a very steep yield curve exhibited in the market, this tended to reduce the portfolio’s income. Additionally, in 2009 the Company realized a large portion of the unrealized gains in the portfolio by selling securities with market values considerably greater than their book values. This was the primary catalyst for the reduction of the portfolio’s tax-equivalent book yield from 4.72% at December 31, 2008 to 4.24% at December 31, 2009.

The increase in income from the equity portfolio is due to higher dividend income as a result of the Company increasing its holdings of dividend paying common stocks. During the second quarter 2009, the Company began adding to its equity portfolio via purchases of common stocks and mutual funds. The increase in interest income from cash and cash equivalents was affected by approximately $73,000 in interest received in 2009 as a result of a settlement of a claim. Excluding this item, interest from cash and cash equivalents decreased

approximately $62,000 due to the lower yield environment in 2009. Investment expenses are up as a result of an increase in general expenses associated with investment activities including management fees based on invested assets.

Net realized gains from the portfolio for the years ended December 31 are as follows:


	2009		2008			Change			% Change
Net realized gains (losses)—fixed maturities	$	795,364	$	(279,656	)	$	1,075,020			384.4	%
Net realized gains—equity securities		11,137		152,921			(141,784	)		(92.7	%)

Total net realized gains (losses)	$	806,501	$	(126,735	)	$	933,236			(736.4	%)

In 2009, the Company sold approximately $22.5 million in fixed maturity securities which generated realized gains of $795,000. Sales within the equity portfolio generated realized gains of $11,000 on sales of $1,280,000 in 2009. In 2008, the Company generated net realized gains on the sale of fixed maturity securities of approximately $82,000 and a net realized loss of $362,000 as a result of a write-down of a fixed maturity security determined to be other than temporarily impaired

Other Income, Net. Other income, net which includes premium installment charges, fees for non-sufficient fund checks, late payment fees and other miscellaneous income and expense items increased 4.7% to $644,000 in 2009 compared to $615,000 in 2008. The increase was driven by premium volume growth in 2009.

Federal Income Tax. During the year ended December 31, 2009 and 2008 the Company recorded income tax expense of approximately $1,818,000 and $1,577,000 respectively. The increase is due to growth in pre-tax income in 2009 compared to 2008. The effective tax rate for 2009 was 30.0 % compared to 29.5% for 2008.

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 dividends paid to stockholders.

Liquidity is a measure of the ability to generate sufficient cash to meet cash obligations as they come due. In addition to the need for cash flow to meet operating expenses, our liquidity requirements relate primarily to the payment of losses and loss adjustment expenses. Our short and long term liquidity requirements vary because of the uncertainties regarding the settlement dates for liabilities for unpaid claims and because of the potential for large losses, either individually or in the aggregate.

We maintain 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 $5,245,000 in 2010 compared to $6,646,000 in 2009, a decrease of $1,401,000. During the year ended December 31, 2010 as compared to 2009 premiums collected increased $6,231,000 as a result of increased premium writings, net loss and LAE paid increased 3,362,000 while policy acquisition and other underwriting expenses paid increased $2,771,000. Cash paid for income taxes increased $1,549,000 during 2010 compared to 2009. Other cash used in operational activities decreased $50,000 during the year ended December 31, 2010 compared to 2009.

Cash used in investing activities was $6,203,000 and $6,002,000 during the years ended December 31, 2010 and 2009, respectively, an increase of $201,000. During 2010, net cash invested into the Company’s investment portfolio was $4,484,000 compared to $4,763,000 in 2009, a decrease of $279,000. The decrease is a result of lower cash generated from operations in 2010.

During 2010, capital expenditures increased $483,000 to $1,746,000. The majority of the Company’s capital expenditures were related to Fremont Complete, the Company’s web based rating platform. The focus has been to add the commercial package product line to the platform. Cash used in financing activities during 2010 amounted to $259,000 and consisted of shares repurchases of $139,000 and dividends to stockholders of $283,000 offset by proceeds from the issuance of stock of $681,000.

Cash flow provided by operations was $6,646,000 in 2009 compared to $9,452,000 in 2008, a decrease of $2,806,000. During the year ended December 31, 2009 as compared to 2008 premiums collected increased $5,391,000 as a result of increased premium writings, net loss and LAE paid increased $8,932,000 while policy acquisition and other underwriting expenses paid increased $1,440,000. Cash paid for income taxes decreased $2,239,000 during 2009 compared to 2008. Other cash used in operational activities increased $64,000 during the year ended December 31, 2009 compared to 2008.

Cash used in investing activities was $6,002,000 and $6,087,000 during the years ended December 31, 2009 and 2008, respectively, a decrease of $85,000. During 2009, net cash invested into the Company’s investment portfolio was $4,763,000 compared to $4,945,000 in 2008, a decrease of $182,000. During the second quarter 2009, the Company began adding to its equity portfolio via purchases of common stocks and mutual funds. Since March 31, 2009, the Company has added approximately $4,078,000 to the equity portfolio. Funding for the equity purchases has come from existing cash balances, operating cash flow and sales and maturities of fixed maturities.

During 2009, capital expenditures increased $114,000 to $1,263,000. The majority of the Company’s capital expenditures were related to Fremont Complete, the Company’s web based rating platform. The focus has been to add the commercial package product line to the platform. Cash used in financing activities during 2009 amounted to $157,000 and consisted of shares repurchases of $274,000 and dividends to stockholders of $228,000 offset by proceeds from the issuance of stock of $345,000

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

During 2010, the Company paid a quarterly cash dividend. The Company paid a quarterly dividend of $.04 per share in each quarter of 2010. Total dividends paid were approximately $283,000. The Company cannot assure our stockholders that dividends will continue to be paid in the future. The Board’s current intention is to 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 Company, the financial condition and results of operations of the Company and such other factors as are deemed relevant by the Board of Directors. The Company’s principal source of cash available for payment of dividends is dividends from the Insurance Company. The annual future cash requirements of the Company are not foreseen to be significant. They include dividends paid to shareholders and other administrative expenses related to annual filings such as income tax returns and other compliance type filings. During 2010, the Board of Directors of the Insurance Company declared and paid ordinary dividends totaling $1,000,000 to the Company, its sole shareholder. As of December 31, 2010, the Company had a cash balance of approximately $473,000.

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 ending 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 continue 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.

Income Taxes

Under current accounting standards, we may recognize certain tax assets whose realization depends upon generating future taxable income. These tax assets can only be realized through the generation of future taxable income and thereby utilizing the net operating loss (NOL) and Alternative Minimum Tax (AMT) credit carry-forwards we have available. At December 31, 2010, the Company has NOL carryforwards of approximately $5,782,000 and an AMT credit carryforward of approximately $358,000. The AMT credit carryforward can be carried forward indefinitely. The NOL carryforward expires as follows:


2011	$	1,641,000
2012		1,764,000
2018		13,000
2019		898,000
2021		1,466,000

	$	5,782,000

As a result of the Company’s acquisition of the stock of the Insurance Company a limitation on the ability to fully utilize the NOL occurred. The amount of annual taxable income that can be offset each year by the NOL carryforward is approximately $400,000. See Note 5 to the consolidated financial statements, included elsewhere in this report, for further information regarding federal income taxes. Such information is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK

Not Applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Fremont Michigan InsuraCorp, Inc.

Fremont, Michigan

We have audited the accompanying consolidated balance sheets of Fremont Michigan InsuraCorp, Inc. as of December 31, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Fremont Michigan Insuracorp, Inc. at December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

Grand Rapids, Michigan

March 30, 2011

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

December 31, 2010 and 2009


	2010		2009
Assets
Investments:
Fixed maturities available for sale, at fair value	$	57,686,802	$	56,483,580
Equity securities available for sale, at fair value		18,121,044		11,183,580
Mortgage loans on real estate from related parties		231,942		239,303

Total investments		76,039,788		67,906,463
Cash and cash equivalents		6,364,648		7,063,679
Premiums due from policyholders, net		11,556,272		10,087,998
Amounts due from reinsurers		11,197,774		7,859,452
Prepaid reinsurance premiums		2,568,638		1,856,343
Accrued investment income		552,678		600,648
Income taxes recoverable		698,672		—
Deferred policy acquisition costs		4,369,900		3,913,551
Deferred federal income taxes		2,913,698		3,155,625
Property and equipment, net of accumulated depreciation		3,513,902		2,787,134
Other assets		83,088		33,175

	$	119,859,058	$	105,264,068

Liabilities and Stockholders’ Equity
Liabilities:
Losses and loss adjustment expenses	$	29,344,160	$	21,331,243
Unearned premiums		32,579,456		28,886,128
Reinsurance funds withheld and premiums ceded payable		75,263		96,697
Accrued expenses and other liabilities		8,877,625		8,905,213

Total liabilities		70,876,504		59,219,281

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, 1,779,674 and 1,749,032 shares issued and outstanding at December 31, 2010 and 2009, respectively		—		—
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—		—
Additional paid-in capital		9,813,362		9,037,405
Retained earnings		38,388,455		36,332,648
Accumulated other comprehensive income		780,737		674,734

Total stockholders’ equity		48,982,554		46,044,787

Total liabilities and stockholders’ equity	$	119,859,058	$	105,264,068

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

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations

For the Years Ended December 31, 2010, 2009 and 2008


	2010		2009		2008
Revenues:
Net premiums earned	$	59,056,470	$	53,531,831	$	47,503,121
Net investment income		1,632,940		1,964,735		2,212,972
Net realized gains (losses) on investments		3,677,250		806,501		(126,735	)
Other income, net		670,344		643,865		614,828

Total revenues		65,037,004		56,946,932		50,204,186

Expenses:
Losses and loss adjustment expenses, net		42,933,886		33,843,539		29,019,298
Policy acquisition and other underwriting expenses		18,696,594		17,040,452		15,847,386

Total expenses		61,630,480		50,883,991		44,866,684

Income before federal income tax expense		3,406,524		6,062,941		5,337,502
Federal income tax expense		964,984		1,818,127		1,576,914

Net income	$	2,441,540	$	4,244,814	$	3,760,588

Earnings per share:
Basic	$	1.38	$	2.43	$	2.12
Diluted	$	1.35	$	2.38	$	2.08

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

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

For the Years Ended December 31, 2010, 2009 and 2008


	Common Stock Class A (Number of Shares)			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance, December 31, 2007		1,779,321		$	7,722,424		$	30,395,771		$	1,307,763		$	39,425,958
Comprehensive income:
Net income								3,760,588						3,760,588
Net unrealized losses on investments, net of taxes											(3,231,010	)		(3,231,010	)
Amortization of prior service credit, net of tax											(56,550	)		(56,550	)
Amortization of net actuarial loss, net of tax											134,140			134,140

Total comprehensive income														607,168
Issued 51,918 shares in payment of 3% stock dividend					1,008,117			(1,008,117	)					—
Share repurchases of common stock		(41,000	)		(196,390	)		(535,760	)					(732,150	)
Cash dividends at $0.06 per share								(105,339	)					(105,339	)
Stock-based compensation					103,228									103,228
Stock options exercised		1,833			9,383									9,383
Tax benefit from stock options exercised					6,681									6,681

Balance, December 31, 2008		1,740,154			8,653,443			32,507,143			(1,845,657	)		39,314,929

Comprehensive income:
Net income								4,244,814						4,244,814
Net unrealized gains on investments, net of taxes											2,598,716			2,598,716
Amortization of prior service credit, net of tax											(56,549	)		(56,549	)
Amortization of net actuarial gain, net of tax											(21,776	)		(21,776	)

Total comprehensive income														6,765,205
Common stock issued		23,044			317,878									317,878
Common stock repurchased		(17,250	)		(82,751	)		(191,513	)					(274,264	)
Cash dividends at $0.12 per share								(227,796	)					(227,796	)
Stock-based compensation					122,057									122,057
Stock options exercised		3,084			14,957									14,957
Tax benefit from stock options exercised					11,821									11,821

Balance, December 31, 2009		1,749,032			9,037,405			36,332,648			674,734			46,044,787

Comprehensive income:
Net income								2,441,540						2,441,540
Net unrealized gains on investments, net of taxes											369,322			369,322
Amortization of prior service credit, net of tax											(56,551	)		(56,551	)
Amortization of net actuarial gain, net of tax											(206,768	)		(206,768	)

Total comprehensive income														2,547,543
Common stock issued		26,608			571,225									571,225
Common stock repurchased		(5,864	)		(35,895	)		(102,585	)					(138,480	)
Cash dividends at $0.16 per share								(283,148	)					(283,148	)
Stock-based compensation					131,211									131,211
Stock options exercised		9,898			63,557									63,557
Tax benefit from stock options exercised					45,859									45,859

Balance, December 31, 2010		1,779,674		$	9,813,362		$	38,388,455		$	780,737		$	48,982,554

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

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flow

For the Years Ended December 31, 2010, 2009 and 2008


	2010			2009			2008
Cash flows from operating activities:
Net income	$	2,441,540		$	4,244,814		$	3,760,588
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,007,024			921,098			1,194,211
Deferred income taxes		187,321			287,719			(196,589	)
Stock based compensation expense		131,211			122,057			103,228
Net realized (gains) losses on investments		(3,677,250	)		(806,501	)		126,735
(Gain)/loss on sale of property and equipment		(7,814	)		(5,900	)		—
Net amortization of premiums on investments		672,211			359,100			237,529
Excess tax benefit from stock options exercised		(45,859	)		(11,821	)		(6,681	)
Changes in assets and liabilities:
Premiums due from policyholders		(1,468,274	)		(1,199,664	)		(1,035,604	)
Amounts due from reinsurers		(3,338,322	)		(1,015,045	)		(255,560	)
Prepaid reinsurance premiums		(712,295	)		(233,152	)		(475,188	)
Accrued investment income		47,970			(5,872	)		(60,933	)
Income taxes recoverable		(698,672	)		—			—
Deferred policy acquisition costs		(456,349	)		(317,404	)		(262,146	)
Other assets		(12,455	)		(2,505	)		13,235
Losses and loss adjustment expenses		8,012,917			(38,281	)		3,310,605
Unearned premiums		3,693,328			2,272,319			2,997,166
Reinsurance funds withheld and premiums ceded payable		(21,434	)		(65,148	)		(37,618	)
Accrued expenses and other liabilities		(509,947	)		2,140,402			39,063

Net cash provided by operating activities		5,244,851			6,646,216			9,452,041

Cash flows from investing activities:
Proceeds from sales and maturities of fixed maturity investments		60,437,900			30,476,351			18,149,032
Proceeds from sales of equity investments		15,265,449			1,280,962			596,555
Purchases of fixed maturity investments		(61,133,246	)		(31,267,803	)		(23,027,043	)
Purchases of equity investments		(19,054,382	)		(5,252,338	)		(663,421	)
Repayment of mortgage loans from related party		7,361			7,697			6,656
Proceeds from disposal of property and equipment		20,501			16,150			—
Purchase of property and equipment		(1,746,478	)		(1,262,716	)		(1,148,989	)

Net cash used in investing activities		(6,202,895	)		(6,001,697	)		(6,087,210	)

Cash flows from financing activities:
Proceeds from issuance of common stock		634,782			332,835			9,383
Tax benefit from exercised stock options		45,859			11,821			6,681
Share repurchases of common stock		(138,480	)		(274,264	)		(732,150	)
Dividends paid to stockholders		(283,148	)		(227,796	)		(105,339	)

Net cash provided by (used in) financing activities		259,013			(157,404	)		(821,425	)

Net increase (decrease) in cash and cash equivalents		(699,031	)		487,115			2,543,406
Cash and cash equivalents, beginning of year		7,063,679			6,576,564			4,033,158

Cash and cash equivalents, end of year	$	6,364,648		$	7,063,679		$	6,576,564

Supplemental disclosure of cash flow information:
Federal income taxes paid	$	2,000,000		$	450,847		$	2,690,000

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

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting Policies

Nature of operations

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.

Principles of consolidation and presentation

The accompanying 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”), which vary in certain respects from statutory accounting practices followed in reporting to insurance regulatory authorities. See Note 12—Statutory Insurance Accounting Practices for additional information regarding statutory accounting practices. All significant intercompany transactions have been eliminated.

Stock Splits and Dividends

The fair value of shares issued for stock dividends of 25% or less is transferred from retained earnings to additional paid-in capital, to the extent of available retained earnings. No transfer is recorded for stock dividends or splits in excess of 25%. All share and per share amounts are retroactively adjusted for stock dividends in excess of 25% and stock splits. On May 8, 2008, the Board of Directors declared a 3% stock dividend, which was paid on June 5, 2008.

Investments

At December 31, 2010 and 2009, all of the Company’s investments are classified as available-for-sale and are those investments that would be available to be sold in response to the Company’s liquidity needs, changes in market interest rates and asset-liability management strategies, among others. Available-for-sale investments are recorded at fair value, with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported as a component of accumulated other comprehensive income or loss until realized.

When a fixed maturity security has a decline in value, where fair value is below amortized cost, an other than temporarily impaired (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.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

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.

Realized gains and losses on sales of investments are computed based on a specific identification basis and include write downs on available-for-sale investments considered to have other than temporary declines in fair value.

Dividend and interest income are recognized when earned. Discount or premium on fixed maturities purchased at other than par value is amortized using the effective interest method.

Discount or premium on loan-backed investments is amortized using anticipated prepayments with significant changes in anticipated prepayments accounted for retrospectively. Prepayment assumptions for loan-backed investments were obtained from broker dealer survey values or internal estimates. These assumptions are consistent with the current interest rate environment.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and highly liquid short-term investments. The Company considers all short-term investments with an original maturity of three months or less when purchased to be cash equivalents.

Revenue recognition

Insurance premium revenue is recognized on a pro rata basis over the respective terms of the policies in-force and unearned premiums represent the portion of premiums written which is applicable to the unexpired terms of the policies in-force. Generally, premiums are collected in advance of providing risk coverage, minimizing the Company’s exposure to credit risk. Premiums due from policyholders are net of an allowance for doubtful accounts of $85,637 and $43,034 at December 31, 2010 and 2009, respectively.

Other income consists primarily of premium installment charges which are recognized when earned and other miscellaneous income.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Other comprehensive income or loss

The Company presents other comprehensive income or loss as a component of stockholders’ equity on the consolidated statements of stockholders’ equity and comprehensive income. For the years ended December 31, 2010, 2009, and 2008 the components of other comprehensive income consisted of the following:


	Before-Tax Amount			Tax (Expense) or Benefit			Net-of-tax Amount
Year ended December 31, 2008
Unrealized losses on investments:
Unrealized holding losses arising during the period	$	(5,022,204	)	$	1,707,549		$	(3,314,655	)
Less: reclassification adjustment for losses realized in net income		126,735			(43,090	)		83,645

Net unrealized losses		(4,895,469	)		1,664,459			(3,231,010	)
Amortization of prior service credit		(85,682	)		29,132			(56,550	)
Amortization of net actuarial loss		203,242			(69,102	)		134,140

Other comprehensive loss	$	(4,777,909	)	$	1,624,489		$	(3,153,420	)

Year ended December 31, 2009
Unrealized gains on investments:
Unrealized holding gains arising during the period	$	4,743,949		$	(1,612,942	)	$	3,131,007
Less: reclassification adjustment for gains realized in net income		(806,501	)		274,210			(532,291	)

Net unrealized gains		3,937,448			(1,338,732	)		2,598,716
Amortization of prior service credit		(85,682	)		29,133			(56,549	)
Amortization of net actuarial gain		(32,994	)		11,218			(21,776	)

Other comprehensive income	$	3,818,772		$	(1,298,381	)	$	2,520,391

Year ended December 31, 2010
Unrealized gains on investments:
Unrealized holding gains arising during the period	$	4,236,826		$	(1,440,520	)	$	2,796,306
Less: reclassification adjustment for gains realized in net income		(3,677,250	)		1,250,266			(2,426,984	)

Net unrealized gains		559,576			(190,254	)		369,322
Amortization of prior service credit		(85,682	)		29,131			(56,551	)
Amortization of net actuarial gain		(313,286	)		106,518			(206,768	)

Other comprehensive income	$	160,608		$	(54,605	)	$	106,003

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

The components of and changes to accumulated other comprehensive income (loss) as of and for the years ended December 31, 2010, 2009, and 2008 were as follows:


	Net Unrealized Gains (Losses) on Investments			Unrecognized Prior Service Credit			Unrecognized Net Actuarial Loss			Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2007	$	736,381		$	831,588		$	(260,206	)	$	1,307,763
Period Change		(3,231,010	)		(56,550	)		134,140			(3,153,420	)

Balance, December 31, 2008		(2,494,629	)		775,038			(126,066	)		(1,845,657	)
Period Change		2,598,716			(56,549	)		(21,776	)		2,520,391

Balance, December 31, 2009		104,087			718,489			(147,842	)		674,734
Period Change		369,322			(56,551	)		(206,768	)		106,003

Balance, December 31, 2010	$	473,409		$	661,938		$	(354,610	)	$	780,737

Losses and loss adjustment expense reserves

Losses and loss adjustment expense (“LAE”) reserves represent the estimated liability for reported losses and loss adjustment expenses and actuarial estimates for incurred but not reported losses and loss adjustment expenses based upon the Company’s actual experience, assumptions and projections as to claims frequency, severity, inflationary trends and settlement payments. The reserve for losses and loss adjustment expenses is intended to cover the ultimate net cost of all losses and loss adjustment expenses incurred but unsettled through the balance sheet date. The reserves are reported gross of any amounts recoverable from reinsurers and are reduced for anticipated salvage and subrogation. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income currently. The liability for losses and loss adjustment expenses is necessarily an estimate and while it is believed to be adequate, the ultimate liability could exceed or be less than such estimate. The anticipated recoverable salvage and subrogation at December 31, 2010 and 2009 was approximately $79,000 and $151,000, respectively.

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.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Property, equipment and depreciation

Property and equipment is recorded at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method. Estimated useful lives are: building—35 years, computer equipment including software—3 to 5 years and furniture, fixtures and equipment—5 to 7 years. Software is capitalized and amortized on a straight-line method over the estimated useful life of the software, generally not exceeding 3 years. Maintenance, repairs and minor renewals are charged to expense as incurred. Depreciation expense was $1,007,024, $921,098 and $1,194,211 for the years ended December 31, 2010, 2009, and 2008, respectively. Property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Upon sale or retirement, the cost and related accumulated depreciation of assets disposed of are removed from the accounts; any resulting gain or loss is reflected in income.

Deferred policy acquisition costs

Policy acquisition costs, which consist of commissions net of ceding commissions and premium taxes, that vary with and are primarily related to the production of new and renewal business are deferred, subject to ultimate recoverability from future income, including investment income, and amortized to expense over the period in which the related premiums are earned.

Other Postretirement Benefits

The Company provides certain postretirement health care benefits for retired employees. The Company accrues service cost as incurred. The Company’s measurement date for plan assets and obligations is its fiscal year-end.

Current accounting guidance requires companies to recognize the funded status of defined benefit postretirement plans on the balance sheet and recognize changes in the funded status of the plan in the year in which the changes occur. See Note 9—Employee Benefit Plans for additional information.

Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities included the following:


	As of December 31,
	2010		2009
Commissions payable	$	2,886,243	$	3,062,449
Advance premiums		840,901		734,618
Accrued salaries & employee benefits		995,806		1,114,020
Income taxes payable		—		569,485
Postretirement health care benefit obligation		2,152,865		1,819,308
Payable from investment purchases		129,582		13,002
State mandated pool assessments		1,187,992		960,360
Other		684,236		631,971

	$	8,877,625	$	8,905,213

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Stock-based compensation

The Company accounts for stock-based compensation using the fair value based method. The Company values stock options issued based upon an option-pricing model and recognizes the fair value as an expense over the period in which the options vest.

Federal income taxes

Income tax expense is computed under the liability method, whereby deferred income taxes reflect the estimated future tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and those for income tax purposes. 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.

The Company evaluates all tax positions taken on its U.S. federal income tax return. No material uncertainties exist for any tax positions taken by the Company.

The Company files income tax returns in the U.S. federal jurisdiction. The Company is subject to U.S federal income tax examinations for all tax years from 1994 to the current year (with the exception of the 2002 tax year) due to the utilization of its net operating losses in current open tax years. The Company has not recently been examined by the Internal Revenue Service for any open tax year. It is the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense.

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. If no accrual is made for a loss contingency, disclosure of the contingency is made when there is at least a reasonable possibility that a loss or an additional loss may have been incurred.

Preparation of financial statements

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.

Reclassifications

Certain 2008 amounts have been reclassified from the prior year financial statements to confirm to the 2010 presentation.

New Accounting Standards

Adopted Accounting Standards

In January 2010, an update to the Accounting Standards Codification (ASC) was issued related to fair value measurements and disclosures. This ASC update provides for additional disclosure requirements to improve the

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

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.

2. Investments

The cost or amortized cost, gross unrealized gains, gross unrealized losses and estimated fair value of investments at December 31, 2010 and 2009 are as follows:


	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

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)


	2009
	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	$	5,670,813	$	30,533	$	5,136	$	5,696,210
States and political subdivisions		23,790,222		473,278		76,596		24,186,904
Corporate securities		12,514,810		198,936		26,830		12,686,916
Mortgage-backed securities		13,846,261		154,329		87,040		13,913,550

		55,822,106		857,076		195,602		56,483,580

Equity securities		11,687,346		829,461		1,333,227		11,183,580

Total	$	67,509,452	$	1,686,537	$	1,528,829	$	67,667,160

The cost or amortized cost and estimated fair value of fixed maturities at December 31, 2010, 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	$	1,439,746	$	1,446,360
Due after one year through five years		18,002,701		18,101,091
Due after five years through ten years		22,860,231		22,250,735
Due after ten years		1,052,940		979,785
Mortgage-backed securities		14,896,618		14,908,831

	$	58,252,236	$	57,686,802

Net investment income for the years ended December 31, 2010, 2009 and 2008 is summarized as follows:


	Years Ended December 31,
	2010			2009			2008
Fixed maturities	$	1,730,405		$	2,106,186		$	2,345,680
Equity securities		274,495			102,731			65,137
Cash and cash equivalents		41,769			143,234			132,028

Gross investment income		2,046,669			2,352,151			2,542,845
Less: Investment expenses		(413,729	)		(387,416	)		(329,873	)

Net investment income	$	1,632,940		$	1,964,735		$	2,212,972

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Net realized gains (losses) on investments for the years ended December 31, 2010, 2009 and 2008 are summarized as follows:


	Years Ended December 31,
	2010			2009			2008
Gross realized investment gains:
Fixed maturities	$	2,315,203		$	795,365		$	134,192
Equity securities		1,508,013			72,357			152,921

		3,823,216			867,722			287,113

Gross realized investment losses:
Fixed maturities		—			—			(413,848	)
Equity securities		(145,966	)		(61,221	)		—

		(145,966	)		(61,221	)		(413,848	)

Net realized gains (losses) on investments	$	3,677,250		$	806,501		$	(126,735	)

During the year ended December 31, 2008, other-than-temporary impairment losses on available-for-sale fixed maturity investments amounted to $362,000 and are included in net realized investment gains (losses) on investments in the consolidated statement of operations. There were no other-than-temporary impairment losses in 2010 or 2009.

Sales of available-for-sale fixed maturities resulted in the following during the years ended December 31, 2010, 2009 and 2008:


	2010		2009		2008
Proceeds	$	54,207,083	$	22,525,394	$	11,955,068

Gross gains	$	2,315,203	$	795,365	$	134,192

Gross losses	$	—	$	—	$	51,848

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Evaluating Investments for Other-than-Temporary Impairments

The tables below show the total value of securities that were in an unrealized loss position as of December 31, 2010 and 2009 including the length of time they have been in an unrealized loss position. As of December 31, 2010 and 2009, unrealized losses, as shown in the following tables, were 1.8% and 2.0%, respectively of total invested assets including cash and cash equivalents.


	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		4,338,739		413,733		5,924,605		484,845

Total	$	37,205,486	$	1,068,888	$	4,338,739	$	413,733	$	41,544,225	$	1,482,621


	December 31, 2009
	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	$	2,960,523	$	5,136	$	—	$	—	$	2,960,523	$	5,136
States and political subdivisions		2,630,506		57,311		480,715		19,285		3,111,221		76,596
Corporate securities		3,689,734		26,830		—		—		3,689,734		26,830
Mortgage-backed securities		5,249,649		36,993		1,770,809		50,047		7,020,458		87,040

		14,530,412		126,270		2,251,524		69,332		16,781,936		195,602

Equity securities		103,878		5,771		6,197,433		1,327,456		6,301,311		1,333,227

Total	$	14,634,290	$	132,041	$	8,448,957	$	1,396,788	$	23,083,247	$	1,528,829

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

The following table shows the composition of the fixed maturity securities in unrealized loss positions at December 31, 2010 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.


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	$	36,558,978	$	35,561,382	$	997,596		99.98	%
2	BBB	Baa		—		—	$	—		0	%
3	BB	Ba		—		—	$	—		0	%
4	B	B		—		—	$	—		0	%
5	CCC or lower	Caa or lower		—		—	$	—		0	%
1	Not Rated	Not Rated		58,418		58,238	$	180		0.02	%

			$	36,617,396	$	35,619,620	$	997,776		100.0	%

As of April 1, 2009, we adopted new accounting standards related to the recognition guidance for other-than-temporary impairments (OTTI) of debt securities and the financial statement disclosures for OTTI on debt and equity securities. Accordingly, any credit-related impairment related to fixed maturity securities 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.

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.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

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. These 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.

As of December 31, 2009, the portfolio included 23 fixed maturity securities and 7 equity securities in an unrealized loss position for less than 12 months and 4 fixed maturity securities and 14 equity securities in an unrealized loss position for more than 12 months. Of the fixed maturity securities, all twenty-seven 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.

At December 31, 2010, fixed maturities with a fair value approximating $420,000 were on deposit with regulatory authorities, as required by law.

3. 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

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

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.

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 December 31, classified by the valuation hierarchy (as discussed above):


	December 31, 2010
			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	$	7,397,044	$	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	$	—

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)


	December 31, 2009
			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	$	5,696,210	$	1,632,250	$	4,063,960	$	—
States and political subdivisions		24,186,904		—		24,186,904		—
Corporate securities		12,686,916		—		12,686,916		—
Mortgage-backed securities		13,913,550		—		13,913,550		—

		56,483,580		1,632,250		54,851,330		—

Equity Securities		11,183,580		11,183,580		—		—

Total	$	67,667,160	$	12,815,830	$	54,851,330	$	—

The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value:

Cash and cash equivalents

The carrying amount is a reasonable estimate of fair value.

Mortgage loans

The carrying amount is a reasonable estimate of fair value based on the terms of the loans.

The carrying amount and estimated fair value of the Company’s financial instruments as of December 31, are as follows:


	2010				2009
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Fixed maturities	$	57,686,802	$	57,686,802	$	56,483,580	$	56,483,580
Equity securities		18,121,044		18,121,044		11,183,580		11,183,580
Mortgage loans		231,942		231,942		239,303		239,303
Cash and cash equivalents		6,364,648		6,364,648		7,063,679		7,063,679

4. Reinsurance

In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company determines the amount and scope of reinsurance coverage to purchase each year based on an evaluation of the risks accepted, consultation with reinsurance professionals and a review of market conditions, including availability and cost. The Company utilizes three primary categories of treaty reinsurance coverage, as well as facultative coverage, to reduce the impact of major losses. The treaty reinsurance includes multi-line excess of loss, catastrophic excess of loss and quota share coverages.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Multi-line excess of loss coverage

The excess of loss program is the Company’s primary reinsurance coverage. For all lines of business covered by this treaty, the Company’s retention on any one risk in 2010 and 2009 was $175,000 and in 2008 was $150,000.

In 2010 and 2009, the property excess of loss layers provided up to $2,825,000 of coverage over the $175,000 retention. In 2008 the property excess of loss layers provided up to $2,850,000 of coverage over the $150,000 retention. In 2010 and 2009, the casualty and workers compensation excess of loss layers provided up to $5,825,000 of coverage over the $175,000 retention. In 2008 the casualty and workers compensation excess of loss layers provided up to $4,850,000 of coverage over the $150,000 retention. In 2010, an additional workers compensation catastrophe excess of loss layer provided an additional $6,000,000 of coverage to cover a catastrophic event. In 2009, an additional workers compensation catastrophe excess of loss layer provided an additional $4,000,000 of coverage to cover a catastrophic event. In 2008 an additional workers compensation catastrophe excess of loss layer provided an additional $5,000,000 of coverage to cover a catastrophic event.

Catastrophic coverage

The Company’s catastrophe treaty has three layers which in total provided up to $24,750,000 of coverage above a $1,250,000 retention in 2010, 2009 and 2008. The Company has an automatic reinstatement provision after the first loss for each layer to provide coverage in the event of subsequent catastrophes during the year. Coverage would have lapsed after the second event, in which case the Company would have evaluated the need for a new contract for the remainder of a particular year. During 2010, 2009 and 2008 the coverage could be reinstated for a fee of 100% of the original premium.

Quota share coverage

The Company’s boiler and machinery quota share agreements are primarily an equipment breakdown endorsement to commercial and farm policies. The agreements are 100% quota share and the Company receives ceding commissions ranging from 32% to 35% on the premiums ceded. The agreements also include profit sharing provisions based on the profitability of the underlying underwriting performance of the business ceded. In 2008, the Company entered into a quota share agreement which covers employment practices liability which is an endorsement to commercial policies. The agreement is 100% quota share and the Company receives ceding commission of 35% on the premiums ceded.

Facultative

The Company utilizes facultative reinsurance to provide additional underwriting capacity, to mitigate the effect of individual losses and to reduce the Company’s net liability on individual risks. Coverage is determined on each individual risk. In 2010, the Company obtained coverage up to $20,000,000 for certain commercial and farm properties it insured. In 2009, the Company obtained coverage ranging from $100,000 up to $59,000,000 for certain commercial and farm properties it insured. In 2008, the Company obtained coverage ranging from $100,000 up to $18,900,000 for certain commercial properties it insured. The Company also purchased facultative reinsurance on certain casualty risks ranging from $1,000,000 to $5,000,000 for certain commercial umbrella policies.

Although reinsurance agreements contractually obligate the Company’s reinsurers to reimburse the Company for their share of losses, they do not discharge the primary liability of the Company. The Company remains liable for the ceded amount of reserves for unpaid losses and loss adjustment expenses and ceded unearned premiums in the event the assuming insurance organizations are unable to meet their contractual obligations. As a result, the Company is subject to credit risk with respect to the obligations of its reinsurers.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

In order to minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors the economic characteristics of the reinsurers on an ongoing basis. All reinsurers are rated A- or better by A. M. Best Company. The Company has not experienced a collectibility problem with any reinsurer.

The Company receives a ceding commission in conjunction with certain reinsurance activities. These ceding commissions are offset against direct commission expense and were $453,193, $390,059 and $413,592 in 2010, 2009 and 2008, respectively.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. At December 31, 2010 and 2009, amounts recoverable from reinsurers consisted of the following:


	As of December 31,
	2010		2009
Paid losses	$	1,081,212	$	1,041,969
Unpaid losses		10,116,562		6,817,483

Total amounts recoverable from reinsurers	$	11,197,774	$	7,859,452

The Company holds collateral in the form of letters of credit, trust accounts or funds withheld accounts for amounts recoverable from reinsurers that are not considered authorized insurers by the State of Michigan Office of Financial and Insurance Regulation. At December 31, 2010, the Company had 6 reinsurance recoverable amounts from reinsurers whose individual recoverable balance exceeded 5% of the total recoverable amount. The amount due from these 6 reinsurers accounts for 96% of the total recoverable.

The effect of reinsurance on premiums written and earned for the years ended December 31, 2010, 2009 and 2008, are as follows:


	2010						2009						2008
	Written			Earned			Written			Earned			Written			Earned
Direct	$	75,318,525		$	71,639,650		$	66,856,297		$	64,588,128		$	60,882,499		$	57,884,543
Assumed		134,024			119,571			89,265			85,115			76,823			77,614
Ceded		(13,333,566	)		(12,702,751	)		(11,288,414	)		(11,141,412	)		(10,934,224	)		(10,459,036	)

Net premiums	$	62,118,983		$	59,056,470		$	55,657,148		$	53,531,831		$	50,025,098		$	47,503,121

The effect of reinsurance on incurred losses and loss adjustment expenses for the years ended December 31, 2010, 2009 and 2008, are as follows:


	Years Ended December 31,
	2010			2009			2008
Losses and loss adjustment expenses	$	50,529,967		$	37,664,427		$	31,831,495
Reinsurance recoveries		(7,596,081	)		(3,820,888	)		(2,812,197	)

Net losses and loss adjustment expenses	$	42,933,886		$	33,843,539		$	29,019,298

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

5. Federal Income Taxes

The provision for federal income taxes consists of the following:


	Years Ended December 31,
	2010			2009		2008
Current	$	777,664		$	1,530,408	$	1,773,502
Deferred expense (benefit)		311,786			287,719		(196,588	)
Change in valuation allowance		(124,466	)		—		—

	$	964,984		$	1,818,127	$	1,576,914

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. For the years ended December 31, 2010, 2009 and 2008, the reasons for these differences and the tax effects thereof, are as follows:


	Years Ended December 31,
	2010			2009			2008
Expected tax expense	$	1,158,218		$	2,061,400		$	1,814,751
Expiration of NOL Carryforwards		124,466			—			—
Change in valuation allowance		(124,466	)		—			—
Nontaxable investment income		(223,566	)		(254,248	)		(314,677	)
Nondeductible expenses, net		31,447			14,555			8,110
Provision to return variance		(1,115	)		(3,580	)		68,776
Other, net		—			—			(46	)

	$	964,984		$	1,818,127		$	1,576,914

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. As of December 31, 2010, the Company has net operating loss carryforwards of approximately $5,782,000, which began expiring in 2010 and fully expire in 2021, and alternative minimum tax credits of approximately $358,000, which may be carried forward indefinitely. As a result of the demutualization of FIC in 2004 the aforementioned net operating losses are subject to certain “change in control” limitations under Section 382. The annual limitation on the utilization of the net operating losses is approximately $400,000. In addition to the net operating loss carryforwards, the Company’s alternative minimum tax credit carryforwards are also subject to the Section 382 limitation however these credit carryforwards have no expiration and can be carried forward indefinitely. Based on the annual Section 382 limitation of the utilization of net operating loss carryforwards management has determined that a valuation allowance of $886,000 will be maintained for the deferred tax asset associated with these amounts. In 2010, $366,075 of net operating loss carryforwards expired. A full valuation allowance had been carried against the amount expected to expire. As a result of the expiration, the Company recorded a reduction to the valuation allowance of $124,466. During the years ended December 31, 2009 and 2008, there were no changes in the deferred tax valuation allowance.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

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 December 31, 2010 it is more likely than not that sufficient taxable income will exist in the periods of reversal in order to realize the recorded net deferred tax asset.

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


	As of December 31,
	2010			2009
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves	$	539,107		$	390,239
Unearned premium reserves		2,109,316			1,893,838
Postretirement benefits accrued		731,974			618,565
Net operating loss carryforward		1,965,950			2,226,423
Alternative minimum tax credit carryforward		357,697			357,697
Other deferred tax assets		306,672			252,027

Total deferred federal income tax assets		6,010,716			5,738,789

Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs		(1,524,469	)		(1,364,651	)
Unrealized gains on investments		(243,876	)		(53,621	)
Property and equipment		(440,186	)		(141,626	)
Other deferred tax liabilities		(2,916	)		(13,229	)

Total deferred federal income tax liabilities		(2,211,447	)		(1,573,127	)

Net deferred federal income tax asset		3,799,269			4,165,662
Valuation allowance		(885,571	)		(1,010,037	)

Deferred federal income taxes	$	2,913,698		$	3,155,625

6. Property and Equipment

At December 31, 2010 and 2009, property and equipment consisted of the following:


	As of December 31,
	2010			2009
Building and land	$	2,174,667		$	2,166,899
Computer equipment, including software		6,860,066			5,365,572
Furniture, fixtures and equipment		1,073,829			912,518

		10,108,562			8,444,989
Less: Accumulated depreciation		(6,594,660	)		(5,657,855	)

Total property and equipment, net	$	3,513,902		$	2,787,134

At December 31, 2010, furniture, fixtures and equipment includes $39,220 of capitalized costs related to equipment that has not yet been placed in-service. The Company expects to begin using the equipment in 2011 at which time it will begin depreciating the asset.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

7. Deferred Policy Acquisition Costs

Deferred policy acquisition costs and the related amortization were as follows:


	Years Ended December 31,
	2010			2009			2008
Balance, beginning of year	$	3,913,551		$	3,596,147		$	3,334,001
Acquisition costs deferred		9,780,955			8,742,405			8,084,996
Amortization		(9,324,606	)		(8,425,001	)		(7,822,850	)

Balance, end of year	$	4,369,900		$	3,913,551		$	3,596,147

The Company assesses the recoverability of deferred policy acquisition costs against future expected underwriting income and reduces deferred policy acquisition costs if it appears that a premium deficiency may exist. There were no premium deficiencies at December 31, 2010, 2009 and 2008.

8. Loss and Loss Adjustment Expense Liability

The Company regularly updates its reserve estimates as new information becomes available and further events occur that may impact the resolution of unsettled claims. Changes in prior years’ reserve estimates are reflected in the results of operations in the year such changes are determined. Activity in the liability for loss and loss adjustment expenses is summarized as follows (in thousands):


	Years Ended December 31,
	2010			2009			2008
Balance, beginning of year	$	21,331		$	21,370		$	18,059
Less reinsurance balance recoverable		6,817			6,118			5,601

Net balance, beginning of year		14,514			15,252			12,458

Incurred related to:
Current year		44,648			36,180			31,741
Prior years		(1,714	)		(2,336	)		(2,722	)

Total incurred		42,934			33,844			29,019

Paid related to:
Current year		31,921			26,752			21,111
Prior years		6,299			7,830			5,114

Total paid		38,220			34,582			26,225

Net balance, end of year		19,228			14,514			15,252
Plus reinsurance balances recoverable		10,116			6,817			6,118

Balance, end of year	$	29,344		$	21,331		$	21,370

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Commercial auto experienced adverse development of $173,000. The farm segment experienced redundant development of $156,000 while the marine segment had redundant development of $127,000. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2010.

In 2009, the Company experienced favorable development of $2,336,000 on loss and loss adjustment expense (LAE) reserves for prior accident years. In the personal segment, homeowners had redundant development of $760,000 while personal auto experienced redundant development of $853,000 and other personal segment products had redundant development of $8,000. In the commercial segment, commercial multi-peril had redundant development of $660,000 offset by adverse development in workers compensation of $129,000. The development experienced in the workers compensation line was concentrated in accident years 2003, 2005 and 2007. The farm segment experienced redundant development of $63,000 while the marine segment had redundant development of $121,000. The development which occurred in 2009 is a result of downward development on both case and incurred but not reported reserves and loss adjusting expense reserves. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2009.

In 2008, the Company experienced favorable development on losses and loss adjustment expenses for prior accident years of $2,722,000. The redundant development included $814,000 related to homeowners, $864,000 related to commercial multi-peril, $336,000 related to workers compensation, $179,000 related to farm, $204,000 relating to general liability while the remaining lines of business had redundant development of $325,000. The favorable development was concentrated in accident years 2005 through 2007 and is a result of downward development on both case and incurred but not reported reserves and loss adjusting expense reserves. There were no significant changes in the key assumptions utilized in the analysis and calculations of the Company’s reserves during 2008.

9. Employee Benefit Plans

Other postretirement plans

The Company provides certain postretirement health care benefits for retired employees. In December 2004 the Company’s board of directors approved an amendment to the plan effective December 31, 2004 which significantly reduced the number of eligible participants in the plan, discontinued future eligibility for all other employees and reduced the level of health care benefits for future retirees determined to be eligible as of December 31, 2004. The plan amendment resulted in a reduction to the accumulated projected benefit obligation at December 31, 2004 of $2,003,943 of which $486,915 reduced the unrecognized transition obligation while the remaining credit balance of $1,517,028 represents the unrecognized reduction to prior service cost as a result of the plan amendment. The balance of the unrecognized reduction to prior service cost will be amortized over 17.7 years which represents the average future lifetime of retirees and fully eligible active participants at the date of the amendment.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Changes in the accumulated benefit obligation were:


	Years Ended December 31,
	2010			2009			2008
Change in benefit obligation:
Benefit obligation, beginning of year	$	1,819,308		$	1,738,697		$	1,895,238
Service cost		—			7,781			11,377
Interest cost		101,414			105,141			101,105
Plan participants’ contributions		25,758			18,233			16,303
Actuarial (gain) loss		308,934			37,477			(212,061	)
Benefits paid		(102,549	)		(88,021	)		(73,265	)

Benefit obligation, end of year		2,152,865			1,819,308			1,738,697

Fair value of plan assets at beginning and end of year		—			—			—

Funded status	$	(2,152,865	)	$	(1,819,308	)	$	(1,738,697	)

At December 31, 2010, 2009 and 2008 the funded status of $2,152,865, $1,819,308 and $1,738,697, respectively, is recognized in the accompanying balance sheet as accrued expenses and other liabilities.

Gross amounts recognized in accumulated other comprehensive income consist of:


	Years Ended December 31,
	2010			2009			2008
Prior service cost (credit)	$	(1,002,936	)	$	(1,088,619	)	$	(1,174,300	)
Net actuarial loss		537,287			224,002			191,009

	$	(465,649	)	$	(864,617	)	$	(983,291	)

Components of net periodic benefit cost and the weighted average discount rate are below:


	Years Ended December 31,
	2010			2009			2008
Components of net periodic benefit cost:
Service cost	$	—		$	7,781		$	11,377
Interest cost		101,414			105,141			101,105
Amortization of prior service credit		(85,682	)		(85,682	)		(85,682	)
Amortization of net actuarial loss		2,480			1,014			12,252

Net periodic benefit cost	$	18,212		$	28,254		$	39,052

Weighted-average assumptions as of December 31:
Discount rate		5.28	%		5.82	%		6.30	%

The discount rate assumption used to determine the benefit obligation was lowered from 5.82% to 5.28% as of December 31, 2010 to match the effective rate produced when matching the expected future benefit payments to the Citigroup Discount Pension Curve.

The estimated prior service credit and net actuarial loss that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $85,682 and $18,798, respectively.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

The Company uses a December 31 measurement date for its other postretirement plan. As this plan is not pre-funded, no contributions other than those necessary to cover benefit payments are anticipated. At December 31, 2010, the Company’s expected future benefit payments are as follows:


2011	$	81,000
2012		101,000
2013		110,000
2014		121,000
2015		125,000
2016-2020		723,000

	$	1,261,000

For measurement purposes as of December 31, 2010, 2009 and 2008 the annual rate of increase in the per capita cost of covered health care benefits assumed for the subsequent year was 7.0%, 8.0% and 9.0%, respectively. The rate was assumed to decrease to an ultimate rate of 5.0% in 2013. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage-point change in assumed health care cost trend rates would have the following effects:


	1- Percentage- Point Increase		1- Percentage- Point Decrease
Effect on total service and interest cost components	$	12,629	$	(10,792	)
Effect on postretirement benefit obligation	$	261,417	$	(223,087	)

Defined contribution plan

The Company has a defined contribution 401(k) plan covering substantially all employees meeting certain eligibility requirements. The 401(k) plan provides for matching contributions and /or profit sharing contributions as defined by the Board of Directors. Company contributions approximated $166,000 in 2010, $147,000 in 2009 and $150,000 in 2008.

10. Lease Agreements

The Company leased various vehicles under non-cancelable operating lease agreements. The vehicle lease agreements expired in 2009. Rental expense was approximately $3,000 in 2009 and $9,000 in 2008.

11. Capital and Surplus and Related Restrictions

As of December 31, 2010 and 2009, approximately $118,709,000 and $104,875,000, respectively, of consolidated assets represent assets of FIC that are subject to regulation and may not be transferred to FMIC in the form of dividends, loans or advances without the prior approval of the Michigan Office of Financial and Insurance Regulation (“OFIR”). Dividends paid by FIC are subject to limitations imposed by the Michigan Insurance Code (“Code”). Under the Code, FIC may pay dividends only from statutory earnings and capital and surplus. In addition, FIC may not declare an “extraordinary” dividend to its shareholders without the prior approval of OFIR. An extraordinary dividend or distribution is defined as a dividend or distribution of cash or other property whose fair market value, together with that of other dividends and distributions made within the preceding 12 months, exceeds the greater of 10% of statutory capital and surplus as of December 31, of the preceding year or the statutory net income, excluding net realized investment gains, for the immediately

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

preceding calendar year. Accordingly, FIC may pay dividends of approximately $3,219,000 in 2011 without prior approval. However, the OFIR has the authority to prohibit payment of any dividend.

Certain regulations that affect the insurance industry are promulgated by the National Association of Insurance Commissioners (“NAIC”), which is an association of state insurance commissioners, regulators and support staff that acts as a coordinating body for the state insurance regulatory process. The NAIC has established risk-based capital (“RBC”) requirements to assist regulators in monitoring the financial strength and stability of property and casualty insurers. Under the NAIC requirements, each insurer must maintain its total capital and surplus above a calculated minimum threshold or take corrective measures to achieve that threshold. The Company has calculated its RBC level based on these requirements and has determined that it passed the RBC test and has capital and surplus in excess of the minimum threshold.

FIC’s statutory capital and surplus at December 31, 2010 and 2009 and statutory net income for the years ended December 31, 2010, 2009 and 2008 are as follows:


	As of December 31,
	2010		2009
Statutory capital and surplus	$	42,193,594	$	39,435,244


	Years Ended December 31,
	2010		2009		2008
Statutory net income	$	2,862,466	$	4,382,810	$	3,388,277

12. Contingencies

The Company participates in the Property and Casualty Guaranty Association (“Association”) of the State of Michigan which protects policyholders and claimants against losses due to insolvency of insurers. When insolvency occurs, the Association is authorized to assess member companies up to the amount of the shortfall of funds, including expenses. Member companies are assessed based on the type and amount of insurance written during the previous calendar year. Assessments to date have not been significant; however, in the opinion of management, while uncertain, the liability for future assessments will not materially affect the financial condition or results of operations of the Company.

13. Related Party Transactions

During 2005, the Company issued a $130,000 mortgage receivable to an agent of the Company. The note required a monthly payment, including interest at 8%, of $1,097, which is based on a 15 year amortization. The note included a 5 year balloon payment, which became due June 2010. In July 2010, the Company extended the note with the following terms: a monthly payment, including interest at 8%, of $1,100, which is based on a 15 year amortization. The note includes a 3 year balloon payment which becomes due in July 2013. During 2010, 2009 and 2008 the agent earned $60,188, $58,805 and $70,586, respectively, in regular and profit sharing commissions. The terms and conditions of the agency agreement between this agent and the Company are similar in all material respects to agency agreements with other agents of the Company.

During 2003, the Company issued a $140,000 mortgage receivable to an agent of the Company. The note required a monthly payment, including interest at 6%, of $1,003, which is based on a 20 year amortization. The note included a 5 year balloon payment, which became due January 2009. In January 2009, the Company

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

extended the note with the following terms: a monthly payment, including interest at 6%, of $849, which is based on a 20 year amortization. The note includes a 5 year balloon payment which becomes due in January 2014. During 2010, 2009 and 2008, the agent earned $112,291, $98,743 and $91,082, respectively, in regular and profit sharing commissions. The terms and conditions of the agency agreement between this agent and the Company are similar in all material respects to agency agreements with other agents of the Company.

Three nonemployee directors of the Company are also owners of independent insurance agencies. These individuals are currently appointed as agents with and write insurance for the Company. The terms and conditions of the agency agreements between these agencies and the Company are similar in all material respects to agency agreements with other agents of the Company. The Company pays all agencies commissions on business produced. All agencies are also able to earn profit sharing commissions based on the profit margins of the business produced. Total regular and profit sharing commissions earned by these agencies approximated $627,000, $548,000 and $545,000 in 2010, 2009 and 2008, respectively. The commission rates, including profit sharing commission opportunity, are the same as other agents of the Company. The agencies are independent agents and also write with regional and national insurers that may be competitors of the Company.

A nonemployee director of the Company was a principal in a law firm through May 31, 2010. The Company has retained this law firm for certain legal matters in the past. Legal fees paid by the Company to the law firm were approximately $218,000 in 2010, $138,000 in 2009 and $69,000 in 2008. On June 1, 2010, the nonemployee director became an employee of another law. The Company has retained this law firm for certain legal matter and plans to continue to do so in the future. Legal fees paid by the Company to the law firm were approximately $88,000 in 2010.

14. Segment Information

The Company defines its operations as property and casualty insurance operations. The Company writes four major insurance lines exclusively in the State of Michigan: Personal Lines, Commercial Lines, Farm and Marine. The separate financial information of these four major insurance lines is consistent with the way results are regularly evaluated by management in deciding how to allocate resources and in assessing performance. All revenues are generated from external customers and the Company does not have a significant reliance on any single major customer or agent.

The Company evaluates product line profitability based on underwriting gain (loss). Certain expenses are allocated based on net premiums earned and net losses incurred. Underwriting gain (loss) by product line would change if different methods were applied.

During the quarter ended June 30, 2009, the Company completed its implementation of a new financial reporting system. The new system has expanded the Company’s capability in assigning expenses to a product line, a department or one of the major insurance lines. Prior to April 1, 2009, expenses were allocated to the four major insurance lines based on either net premiums earned or net losses incurred. Effective, April 1, 2009, expenses which are not directly assigned to a product line, a department or a major insurance line are allocated based on measurements including premiums, incurred losses or other departmental employee data. The underwriting gain (loss) by major insurance line would change if different methods were applied.

The Company does not allocate assets, net investment income, net realized gains (losses) on investments, other income (expense), interest expense or demutualization expenses to its product lines. The accounting policies of the operating segments are the same as those described in Note 1—Summary of Significant Accounting Policies.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

Segment data for the years ended December 31 are as follows:


	2010			2009			2008
Revenues:
Net premiums earned:
Personal lines	$	43,945,938		$	39,387,044		$	33,452,206
Commercial lines		8,251,480			7,209,804			7,711,397
Farm		4,924,623			5,039,075			4,541,837
Marine		1,934,429			1,895,908			1,797,681

Total net premiums earned		59,056,470			53,531,831			47,503,121

Expenses:
Loss and loss adjustment expenses:
Personal lines		33,853,063			26,079,141			23,099,032
Commercial lines		4,679,029			4,092,210			2,394,681
Farm		3,190,637			2,547,121			2,466,282
Marine		1,211,157			1,125,067			1,059,303

Total loss and loss adjustment expenses		42,933,886			33,843,539			29,019,298

Policy acquisition and other underwriting expenses:
Personal lines		12,628,454			11,174,055			11,159,899
Commercial lines		3,767,720			3,456,772			2,572,578
Farm		1,693,221			1,688,691			1,515,190
Marine		607,199			720,934			599,719

Total policy acquisition and other underwriting expenses		18,696,594			17,040,452			15,847,386

Underwriting gain (loss):
Personal lines		(2,535,579	)		2,133,848			(806,725	)
Commercial lines		(195,269	)		(339,178	)		2,744,138
Farm		40,765			803,263			560,365
Marine		116,073			49,907			138,659

Total underwriting gain		(2,574,010	)		2,647,840			2,636,437
Net investment income		1,632,940			1,964,735			2,212,972
Net realized gains (losses) on investments		3,677,250			806,501			(126,735	)
Other income		670,344			643,865			614,828

Income before federal income taxes	$	3,406,524		$	6,062,941		$	5,337,502

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

As previously noted, effective April 1, 2009, the Company changed its method for determining how certain expenses are assigned to its four major insurance lines. The table below reflects the impact of these changes on each of the affected statement lines:


	Year Ended December 31, 2009
	As Reported			Prior Method
Policy acquisition and other underwriting expenses:
Personal lines		11,174,055		$	12,066,744
Commercial lines		3,456,772			2,565,457
Farm		1,688,691			1,785,822
Marine		720,934			622,429

Total policy acquisition and other underwriting expenses	$	17,040,452		$	17,040,452

Underwriting gain (loss):
Personal lines	$	2,133,848		$	1,241,159
Commercial lines		(339,178	)		552,137
Farm		803,263			706,132
Marine		49,907			148,412

Total underwriting gain (loss)	$	2,647,840		$	2,647,840

15. Earnings Per Share

Basic earnings per share are calculated by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share are 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 is as follows:


	Year ended December 31,
	2010		2009		2008
Numerator for basic and diluted earnings per share:
Net income	$	2,441,540	$	4,244,814	$	3,760,588

Denominator for basic earnings per share—weighted average shares outstanding		1,764,580		1,749,196		1,770,025
Dilutive effect of stock-based compensation plan		39,690		35,982		36,611

Denominator for diluted earnings per share		1,804,270		1,785,178		1,806,636

Basic earnings per share	$	1.38	$	2.43	$	2.12

Diluted earnings per share	$	1.35	$	2.38	$	2.08

Number of shares that are anti-dilutive		53,393		47,738		31,988

16. Stock-based Compensation

The Company has two stock-based compensation plans which are described below. The compensation cost for these plans that has been charged against income for the years ended December 31, 2010, 2009 and 2008 was $131,211, $122,057 and $103,228, respectively. The total income tax benefit recognized in the statement of operations for stock-based compensation was $44,612, $41,499 and $35,098, for the years ended December 31, 2010, 2009 and 2008, respectively.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

The Company adopted the Fremont Michigan InsuraCorp, Inc. Stock-based Compensation Plan (the “2003 Plan”) in November of 2003 and the plan was subsequently approved by shareholders in May 2005. In February 2006 the Company adopted the Fremont Michigan InsuraCorp, Inc. Stock Incentive Plan of 2006 (the “2006 Plan”) and the plan was subsequently approved by shareholders in May 2006. Under both plans awards may include, among others, nonqualified stock options (“NQSOs”), restricted stock and stock appreciation rights.

Pursuant to the 2003 Plan, the Company is authorized to grant up to 88,796 shares. Pursuant to the 2006 Plan, the Company is authorized to grant up to 154,500 shares. Upon exercise of an option the Company issues new shares. Option awards under both plans are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant; those option awards vest 20% per year and have a 10 year contractual term. The options may fully vest upon the death or disability of the optionee or a change in control of the Company as defined in the plans. Under both plans if awards should expire, become unexercisable or be forfeited for any reason without having been exercised or without becoming vested in full, the shares of common stock subject to those awards would be available for the grant of additional awards.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2010, 2009 and 2008. The expected volatility is based on historical volatility of the Company’s stock. The expected dividend yield is based on the Company’s historical dividend payout. The expected term is an estimate based on expected behavior of the group of optionees. The risk free rate for the expected term of the option is based on U.S. Treasury Strips in effect at the time of grant.


	Years Ended December 31,
	2010		2009		2008
Expected volatility		37.2% - 38.5%		37.2%		33.4% - 33.7%
Expected dividend yield		0.60%		0.60%		0.77%
Expected term (in years)		4.5 - 6.5		0.4 - 6.5		1.5 - 6.5
Risk-free rate		1.83% - 3.03%		0.13% - 3.14%		0.57% - 3.48%

A summary of option activity under the plans as of December 31, 2010 and changes during the year then ended is presented below:


Options	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding—beginning of year		141,084		$	12.92
Granted		18,750		$	25.99
Exercised		(9,898	)	$	6.42
Forfeited		(1,112	)	$	25.63

Outstanding—end of year		148,824		$	14.91		6.2	$	2,023,002

Exercisable at end of year		100,982		$	10.94		5.1	$	1,772,834

The weighted-average grant-date fair value of options granted in 2010, 2009 and 2008 was $10.15, $10.30 and $5.20, respectively. The total intrinsic value of options exercised in 2010, 2009 and 2008 was $160,333, $41,966 and $24,177, respectively.

FREMONT MICHIGAN INSURACORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements—(Continued)

A summary of the status of the Company’s nonvested options as of December 31, 2010 and changes during the year ended December 31, 2010 is presented below:


Nonvested Options	Number of Options			Weighted Average Grant- Date Fair Value
Nonvested—beginning of year		45,275		$	8.61
Granted		18,750		$	10.15
Vested		(16,183	)	$	8.54
Forfeited		—		$	—

Nonvested—end of year		47,842		$	9.24

As of December 31, 2010, there was $419,023 of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under both plans. That cost is expected to be recognized over a weighted average period of 3.4 years.

17. Credit Arrangement

In 2010, the Company entered into a business loan agreement with a bank that allows the Company to borrow up to $7,000,000. Interest is charged at a variable rate equal to LIBOR (as defined in the agreement) plus two and one-half percentage points. The maturity date for this agreement is December 2, 2011. The agreement contains customary covenants with which the Company must comply. The Company is required to maintain an average daily collected cash balance of not less than $2,300,000. The Company has not had any borrowings under the agreement.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Vice President of Finance, as appropriate, to allow timely decisions regarding required disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures which, by their nature, can provide only reasonable assurance regarding management’s control objectives.

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President of Finance, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15, as of the end of the fiscal period covered by this report on Form 10-K. Based upon that evaluation, each of our Chief Executive Officer and our Vice President of Finance concluded that our disclosure controls and procedures are effective.

Management’s Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a—15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may be inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Under the supervision and with the participation of the Company’s Chief Executive Officer and Vice President of Finance, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2010 under this framework.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting. In connection with our evaluation, no change was identified in our internal controls over financial reporting that occurred during the fourth quarter of 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Class I Directors—Terms Expiring in 2013


Name Position with Fremont; Principal Occupation; Business Experience and Qualifications.	Age	Director Since	Directorships in Other Reporting Companies Currently and During the Preceding Five Years
Michael A. DeKuiper Director; Director of Fremont Insurance since 1997; is a principal of and President of The White Agency, Inc. an independent insurance agency in Fremont, Grant and Twin Lake, Michigan and has been employed there since 1971; Mr. DeKuiper has experience and knowledge of the insurance industry, especially commercial lines, our agency distribution channel and the insurance needs of our customers.	63	2003	None

Monica C. Holmes Director; is Associate Dean, College of Business, Central Michigan University, Mount Pleasant, Michigan, since August 2006, and has been a professor in the College of Business since 1995; Ms. Holmes has extensive knowledge of information technology and the application of technology to business.	61	2006	None

James P. Hallan Director; President and CEO of the Michigan Retailers Association, President and CEO of Retailers Mutual Insurance Company, and Chairman of Delta Dental Plans of Michigan, Ohio and Indiana; Mr. Hallan has extensive leadership experience, including as an executive officer of a Michigan insurer, and experience as an attorney.	58	2009	None

Jack A. Siebers Director; Director of Fremont Insurance since 1999; has practiced business law for over 40 years. On June 1, 2010, Mr. Siebers became an employee of the law firm of Foster Swift Collins & Smith, PC in Holland, Michigan and is currently employed by that firm. Prior to this employment, Mr. Siebers had been a principal in the law firm of Siebers Mohney, PLC for more than ten years. Mr. Siebers has extensive knowledge and experience in corporate law, and leadership skills as an executive officer of a public insurance group.	69	2003	None

Class II Directors—Term Expires in 2011


Name Position with Fremont; Principal Occupation; Business Experience and Qualifications.	Age		Director Since		Directorships in Other Reporting Companies Currently and During the Preceding Five Years
Jack G. Hendon Director; Director of Fremont Insurance since 2003; employed as a certified public accountant for over 30 years and is a principal of H&S Companies, a certified public accounting firm in Fremont, Michigan; franchise owner and financial advisor with Ameriprise Financial Services, Inc. Mr. Hendon has extensive knowledge and experience in corporate finance, accounting and investment management.		55		2003	None

Donald VanSingel Chairman of the Board; Chairman of Fremont Insurance since 1997 and Director since 1978; served 20 years as a Representative in the Michigan House of Representatives, and was a lobbyist from 1993 until his retirement in 2007 with Government Consultant Services in Lansing, Michigan; Mr. VanSingel has experience in government relations, legislative matters and as a director of a public company.		67		2003	ChoiceOne Financial Services, Inc.

Harold L. Wiberg Director; Director of Fremont Insurance since 1999; is a principal and President of Bonek Agency, Inc., an independent insurance agency in Suttons Bay, Michigan and has been employed there since 1974; Mr. Wiberg has experience and knowledge of the insurance industry, our agency distribution channel, the insurance needs of our customers, and investment management.		59		2003	None

Class III Directors—Term Expiring in 2012

Name

Position with Fremont; Principal Occupation; Business Experience and Qualifications.

Age

Director
Since

Directorships in
Other Reporting
Companies Currently and
During the Preceding
Five Years

Richard E. Dunning

Director, President and Chief Executive Officer; President and Chief Executive Officer of Fremont Insurance since 1997; Mr. Dunning has leadership and insurance industry experience and, business experience in various disciplines from his prior employment with a Fortune 500 company.

2003

None

William L. Johnson

Director and Vice-Chairman of the Board; Director of Fremont Insurance since 2003; formerly the Chairman, President and Chief Executive Officer of Semco Energy, Inc. from 1996 to 2002; Mr. Johnson is President and CEO of Berean Group, LLC, a business consulting firm; Mr. Johnson has leadership and public company experience, with strong skills in strategic planning and business management.

2003

None

Donald C. Wilson

Director; President and owner of Don Wilson Insurance Agency, Inc. and D. Beacom Insurance Agency since 1999; Mr. Wilson has experience and knowledge of the insurance industry, our agency distribution channel the insurance needs of our customers, and investment and other management experience from prior employment as an officer of a public company.

2006

None

Executive Officers


Name Position with Fremont	Age	Principal Occupation During Past Five Years
Richard E. Dunning Director, President and Chief Executive Officer;	64	President and Chief Executive Officer of Fremont since 2004; President and Chief Executive Officer of Fremont Insurance since 1997;

Kurt M. Dettmer Vice President of Marketing of Fremont Insurance;	43	Vice President of Marketing of Fremont Insurance since 2005, Marketing Manager of Fremont Insurance—2004; Mr. Dettmer began his career with Fremont Insurance in 1998 as a claims adjuster;

Marvin R. Deur Senior Vice President—Administration and Treasurer; Senior Vice President—Administration and Treasurer of Fremont Insurance;	59	Senior Vice President—Administration of Fremont Insurance since 2005 and Treasurer since 1995. Mr. Deur began his career with Fremont Insurance as an accountant in 1982;

Kevin G. Kaastra Vice President of Finance; Vice President of Finance of Fremont Insurance;	40	Vice President of Finance of Fremont Insurance since 2005; Mr. Kaastra, a certified public accountant, began his career with Fremont Insurance in November 2003 as the Controller; Prior to joining Fremont, Mr. Kaastra was employed as a certified public accountant in public accounting for 10 years.

David L. Mangin Executive Vice President and Chief Information Officer Fremont	52	Executive Vice President and Chief Information Officer of Fremont Insurance since July 2008; Vice President of Information Technology from 2007 to July 2008; Mr. Mangin began his career with Fremont Insurance in May 2005 as Director of Information Technology; Prior to joining Fremont Insurance Mr. Mangin held various positions in information technology.

Francis Massucci Senior Vice President of Personal Lines and Product Management of Fremont Insurance;	52	Senior Vice President of Personal Lines and Product Management of Fremont Insurance since 2007; Director of Pricing and Product Development from 2005 to 2006; Mr. Massucci began his career with Fremont Insurance in June 2003 as Manager of Pricing and Product Development.

Kent B. Shantz Executive Vice President and Chief Operating Officer of Fremont;	52	Executive Vice President and Chief Commercial Officer of Fremont Insurance since July 2008; Vice President of Commercial lines from April 2007 to July 2008; Prior to joining Fremont, Mr. Shantz held various executive positions in the insurance industry and since 2002 was an owner of an independent insurance agency.

There are no family relationships between any of the listed persons, except that Mr. DeKuiper’s daughter is married to Kevin G. Kaastra, Fremont’s Vice President of Finance.

The Company has adopted a Code of Ethics that applies to the principal executive officer, principal financial officer, principal accounting officer and other persons performing similar functions. A copy of the Company’s

Code of Ethics for Senior Financial Officers was filed as Exhibit 14 to its Annual Report on Form 10-K for the year ended December 31, 2005 and is also posted on the Company’s Internet website under Investor Information at www.fmic.com. As of December 31, 2010, no amendments or waivers had been made to our Code of Ethics as previously filed with the Securities and Exchange Commission. The Company intends to post any amendments to or any waivers from a provision of its Code of Ethics that applies to its principal executive officer and principal financial officer, or persons performing similar functions on its website.

The Audit Committee of the Board of Directors of Fremont is a separately-designated standing committee of the Board of Directors and is comprised of four independent Directors, Messrs. Hendon, Johnson and VanSingel and Ms. Holmes. The Board has determined their independence based on Exchange Act Rule 10a-3 and the NASDAQ definition of independence. The Audit Committee operates under a written charter adopted by the Board of Directors on September 21, 2004. A copy of the Audit Committee Charter is also posted on the Company’s website. The Board of Directors has determined that Mr. Jack G. Hendon is the “audit committee financial expert” of the Audit Committee. Mr. Hendon’s qualifications as a financial expert are described in the table above.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our executive officers and directors, and persons who own more than 10% of a registered class of our equity securities (collectively, “Reporting Persons”), to file reports of ownership and changes in ownership with the SEC. Based solely on our review of the reports filed by Reporting Persons, we believe that, during the year ended December 31, 2010, the Reporting Persons met all applicable Section 16(a) filing requirements.

ITEM 11. EXECUTIVE COMPENSATION.

2010 SUMMARY COMPENSATION

The following table sets forth summary compensation information earned during the years ended December 31, 2010 and 2009 for our chief executive officer and each of our other two most highly compensated executive officers whose compensation exceeded $100,000 for the last fiscal year. We refer to these persons as our “named executive officers” elsewhere in this report. Except as provided below, none of our named executive officers received any other compensation required to be disclosed by law or in excess of $10,000 annually.

SUMMARY COMPENSATION TABLE


Name and Principal Position	Year		Salary (1)		Bonus (2)		Option Awards (3)		Non-Equity Incentive Plan Compensation (4)		All Other Compen- sation (5)		Total
Richard E. Dunning		2010	$	234,000	$	25,000	$	30,660	$	30,420	$	9,338	$	329,418
President, Chief Executive Officer and Director		2009	$	225,000	$	12,000	$	31,950	$	49,500	$	13,673	$	332,123

David L. Mangin		2010	$	145,860	$	—	$	14,308	$	30,631	$	3,282	$	194,081
Executive Vice President of Information Technology, Chief Information Officer		2009	$	143,000	$	—	$	15,975	$	35,750	$	7,177	$	201,902

Kent B. Shantz		2010	$	156,468	$	—	$	14,308	$	39,117	$	8,457	$	218,350
Executive Vice President, Chief Commercial Officer		2009	$	153,400	$	—	$	15,975	$	36,816	$	8,035	$	214,226

(1)

Includes amounts deferred under the 401(k) Plan.

(2)	Discretionary annual cash bonus awards.

(3)

Amounts shown in this column represent the aggregate grant date fair value computed in accordance with current accounting standards. The assumptions and methodology used in the valuation of these stock option awards are disclosed in Note 16 to the Company’s audited financial statements for the year ended December 31, 2010 included in Item 8 of this Annual Report on Form 10-K for the year ended December 31, 2010.

(4)	Annual cash awards based on the satisfaction of Company and individual performance goals under the non-equity incentive plan were as follows:


Name	Year		Company Performance Goals		Individual Performance Goals		Total Non-Equity Incentive Plan Compensation
Richard E. Dunning		2010	$	30,420	$	—	$	30,420
		2009	$	49,500	$	—	$	49,500

David L. Mangin		2010	$	18,962	$	11,669	$	30,631
		2009	$	31,460	$	4,290	$	35,750

Kent B. Shantz		2010	$	20,341	$	18,776	$	39,117
		2009	$	33,748	$	3,068	$	36,816

(5)

Except for the 2009 amount for Mr. Dunning, all other compensation includes all amounts contributed by the Company as discretionary or matching contributions for the benefit of the executive under the 401(k) Plan and perquisites. The 2009 amount for Mr. Dunning includes the Company matching contribution under the 401(k) Plan of $9,346 plus $ 4,327 which represents unused vacation which was “sold back” to the Company. The value of perquisites did not equal or exceed $10,000 for any of the named executives.

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION

Annual Cash Incentives

Discretionary Bonus. The Compensation Committee approved a discretionary bonus for 2010 for the CEO. This bonus is not tied to a predetermined financial goal, but is meant to recognize individual performance. For 2010, the total amount of the discretionary bonus approved by the Compensation Committee and awarded to the CEO was $25,000. This amount was based upon contribution to Company objectives, leadership and performance. The “Bonus” column of the Summary Compensation Table reflects the amount of the discretionary bonus awarded to the CEO.

Non-Equity Incentive Plan. We provide the opportunity for our named executive officers, other executives and employees to earn an annual cash incentive based upon the achievement of certain corporate objectives and individual performance objectives. During the fourth quarter of each year, the Compensation Committee reviews our objectives and establishes the goals for the following year. The first component of the annual cash incentive awards for 2010 was based on the operating growth in statutory surplus of our subsidiary, Fremont Insurance Company. Depending on the amount of growth in statutory surplus, the range of annual cash incentive opportunities, expressed as a percentage of base salary paid during the fiscal year, is from 0% to 22% for all of the named executive officers. For 2010, the threshold award goal was 2% of base salary for an increase in surplus of $1,000,000 and the maximum award goal of 22% was based on an increase in surplus of $5,750,000. There was no minimum or guaranteed bonus level. In 2010, the operating change in statutory surplus of Fremont Insurance Company was an increase of $3,758,000 compared to 2009 resulting in non-equity incentive plan awards equal to 13% of base salary for the named executive officers. The second component of the annual cash incentive awards for 2010 was based on the achievement of individual performance goals for the executive officers excluding the CEO. Depending on the achievement of individual performance goals, the range of annual

cash incentive opportunities, expressed as a percentage of base salary paid during the fiscal year, is from 0% to 22% for all of the named executive officers. There was no minimum guaranteed bonus level. The amounts awarded each named executive officer is set forth in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table.

Long-Term Equity Incentives

In General. We provide the opportunity for our named executive officers to earn a long-term equity incentive award. The Compensation Committee reviews long-term equity incentives for our named executive officers annually in November or December. For 2010, our long-term equity incentive program consisted of grants of stock options.

The Company has two stock-based incentive plans. The initial plan was the Stock-Based Compensation Plan dated November 18, 2003 (the “2003 Plan”). Under the 2003 Plan, awards for 86,210 shares of Fremont Common Stock were reserved and as of this date all awards available under the 2003 Plan have been granted. If awards previously granted under the 2003 Plan should expire, become unexercisable or be forfeited for any reason without having been exercised, the shares of common stock subject to those awards would be available for the grant of additional awards under the 2003 Plan. On May 11, 2006, our Shareholders approved the Stock Incentive Plan of 2006 (the “2006 Plan”), which provides stock incentives to Fremont’s key employees and non-employee directors. Pursuant to the 2006 Plan, 150,000 shares of Fremont Common Stock were reserved for future issuance by Fremont, in the form of newly-issued shares in satisfaction of awards under the 2006 Plan. If awards should expire, become unexercisable or be forfeited for any reason without having been exercised, the shares of common stock subject to those awards would be available for the grant of additional awards. The following summary describes the major features of the 2003 Plan and the 2006 Plan (collectively the “Plan”), which have essentially similar terms and conditions as described below, except for the number of awards authorized.

Awards. Subject to certain limits set forth in the Plan, the Compensation Committee has the discretionary authority to determine the size of an award. However, the stock purchase price for any options granted under the Plan will not be less than 100% of the fair market value of a share of Common Stock on the date the option is granted and no participant shall be granted, during any calendar year, awards with respect to more 15,000 shares. Fremont does not receive any payment for granting stock options. Awards under the Plan may be in the form of nonqualified stock options, restricted stock or other stock-based form, in the discretion of the Compensation Committee. The Compensation Committee, at the time of award, has discretion to determine the vesting of awards and performance-based criteria, if any.

Adjustments. In the event of a stock dividend, recapitalization, stock split, reorganization, merger, spin-off, repurchase or exchange of Fremont Common Stock, or similar event affecting Fremont Common Stock, the number and kind of shares granted under the Plan, the number and kind of shares subject to outstanding stock options and restricted stock awards, and the exercise price of outstanding stock options are required to be adjusted to prevent dilution or enlargement of benefits.

Exercise of Stock Options. The exercise price of stock options granted under the Plan may not be less than the fair market value of Fremont Common Stock on the date of grant and the option term may not be longer than 10 years and one month. The Compensation Committee determines at the time of grant when each stock option becomes exercisable. Payment of the exercise price of a stock option may be in cash by the participant. Fremont will require, prior to issuing Fremont Common Stock under the Plan, that the participant who is an employee remit an amount in cash or Fremont Common Stock sufficient to satisfy any tax withholding requirements.

Vesting of Restricted Stock. Awards of restricted stock lose their restrictions (i.e. the restrictions lapse) at the conclusion of a specified period of continuous employment or service with Fremont, and/or its subsidiary, and/or achievement of performance goals.

Change in Control. Stock options and restricted stock awarded under the Plan will become exercisable and fully vested upon the occurrence of a “change in control,” as defined in the Plan. In addition, upon a change in control, the Plan requires the Compensation Committee authority to take certain actions with respect to unexercised options in connection with preservation of the rights intended by the Plan.

Termination, Death, and Retirement. Subject to certain exceptions, the ability to exercise vested stock options will expire thirty days after the termination of a participant’s employment with Fremont or a subsidiary or service as a non-employee director of Fremont and all unvested option grants are forfeited as of termination. In the case of involuntary termination or retirement, the ability to exercise vested stock options will expire three months after termination or retirement of a participant’s employment or service (one year, in the case of death or disability). In the event of termination, if the Compensation Committee determines that the participant has engaged in any activity detrimental to the interests of the Company, the Compensation Committee may terminate the unexercised portion of an option. The Compensation Committee may accelerate or waive any service requirement upon the death or disability of an option holder. Restricted stock awards are generally subject to the same provisions with respect to the acceleration of vesting and performance goals as described above.

Administration of the Plan. The Plan is administered by the Compensation Committee. The Compensation Committee selects the Fremont employees and non-employee directors who will receive awards, determine the number of shares covered thereby, and establish the terms, conditions, and other provisions of the grants. The Compensation Committee may interpret the Plan and establish, amend, and rescind any rules relating to the Plan.

Amendments. Subject to approval of the Board of Directors where required, the Compensation Committee may terminate, amend, or suspend the Plan, but no action may be taken by the Compensation Committee or the Board of Directors (except those described earlier in the Section entitled “Adjustments”) without the approval of the shareholders to materially increase the number of shares that may be issued under the Plan; permit granting of stock options at less than fair market value; permit the repricing of outstanding stock options; permit the reload of exercised stock options; or amend the maximum shares set forth that may be granted as stock options to any employee.

Benefits and Perquisites

We provide the opportunity for our named executive officers and other executives to receive certain general health and welfare benefits. We also offer participation in our defined contribution 401(k) plan. Under our 401(k) plan, we make matching contributions up to 75% of an employee’s voluntary contribution. In 2010, matching contributions were capped at 4.5% of each participant’s eligible compensation. The Compensation Committee can also establish an annual discretionary contribution to the 401(k) plan. In 2010, there were no discretionary contributions to the 401(k) plan. All employees who work at least 1,000 hours per year, after their first six months of service, become eligible for participation in the 401(k) plan. The named executives participate on the same basis as all other employees. For 2010, none of the named executives or any of the directors received perquisites in an amount valued at $10,000 or more.

Change in Control and Severance Benefits

We provide the opportunity for certain of our named executive officers to be protected under the severance and change in control provisions contained in employment agreements or severance agreements. Our severance and change in control provisions for the named executive officers are summarized below in “Employment Agreement with Mr. Dunning” and “Severance Agreements with Mssrs. Mangin and Shantz.” Our analysis indicates that our severance and change in control provisions are consistent with the provisions and benefit levels of other companies. We believe our arrangements are reasonable in light of the fact that cash severance is limited three years for Mr. Dunning and two years for the other named executives. There are no “single trigger” benefits upon a change in control other than the accelerated vesting of awards pursuant to the Company’s equity incentive plans discussed above.

Pension Benefits

We do not sponsor any qualified or non-qualified defined benefit pension plans.

Nonqualified Deferred Compensation

We do not maintain any non-qualified defined contribution or deferred compensation plans.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

The following table summarizes the number of securities underlying outstanding plan awards for each named executive officer as of December 31, 2010.


	Option Awards
Name	Number of Securities Underlying Unexercised Options (#)		Number of Securities Underlying Unexercised Options (#)				Option Exercise Price ($)		Option Expiration Date
Name	Exercisable		Unexercisable				Option Exercise Price ($)		Option Expiration Date
Richard E. Dunning		16,480		—	(1	)	$	4.85		10/15/14
		412		—	(3	)	$	10.72		12/29/15
		3,048		763	(4	)	$	24.16		12/29/16
		1,854		1,236	(5	)	$	18.69		12/28/17
		1,714		1,286	(7	)	$	15.55		12/31/18
		1,200		1,800	(8	)	$	26.50		12/30/19
		—		3,000	(9	)	$	26.03		12/30/20

David L. Mangin		1,545		—	(2	)	$	4.85		5/16/15
		412		—	(3	)	$	10.72		12/29/15
		824		206	(4	)	$	24.16		12/29/16
		741		495	(5	)	$	18.69		12/28/17
		600		900	(7	)	$	15.55		12/31/18
		300		1,200	(8	)	$	26.50		12/30/19
		—		1,400	(9	)	$	26.03		12/30/20

Kent B. Shantz		618		412	(6	)	$	27.38		4/30/17
		741		495	(5	)	$	18.69		12/28/17
		600		900	(7	)	$	15.55		12/31/18
		300		1,200	(8	)	$	26.50		12/30/19
		—		1,400	(9	)	$	26.03		12/30/20

(1)	This option grant became fully vested on October 15, 2009.

(2)	This option grant became fully vested on May 16, 2010.

(3)	This option grant became fully vested on December 29, 2010.

(4)	This option grant vests over 5 years at 20% per year, commencing on December 29, 2006.

(5)	This option grant vests over 5 years at 20% per year, commencing on December 28, 2007.

(6)	This option grant vests over 5 years at 20% per year, commencing on April 30, 2007.

(7)	This option grant vests over 5 years at 20% per year, commencing on December 31, 2008.

(8)	This option grant vests over 5 years at 20% per year, commencing on December 30, 2009.

(9)	This option grant vests over 5 years at 20% per year, commencing on December 30, 2010.

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Employment Agreement with Mr. Dunning

On March 16, 2004, the Compensation Committee approved employment agreements with Mr. Dunning. The agreement provides for a period of employment continuing until the third anniversary of any change in control. Any party to an agreement may elect not to extend that agreement for an additional year by providing written notice at least 90 days prior to any annual anniversary date.

If Mr. Dunning were terminated, other than for cause, disability, retirement or death, or voluntarily terminates employment for “good reason” due to breach of his employment agreement, then he would be entitled to (i) a cash severance amount equal to 2.99 times his average annual compensation over his most recent three taxable years, payable in equal monthly installments over 36 months, and (ii) a continuation of benefits similar to those he is receiving at the time of such termination for the same term. If Mr. Dunning is terminated after a change in control and the amount of the change in control payments constitutes an excess payment under Section 280G of the Code, Mr. Dunning will also receive an additional cash payment (“Gross-Up”) so that after payment of all applicable excise taxes including those assessed on the change in control payment and the federal, state and local income taxes on the Gross-Up payment, he is placed in the same after-tax position he would have been in if such payments of compensation and benefits had not constituted an excess parachute payment.

The following definitions apply to the Employment Agreement of Mr. Dunning:

“Average Annual Compensation” shall be deemed to mean the average level of compensation paid to the executive by the employer and any subsidiary of the employer during the most recent three calendar years preceding the Date of Termination, including Base Salary, bonuses under any employee benefit plans of the Employer, and contributions to 401(k), pension and other retirement plans.

“Cause” shall mean termination because of (i) willful and continued failure to perform substantially the executive’s duties with the employer or one of its subsidiaries (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to the executive by the Board which specifically identifies the manner in which the Board believes that the executive has not substantially performed the executive’s duties, or (ii) the willful engaging by the executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the employer. For purposes of this provision, no act or failure to act on the executive’s part shall be considered “willful” unless done, or omitted to be done, by the executive in bad faith or without reasonable belief that the executive’s action or omission was in the best interest of the employer. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon advice of counsel for the employer shall be conclusively presumed to be done, or omitted to be done, by the executive in good faith and in the best interests of the employer.

“Change in Control” of the employer shall mean a change in control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”), or any successor to such regulation, whether or not the Company is registered under the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred if:

(i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities; or

(ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company cease for any reason to constitute at least a majority of that Board unless the election, or the nomination for election by stockholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period.

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“Good Reason” shall mean termination by the executive based on any of the following, except that Mr. Deur may only terminate his employment for Good Reason following a Change in Control of the Company:

(i) Without the executive’s express written consent, the failure to elect or to re-elect or to appoint or to re-appoint the executive to the position and office held of the employer or a material adverse change made by the employer in the executive’s functions, duties or responsibilities, including a diminution of the executive’s reporting relationship;

(ii) Without the executive’s express written consent, a material reduction by the employer in the executive’s base salary as the same may be increased from time to time or, except to the extent permitted by the agreement, a material reduction in the package of fringe benefits provided to the executive, taken as a whole;

(iii) Without the executive’s express written consent, the employer requires the executive to work in an office which is more than 30 miles from the location of the employer’s current principal executive office, except for required travel on business of the employer to an extent substantially consistent with the executive’s present business travel obligations;

(iv) Any purported termination of the executive’s employment for Cause, Disability or Retirement which is not effected pursuant to a Notice of Termination satisfying the requirements of the agreement; or

(v) The failure by the employer, after a Change in Control of the employer, to obtain the assumption of and agreement to perform the agreement by any successor.

The Employment Agreement prohibits Mr. Dunning, during his employment and for a period of two (2) years following a termination that entitles him to a severance payment, from directly or indirectly performing services for, having ownership in or participating in the management of any business engaged in the property and casualty insurance business. After termination, this non-competition covenant is limited geographically to the State of Michigan.

Mr. Dunning’s Employment Agreement was amended on November 23, 2010 to assure compliance with Section 409A of the Code in accordance with IRS Notice 2010-6 Correction Procedure. The amendment: (1) eliminated a Company option to pay the benefits in a lump sum, (2) added a provision that if Mr. Dunning is deemed a “Key Employee” of the Company as said definition is applied by Section 409A of the Code, that all installment payment payments otherwise payable to Mr. Dunning within the first six months following termination shall be held, accumulated and paid to Mr. Dunning on the first day of the seventh month following termination; (3) clarifies the timing of the payment of any “Gross-Up” amounts payable under the Agreement; and (4) requires the Company to establish and fund a “rabbi trust” upon any termination of employment that would trigger payments under the Agreement.

Severance Agreement with Mssrs. Mangin and Shantz

Fremont entered into Change in Control Severance Agreements with Mssrs. Mangin and Shantz in March 2010 replacing similar pre-existing agreements (the “Severance Agreement”). Under the terms of the Severance Agreement, the Company will owe the executive severance pay in the event that (1) a change in control of the Company occurs during the executive’s employment with the Company, or within six months after the executive’s earlier termination, and (2) within two years of the date of a change in control the executive’s employment with the Company is terminated by (a) the Company for any reason other than cause, disability, retirement or death or (b) the executive for Good Reason.

In the event of a termination covered by the Severance Agreement, the Company owes the executive (1) unpaid salary and a prorated target bonus through the date of termination, (2) a lump sum payment due within 10 business days following the date of termination equal to two (2) times the executive’s Average Annual Compensation, and (3) continuation, for a period beginning on the date of termination and ending on the earlier

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of (a) two years following the termination of employment or (b) the date the executive receives substantially equal benefits from a new employer, of the executive’s participation in all employee group insurance benefit programs in which the executive participated in immediately prior to termination. If participation in a benefit program is not permitted under the program, the Company shall reimburse the executive for the cost to obtain equivalent benefits. If the executive is a “specified employee” within the meaning of Section 409A of the Code at the time of executive’s termination and the severance benefits are considered deferred compensation under Section 409A, the payment of the lump sum shall be delayed for six months and one day following the date of termination.

If the amount of the change in control payments constitutes an excess payment under Section 280G of the Code, the executive will also receive an additional cash payment (“Gross-Up”) so that after payment of all applicable excise taxes including those assessed on the change in control payment and the federal, state and local income taxes on the Gross-Up payment, he is placed in the same after-tax position he would have been in if such payments of compensation and benefits had not constituted an excess parachute payment. However, if the excise taxes can be avoided by a reduction of up to 10% of the severance benefits, the severance benefits shall be reduced by up to 10%. If a reduction of up to 10% does not avoid the excise tax, there shall be no reduction in severance benefits and the Gross-Up will be paid.

Under the Severance Agreement, the definitions of “Average Annual Compensation” and “Cause” are defined substantially similar to those terms as used under Mr. Dunning’s Employment Agreement. In addition, the following definitions apply to the Severance Agreement:

“Change of Control” of the Company means:

(i) the acquisition by any individual, entity, or group (“Person”), including any “person” within the meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (“Exchange Act”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act of 25% or more of either (x) the then outstanding shares of common stock of the Company (“Outstanding Company Common Stock”) or (y) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (“Outstanding Company Voting Securities”); provided, however, that the following acquisitions shall not constitute a Change in Control: (aa) any acquisition by the Company, (bb) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any Person controlled by the Company, (cc) any acquisition by any corporation pursuant to a reorganization, merger, or consolidation involving the Company, if, immediately after such reorganization, merger, or consolidation, each of the conditions described in clauses (x), (y) and (z) of subsection (iii) of this Section shall be satisfied, or (dd) any acquisition by the Executive or any group of persons including the Executive; and provided further that, for purposes of clause (aa), if any Person, other than the Company or any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, shall become the beneficial owner of 25% or more of the Outstanding Company Common Stock or 25% or more of the Outstanding Company Voting Securities by reason of an acquisition by the Company and such Person shall, after such acquisition by the Company, become the beneficial owner of any additional shares of the Outstanding Company Common Stock or any additional Outstanding Company Voting Securities, such additional beneficial ownership shall constitute a Change in Control;

(ii) individuals who, as of the date hereof, constitute the Board (“Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual who becomes a director of the Company subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a two-thirds of the directors then compri sing the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; provided, however, no individual shall be deemed a member of the Incumbent Board if the individual was initially elected as a director of the Company as a result of an actual or threatened election contest, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, or any other actual or threatened solicitation of proxies or consents by or on behalf of any Person other than the Board; or

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(iii) approval by the shareholders of the Company of a reorganization, merger or consolidation or consolidation unless, in any such case, immediately after such reorganization, merger, or consolidation, (x) more than 50% of the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, or consolidation and more than 50% of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals or entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such reorganization, merger, or consolidation and in substantially the same proportions relative to each other as their ownership, immediately prior to such reorganization, merger, or consolidation, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (y) no Person (other than (aa) the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or the corporation resulting from such reorganization, merger, or consolidation (or any corporation controlled by the Company), or (bb) any Person which beneficially owned, immediately prior to such reorganization, merger, or consolidation, directly or indirectly, 25% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of the then outstanding shares of common stock of such corporation or 25% or more of the combined voting power of the then outstanding securities of such corporation entitled to vote generally in the election of directors, and (z) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such reorganization, merger, or consolidation; or

(iv) approval by the shareholders of the Company of (x) a plan of complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets the Company other than to a corporation with respect to which, immediately after such sale or other disposition, (aa) more than 50% of the then outstanding shares of common stock thereof and more than 50% of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities immediately prior to such sale or other disposition and in substantially the same proportions relative to each other as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and the Outstanding Company Voting Securities, as the case may be, (bb) no Person (other than the Company, any employee benefit plan (or related trust) sponsored or maintained by the Company or such corporation (or any corporation controlled by the Company), or any Person which beneficially owned, immediately prior to such sale or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common Stock or the Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of the then outstanding shares of common stock thereof or 25% or more of the combined voting power of the then outstanding securities thereof entitled to vote generally in the election of directors and (cc) at least a majority of the members of the board of directors thereof were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition.

“Good Reason” means, without Executive’s express written consent, the occurrence of any of the following events after or in connection with a Change in Control:

(i) (aa) the assignment to Executive of any duties inconsistent in any material adverse respect with Executive’s position, duties, responsibilities, or status with the Company immediately prior to the Change in Control, (bb) a material adverse change in Executive’s positions, reporting responsibilities, titles or offices with the Company as in effect immediately prior to such Change in Control, (cc) any removal or involuntary termination of Executive by the Company otherwise than as expressly permitted by this Agreement (including any purported termination of employment which is not effected by a Notice of Termination), or (dd) any failure to re-elect Executive to any position with the Company held by Executive immediately prior to such Change in Control;

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(ii) a material reduction by the Company in Executive’s rate of annual base salary as in effect immediately prior to such Change in Control or as the same may be increased from time to time thereafter;

(iii) the failure of the Company to continue the Company’s executive incentive plans or bonus plans in which Executive is participating immediately prior to such Change in Control or a reduction of the Executive’s target incentive award opportunity under any such bonus plan, unless Executive is permitted to participate in other plans providing Executive with substantially comparable benefits or receives compensation as a substitute for such plans providing Executive with a substantially equivalent economic benefit;

(iv) the Company requires Executive to work in an office which is more than 50 miles from the location of the Company’s current principal executive office, except for required travel on business of the Company to an extent substantially consistent with Executive’s business travel obligations immediately prior to such Change in Control;

(v) the failure of the Company to continue in effect any employee benefit plan, welfare benefits, vacation or compensation plan in which Executive is participating immediately prior to such Change in Control, unless Executive is permitted to participate in other plans providing Executive with substantially comparable benefits or receives compensation as a substitute for such plans providing Executive with a substantially equivalent after-tax economic benefit, or the taking of any action by the Company which would adversely affect Executive’s participation in or materially reduce Executive’s benefits under any such plan;

(vi) the failure of the Company to pay any amounts owed Executive as salary, bonus, deferred compensation or other compensation;

(vii) the failure of Company to obtain any assumption agreement contemplated in Section 14;

(viii) any purported termination of Executive’s employment which is not effected pursuant to a Notice of Termination which satisfies the requirements of a Notice of Termination; or

(ix) any other material breach by Company of its obligations under this Agreement.

The Company is not obligated to make any cash payments to these executives under these agreements if their employment is terminated by us for Cause or by the executive not for Good Reason. No severance or benefits are provided under their agreements for any of the executive officers in the event of retirement, death or disability.

The Severance Agreement between the Company and the named executives, prohibit the executives, during the executive’s employment and for a period of two years following a termination that entitles the executive to a severance payment, from (1) recruiting or hiring, any person then employed by the Company and (2) soliciting or interfering with the Company’s business relationships with its independent agents. However, the Severance Agreement provides the executive the option of waiving all severance benefits after termination but before payment thereof, and in the case of such waiver the non-solicitation obligations cease at termination.

DIRECTOR COMPENSATION

Summary of Director Compensation

Non-employee directors of Fremont receive an annual retainer of $5,000 as a director, except for the Board Chairman who receives an annual retainer of $7,000. Non-employee directors also receive an additional annual retainer of $600 for each committee on which they serve, except for the committee Chair who receives a $1,000 annual retainer. Directors also receive a meeting fee of $300 for each board or committee meeting attended while the Board Chairman and the committee chair receive a meeting fee of $400. Under our stock based incentive plans, directors are eligible to receive stock option grants at the discretion of the Compensation Committee. The

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grants are made on similar terms as grants to employees. However, all stock options granted to directors become fully vested upon retirement after age 70 and 10 years of service. The directors also receive the benefit of a group accidental death plan providing $100,000 of coverage. Our directors are reimbursed for reasonable travel and other expenses incurred in connection with attending meetings of the Board and its committees. Executive officers of Fremont who are directors or members of committees of the Fremont Board of Directors or its subsidiaries receive no compensation for their service, but may be reimbursed for actual expenses incurred in connection with their duties.

In December 2007, the Board of Directors approved a plan, effective January 1, 2008, whereby directors may elect to receive all or a portion of their director’s fees in shares of the Company’s stock in lieu of cash compensation. Shares are issued under the Company’s Stock Incentive Plans (“Plan”). The number of shares issued is based on the Fair Market Value of a Share on the issuance date, as these terms are defined in the Plan. Shares are issued after the director’s fees are earned, but may only be issued on the second trading day following a date on which the Company issues a press release announcing quarterly financial results. The Shares are fully vested at issuance.

The following table summarizes compensation that our directors earned during 2010 for services as members of our Board.

2010 DIRECTOR COMPENSATION TABLE


Name	Fees Earned or Paid in Cash		Stock Awards (1)		Option Awards (2)		Total
Donald E. Bradford	$	6,650	$	—	$	—	$	6,650
Michael A. DeKuiper	$	11,200	$	—	$	4,599	$	15,799
James P. Hallan	$	5,525	$	5,510	$	4,599	$	15,634
Jack G. Hendon	$	7,025	$	7,030	$	4,599	$	18,654
Monica C. Holmes	$	—	$	12,386	$	4,599	$	16,985
William L. Johnson	$	7,425	$	7,416	$	4,221	$	19,062
Kenneth J. Schuiteman	$	5,500	$	—	$	—	$	5,500
Jack A. Siebers	$	—	$	12,926	$	3,830	$	16,756
Donald VanSingel	$	21,150	$	—	$	4,599	$	25,749
Harold L. Wiberg	$	12,550	$	—	$	4,599	$	17,149
Donald C. Wilson	$	6,000	$	6,000	$	4,599	$	16,599

(1)

The amounts shown in this column represent the Fair Market Value, as defined in the Plan, of common stock awards that the director elected to receive in lieu of cash compensation for a portion of the director’s fees earned in 2010. The 2010 awards were issued on February 24, 2011 and the Fair Market Value was $25.75 per share. The shares are fully vested at issuance. The number of shares granted to directors in lieu of director fees earned in 2010 appears in the table below.

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2010 DIRECTOR STOCK AWARDS TABLE


Name	Number of Shares Issued
James P. Hallan		214
Jack G. Hendon		273
Monica C. Holmes		481
William L. Johnson		288
Jack A. Siebers		502
Donald C. Wilson		233

(2)

Amounts shown in this column represent the aggregate grant date fair value computed in accordance with current accounting standards. The assumptions and methodology used in the valuation of these stock option awards are disclosed in Note 16 to the Company’s audited financial statements for the year ended December 31, 2010 included in the Company’s Annual Report on Form 10-K. The aggregate number of option awards outstanding at year-end appears below in the “Outstanding Director Equity Awards at Year-End” table.

OUTSTANDING DIRECTOR EQUITY AWARDS AT YEAR-END TABLE


Name	Number of Options
Michael A. Dekuiper		2,956
James P. Hallan		500
Jack G. Hendon		3,374
Monica C. Holmes		1,720
William L. Johnson		3,780
Jack A. Siebers		3,780
Donald VanSingel		3,780
Harold L. Wiberg		3,780
Donald C. Wilson		1,720

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The Company has two equity compensation plans pursuant to which it has granted stock options to employees and non-employee directors. The Stock-Based Compensation Plan dated November 18, 2003 was approved by the shareholders on May 12, 2005 and the Stock Incentive Plan of 2006 was approved by the shareholders on May 11, 2006. The following table sets forth, with respect to the equity compensation plans, as of December 31, 2010, (a) the number of shares of common stock to be issued upon the exercise of outstanding options, (b) the weighted average exercise price of outstanding options, and (c) the number of shares remaining available for future issuance.


	Equity Compensation Plan Information				Number of securities remaining available for future issuance under equity compensation plans (excluding securities in column (a)) (c)
Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)
Equity compensation plans approved by security holders		148,824	$	14.91		76,361
Equity compensation plans not approved by security holders		—		—		—

Total		148,824				76,361

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

There are no persons or entities known to Fremont or its management who own of record or beneficially, as of the Record Date, more than 5% of the outstanding shares of Fremont Common Stock other than:


Title of Class	Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership			Percent of Class
Common Stock	Mitchell Partners, L.P., a California limited partnership: J.E. Mitchell & Co., L.P. (General Partner); and James E. Mitchell (General Partner of J.E. Mitchell & Co., L.P.), 3187-D Airway Avenue, Costa Mesa, California 92626		175,868	(1)		9.9	%
Common Stock	Biglari Holdings Inc., an Indiana corporation, 175 East Houston Street, Suite 1300 San Antonio, Texas 78205		172,500	(2)		9.7	%
Common Stock	Loeb Management Holding LLC, General Partner of Loeb Arbitrage Management LP, Loeb Arbitrage Fund and Loeb Offshore Management LP, 61 Broadway, New York, N.Y. 10006		160,600	(3)		9.0	%

(1)	According to Schedule 13G dated February 10, 2009, of Mitchell Partners, L.P., J.E. Mitchell & Co., L.P., and James E. Mitchell, claiming sole voting and dispositive power over the shares.

(2)	According to Schedule 13D/A dated January 3, 2011, of Biglari Holdings Inc. claiming sole voting and dispositive power over the shares.

(3)

According to Schedule 13D dated October 18, 2010 the Reporting Persons are: Loeb Arbitrage Management LP, a Delaware limited partnership, is the beneficial owner of 122,778 shares and claims shared voting and dispositive power over 122,778 shares; Loeb Arbitrage Fund, a New York limited partnership, is the beneficial owner of 108,968 shares, and claims shared voting and dispositive power over 108,968 shares; and Loeb Offshore Management LP, a Delaware limited partnership, is the beneficial owner of 37,822 shares and claims shared voting and dispositive power over 37,822 shares.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth information concerning the number of shares of Fremont Common Stock beneficially owned, as of March 4, 2011, by each present director, nominee for director, and each executive officer named in the compensation table set forth elsewhere herein.


Name of Beneficial Owner (1)	Common Stock (2)		Options Currently Exercisable Or within 60 Days		Total Stock and Stock Based Holdings		Percent of Class
Michael A. DeKuiper		10,358		1,970		12,328		*
Richard E. Dunning		55,679		24,708		80,387		4.3%
James P. Hallan		1,614		100		1,714		*
Jack G. Hendon		9,270		2,348		11,618		*
Monica C. Holmes		2,584		654		3,238		*
William L. Johnson		13,373		2,784		16,157		*
David L. Mangin		604		4,422		5,026		*
Kent B Shantz		4,469		2,199		6,668		*
Jack A. Siebers		10,035		3,738		13,773		*
Donald VanSingel		8,382		3,780		12,162		*
Harold L. Wiberg		12,371		2,754		15,125		*
Donald C. Wilson		5,946		654		6,600		*
Officers, Directors and Nominees for Director as a Group (16 persons)		183,669		84,725		268,394		14.2%

*	Less than 1%

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(1)

Each of the identified beneficial owners, including the officers, directors and nominees for director, has sole investment and voting power as to all the shares beneficially owned with the exception of those shares held indirectly by certain officers, directors and nominees for director as noted in the footnotes below.

(2)	Includes shares held by the Company’s 401(k) Plan Trust and allocated to their Plan accounts.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

CERTAIN TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS

Mr. Harold L. Wiberg, a director, is the President and principal of The Bonek Agency, Inc. This agency is currently appointed as an agent with and writes insurance for Fremont Insurance. The terms and conditions of the agency agreement between The Bonek Agency and Fremont Insurance are similar in all material respects to agency agreements with the other agents of Fremont Insurance. Fremont Insurance pays The Bonek Agency commissions on business produced. The agency is also able to earn profit sharing commissions based on the profit margins of the business produced. Total regular and profit sharing commissions earned by The Bonek Agency were approximately $178,000 in 2010 and $140,000 in 2009. The commission rates, including profit sharing commission opportunity, are the same as other agents of Fremont Insurance. The Bonek Agency is an independent agent and also writes with regional and national insurers that may be competitors of Fremont Insurance.

Mr. Michael A. DeKuiper, a director, is the President and principal of The White Agency, Inc. This agency is currently appointed as an agent with and writes insurance for Fremont Insurance. The White Agency is Fremont Insurance’s largest producer. The terms and conditions of the agency agreement between The White Agency and Fremont Insurance are similar in all material respects to agency agreements with the other agents of Fremont Insurance. Fremont Insurance pays The White Agency commissions on business produced. The agency is also able to earn profit sharing commissions based on the profit margins of the business produced. Total regular and profit sharing commissions earned by The White Agency were approximately $373,000 in 2010 and $343,000 in 2009. The commission rates, including profit sharing commission opportunity, are the same as other agents of Fremont Insurance. The White Agency is an independent agent and also writes with regional and national insurers that may be competitors of Fremont Insurance.

Mr. Jack A. Siebers, a director, was a principal in the law firm of Siebers Mohney PLC. On June 1, 2010, Mr. Siebers became an employee of the law firm of Foster Swift Collins & Smith, PC in Holland, Michigan and is currently employed by that firm. The Company has retained these law firms for certain corporate legal matters in the past and plans to continue to retain Foster Swift Collins & Smith PC in the future. Legal fees paid to Siebers Mohney, PLC were approximately $218,000 in 2010 and $138,000 in 2009. During 2010, the Company paid fees for corporate legal services of approximately $88,000 to Foster Swift Collins & Smith PC.

CORPORATE GOVERNANCE

Director Independence

The Company has adopted the director independence standards of The NASDAQ Stock Market (“NASDAQ”). The Board of Directors has determined that Mr. Hallan, Mr. Hendon, Ms. Holmes, Mr. Johnson, Mr. VanSingel, Mr. Wiberg and Mr. Wilson are independent directors. Mr. Dunning is not independent as he is employed as President and Chief Executive Officer of the Company. Mr. DeKuiper is not deemed independent as his firm had certain transactions with the Company during 2009 and 2010 as disclosed above under the heading “Transactions with Executive Officers and Directors” aggregating in excess of $200,000. Mr. Siebers is no longer deemed independent as his law firm had certain transactions with the Company during 2010 as disclosed above under the heading “Certain Transactions with Executive Officers and Directors” aggregating in excess of $200,000. The Board of Directors had also determined that Mr. Bradford and Mr. Schuiteman, who served as directors until their retirement on May 13, 2010, were independent directors.

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The Company has adopted corporate governance guidelines which include adherence to the Company’s Conflict of Interest and Business Ethics Policy. Any services to be rendered by a director or a director’s firm for the Company which may create a conflict of interest must receive pre-approval from the Governance Committee and the full Board prior to commencement of such services. In addition, on an annual basis, each director and executive officer is obligated to complete a director and officer questionnaire which requires disclosure of any transactions with the Company in which the director or executive officer, or any member of his or her immediate family, have a direct or indirect material interest. The Audit Committee is responsible for the annual review and recommendation of the Conflicts of Interest and Business Ethics Policy for approval by the Board. In addition, the Committee is responsible for reviewing annually the management’s program to monitor compliance therewith and compliance with relevant laws and regulations.

Committees of the Board

The Board of Directors has various standing committees including an Audit Committee, Compensation Committee, and Governance Committee. Each such committee has a written charter.

The Audit Committee is comprised of Directors Hendon (Chairman), Holmes, Johnson and Vansingel, each of whom is independent in the judgment of the Board of Directors. The Committee is responsible for the appointment, compensation, oversight and termination of Fremont’s independent auditors. The Committee is required to pre-approve audit and non-audit services performed by the independent auditors. The Committee also assists the Board in providing oversight over the integrity of Fremont’s financial statements and Fremont’s compliance with applicable legal and regulatory requirements. The Committee also is responsible for, among other things, reporting to Fremont’s Board on the results of the annual audit and reviewing the financial statements and related financial and non-financial disclosures included in Fremont’s Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Importantly, from a corporate governance perspective, the Audit Committee regularly evaluates the independent auditors’ independence from Fremont and Fremont’s management, including approving legally permitted, non-audit services provided by Fremont’s auditors and the potential impact of the services on the auditors’ independence. The Committee meets periodically with Fremont’s independent auditors outside of the presence of Fremont’s management, and possesses the authority to retain professionals to assist it in meeting its responsibilities without consulting with management. The Committee reviews and discusses with management earnings releases, including the use of pro forma information and financial information provided to analysts and rating agencies. The Committee discusses with management and the independent auditors the effect of accounting initiatives. The Committee also is responsible for receiving and retaining complaints and concerns relating to accounting and auditing matters.

The Governance Committee is comprised of Directors Johnson (Chairman), DeKuiper, Hallan, Holmes, Siebers, VanSingel and Wilson. Each member of this committee, except Mr. DeKuiper and Mr. Siebers, is independent in the judgment of the Board of Directors. The Governance Committee is responsible for identifying and recommending to the Board individuals to stand for election as directors at the Annual Meeting of Shareholders, assisting the Board in the event of any vacancy on the Board by identifying individuals qualified to become Board members, recommending to the Board qualified individuals to fill such vacancy, recommending to the Board, on an annual basis, nominees for each Board Committee and to make independent recommendations to the Board of Directors as to the best practices for Board governance and evaluation of Board performance. The Committee has the responsibility to develop and recommend criteria for the selection of director nominees to the Board. The Committee has the power to apply standards for independence imposed by Fremont and all applicable federal laws in connection with such identification process.

The Compensation Committee is comprised of Directors Wilson (Chairman), DeKuiper, Hallan, Johnson and VanSingel. Each member of this committee, except Mr. DeKuiper, is independent in the judgment of the Board of Directors. The Compensation Committee is responsible for reviewing, establishing and making recommendations regarding the compensation and benefits of officers, employees, and with the administration of and the granting of stock awards to employees and directors under Fremont’s stock incentive plans.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

INDEPENDENT PUBLIC ACCOUNTANTS

The Company’s Audit Committee appointed BDO USA, LLP to act as the Company’s independent registered public accounting firm to audit the consolidated financial statements of the Company for the year ended December 31, 2005. BDO USA, LLP has audited Fremont’s financial statements for each fiscal year since the year ended December 31, 2005, and the report on such financial statements for the year ended December 31, 2010 appears in this Report on Form 10-K.

Audit Fees of Independent Auditors

The following table sets forth the aggregate fees billed to Fremont and its subsidiary by BDO USA, LLP for the fiscal years ended December 31, 2010 and December 31, 2009.


	December 31, 2010		December 31, 2009
Audit Fees	$	197,500	$	190,000
Audit Related Fees	$	—	$	2,000
Tax Fees	$	17,250	$	16,500
All Other Fees	$	—	$	2,800

Audit fees included the audit of Fremont’s annual financial statements, reviews of Fremont’s quarterly financial statements, statutory and regulatory audits, consents and other services related to SEC matters. Audit related fees include services related to Section 404 of the Sarbanes-Oxley Act. All other fees include accounting consultations related to the various accounting matters. Tax fees included tax compliance services rendered in connection with federal, state and local income tax returns and transaction planning advice. The Audit Committee may, from time to time, grant pre-approval to those permissible non-audit services classified as “all other services” that it believes are routine and recurring services, and would not impair the independence of the auditor. A list of the SEC’s prohibited non-audit services is attached to the pre-approval policy. The SEC’s rule and relevant guidance will be consulted to determine the precise definitions of these services and the applicability of exceptions to certain of the prohibitions. The pre-approval fee levels for all services to be provided by the independent auditors will be established annually by the Audit Committee. Any proposed services exceeding these levels will require specific pre-approval by the Audit Committee.

Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by Independent Auditors

The Audit Committee pre-approves all audit and legally permissible non-audit services provided by the independent auditors in accordance with the pre-approval policies and procedures adopted by the Audit Committee. These services may include audit services, audit-related services, tax services and other services. Under the policy, pre-approved services include pre-approval of non-prohibited services for a limited dollar amount. The Audit Committee may delegate pre-approval authority to one or more of its members. Such member must report any decisions to the Audit Committee at the next scheduled meeting. All services performed by BDO USA, LLP in 2010 and 2009 were pre-approved in accordance with the pre-approval policy.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

(a)(1) The following consolidated financial statements are filed as a part of this report in Item 8.

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2010 and 2009

Consolidated Statements of Operations for Each of the Years in the Three-year Period Ended December 31, 2010

Consolidated Statements of Stockholders’ Equity for Each of the Years in the Three-year Period Ended December 31, 2010

Consolidated Statements of Cash Flows for Each of the Years in the Three-year Period Ended December 31, 2010

Notes to Consolidated Financial Statements

(2) The following consolidated financial statement schedules for the years 2010, 2009 and 2008 are submitted herewith:

Report of Independent Registered Public Accounting Firm

Financial Statement Schedules:

Schedule I Summary of Investments—Other Than Investments in Related Parties

Schedule II Condensed Financial Information of Parent Company

Schedule III Supplementary Insurance Information

Schedule IV Reinsurance

Schedule V Allowance for Uncollectible Premiums and other Receivables

All other schedules under Regulation S-X are not required in accordance with the related instructions and, therefore, have been omitted.

(3) Exhibits:

The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index. Documents not accompanying this report are incorporated by reference as indicated on the Exhibit Index.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

By:	/s/ RICHARD E. DUNNING	March 30, 2011
	Richard E. Dunning President, Chief Executive Officer and Director

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Richard E. Dunning and Kevin G. Kaastra, or either of them acting individually, his true and lawful attorney-in-fact and agent, each with full power of substitution, for him and in his name and in all capacities, to sign all amendments to this report and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact and agent, his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.



By:	/s/ RICHARD E. DUNNING	March 30, 2011
	Richard E. Dunning President, Chief Executive Officer and Director (principal executive officer)

By:	/s/ KEVIN G. KAASTRA	March 30, 2011
	Kevin G. Kaastra Vice President of Finance (principal financial and accounting officer)

By:	/s/ MICHAEL A. DEKUIPER	March 30, 2011
	Michael A. DeKuiper Director

By:	/s/ JAMES P. HALLAN	March 30, 2011
	James P. Hallan Director

By:	/s/ JACK G. HENDON	March 30, 2011
	Jack G. Hendon Director

By:	/s/ MONICA C. HOLMES	March 30, 2011
	Monica C. Holmes Director

By:	/s/ WILLIAM L. JOHNSON	March 30, 2011
	William L. Johnson Director

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By:	/s/ JACK A. SIEBERS	March 30, 2011
	Jack A. Siebers Director

By:	/s/ DONALD VANSINGEL	March 30, 2011
	Donald VanSingel Chairman of the Board of Directors

By:	/s/ HAROLD L. WIBERG	March 30, 2011
	Harold L. Wiberg Director

By:	/s/ DONALD C. WILSON	March 30, 2011
	Donald C. Wilson Director

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Fremont Michigan InsuraCorp, Inc.

Fremont, Michigan

The audits referred to in our report dated March 30, 2011 relating to the consolidated financial statements of Fremont Michigan InsuraCorp, Inc., which is contained in Item 8 of this Form 10-K also included the audit of the financial statement schedules listed in the accompanying index. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.

In our opinion such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

/s/ BDO USA, LLP

Grand Rapids, Michigan

March 30, 2011

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Fremont Michigan InsuraCorp Inc. and Subsidiary

Schedule I—Summary of Investments—Other than

Investments in Related Parties as of December 31, 2010


Column A	Column B		Column C		Column D
Type of Investment	Cost		Market Value		Balance Sheet
Fixed maturities:
Bonds:
United States Government and government agencies and authorities	$	7,472,982		7,397,044		7,397,044
States, municipalities and political subdivisions		20,115,479		19,754,595		19,754,595
All other		30,663,775		30,535,163		30,535,163

Total fixed maturities		58,252,236		57,686,802		57,686,802

Equity securities:
Common stocks:
Public utilities		244,673		250,074		250,074
Banks, trust and insurance companies		1,229,137		1,293,027		1,293,027
Industrial, miscellaneous and all other		15,364,516		16,577,943		16,577,943
Nonredeemable preferred stock		—		—		—

Total equity securities		16,838,326		18,121,044		18,121,044

Total investments	$	75,090,562		75,807,846		75,807,846

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Fremont Michigan InsuraCorp Inc.

Schedule II—Condensed Financial Information of Parent Company

Condensed Balance Sheet


	December 31,
	2010		2009
Assets
Investment in common stock of subsidiary (equity method)	$	47,833,437	$	45,635,970
Cash and cash equivalents		473,152		97,716
Other assets		677,025		382,772

Total assets	$	48,983,614	$	46,116,458

Liabilities and Stockholders’ Equity
Liabilities—Accrued expenses	$	1,060	$	71,671

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, 1,779,674 and 1,749,032 shares issued and outstanding at December 31, 2010 and 2009, respectively		—		—
Class B common stock, no par value, authorized 500,000 shares, no shares issued and outstanding		—		—
Additional paid-in capital		9,813,362		9,037,405
Retained earnings		38,388,455		36,332,648
Accumulated other comprehensive income (loss)		780,737		674,734

Total stockholders’ equity		48,982,554		46,044,787

Total liabilities and stockholders’ equity	$	48,983,614	$	46,116,458

117

Fremont Michigan InsuraCorp Inc.

Schedule II—Condensed Financial Information of Parent Company

Condensed Statement of Earnings


	For the years ended December 31,
	2010			2009			2008
Revenue—net investment income	$	1,310		$	882		$	2,612
Expenses:—operating expenses		986,043			270,443			78,440

Loss before federal income tax benefit		(984,733	)		(269,561	)		(75,828	)
Federal income tax benefit		334,809			91,651			25,781

Loss before equity in income of subsidiary		(649,924	)		(177,910	)		(50,047	)
Equity in income of subsidiary		3,091,464			4,422,724			3,810,635

Net income	$	2,441,540		$	4,244,814		$	3,760,588

118

Fremont Michigan InsuraCorp Inc.

Schedule II—Condensed Financial Information of Parent Company

Condensed Statement of Cash Flows


	For the years ended December 31,
	2010			2009			2008
Net cash (used in) provided by operating activities	$	(883,577	)	$	(61,909	)	$	13,041

Cash flows from investing activities—Dividend received from subsidiary		1,000,000			250,000			700,000

Cash flows from financing activities:
Proceeds from issuance of common stock		571,225			317,878			—
Proceeds from exercised stock options		63,557			14,957			9,383
Tax benefit from exercised stock options		45,859			11,821			6,681
Share repurchases of common stock		(138,480	)		(274,264	)		(732,150	)
Dividends paid to shareholders		(283,148	)		(227,796	)		(105,339	)

Net cash (used in) provided by financing activities		259,013			(157,404	)		(821,425	)

Net increase (decrease) in cash and cash equivalents		375,436			30,687			(108,384	)
Cash and cash equivalents at beginning of period		97,716			67,029			175,413

Cash and cash equivalents at end of period	$	473,152		$	97,716		$	67,029

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Fremont Michigan InsuraCorp Inc. and Subsidiary

Schedule III—Supplementary Insurance Information


Column A	Column B		Column C		Column D		Column E		Column F
Segment	Deferred policy acquisition costs		Future policy benefits, losses, claims, and loss expenses		Unearned premiums		Other policy claims and benefits payable		Premium revenue
December 31, 2010
Personal lines	$	2,855,718		19,358,392		22,399,622		—		43,945,938
Commercial lines		825,155		6,616,537		6,208,236		—		8,251,480
Farm		532,813		2,061,407		3,001,636		—		4,924,623
Marine		156,214		1,307,824		969,962		—		1,934,429

Total	$	4,369,900		29,344,160		32,579,456		—		59,056,470

December 31, 2009
Personal lines	$	2,510,515		13,056,673		19,551,284		—		39,387,044
Commercial lines		738,073		6,151,084		5,444,497		—		7,209,804
Farm		508,195		1,444,992		2,905,798		—		5,039,075
Marine		156,768		678,494		984,549		—		1,895,908

Total	$	3,913,551		21,331,243		28,886,128		—		53,531,831

December 31, 2008
Personal lines	$	2,325,411		13,580,773		17,618,806		—		33,452,206
Commercial lines		745,124		5,181,944		5,274,421		—		7,711,397
Farm		387,135		1,675,043		2,740,364		—		4,541,837
Marine		138,477		931,764		980,218		—		1,797,681

Total	$	3,596,147		21,369,524		26,613,809		—		47,503,121


	Column G		Column H		Column I		Column J		Column K
	Net investment income		Benefits, claims, losses and settlement expenses		Amortization of DPAC		Other operating expenses		Premiums written
December 31, 2010
Personal lines				33,853,063		6,375,820		6,252,634		46,312,357
Commercial lines				4,679,029		1,596,483		2,171,237		8,868,591
Farm				3,190,637		1,019,143		674,078		5,018,194
Marine				1,211,157		333,160		274,039		1,919,841

Total	$	1,632,940		42,933,886		9,324,606		9,371,988		62,118,983

December 31, 2009
Personal lines				26,079,141		5,730,823		5,443,232		41,160,490
Commercial lines				4,092,210		1,508,906		1,947,866		7,449,675
Farm				2,547,121		869,882		818,809		5,146,744
Marine				1,125,067		315,390		405,544		1,900,239

Total	$	1,964,735		33,843,539		8,425,001		8,615,451		55,657,148

December 31, 2008
Personal lines				23,099,032		5,508,935		5,650,964		35,486,111
Commercial lines				2,394,681		1,269,919		1,302,659		8,109,475
Farm				2,466,282		747,953		767,237		4,592,638
Marine				1,059,303		296,043		303,676		1,836,874

Total	$	2,212,972		29,019,298		7,822,850		8,024,536		50,025,098

120

Fremont Michigan InsuraCorp Inc. and Subsidiary

Schedule IV—Reinsurance


Column A	Column B		Column C		Column D		Column E		Column F
Premiums Earned	Gross amount		Ceded to other companies		Assumed from other companies		Net amount		Percentage of amount assumed to net
For the year ended December 31, 2010	$	71,639,650		12,702,751		119,571		59,056,470		0.2	%
For the year ended December 31, 2009	$	64,588,128		11,141,412		85,115		53,531,831		0.2	%
For the year ended December 31, 2008	$	57,884,543		10,459,036		77,614		47,503,121		0.2	%

121

Fremont Michigan InsuraCorp Inc. and Subsidiary

For the years ended December 31,

Schedule V—Allowance for Uncollectible Premiums


Allowance for Uncollectible Premiums	2010			2009			2008
Balance, January 1	$	43,034		$	58,678		$	39,029
Additions		187,353			165,026			195,465
Deletions		(144,750	)		(180,670	)		(175,816	)

Balance, December 31	$	85,637		$	43,034		$	58,678

122

EXHIBIT INDEX


NUMBER		TITLE

3.1(a)		Articles of Incorporation of Fremont Michigan InsuraCorp, Inc. (Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-112414 on Form S-1).

3.1(b)		Certificate of Amendment to the Articles of Incorporation of Fremont Michigan InsuraCorp, Inc. (Incorporated by reference to Exhibit 3.1(b) to the Company’s Form 10-Q for the period ending June 30, 2007).

3.2		Bylaws of Fremont Michigan InsuraCorp, Inc. (Incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commisson on November 19, 2009)

4.1		See Articles of Incorporation, filed as Exhibit 3.1

4.2		Shareholder Rights Agreement dated November 1, 2004 by and between the Company and Registrar and Transfer Company, as Rights Agent (Incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 3, 2004).

4.3		Certificate of Adoption of Resolution Designating and Prescribing Rights, Preferences and Limitations of Junior Participating Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Company’s Form 8-K filed with the Securities and Exchange Commission on November 3, 2004).

4.4		Amendment No. 1 to Shareholders Rights Agreement dated May 13, 2010 (Incorporated by reference to Exhibit 4.4 to the Registrant’s Form 8-K Current Report filed with the Securities and Exchange Commission on May 17, 2010).

10.1		Stock-Based Compensation Plan dated November 18, 2003, as amended and restated effective December 11, 2007 (Incorporated by reference to Exhibit 10.1 to the Company’s Form 10-K for the year ended December 31, 2007).

10.2		Employment Agreement between Richard E. Dunning and Fremont Michigan InsuraCorp, Inc. (Incorporated by reference to Exhibit 10.3 to Registration Statement No. 333-112414 on Form S-1).

10.3		Form of Employment Agreement for other officers (Incorporated by reference to Exhibit 10.8 to Registration Statement No. 333-112414 on Form S-1).

10.4		Agent Stock Purchase Plan (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 26, 2008).

10.5		Form of Indemnity Agreement between Fremont Michigan InsuraCorp, Inc and its directors and officers (Incorporated by reference to Exhibit 10.5 to Registration Statement No. 333-112414 on Form S-1).

10.6		Form of Agency Agreement and Endorsement to Agency Agreement for Profit Sharing (Incorporated by reference to Exhibit 10.6 to Registration Statement No. 333-112414 on Form S-1).

10.7		Investment Management Agreement with Prime Advisors, Inc. (Incorporated by reference to Exhibit 10.7 to Registration Statement No. 333-112414 on Form S-1).

10.8		Stock Incentive Plan of 2006, dated February 24, 2006, as amended and restated effective December 11, 2007 (Incorporated by reference to Exhibit 10.8 to the Company’s Form 10-K for the year ended December 31, 2007).

10.9		Form of Change in Control Severance Agreement (Incorporated by reference to Exhibit 10.9 to the Company’s Form 10-K for the year ended December 31, 2009).

123


NUMBER		TITLE

10.10		Business Loan Agreement and Promissory Note between the Company and The Huntington National Bank dated December 3, 2010 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on December 6, 2010.)

10.11		Amendment No. 1 to Employment Agreement between Richard E. Dunning and Fremont Michigan InsuraCorp, Inc. dated November 23, 2010.

10.12		Amendment No. 1 to Employment Agreement between Marvin R. Deur and Fremont Michigan InsuraCorp, Inc. dated November 23, 2010.

14		Code of Ethics for Senior Financial Executives (Incorporated by reference to Exhibit 14 to the Company’s Form 10-K for the year ended December 31, 2005).

21		Subsidiaries of the registrant.

23.1		Consent of BDO USA, LLP

24		Power of Attorney (see Signatures of this Annual Report on Form 10-K and incorporated herein by reference).

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 and Treasurer under Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification pursuant to 18 U.S.C. Section 1350.

124

FREMONT MICHIGAN INSURACORP INC - FORM 10-K - March 30, 2011

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FREMONT MICHIGAN INSURACORP INC Reports