Build Fremont

Transparency and Corporate Governance

1. Fremont needs pay for performance. The company's income has dropped for 3 years. However, in each of the past 3 years, total compensation for CEO Richard Dunning has gone up:

   The Table of Greed
   	Fremont's Net Income	CEO Richard Dunning's Total Compensation
   2005	$9,082,269	$195,138 *
   2006	$7,215,333	$218,121
   2007	$4,884,358	$233,541
   2008	$3,760,588	$242,535
   		* plus 200 Securities Underlying Options/SARs

   Does your salary go up when your performance goes down? Dick Dunning's does. Is this the kind of "pay-for-performance" we need in corporate America today?

   As Americans, we all recognize the crucial need for pay for performance in a meritocratic society. At a public company, this must be a requirement. The fact that Fremont's board has approved a pay package for Richard Dunning that has resulted in total compensation increasing, in the face of deteriorating company performance, is evidence that the current board must be replaced with one that is shareholder friendly.

2. From my experience as an investor, Fremont company officers often do not return phone calls in a timely manner, if at all.* When things are going well, and I have no substantive thoughts or ideas to improve the business, they seem more willing to communicate their thinking. When things are going poorly, the company seems to go into a bunker mentality and executives are unwilling to communicate with me about problems the company is having and possible solutions shareholders may have to turn things around. In my view, this demonstrates insecurity and an inability to approach problems from new points of view.

   * UPDATE - July 1, 2009:

   Since the BuildFremont.com website has gone up, Dick Dunning and Kevin Kaastra have not only returned phone calls for the first time in months, but also Dick agreed to a meeting in Grand Rapids between me, him, Kevin Kaastra (CFO), Kent Shantz (COO), and Francis "Skip" Massucci.

   Dick Dunning and Kevin Kaastra showed up to the meeting on June 30, 2009 at the offices of BDO Seidman in Grand Rapids without Kent and Skip. There has been a frank exchange of views between company officers and Harry Long. On July 1, 2009 at 2:00PM, there was a conference call with me, Dick, Kent, and Skip participating. More detailed updates to follow (on Twitter and the blog).

3. There are familial relationships between board members and company officers. Michael Dekuiper, a board member, is the father-in-law of CFO Kevin Kaastra. I do not believe that familial relationships are conducive to board independence.

4. Three board members (including Michael Dekuiper) are independent agents of the company, receiving hundreds of thousand of dollars, in aggregate, from the company in commissions. I am confident these payments are proper. However, in my opinion, these payments may create incentives that make it hard for directors to be truly independent. If I were an agent on Fremont's board, I would not want to do anything that would upset executives, since I would be afraid that would jeopardize my business and commissions from the company. Therefore, no independent agent of the company should be sitting on its board. I feel that their presence entrenches management.

"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 $545,000, $526,000 and $484,000 in 2008, 2007 and 2006, 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." (quoted from Fremont's latest 10-K, page 80)

5. In order to assure shareholders and agents that business is being placed with agents on the basis of merit, not familial relationships, or membership on the company's board, the company should publicly disclose the loss ratio of business generated by board members who serve as independent agents in relation to the average loss ratio for the company, broken out by each of the company's business lines, not only each year, but on average for the past 5 years.

6. One board member, Jack A. Siebers, is employed as a principal of Siebers Mohney PLC, a law firm that receives legal fees from the company. I would argue that such legal fees might incentivize him not to jeopardize business for his firm. Similar to the three agents on the board, I believe his presence entrenches management. Whether or not board members pass stock exchange definitions of independence, the most important thing is that they are independent of any conflicts of interest or incentives which would run counter to their representing shareholders' interests.

   "A nonemployee director of the Company is a partner in a law firm. The Company has retained this law firm for certain legal matters in the past and plans to continue to do so in the future. Legal fees paid by the Company to the law firm were approximately $69,000 in 2008, $74,000 in 2007 and $35,000 in 2006." (quoted from Fremont's latest 10-K, page 80)

7. The board is staggered. This prevents shareholders from being able to elect a majority of board members in any individual year. A non-staggered board is shareholders' best check on management. As we have seen in America, we need stronger board oversight, not weaker oversight of management, to prevent breaches in corporate governance and irresponsible risk-taking. Being able to replace the entire board at one annual meeting is an excellent check on management.

8. The company needs to be far more diligent in its public filings. For instance, in its 2008 proxy statement, it stated the wrong deadline for the nomination of directors. The deadline in the proxy, disturbingly, contradicted the date stated in its Articles of Incorporation. While I am sure the company did not do this on purpose, the company did refuse to recognize my nomination, even though it was made before the deadline listed in the company's own proxy statement.

Conservative Underwriting

1. Fremont's personal lines have gone from a 2006 underwriting gain of $4,129,003 to a 2008 loss of $806,725. Simultaneously, net premiums earned in personal lines have grown tremendously. In the latest 9 months, we can see a similar trend: a 97.4% combined ratio this year vs. a 90.8% combined ratio last year.

2. Management must be open to suggestions on how to improve the situation and publicly articulate a plan to ALL shareholders. This plan must include a provision not to grow personal lines until the underwriting situation is fully remedied, with a strong combined ratio in the line of below 95, for at least 2 years. I believe that management's failure to do so already violates the tenets of conservative underwriting. In addition, I believe that the board's failure to insist on such a plan is clear evidence that the board is not overseeing risk properly. As we have seen in America, at financial institutions, board oversight of risk control is a key function of good corporate governance, and indeed, corporate survival.

FMIC as a Beacon for Fremont and the Midwestern Community

1. If Fremont Michigan Insuracorp successfully implements philosophies, policies, risk control systems, and actions geared towards transparency, strong corporate governance, and conservative underwriting, I believe the company will not only grow, but will also gain the support of the investment community. Such intelligent growth, focused on underwriting profits--not premiums--will allow Fremont to employ more people in the Fremont community and in the wider Midwest.

2. I have pushed the company to expand into Indiana, while focusing on lines of business in Michigan where it can enjoy strong underwriting profits. A profitable, growing Fremont can employ more people and serve as a beacon of strong, transparent, ethical leadership in the community.

A Warning to Management

Shareholders will not be satisfied with accounting "fixes" to fundamental underwriting issues. For example, if the reported combined ratio "improves," while reserving suffers and turns from redundancies to deficiencies, shareholders will not consider this an operating improvement, but rather accounting chicanery. Tightening underwriting standards by refusing bad pricing and by turning away business without the proper risk-reward balance is the only way to a better combined ratio.

I expect that, in practice, this will mean contracting net premiums earned in lines for which adequate combined ratios cannot be obtained. If this means a contraction in net premiums earned across all lines, so be it. It might also mean asking under performing agencies to cancel their contracts, while forging new relationships with excellent insurance brokers. I believe the current operating culture at Fremont, which reminds me more of a product-centric company's "more growth is better" mantra, is economically deadly in insurance. Fine insurers, such as Berkshire Hathaway, routinely contract net premiums earned in order to maintain profitability and prevent losses when pricing is inadequate. It is this discipline that separates strong insurers from the weak. Management cannot ignore such time-tested disciplines and expect Fremont to prosper.

Conclusion

My goal is to help build Fremont into the strongest insurer in the Midwest, with an ethical, fair way of treating customers, employees, agents, and investors that we can all be proud of. Accomplishing this goal will require a new way of thinking, a new way of treating people, and a new way of doing business. Changing hearts and minds is difficult, especially where money and pride are concerned. Few people enjoy admitting that they are wrong, nor do it quickly. However, management and board members must realize that the greatest long term profit is in treating people fairly and the truest pride is the result of real decency towards others. Please help me create a win-win culture at Fremont.

At Fremont, as in America, either we all win, or we all ultimately lose.