Don't Let Biglari Steal Fremont Michigan Insuracorp

| About: Fremont Michigan (FMMH)

Fremont Michigan Insuracorp Inc (OTC:FMMH) is a property and casualty insurance company that is focused in the dismal market of Michigan. Despite the negative trends of its home market, their financials have been extremely steady, with earnings and book value steadily growing over the last 5 years.

Furthermore, recognizing the dismal state of Michigan's finances and demographic trends, the company has made plans to expand into bordering markets - starting with Wisconsin and then following with Indiana. Management, for whatever reasons that pushed them to finally come to this realization, is therefore not completely inept. Biglari, who by the way runs a public company called Biglari Holdings from which he made the unsolicited offer, may have pushed the right buttons with his unsolicited offers to get things moving in the right direction but I still don't think he's offering a fair price.

Regardless, if I had the money, I'd take the chance and buy FMMH.OB at $31 a share any day. For some understanding of the company's valuation we can take a look at their public shares and financials. At $28, FMMH trades at a valuation of $50mil. They have 0 debt and cash of $12mil, making enterprise value a tiny $38mil.

With insurance companies, some people look at earnings, some people look at book value, some look at projected earnings. Whatever floats your boat. I personally look at a average of ROE for some period. I understand that the insurance business is one that is cyclical, generally over a FULL business cycle. This means that there is, generally and conservatively speaking, an outlier event every 7-8 years, which causes book value losses and/or negative earnings, followed by higher pricing environment, followed by competition and lower pricing environment. It is interesting that you will generally see a low pricing environment when an outlier event occurs - quite disastrous!

So looking at their balance sheet. FMMH has $47mil in book value. Their long-term average ROE has been about 10%. Which is decent, by the way; not great by any standards and probably a function of having to operate in a pretty dismal market. Taking 10% * $47mil, I get a projected income of about $5mil. Multiply that number by 10 and I figure that FMMH is worth at least $50mil. To hit $50mil in enterprise value, FMMH would have to trade at $35 a share.

Personally I bought these shares at around $25. I figure with the growth and all that they'll be closer to $40 in time, giving me 50% upside. However, with prices closer to $28, just be sure to judge wisely.

Current Price: $28

Conservative Minimum Fair Value: $35

Projected Value: $40+

Strategy: This is a thinly traded over the counter company. I strongly recommend buying in lots and building a position slowly and taking advantage of illiquidity pricing and/or any dips.

Disclosure: I am long OTC:FMMH.