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Harry Long is the inventor of Hedged Contango Capture and Hedged Convexity Capture and is the Managing Partner of ZOMMA, the world's most innovative strategy index creator. Mr. Long is a globally recognized expert on the research and development of quantitative investment strategies. The ZOMMA... More
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  • Adventures at the Frontier if Corporate Governance: Part II 0 comments
    Aug 14, 2009 5:13 AM | about stocks: FMMH

    On June 30, 2009 I had a meeting with CEO Richard Dunning and CFO Kevin Kaastra.

    On July 1, 2009, there was a conference call between me, Richard Dunning, Kent Shantz (COO/handles commercial), and Francis "Skip" Masscucci (VP Personal Lines/handles pricing).


    The substance of the meeting and conference call and my revelations about the motivations, psychology, reasoning, and logical positions of the participants were the most fascinating (and at times bewildering) of my business career.

    I have struggled deeply with how to present them to the kind reader. Would a detailed blow-by-blow account of the events be best, or would a summary be most appropriate? A detailed summary might run into the hundreds of pages and touch upon a myriad of issues which might be of little concern to the intelligent lay reader. A summary might be useless to convey the nuance of various points and the basis for my impressions, observations, and conclusions about what has transpired.

    Instead, I will attempt to present a very detailed account of key points. I want to fairly present some of the main arguments that management made, while pointing out strengths and weaknesses on a strategic, tactical, logical, ethical, factual, psychological, and emotional basis. When citing numbers, I will attempt to refer to handwritten notes made during the conversation. Much of my commentary will be my opinion and analysis of what has transpired. Perhaps the following will say as much about my own thought process as it will that of management. My main goal in the following is not to engage in a conflict of personalities, but to do my ethical duty as an investor to help build shareholder value.


    June 30, 2009 Fort Lauderdale, Florida

    When I woke up in the morning in Fort Lauderdale, I contemplated the big day of travel ahead of me and the gestation of the day’s coming meeting.

    After putting up the blog some weeks before, I was able to speak with Kevin Kaastra and Dick Dunning on the phone for the first time in months (Dick finally returned a phone call). I had expressed to Dick and Kevin that occasional losses in an insurance line happen. However, that was not my main concern. I expressed in the strongest terms possible that my main concern was the company’s reaction to losses, which was to grow net premiums earned (and thereby increase exposure) in personal lines, which had lost over $800,000 last year. I said that the company should put its foot on the brakes, whenever it had a year of losses in an insurance line, rather than putting its foot on the gas and increasing net premiums earned at a double-digit clip.

    In separate phone calls (we were not on a conference call), I asked Dick and Kevin one simple, but powerful question, “Can you give me one example in all of business history of a leveraged financial institution growing a business line in the face of losses and that turning out well?” Both took a few moments to think and expressed that they could not think of one example. I then listed all of the leveraged financial institutions which had grown money-losing business lines, thereby doubling down on bets, which had run into mortal problems: AIG, Lehman Brothers, Bear Stearns, Citigroup, Banc of America, Merrill Lynch, etc, etc. I said that the burden of proof was on management to prove that the strategy of growing net premiums earned was prudent, rather than on me to prove that contracting premiums in the line was good risk control, given that personal lines lost money last year.

    In my conversation with Dick, I said that this latest financial crisis had proven once and for all that the ultimate responsibility for risk management lies with a company’s board of directors, and I requested a meeting with him and with the board. He said that he was not aware of any company in which the board met with investors. I replied with a variety of examples of boards that had met with shareholders, and he just repeated that investor relations would be handled by management and not by directors, refusing my request. I then requested a meeting between me, him, Kevin Kaastra, Kent Shantz, Skip Massucci, and any other underwriters he thought would be helpful to bring. He said yes, agreeing to bring Kent and Skip.


    I called some board members that week. Most of those I spoke with were extremely courteous and friendly. They could not have been more professional when I reached out to them over the phone. One was unaware of my blog, and I told him about the website. I was very pleased to connect with them and to make their acquaintance.

    Unfortunately, one board member, Dr. Monica Holmes, was atrociously rude. She seemed angry and standoffish. For example, when I got Dr. Holmes on the phone at 1:08 PM one afternoon, I introduced myself as a long term shareholder of the company. I said that it was an honor to speak with her, and that I was reaching out to her, because management had refused my request for a meeting with the board and that I wanted to express some concerns with the business to her personally.

    “Could I express to you my concerns with risk control?” I asked.

    She snapped at me angrily, “OK, but make it quick!”

    I was taken aback. You would think that anyone with a pulse in the past few years would be very concerned about risk management at a financial company. Given that she was a director of an insurance company (Fremont), and a business school dean at Central Michigan University no less, I was just shocked. Silently, I was thinking about the possibilities...Was she against risk management? Did she even care? Was she angry that a shareholder whose interests she was legally bound to represent as the director of a publicly traded corporation had the temerity to call her?

    I resolved to give her the benefit of the doubt, imagining that maybe something unspeakable had happened before I called to put her in such a foul mood.

    I explained that at a lot of the problem banks, they continued issue more loans as subprime losses mounted. I expressed concern that Fremont seemed to be continuing to grow personal lines in the face of losses. She then cut me off, seeming very, very upset.

    “Would there be some other time which would be more convenient to talk?” I asked. “I would be delighted to invite you to lunch anytime which would be good for you,” I assured her.

    However, my politeness in the face of her rudeness seemed to make her even angrier. She addressed me in the contemptuous, condescending tone one might use with a student who had fallen asleep during an exam.

    “I will inform Dick Dunning and the Chairman of the Board…. [she fumbled for a moment, seemingly flustered that she couldn’t recall his name]

    “Mr. VanSingel, ” I volunteered, embarrassed on her behalf.

    “Yes, Mr. VanSingel, that you called. You are welcome to bring up your concerns with management. Thank you for calling, have a nice day,” she said as she was hanging up.

    “Thank you for your time,” I replied as she slammed down the receiver.

    Wow. What a conversation. In my opinion, I have never met a board member at any public company with such a lack of good breeding. I just hope that Central Michigan University never chooses her to teach an investor relations class.


    Over coming days, I was taking a road trip through the South, but Kevin Kaastra and me went back and forth over email between bouts of intermittent internet coverage in the countryside. I suggested my lawyers’ offices in Grand Rapids, then they suggested their auditor BDO’s offices as a meeting spot. I informed them that I was bringing my counsel Tracy Larsen to the meeting. They objected. I then agreed not to bring him.

    While boarding my flight in Fort Lauderdale on the morning of the 30th, I called Kevin to confirm our meeting, and he confirmed that it was on, not mentioning any last minute problems or changes. After an uneventful (but delayed) flight, I called Kevin Kaastra to let him know I was running 25 minutes late, rented a car in Detroit, and drove two and a half hours to Grand Rapids.


    June 30, 2009 BDO Seidman Offices, Grand Rapids, MI

    I arrived at BDO’s offices a little after three. As I was speaking with the receptionist, Kevin Kaastra came up and greeted me warmly. After saying hi, I made a quick pit stop, then headed into the conference room. There were Kevin and Dick. But no sign of Kent or Francis. I couldn’t believe it.

    Dick hadn’t brought them. I had made the effort to travel from Florida to Michigan with the clear understanding that Kent and Francis would be at the meeting.  And Dick hadn’t even brought them from Fremont, an hour’s car ride away. The meeting’s agenda was about underwriting in personal lines. Skip is the head of personal lines. It was so insulting and disrespectful. I had expended time and energy to travel long distances to meet with them for the sole purpose of finding common ground on serious business issues which faced Fremont in personal lines.

    Not once in the days before had Dick or Kevin contacted me to let me know they wouldn’t be bringing Kent and Francis. Not in an email, not over the phone, not when I called earlier in the morning to confirm our meeting. It was quite a way to start off—with a proverbial slap in the face. Maybe I’m just old-fashioned. I do business on a hand shake. My word is my bond. I believe it is unethical to make commitments and then not to honor them. It is a way of treating people. Oh, well. I took a deep breath. I need to be the bigger person.

    In retrospect, I should have just walked out and given them four hours to produce Kent and Francis.

    [Continued in Part III]

    Disclosure: Harry Long owns FMMH shares directly, through partnerships, and through trusts. To the best of his knowledge, certain of his family members own FMMH shares through partnerships and trusts. Such ownership may change at any time.

    Stocks: FMMH
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