SNS takes 9.9% stake in P&C insurer

[wabuffo]

http://www.sec.gov/Archives/edgar/data/93859/000009385909000060/sc13d.htm

 

Well I guess you knew this was coming, eh?  Will this be Biglari's National Indemnity or Gen Re?

 

wabuffo

 

 

[oldye]

great minds think alike :)

[omagh]

Here are the recent financials:  

 

http://www.google.com/finance?q=OTC:FMMH

 

http://holdings.nasdaq.com/asp/Form4.asp?strFilter=T&sHead=&coname=Fremont+Michigan+InsuraCorp%2C+Inc%2E&market=OTCBB&selected=FMMH&symbol=FMMH&ads=1&SortOrder=a&SortColumn=5

 

http://www.sec.gov/cgi-bin/browse-edgar?company=fremont+michigan&CIK=&filenum=&State=&SIC=&owner=include&action=getcompany

 

http://www.fmic.com/company_6.html

 

-O

 

http://www.sec.gov/Archives/edgar/data/93859/000009385909000060/sc13d.htm

 

Well I guess you knew this was coming, eh?  Will this be Biglari's National Idemnity or Gen Re?

 

wabuffo

 

 

[rogermunibond]

It appears that Fremont has been the target of some investor activism.

 

www.buildfremont.com

 

Current website has nothing.  But Google cache has the goods.

 

 

*********************************

http://buildfremont.com/resource/whitepaper/HarryLong-RoadmapForExpansion.pdf

 

http://buildfremont.com/resource/presentation/HarryLong-FremontManagementPresentation.pdf

 

My name is Harry Long, and I am an investor in Fremont Michigan Insuracorp (FMMH). I believe that shares of companies are not just pieces of paper, but represent ownership in a real, living business enterprise. For years, my family and I have owned shares in Fremont Michigan Insuracorp. My goal as an investor is to help build Fremont into the strongest insurer in the Midwest, with an ethical and fair way of treating customers, employees, agents and investors that we can all be proud of.

 

In order to accomplish this vision, Fremont Michigan Insuracorp needs to become transparent, conservative in its underwriting, and a beacon for Fremont and the Midwestern community with strong corporate governance. Right now, Fremont needs to improve in each of these areas.

 

This story, about a living, breathing, tiny insurance company in a small town in Michigan, is not just about Fremont, but is a parable for what needs changing in the wider community of our country. I hope that this story reminds us that, as Americans, we all succeed best when we enlarge the pie, rather than seeing its size as static and spending time divvying it up amongst ourselves to get unfair portions. If we can help build a grassroots effort towards this goal, community by community, company by company, we can get the ball rolling in the right direction for America.

 

 

 

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. This growth has continued in the latest quarter reported at a high rate. Why is management growing a line with profitability that has declined for years and has now gone negative? If management and directors really understand that this is a grave problem, why haven't they stopped and indeed contracted the growth in premiums in this line until the issue of losses has been shown to be successfully remedied for at least two years?

  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 Fremont which loses money and investor support due to underwriting which results in losses, a lack of transparency and communication, and weak corporate governance practices can never employee more people and grow.

 

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.

 

[Packer16]

Does anyone who works in the insurance area have an opinion?  This sounds like it could be a difficult turn around due to the poor trend in underwriting today and in trenched management incentives.  Although Sadar has good experience in getting rid of bad management (in Friendly's and Stake n Shake), insurance firms are much more complex than restaurant (due to the culture effecting LT value).  Fairfax tried to do this with its two buys in the late 90s and it had a difficult time.  

 

The combined ratios are still around 100 but does anyone have insights into the reserving policy of this company?  Is it aggressive or conservative.  It appears that there has been historical redundancies in reserves but more recently there has been declines in cumulative redundancies when the growth increased.

 

Packer  

[Junto]

Does anyone who works in the insurance area have an opinion?  This sounds like it could be a difficult turn around due to the poor trend in underwriting today and in trenched management incentives.  Although Sadar has good experience in getting rid of bad management (in Friendly's and Stake n Shake), insurance firms are much more complex than restaurant (due to the culture effecting LT value).  Fairfax tried to do this with its two buys in the late 90s and it had a difficult time.  

 

The combined ratios are still around 100 but does anyone have insights into the reserving policy of this company?  Is it aggressive or conservative.  It appears that there has been historical redundancies in reserves but more recently there has been declines in cumulative redundancies when the growth increased.

 

Packer  

 

I am also concerned about the lack of liquidity if he cannot influence management. There is no exit opportunity without cratering prices. Similar to his investment in ITEX...On the positive he did purchase at less than book which is reassuring on some level.

[shalab]

This is neither National Indemnity nor Gen Re. I think this is the right move as the downside is pretty limited ( 3 million dollars ) compared to SNS market cap. If it works out, it could be huge. I would buy more SNS at current prices given this move.

 

cheers!

shalab

[Redskin212]

AM Best just upgraded Freemont

 

http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20091027006369&newsLang=en

[Guest Bronco]

This may be obvious to many (if so, I apologize) but the most recently released financial statements indicate that SNS is no longer a restaurant company but instead is a capital allocation company.  Free cash flow is the main focus, and I am a huge fan of that.  However, I do believe it is important that future cash flows don't nosedive b/c sufficient cash isn't allocated to maintaining quality restaurants.  Keep in mind - I am not an expert in this area, just my 2 cents.

 

A 10% stake in a small insurance company is interesting.  But SNS is a long way from becoming Berkshire Hathaway.  Baby steps.  I am curious if SNS will be as obsessed with investment float as Warren Buffett.

 

In full dislosure - I only own 10 shares of SNS - which basically means it is a radar stock ("on my radar").  Don't think it is really cheap right now, just very interesting.  I prefer owning FFH right now.  Good luck to all.

 

 

[Guest HarryLong]

Hi Guys,

 

I put the site back up. As I said in another thread, I am going update it. There was a very interesting post on the blog Farnam Street on the consistency principle. http://1440-68131.blogspot.com/2009/10/persuasion-tactics-presentation.html

 

To make a very long story relatively short, it's amazing how people will delude themselves into thinking that a dumb strategy is correct. Among underwriters, unfortunately, there are those who would rather be "right" than underwrite profitably.

 

Dick Dunning came from Gerber some years back, and in my view, you're getting some of the "more growth is better" philosphy when it comes to premium growth at Fremont. My number one goal is to get the company to practice proper underwriting discipline and risk control.

 

If any of y'all have any questions, I would be happy to answer them.

 

Cheers,

 

Harry

 

 

203-564-0258

[Parsad]

Hi Harry,

 

Welcome to the board!  Cheers!

[valuecfa]

Hi guys,

 

I thought this disclosure might be worth mentioning:

 

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:

 

 

  •  

 

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

 

 

  •  

 

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

 

 

  •  

 

Restrictions on voting of common stock by any individual, entity or group owning more than 10% of the common stock;

 

 

  •  

 

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

 

 

  •  

 

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 Fremont Common Stock, to merge or consolidate Fremont with any other entity, or to purchase or acquire all or substantially all of Fremont'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 Fremont and its shareholders; and

 

 

  •  

 

The shareholder rights plan.

 

In addition, the Michigan Insurance Code provides that no person may acquire 10% or more of our voting stock, or more than 5% of our voting stock within 5 years of the conversion, without approval of the Commissioner of Michigan’s Office of Financial and Insurance Regulation (“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.

[Guest HarryLong]

Hi Harry,

 

Welcome to the board!  Cheers!

 

Thanks, Parsad!

[dowfin1]

"If any of y'all have any questions, I would be happy to answer them."

 

Hi Harry,

 

I read some of your blog and agree that the expansion of the personal lines does not make sense based on the numbers.  What do you think is Mgts'. thinking behind this move?  Is it in any way related to the fact that there are potentially conflicted producers on the board?  Is it feasible that this co. would benefit from a WEST/SNS/Friendlys style activism, and if so through what means?

 

 

[Guest HarryLong]

"If any of y'all have any questions, I would be happy to answer them."

 

Hi Harry,

 

I read some of your blog and agree that the expansion of the personal lines does not make sense based on the numbers.  What do you think is Mgts'. thinking behind this move?  Is it in any way related to the fact that there are potentially conflicted producers on the board?  Is it feasible that this co. would benefit from a WEST/SNS/Friendlys style activism, and if so through what means?

 

 

 

From my interactions with Dick Dunning, his answer to my arguments seems to be varying versions of "well, we think we're right."

 

My responses are generally:

 

I. Give me one example at a financial firm where growing a money-losing line went well (they never can come up with one).

 

II. What makes you think that you can do something different than well run insurers, such as Berkshire (contracting premiums in order to maintain profitability) and make money? (Dunning never has a clear answer, but indicates that their agents would not be happy with premium contraction. I always reply that his fiduciary duty is to shareholders, not agents.)

 

III. At times, CEO Dick Dunning, COO Kent Shants, and VP Skip Massucci have argued that they have a well thought out plan. I respond that their plan is not working and that they need a new plan. Adherence to plan is not a success metric. Underwriting profits are the measure of success. Sticking to a dumb plan is a sign of delusion brought on by the consistency principle, not discipline.

 

Bottom line: In my opinion, Dunning, Shantz, and Massucci have to go. David Mangin (a great guy), head of IT, and maybe Kevin Kaastra, CFO, should stay.

 

The management is certaintly not going to all resign on their own, are they? ;)

[Packer16]

Harry,

 

Based upon your interactions and understanding with how the firm operates, how embedded is the top management philosophy (growing with marginal if not negative profitability) in the employees specifically in the underwriting and distribution folks?  If this philosophy changed, how many folks would have to be replaced? Did you get a sense that there were any shortcuts in underwriting and reserving to preserve/enhance this growth?  TIA

 

Packer

[Guest HarryLong]

Harry,

 

Based upon your interactions and understanding with how the firm operates, how embedded is the top management philosophy (growing with marginal if not negative profitability) in the employees specifically in the underwriting and distribution folks?  If this philosophy changed, how many folks would have to be replaced? Did you get a sense that there were any shortcuts in underwriting and reserving to preserve/enhance this growth?  TIA

 

Packer

 

Just to be clear, they will look you in the eye and say that they underwrite with the aim of underwriting profits, but the torrid growth in premiums speaks for itself.

 

Skip Massucci is head of pricing, and he would have to go right away. Skip also handles a lot of their personal lines. Kent handles the commercial lines, in addition to being COO. My interaction is really at that level.

 

However, let's talk nuts and bolts. A fantastic underwriter in the Midwest costs around $90,000 a year. You can fire Dunning, Skip, and Shantz, and reduce payroll expenses to below current numbers if you hire 3-4 great new underwriters, so why take any chances? As Charlie Munger once opined, if you really need to spend money on something, and you don't, you're already paying for it.

 

From what I can see, their reserving is solid. It's the growth/pricing trade-off that I totally disagree with.

[Guest HarryLong]

Harry,

 

Based upon your interactions and understanding with how the firm operates, how embedded is the top management philosophy (growing with marginal if not negative profitability) in the employees specifically in the underwriting and distribution folks?  If this philosophy changed, how many folks would have to be replaced? Did you get a sense that there were any shortcuts in underwriting and reserving to preserve/enhance this growth?  TIA

 

Packer

 

In terms of agents, I have advocated publicly and privately that the company go to agents with substandard loss ratios and ask them to cancel their contracts (almost all do, if asked). So really, that is a question of blocking and tackling. Finding the appropriate time period, perhaps ranking them within their geographic area to adjust for differences in weather/storms/etc. There are a few ways of doing it, but that's the road Fremont needs to go down, in my opinion.

[nshah]

http://valueinvestingworld.blogspot.com/2008/07/find-in-fremont.html

[Williams406]

Harry,

 

One of the reports you posted on your site summarizing a conversation with Fremont's management indicated that management believed their personal lines business would turn profitable at some point in the future. It seems to me that would suggest they hold the view that some combination of the following is likely to occur down the road: Lower underwriting expenses, lower losses, or higher premiums. Have they expressed to you their rationale for believing future personal lines experience will be better than it is now?

 

Williams

[Guest HarryLong]

Harry,

 

One of the reports you posted on your site summarizing a conversation with Fremont's management indicated that management believed their personal lines business would turn profitable at some point in the future. It seems to me that would suggest they hold the view that some combination of the following is likely to occur down the road: Lower underwriting expenses, lower losses, or higher premiums. Have they expressed to you their rationale for believing future personal lines experience will be better than it is now?

 

Williams

 

If memory serves, there were a lot of platitudes about how insurance is a cyclical business. However, I think it is important to remember that personal auto and homeowners is very short tail business. In my view, their cyclical argument is an excuse for poor performance.

[mmiller]

A Find in Fremont - Update

 

In July of 2008, I posted a write-up on Fremont Michigan Insuracorp ('A Find in Fremont'). This week, the company has of course gotten a little more notice as Steak n Shake took a stake in the company. Another shareholder has also gone public with concerns about the company and its management over the last several months. As a result, I decided it was a good time to provide an update on the company, what my guesses are about Mr. Biglari's intentions, and why I believe the concerns about the company and its management team are not valid.

 

You can find it here:  http://www.chanticleeradvisors.com/files/107293/A%20Find%20in%20Fremont%20-%20An%20Update.pdf

 

[Guest HarryLong]

A Find in Fremont - Update

 

In July of 2008, I posted a write-up on Fremont Michigan Insuracorp ('A Find in Fremont'). This week, the company has of course gotten a little more notice as Steak n Shake took a stake in the company. Another shareholder has also gone public with concerns about the company and its management over the last several months. As a result, I decided it was a good time to provide an update on the company, what my guesses are about Mr. Biglari's intentions, and why I believe the concerns about the company and its management team are not valid.

 

You can find it here:  http://www.chanticleeradvisors.com/files/107293/A%20Find%20in%20Fremont%20-%20An%20Update.pdf

 

 

As I've said before on the buildfremont.com thread on the general discussion board, I respect Matt a lot. There is nothing wrong with different opinions--that's what makes a market.

 

I think that it's important for Fremont shareholders and those doing investment research to come to their own conclusions.

 

There is really only one way to settle the debate:

 

Give CEO Dick Dunning a call at 231-924-0300 and judge for yourself whether his answers to questions are reasonable, well thought out, and demonstrate a good philosophy and knowledge of insurance underwriting.

 

Ask him some questions and maybe ask him a few that I posed in meetings (which are on the buildfremont.com blog). His answers may be enlightening and will let people form their own opinions about his competence.

 

Just an idea. What was it Peter Lynch said? Rather than try to deduce the number of teeth in a horse's mouth from philosophical first principles, just look in the horse's mouth and count the teeth  :)

 

Cheers,

Harry

[limbacmf]

An interesting side note to the SNS investment.  About a month before Sardar began his investment in Fremont, Frank Kavanaugh purchased  6.75% of the company. 

 

http://www.sec.gov/Archives/edgar/data/1271245/000117152009000462/eps3470.htm

 

Who is Frank Kavanaugh? He's the Managing Director of Fort Ashford Funds, a private equity firm that specializes in insurance companies. 

 

http://fortashford.com/fort-ashford/our-people-leadership/frank-p-kavanaugh

 

I wonder if Sardar has a business partner in this deal.

[mmiller]

Fremont reported results this morning.

 

http://finance.yahoo.com/news/Fremont-Michigan-InsuraCorp-iw-557215332.html?x=0&.v=1

 

Cheers,

 

mmiller