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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

OR

For the transition period from              to             

No. 000-50926

(Commission File Number)

FREMONT MICHIGAN INSURACORP, INC.

(Exact name of Registrant as specified in its charter)

(231) 924-0300

(Registrant’s telephone number, including area code)

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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FORWARD-LOOKING STATEMENTS

Fremont Michigan InsuraCorp, Inc. (the “Holding 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 Quarterly Report on Form 10-Q and the exhibits hereto and thereto), in its reports to shareholders and in other communications by the Holding 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, forecast, estimated or budgeted in the forward-looking information. These factors, which are listed below, are difficult to predict and many are beyond our control:

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 Holding 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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Fremont Mutual Insurance Company

Balance Sheets (Unaudited)

September 30, 2004 and December 31, 2003

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

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Fremont Mutual Insurance Company

Statements of Operations (Unaudited)

For the Nine Months Ended September 30, 2004 and 2003

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

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Fremont Mutual Insurance Company

Statements of Operations (Unaudited)

For the Quarter Ended September 30, 2004 and 2003

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

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Fremont Mutual Insurance Company

Statement of Policyholders’ Surplus (Unaudited)

For the Nine Months Ended September 30, 2004

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

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Fremont Mutual Insurance Company

Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, 2004 and 2003

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

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Fremont Mutual Insurance Company

Notes to Financial Statements (Unaudited)

The financial information for the interim periods included herein is unaudited; however, such information reflects all adjustments which are, in the opinion of management, necessary to a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of results to be expected for the full year.

These financial statements should be read in conjunction with the financial statements and notes for the year ended December 31, 2003 included in the Company’s registration statement No. 333-1112414 filed with the SEC.

The Company’s comprehensive income for the nine months ended September 30, 2004 and 2003 is as follows:

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Fremont Mutual Insurance Company

Notes to Financial Statements (Unaudited)

The Company’s comprehensive income (loss) for the quarters ended September 30, 2004 and 2003 is as follows:

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.

The Company evaluates product line profitability based on underwriting gain (loss). Certain expenses are allocated based on assumptions and estimates made by management. Underwriting gain (loss) 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, other income (expense), interest expense or demutualization expenses to its product lines. In addition, the Company does not separately identify depreciation expense related to its home office building by product line and such disclosure would be impracticable.

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Fremont Mutual Insurance Company

Notes to Financial Statements (Unaudited)

Segment data for the nine months ended September 30 are as follows:

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Fremont Mutual Insurance Company

Notes to Financial Statements (Unaudited)

Segment data for the quarters ended September 30 are as follows:

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Fremont Mutual Insurance Company

Notes to Financial Statements (Unaudited)

The Company provides certain postretirement health care benefits for retired employees. The components of the net periodic benefit cost are as follows:

The Company has not made and does not expect to make a contribution to its other postretirement plan in 2004.

Premiums earned are net of amounts ceded of $10,756,632 and $13,972,808 for the nine months ended September 30, 2004 and 2003, respectively. Loss and loss adjustment expenses are net of amounts ceded of $7,837,563 and $8,428,011 for the nine months ended September 30, 2004 and 2003, respectively.

Premiums earned are net of amounts ceded of $2,747,673 and $4,927,069 for the quarter ended September 30, 2004 and 2003, respectively. Loss and loss adjustment expenses are net of amounts ceded of $2,466,845 and $2,627,177 for the quarter ended September 30, 2004 and 2003, respectively.

On October 15, 2004, Fremont Michigan InsuraCorp, Inc. (the “Holding Company”) acquired all of the authorized shares of Fremont Insurance Company (the “Insurance Company”), the company resulting from the conversion of Fremont Mutual Insurance Company from the mutual to stock form of insurer. The conversion will be accounted for as a simultaneous conversion, recapitalization and share offering which will not change the historical accounting basis of the Insurance Company’s financial statements. The Holding Company commenced the stock offering on August 6, 2004 and it was concluded on October 6, 2004. On October 15, 2004 the Holding Company issued and sold 862,118 shares of its Common Stock at $10 per share which raised approximately $7.4 million in net proceeds.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Our Conversion and Stock Offering

On October 15, 2004, Fremont Michigan InsuraCorp, Inc. (the “Company” or the “Holding Company”) acquired all of the authorized shares of Fremont Insurance Company (the “Insurance Company”), the company resulting from the conversion of Fremont Mutual Insurance Company from the mutual to stock form of insurer (the “Conversion”). Prior to the Conversion and since 1876, Fremont Mutual Insurance Company conducted business as a Michigan domiciled mutual property and casualty insurer. The Holding Company was formed on November 18, 2003 for the purpose of acquiring all of the stock of the Insurance Company.

On August 25, 2003, the Insurance Company’s board of directors unanimously adopted the Plan of Conversion. Our Plan of Conversion was approved on April 15, 2004, by the Michigan Office of Financial and Insurance Services (“OFIS”). A Special Meeting of Policyholders was held on August 4, 2004 to vote on the approval of the Plan. The Plan was adopted by more than 93% of votes cast. However, on August 23, 2004, we discovered that approximately 1,300 Eligible Policyholders were omitted from the mailing list and did not receive written notice of the Special Meeting. To correct this, the Insurance Company held a new Special Meeting of Policyholders on September 28, 2004. The Plan of Conversion was approved by more than two-thirds of the votes cast by eligible policyholders at the new Special Meeting of Policyholders held on September 28, 2004.

The Holding Company initially filed a Form S-1 Registration Statement for its Common Stock Offering on February 4, 2004. The Securities and Exchange Commission declared the registration statement effective on August 6, 2004. The Holding Company commenced the stock offering on August 6, 2004 and it was concluded on October 6, 2004. On October 15, 2004 the Holding Company issued and sold 862,118 shares of its Common Stock at $10 per share which raised approximately $7.4 million in net proceeds.

Except for $250,000 that was retained for administrative expenses, the Holding Company, in exchange for all of the stock in the Insurance Company, contributed to the Insurance Company all of the net cash proceeds from the sale of the Holding Company Common Stock. The contribution will substantially increase the Insurance Company’s surplus that will, in turn, enhance policyholder protection and increase the amount of funds available to support both current operations and future growth. The holding company structure also provides greater flexibility for diversification of business activities in the future, although no other business activities are currently planned. We believe that this increased capital and operating flexibility will enable us to compete more effectively with other insurance companies. In addition, the conversion will enhance our future access to the capital markets.

The conversion will be accounted for as a simultaneous conversion, recapitalization and share offering which will not change the historical accounting basis of the Insurance Company’s financial statements.

The unissued common stock authorized by the Articles of Incorporation of the Holding Company will permit us to raise additional equity capital through further sales of securities. Presently, we have no plans to make additional offerings of securities after the conversion, other than the proposed issuance of additional shares under our stock-based compensation plan. Following the conversion, we also will be able to use stock-based incentives to attract, motivate and retain highly qualified employees.

General

The Insurance Company is a Michigan licensed property and casualty insurer operating exclusively in the State of Michigan and writing principally personal lines, commercial lines, farm and marine insurance policies through independent agents. We use accounting principles that are in compliance with those generally accepted in the United States of America (GAAP). Management’s discussion and analysis covers the Insurance Company’s financial condition and results of operations for the three months and nine months ended September 30, 2004 and 2003. The Insurance Company’s fiscal year ends on December 31.

Critical Accounting Policies

General. We are required to make estimates and assumptions in certain circumstances that affect the amounts reported in our financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on historical developments, market trends, industry trends and other data we believe to be reasonable under the circumstances. There can be no assurance that actual results will conform to our estimates and assumptions, and that reported results of operation will not be adversely affected by the need to make accounting adjustments to reflect changes in these estimates and assumptions from time to time. We believe the following policies and procedures are among the most sensitive to estimates and judgments.

Liabilities for Loss and Loss Adjustment Expenses (LAE). These liabilities are estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported to the Insurance Company. The amount of the reserve for reported claims is based primarily on a case-by-case evaluation of the type of risk involved, knowledge of the circumstances surrounding each occurrence, and the insurance policy provisions relating to the type of loss. The amounts of loss reserves for unreported claims and loss adjustment expense reserves are calculated by using historical and actuarial information by line of business as adjusted to current conditions. Inflation is implicitly provided for in the reserving function through analysis of costs, trends and comparisons of historical reserving results to the ultimate results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Reserves are estimates. We expect that these estimates will be more or less than the amounts ultimately paid when the claim is settled. Changes in estimates, or differences between estimates and amounts ultimately paid, are reflected in the current financial statements.

Loss reserving techniques, which rely on historical information as adjusted to reflect current conditions, have been consistently applied during the periods presented. Changes in the estimate of the liability for losses and LAE reflect actual payments and evaluations of new information and data since the last report. Because of the nature of insurance claims, there are uncertainties inherent in the estimates of the ultimate loss payment. Court decisions, regulatory changes and economic conditions can affect the ultimate cost of claims that occurred in the past as well as uncertainties regarding future loss cost trends. The ultimate liability for unpaid losses and LAE will differ from the amount recorded at the last reported date.

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The property and casualty insurance industry generally has incurred substantial aggregate losses from claims related to asbestos-related illnesses, environmental remediation, product and construction defect liability, mold and other uncertain exposures. However, the Insurance Company has not experienced significant losses from these types of claims.

The following table shows the loss and LAE reserves by major business segment as of September 30, 2004 and December 31, 2003 (in thousands):

The reserves are reported gross of any amounts recoverable from reinsurers and are reduced for anticipated salvage and subrogation. Anticipated salvage and subrogation as of September 30, 2004 and December 31, 2003, was approximately $547,000 and $794,000, respectively.

The increase in personal lines loss and LAE reserves from December 31, 2003 to September 30, 2004 is due to increased claim severity in the homeowners and private auto product lines coupled with normal volume growth in written exposures. The commercial segment loss and LAE reserves were impacted by fire losses during the nine months ended September 30, 2004. As of September 30, 2004, the commercial lines loss and LAE reserves included approximately $639,000 relating to two larger commercial fire losses that occurred during the period.

The total liability for unpaid losses and loss adjustment expenses includes both reported and IBNR reserves. An actuarial point estimate is developed from the use of three actuarial loss development methodologies; they are the paid loss development method, the incurred loss development method and the Bornhuetter-Ferguson expected loss ratio method. Each method calculates a different amount. These three methods use ten years of historical accident year development of recorded reserves. The development over time is used to establish a factor to calculate the point estimate. The key assumptions used in management’s selection of ultimate reserves include actuarial methodologies, a review of current pricing and underwriting initiatives and a detailed claim analysis with emphasis on how aggressive claims handling may be impacting the paid and incurred loss data contained in the actuarial methods. 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.

Investments. Our investment securities are classified as available for sale. Investments classified as available for sale are available to be sold in the future in response to the Insurance Company’s liquidity needs, changes in market interest rates, tax strategies and asset-liability management strategies, among other reasons. Available for sale securities are reported at fair value, with unrealized gains and losses reported in the accumulated other comprehensive income component of shareholders’ equity, net of deferred taxes and the corresponding deferred tax asset valuation allowance.

Other Than Temporary Impairments of Securities and Unrealized Losses on Investments. We review the status and market value changes of our securities 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 investments for other than temporary impairment, we consider, in addition to a security’s market price history, 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 markets conditions, analyst expectations, and our intent and ability to retain fixed maturity securities for a period of time sufficient to allow for anticipated recovery in market value, in their totality to reach our conclusions.

Additionally, our impairment evaluation and recognition for interests in mortgage-backed/asset-backed securities is conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. Under this guidance, impairment losses on securities must be recognized if the fair value of the security is less than both its book value and the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. As a result of this evaluation process, there were no impairment losses recorded in mortgage-backed/asset-backed securities during the three months and nine months ended September 30, 2004 and 2003.

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During the three and nine month periods ended September 30, 2004, there were no securities that the Insurance Company determined to be other than temporarily impaired. During the three and nine month periods ended September 30, 2003, the Insurance Company recorded a pretax charge to earnings, included in net realized gains (losses) on the statement of operations, of approximately $179,000 relating to equity securities that the Insurance Company determined were other than temporarily impaired. At September 30, 2004 and December 31, 2003 gross unrealized depreciation on available for sale securities, which were not impaired, was approximately $283,000 and $176,000, respectively. The unrealized depreciation in values is viewed as being temporary.

Policy Acquisition Costs. We defer certain policy acquisition costs, which vary with, and are directly related to, the production of business. In our case, these deferred costs consist primarily of agent commissions incurred net of ceding commissions earned. These costs are amortized over the effective period of the related insurance policies. The method followed in computing deferred policy acquisition costs limits the amount of deferred costs to their estimated realizable value, which gives effect to the premium earned, related investment income, loss and loss adjustment expense and certain other costs expected to be incurred as the premium is earned. Future changes in estimates, the most significant of which is expected to be loss and loss adjustment expense, may require accelerated amortization of deferred policy acquisition costs. Deferred policy acquisition costs at September 30, 2004 and December 31, 2003 were approximately $2,712,000 and $295,000, respectively. The increase in deferred policy acquisition costs as of September 30, 2004 is due to the runoff of the quota share reinsurance agreement. Effective January 1, 2004, the Insurance Company is no longer receiving a ceding commission because it is no longer ceding written premiums to the reinsurers under the quota share agreement. Historically, under the quota share agreement when written premiums were ceded to the reinsurer the Insurance Company earned a 36% ceding commission. As noted above, ceding commissions earned were a component of the deferred policy acquisition cost calculation.

Reinsurance. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. These balances are the amounts we expect to collect from our reinsurers for settled claims and for claims that are in the process of adjustment but have not been completely settled. Premiums paid for reinsurance contracts are recognized over the contract period during which the reinsurance coverage attaches to the underlying policy. Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and LAE are reported separately as assets, instead of being netted with the associated liabilities, because reinsurance does not relieve us of our legal liability to the claimants. Additionally, the same uncertainties associated with estimating unpaid loss and LAE affect the estimates for the ceded portion of these liabilities. We continually monitor the financial condition of our reinsurers.

At September 30, 2004, the Insurance Company had a recoverable amount of $11,543,000 from reinsurers. This balance was comprised of $1,838,000 for paid losses, $9,141,000 for unpaid losses and $564,000 in unearned premium ceded to the reinsurers. At December 31, 2003, the Insurance Company had a recoverable amount of $16,986,000 from reinsurers. This balance was comprised of $863,000 for paid losses, $7,742,000 for unpaid losses and $8,381,000 in unearned premium ceded to the reinsurers.

The effect of reinsurance on premiums written and earned for the three months ended September 30, 2004 and 2003, are as follows:

The effect of reinsurance on premiums written and earned for the nine months ended September 30, 2004 and 2003, are as follows:

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Loss and loss adjustment expenses reported on the statement of operations are net of ceded amounts of approximately $2,467,000 and $2,627,000 for the three month periods ended September 30, 2004 and 2003, respectively. Loss and loss adjustment expenses reported on the statement of operations are net of ceded amounts of approximately $7,838,000 and $8,428,000 for the nine month periods ended September 30, 2004 and 2003, respectively.

The Insurance Company receives a ceding commission in conjunction with its reinsurance activities. These ceding commissions which are a component of deferred policy acquisition costs, were approximately $19,000 and $1,571,000 for the three month periods ended September 30, 2004 and 2003, respectively, and $42,000, and $3,944,000 for the nine month periods ended September 30, 2004 and 2003, respectively. The significant decline in ceding commission as of September 30, 2004 is due to the runoff of the quota share agreement. As previously discussed, effective January 1, 2004 the Insurance Company is no longer ceding written premiums to the reinsurer under the quota share agreement and therefore is no longer earning ceding commission.

2003 Multi Line Quota Share Agreement Runoff. During 2003, the Insurance Company ceded 45% of its remaining net premiums and losses, after the effect of ceding premiums and losses under the excess of loss and catastrophe excess of loss reinsurance agreements, on all business except boiler and machinery to the reinsurers under a multi line quota share agreement. The Insurance Company received a 36% commission on the ceded premium written. The agreement was structured on a funds withheld basis and required the Insurance Company to accrue interest at an annual rate of approximately 2.5%. The agreement provides that a profit commission will be retained by the Insurance Company upon commutation equal to the positive balance in the funds withheld account. In addition to ceding a significant portion of its risks to the reinsurer, the agreement also allows the Insurance Company to reduce its financial leverage and to realize immediate reimbursement for related upfront acquisition costs, thus adding to its financial capacity.

As part of our strategy to reduce our quota share reinsurance, the Insurance Company placed the multi line quota share agreement into runoff on December 31, 2003. This decision was based on several factors. Historically, the Insurance Company has ceded positive underwriting results to the reinsurers under the quota share agreement. This means that the Insurance Company has ceded more premium revenue than losses and loss adjustment expense to the reinsurers. Furthermore, as a result of more stringent risk transfer requirements with respect to quota share reinsurance coverage it became evident that the cost of purchasing quota share reinsurance coverage for 2004 as well as possibly reducing the quota share percentage was cost prohibitive to the Insurance Company.

In addition, the impetus for originally obtaining quota share reinsurance coverage in 1997 was to improve the ratio of net written premiums to statutory surplus. As a result of ceding written premiums to the reinsurer under quota share reinsurance agreements the Insurance Company has been able to maintain a sufficient ratio of net written premiums to statutory surplus. Furthermore, since 1997 the Insurance Company’s statutory surplus has grown from $9.0 million to $15.7 million as of the end of 2003. Moreover, the Insurance Company continues to limit its exposure by maintaining coverage under other treaty and facultative reinsurance agreements including catastrophe and excess of loss programs.

Despite placing the multi line quota share reinsurance agreement into runoff, reinsurance coverage will continue on those covered policies in force as of December 31, 2003 until the underlying policies expire during 2004. Losses from the policies in force will continue to be ceded to the reinsurer until the underlying policies expire in 2004. As a result, the underlying reinsurance assets and liabilities, under the multi line quota share reinsurance agreement, will runoff and any net funds in the funds withheld account would be retained by the Company.

As a result of placing the agreement into runoff the Insurance Company will also increase its exposure and risk with respect to potential losses which may cause our loss reserves to increase. However, the Insurance Company will also increase its net written premiums due to the fact that premiums written in 2004 will no longer be ceded to the reinsurer under a quota share agreement.

At September 30, 2004, there was approximately $374,000 in ceded unearned premium under the multi line quota share agreement. As of December 31, 2004, the ceded unearned premium balance will be reduced to zero as the covered policies expire during 2004. During 2003, the Insurance Company’s ceded premiums written and ceded premiums earned under the multi line quota share agreement were approximately $13.8 million and $13.2 million, respectively. For the three months and nine months ended September 30, 2004 the insurance company recorded ceded premiums earned of $1.0 million and $6.8 million, respectively, under the multi line quota share agreement. The Company has accrued a profit commission based upon the experience of the underlying business ceded to this reinsurance agreement, in the amounts of $370,000 and $945,000 for the three and nine months ended September 30, 2004, respectively. The profit commission reduces ceded written and earned premiums.

The Insurance Company will continue to cede loss and LAE on claims incurred under the policies in force at December 31, 2003. All new policies written in 2004 and policies renewed in 2004 will no longer be covered by the multi line quota share agreement. As a result, the Insurance Company will retain the loss and LAE that otherwise would have been ceded to the reinsurer under the former agreement.

As noted above, the Insurance Company received a 36% ceding commission on ceded premium written. During 2003, the Insurance Company recorded ceding commission under the multi line quota share agreement of approximately $5.3 million which is

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deferred and then amortized to expense, over the period in which the related premiums are earned, as a component of deferred policy acquisition costs. The Insurance Company will not record any ceding commission in 2004 due to the fact that no additional premiums written will be ceded to a reinsurer under a multi line quota share agreement.

Income Taxes. Deferred federal income tax assets and liabilities are recognized for the expected future tax consequences attributable to the differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets primarily relate to deductible temporary differences for unpaid losses and loss adjustment expenses and unearned premiums, as well as minimum tax credit carry forwards. We review our net deferred federal tax asset on a regular basis for recoverability based on the availability of future taxable income in the years when the deductible temporary differences are expected to reverse. As a result of this review, we have established a 100% valuation allowance at September 30, 2004, which reduces the Insurance Company’s net deferred tax asset to zero.

Results Of Operations – Three Months Ended September 30, 2004 and 2003

Premiums. Direct written premium by major business segment for the three months ended September 30 was as follows:

Direct written premiums for the personal segment increased primarily as a result of growth in the number of policies in the homeowners and private passenger auto product lines. The commercial segment’s direct written premium decreased 12.5% due to rate softening which is reflective of current market conditions and the non-renewal of larger commercial exposures that were deemed to be outside of the Insurance Company’s target market. Written premium has also been affected by rate softening in the commercial market. Direct written premiums for the farm and marine segments grew as a result of increased number of policies and rate increases.

Net written premium by major business segment for the three months ended September 30 was as follows:

Net written premium increased $5,177,000 or 97.7% for the three months ended September 30, 2004 compared to the same period in 2003. Approximately, $4,724,000 of the increase is due to a reduction in written premium ceded under the quota share reinsurance contract which was placed into runoff on January 1, 2004. The remaining increase of $453,000 includes an increase of $702,000 due to increased policies written and rate increases during the period offset by an increase of $249,000 in ceded written premium under the Insurance Company’s catastrophe and excess of loss reinsurance agreements.

Net premium earned by major business segment for the three months ended September 30 was as follows:

Net premium earned increased $3,031,000 or 71.1% for the three months ended September 30, 2004 as compared to the same period in 2003. Net premium earned increased $836,000 as a result of growth in policies and rates and $2,449,000 due to the decline in earned premium ceded to the reinsurer under the quota share reinsurance contract. The increase was offset by an increase of $254,000 in ceded premium earned under the Insurance Company’s catastrophe and excess of loss reinsurance agreements.

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Investment Income. Net investment income, excluding net realized gains and losses, increased $116,000, or 82.8%, during the three months ended September 30, 2004 to $256,000 from $140,000 during the same period in 2003. The rate of return on invested assets, including cash and cash equivalents, increased to 2.7% during the three months ended September 30, 2004 from 1.8% during the same period in 2003. The increase in the rate of return is due to lower investment expenses incurred during the three months ended September 30, 2004 compared to the same period in 2003. Average invested assets during the three months ended September 30, 2004 compared to September 30, 2003 increased $6,809,000 or 22.3%. The growth in invested assets was primarily due to increased net cash flows provided from operating activities during 2003 which was used for acquiring investment securities during 2004.

Other Income. Other income primarily includes premium installment charges, fees for non-sufficient fund checks, late payment fees and other miscellaneous income and expense items. Other income was approximately $75,000 for the three months ended September 30, 2004 compared to $76,000 for the same period in 2003.

Loss and Loss Adjustment Expenses (LAE). The Insurance Company’s net loss and LAE by major business segment as well as the loss and LAE ratios for the three months ended September 30 are shown in the tables below: