Examination Reports : Bureau of Insurance

Pursuant to your instructions and in accordance with the provision of 24-A M.R.S.A. § 221, the Maine Bureau of Insurance (hereinafter, "Bureau") conducted an examination of the condition and financial affairs of

MMG INSURANCE COMPANY

(hereinafter, "Company"), as of December 31, 2006.

The examination, performed at the Company's home office in Presque Isle, Maine, was made in accordance with the standards and procedures established by the Bureau and the National Association of Insurance Commissioners (hereinafter, "NAIC") and accordingly, included tests of the accounting records and other procedures considered necessary under the circumstances.

The accompanying financial statements have been prepared in accordance with statutory accounting practices prescribed or permitted by the NAIC and the Bureau. These practices differ in certain respects from generally accepted accounting principles (hereinafter, "GAAP").

For purposes of this report, comments on various items may be limited to matters involving departure from laws, rules or regulations, a significant change in the amount of the item, or where an explanation, comment and/or recommendation is warranted.

The following report is respectfully submitted.

DESCRIPTION OF COMPANY

The Company, a property/casualty insurer, is domiciled in the State of Maine with corporate headquarters located in Presque Isle, Maine. The Company was last examined as of December 31, 2003 by the Bureau.

SCOPE OF EXAMINATION

The Bureau conducted a routine statutory examination of the Company covering the period of January 1, 2004 to December 31, 2006. The full-scope examination was performed using the specific risk analysis approach. The following matters were reviewed to assess their impact on financial condition and conformity with related laws.

Company History

The Company was incorporated on May 22, 1897 in the State of Maine and commenced writing business during that year.

On March 15, 2002, the Company completed the conversion of Maine Mutual Fire Insurance Company to MMG Insurance Company, a stock insurance company; the formation of Maine Mutual Group, a mutual holding company; and the formation of MMG Financial Services, Inc., a stock holding company. MMG Insurance Company is the same legal entity that it was before conversion. Pursuant to Maine law, the converted insurer is a continuation of the insurer in its mutual form and the conversion does not annul, modify or change any of the insurer's existing suits, rights, contracts or liabilities.

Management and Control

Management of the Company is vested in not less than seven (7) and not more than fifteen (15) members of the Board of Directors. The following is a list of the duly elected twelve-member Board of Directors and the Officers serving as of December 31, 2006:

Directors

Tom E. Gagnon, Chairman	George H. Ellis, Honorary
Donald W. Perkins, Jr.	John H. Cashwell, III
Dawn Hill	Jon J. Prescott
Samuel W. Collins	Michael D. MacPherson
Larry M. Shaw	Harold A. Dakin
Jay Y. McCrum	Lisa M. Ventriss

Officers

Larry M. Shaw	President/CEO
Roger J. Roy	Exec.VP/Secretary/Treasurer/COO
Michael M. Young	Chief Financial Officer/Vice President
Matthew R. McHatten	Senior VP External Operations
Steven D. Chandler	Vice President
Pamela J. Johnson	Vice President
Timothy W. Vernon	Vice President
Lynn M. Lombard	Vice President

Each Director and Officer of the Company is required to complete a conflict of interest statement annually to disclose any material interest or affiliation which is likely to be in conflict with his/her official duties and responsibilities to the Company.

Corporate Records

The Company's Articles of Incorporation, Bylaws, and Minutes of the Board of Directors' meetings held during the period of examination were reviewed. On March 15, 2002, the Company's Articles of Incorporation were amended and restated in accordance with the change from a mutual insurance company to a stock insurance company and new Bylaws were adopted. Review of these records indicates that the Company is operating in accordance with its Articles and Bylaws.

Fidelity Bond and Other Insurance

The Company carries both a Financial Institution Bond and a Fiduciary Responsibility Policy that covers both the Employee Retirement Plan and the 401(k) Plan. Each policy carries a limit of liability of $2,000,000. The Company's Other Insurance coverage includes usual and customary coverage for property, casualty and workers' compensation coverage.

Officers', Employees' and Agents' Welfare and Pension Plans

The Company has a defined benefit pension plan covering substantially all its employees. The benefits are based on years of service and the employee's average compensation.

The Company adopted a postretirement benefit plan in 2004 which covers 50% of Medicare supplement costs and prescription drugs at normal retirement age of 65 for officers of the Company. For currently retired officers, the benefit is 100%. This postretirement benefit plan is an unfunded plan.

The Company adopted a 401(k) Profit Sharing Plan on July 1, 1995. Since inception, the Company has approved a discretionary match of employee compensation contributed to the plan subject to approval by the Board of Directors.

Effective July 1, 2006, the Board of Directors, in compliance with Internal Revenue Service Section 409A, established voluntary non-qualified deferred compensation plans for executives and directors.

Territory and Plan of Operation

The Company insures property and casualty risks located in Maine, New Hampshire, Vermont, and Pennsylvania (effective March 14, 2006).

The Company offers a variety of Commercial Lines products including Businessowner, Commercial Package, Special Trade Contractor, Farmowner, Inland Marine, Commercial Auto and Commercial Umbrella. Commercial Lines represents nearly 26% of the Company's premium volume and has seen significant growth in the past several years.

The Company also offers numerous Personal Lines products with several Homeowner and Personal Auto pricing tiers, Personal Umbrella, Watercraft, and distinct Snowmobile products. The Company uses a packaging concept known as "portfolio" which comprises approximately two-thirds of the total premium volume written by the Company. At December 31, 2006, approximately 53% of the Company's business was written in the State of Maine, 32% in New Hampshire, and the remaining 15% in the State of Vermont.

Business In Force by States

Direct Premiums Written by State
	2006	2005	2004
ME	$ 57,246,728	$ 53,772,011	$ 48,767,391
NH	33,950,412	32,561,065	30,903,190
VT	16,652,530	15,727,772	14,710,201
PA	528	-	-
Total	$ 107,850,198	$ 102,060,848	$ 94,380,782

Direct Losses Paid by State

Direct Losses Paid by State
	2006	2005	2004
ME	$ 23,878,907	$ 18,956,482	$ 21,100,943
NH	18,619,649	19,213,549	13,768,667
VT	6,416,075	6,890,822	5,739,926
PA	-	-	-
Total	$ 48,914,631	$ 45,060,853	$ 40,609,536

REINSURANCE

The Company's primary reinsurance treaties include property and casualty excess of loss, catastrophe, facultative, and quota share contracts. Summaries of the contracts in place follow:

Casualty Excess. In 2004, the casualty excess treaty renewal date was changed to July 1. At that time the retention increased from $150,000 to $200,000. At July 1, 2006 the retention increased to $250,000.
Property Excess. Effective January 1, 2006 property excess treaty retention was $150,000. The treaty provides three layers of protection limited at $5,000,000.
Personal Umbrella. The Company cedes 95% of the first $1,000,000, and 100% of the next $1,000,000 up to $2,000,000.
Commercial Umbrella. The Company cedes 97.5% of the first $2,000,000 and 100% of the next $3,000,000.
All Lines Quota Share Contract. The underlying quota share percentage decreased from 14% in 2005 to 13% in 2006 in order to maintain leverage and provide risk transfer at nominal reinsurance costs.
Boiler and Machinery. Boiler and machinery coverage was added to the business owner and commercial package policies in September of 2000. This coverage is 100% reinsured.
Facultative Property Coverage. The Company added facultative property coverage in 2002. This coverage was added in order for the Company to handle larger commercial property risks.
Property Catastrophe Reinsurance. Property catastrophe reinsurance capacity is depicted on the table below:

Year	Limit	Excess of
2003	$38,000,000	$2,000,000
2004	$43,000,000	$2,000,000
2005	$57,000,000	$3,000,000
2006	$67,000,000	$3,000,000

Accounts and Records

Accounts and records were reviewed and tested in order to assess their impact on the Company's financial condition and conformity with related laws.

FINANCIAL STATEMENTS

The accompanying financial statements present fairly, in all material respects, the Company's statutory financial position as of December 31, 2006, statutory results of operations for the period then ended and statutory capital and surplus since the last examination. The financial statements as of December 31, 2005 and December 31, 2004 are unexamined and are presented for comparative purposes only.

STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND SURPLUS

December 31, 2006, 2005 and 2004

	2006	2005 (unexamined)	2004 (unexamined)
Admitted Assets:
Bonds (Note 1)	$ 97,010,411	$ 92,277,194	$ 81,352,479
Preferred Stocks (Note 2)	96,045	99,560	163,831
Common Stocks (Note 3)	17,329,507	14,827,968	12,696,598
Real Estate (Note 4)	4,109,978	1,511,156	1,512,473
Cash (Note 5)	7,051,740	6,828,854	6,046,944
Investment income due and accrued	1,147,951	1,058,611	975,236
Premiums and considerations (Note 6)	27,882,276	25,822,065	24,164,320
Reinsurance recoverable	509,172	383,018	247,516
Federal income tax recoverable	-	-	229,853
Net deferred tax asset (Note 7)	3,206,654	2,896,649	2,652,687
EDP equipment	580,299	392,141	345,392
Receivable from parent, subsidiaries and affiliates	340,486	301,271	164,977
Total Admitted Assets	$ 159,264,519	$ 146,398,487	$ 130,552,306

Liabilities and Surplus:
Loss reserves (Note 8)	$ 29,154,939	$ 28,067,763	$ 24,574,433
Loss adjustment expenses (Note 8)	6,718,298	6,481,355	5,786,466
Commissions payable, contingent commissions and other (Note 9)	9,185,728	8,375,831	7,431,296
Other expenses	978,462	1,339,964	1,098,673
Taxes, licenses, and fees	348,331	268,321	358,588
Federal and foreign income taxes	1,084,454	514,148	-
Unearned premiums (Note 10)	43,178,221	39,443,287	36,180,209
Advance premiums	832,265	961,831	905,625
Ceded reinsurance premiums payable	1,838,029	1,929,233	1,561,137
Funds withheld for reinsurance (Note 11)	9,846,934	9,954,265	9,829,508
Amounts withheld for account of others	64,684	5,264	19
Payable to parent, subsidiaries and affiliates	67,627	32,551	-
Total Liabilities	$ 103,297,972	$ 97,373,813	$ 87,725,954

Common capital stock	$ 2,500,000	$ 2,500,000	$ 2,500,000
Gross paid in and contributed capital	28,532,781	28,532,781	28,532,781
Unassigned funds	24,933,766	17,991,893	11,793,571
Total Surplus	$ 55,966,547	$ 49,024,674	$ 42,826,352
Total Liabilities and Surplus	$ 159,264,519	$ 146,398,487	$ 130,552,306

STATUTORY STATEMENT OF OPERATIONS

Years Ended December 31, 2006, 2005 and 2004

	2006	2005 (unexamined)	2004 (unexamined)
Revenue:
Premiums earned	$ 78,210,480	$ 72,744,640	$ 64,998,331
Deductions
Losses incurred	$ 40,047,502	$ 38,095,590	$ 35,388,976
Loss expenses incurred	7,438,311	6,696,148	6,416,347
Other underwriting expenses incurred	26,509,660	23,213,473	20,820,863
Total underwriting deductions	$ 73,995,473	$ 68,005,211	$ 62,626,186
Net underwriting gain (loss)	$ 4,215,007	$ 4,739,429	$ 2,372,145
Investment Income:
Net investment income earned	$ 4,178,348	$ 3,482,634	$ 2,905,252
Net realized capital gains (losses)	518,835	415,344	218,656
Net investment gain (loss)	$ 4,697,183	$ 3,897,978	$ 3,123,908
Other Income:
Net gain (loss) from premium balances charged off	$ (21,146)	$ (15,630)	$ (12,622)
Finance and service charges not included in premiums	1,046,225	1,022,153	1,035,204
Aggregate write-ins for miscellaneous income	(1,492)	259,877	2,122
Total other income	$ 1,023,587	$ 1,266,400	$ 1,024,704

Net income before dividends, federal and foreign tax	$ 9,935,777	$ 9,903,807	$ 6,520,757
Federal and foreign income taxes incurred	2,945,474	2,997,048	2,447,587
Net Income	$ 6,990,303	$ 6,906,759	$ 4,073,170

STATUTORY STATEMENT OF CAPITAL AND SURPLUS

Years Ended December 31, 2006, 2005 and 2004

	2006	2005 (unexamined)	2004 (unexamined)
Capital and Surplus, Beginning of Year	$ 49,024,674	$ 42,826,352	$ 31,783,896

Net income	6,990,303	6,906,759	4,073,170
Change in unrealized capital gains	237,602	63,444	793,121
Change in net deferred income tax	432,406	276,645	611,728
Change in non-admitted assets	(57,495)	(560,396)	8,184
Cumulative effect of changes in accounting principles	-	96,692	-
Surplus adjustments-Paid in	-	-	5,876,500
Dividends to stockholders	(660,942)	(584,821)	(320,249)
Other surplus change [rounding]	(1)	(1)	2
Change in surplus as regards to policyholders	$ 6,941,873	$ 6,198,322	$ 11,042,456
Capital and Surplus, End of Year	$ 55,966,547	$ 49,024,674	$ 42,826,352

NOTES TO FINANCIAL STATEMENTS

Note 1 – Bonds

$97,010,411

	Cost	Par Value	Market Value	Carrying Value
Government	$ 3,690,773	$ 3,670,933	$ 3,616,891	$ 3,685,075
States, Territories	8,786,111	7,950,000	8,584,431	8,508,767
Political Subdivisions	16,873,049	15,530,000	16,637,557	16,468,428
Special Revenue	42,591,110	40,324,733	42,291,643	41,934,214
Public Utilities	753,725	750,000	780,558	752,499
Industrial & Miscellaneous	25,912,901	25,292,406	25,347,735	25,661,428
Total	$ 98,607,669	$ 93,518,072	$ 97,258,815	$ 97,010,411

All bonds were rated highest quality and high quality (1 and 2) by the NAIC and are stated at amortized cost. Pursuant to 24-A M.R.S.A. §412, the Company has maintained the required security deposit with the Treasurer of Maine. The Company also maintains a security deposit with the Insurance Commissioner of New Hampshire in conjunction with licensing in that state.

Note 2 – Preferred Stock

$96,045

	Cost	Market Value	Carrying Value
Industrial and Miscellaneous	$ 97,977	$ 96,045	$ 96,045
Total	$ 97,977	$ 96,045	$ 96,045

Both Common and Preferred Stocks are stated at market value in accordance with valuations promulgated by the NAIC. Unrealized capital gains and losses on investments reported at market value are recorded directly in surplus.

Note 3 - Common Stocks

$17,329,507

	Cost	Market Value	Carrying Value
Bank, Trusts, and Insurance	$ 952,588	$ 1,124,031	$ 1,124,031
Industrial and Miscellaneous	13,097,087	16,205,476	16,205,476
Total	$ 14,049,675	$ 17,329,507	$ 17,329,507

Note 4 – Real Estate

$4,109,978

Real estate owned and occupied by the Company is located at 44 Maysville Street, Presque Isle, Maine, and is stated at depreciated cost less encumbrances.

Note 5 – Cash

$7,051,740

Bank balances at year-end were confirmed through direct correspondence with various depositories.

Note 6 – Premiums and Consideration

$27,882,276

Premiums and Considerations at December 31, 2006 consisted of:

Uncollected premiums and agents' balances in course of collection	$ 12,949,667
Deferred premiums, agents' balances & installments booked by deferred and not yet due	14,932,609
Total	$ 27,882,276

Premiums and agents' balances due to the Company at December 31, 2006 were verified during the exam.

Note 7 – Net Deferred Tax Asset

$3,206,654

Gross deferred tax asset	$ 4,403,483
Gross deferred tax liabilities	(1,196,829)
Net deferred tax asset	3,206,654
Non-admitted deferred tax assets	-
Net deferred tax asset	$ 3,206,654

Net Deferred Tax Asset was verified and determined to be substantially in compliance with SSAP No. 10.

Note 8 - Losses & Loss Adjustment Expense

Loss Reserves $29,154,939
LAE Reserves $6,718,298

The Company's claim files were reviewed to ensure that Schedule P data was properly reported. The Bureau of Insurance contracted with AMI Risk Consultants, Inc., to perform an actuarial analysis of the Company's loss and loss adjustment expense reserves. Based on this actuarial analysis, the Company's estimates for gross and net unpaid loss and loss adjustment expenses appear to be reasonably stated. (See Appendix A for the Actuarial Opinion)

Note 9 – Commissions Payable, Contingent Commission and Other

$9,185,728

Testing was performed on this balance and it is deemed to be fairly stated.

Note 10 - Unearned Premium

$43,178,221

The Company is utilizing the monthly pro rata method in accordance with SSAP No. 53, ¶7. The unearned premium amount was recalculated using the 2006 written premium file and the monthly pro rata method.

Note 11 – Funds Held By Company Under Reinsurance Treaties

$9,846,934

The withholding of funds under reinsurance contracts was verified to the applicable reinsurance contracts. Under the terms of these agreements, the Company is required to maintain and withhold funds related to the agreements until there is a complete and final release of all of the reinsurer's past, present or future liabilities and obligations to the Company. The amount withheld was determined to be fairly stated.

STATE OF MAINE

COUNTY OF KENNEBEC, SS

Michael R. Nadeau, CPA, CFE, CISA, AES, being duly sworn according to law, deposes and says that in accordance with the authority vested in him by Eric A. Cioppa, Acting Superintendent of Insurance, pursuant to the Insurance Laws of the State of Maine, has made an examination of the condition and financial affairs of

MMG INSURANCE COMPANY

located in Presque Isle, Maine as of December 31, 2006, and that the foregoing report of examination, subscribed to by him, is true to the best of his knowledge and belief. The following examiners from the Bureau of Insurance assisted:

Jill C. Tobey, CPA, CFE
Faith A. Talbot, AFE
Debra L. Blaisdell
Audrey L. Wade

Respectfully submitted,

___________________________________
Michael R. Nadeau, CPA, CFE, CISA, AES
Examiner-In-Charge

Subscribed and sworn to before me
this 11 day of January, 2008

Patricia A. Galouch
_____________________
Notary Public
My commission expires: March 2, 2014

APPENDIX A

ACTUARIAL OPINION

AMI

STATEMENT OF ACTUARIAL OPINION

MMG INSURANCE COMPANY
For the Year Ended December 31, 2006

IDENTIFICATION

I, Aguedo M. Ingco, am an employee of the firm of AMI Risk Consultants, Inc. I have been retained by the State of Maine, Bureau of Insurance ("the Bureau") to express an opinion on the loss and loss adjustment expense (LAE) reserves of MMG Insurance Company ("MMG").

I am a Fellow of the Casualty Actuarial Society and a Member of the American Academy of Actuaries. I meet the Academy's qualification standards for issuing an actuarial opinion on loss and LAE reserves.

SCOPE

I have examined the reserves listed in Exhibit A, as shown in the Annual Statement of MMG, as prepared for filing with state regulatory officials as of December 31, 2006. The reserves listed in Exhibit A reflect the Disclosure Items (3-8) listed in Exhibit B.

In forming my opinion on the loss and loss adjustment expense reserves, I relied upon data in MMG's 2006 Annual Statement. I evaluated the data that was provided for reasonableness and consistency. The data used reconciles to Schedule P of MMG's 2006 Annual Statement.

OPINION

In my opinion, the amounts carried in Exhibit A on account of the items identified:

Meet the requirements of the insurance laws of the State of Maine
Are consistent with reserves computed in accordance with accepted actuarial standards and principles
Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of MMG under the terms of its contracts and agreements.

RELEVANT COMMENTS

Reinsurance Contracts

In my opinion, reinsurance credits are proper and the reinsurance contracts constitute a valid transfer of risk.

Risk of Material Adverse Deviation

In my opinion, there are no significant risks and uncertainties that I believe could result in material adverse deviation of net reserves.

CONCLUSION

An actuarial report and underlying workpapers supporting the findings expressed in this statement of actuarial opinion have been provided to the Bureau. I disclaim their use for any other purpose.

The required Exhibits A and B are attached to this statement.

______________________________________
Aguedo M. Ingco, FCAS, MAAA, CPCU, ARM
AMI Risk Consultants, Inc.
11410 N. Kendall Drive, Suite 208
Miami, FL 33176
(305) 273-1589

December 5, 2007

Exhibit A: SCOPE

Loss Reserves	Amount (in whole dollars)
A. Reserve for Unpaid Losses (net)	$29,154,939
B. Reserve for Unpaid Loss Adjustment Expenses (net)	$6,718,298
C. Reserve for Unpaid Losses - Direct and Assumed	$40,331,000
D. Reserve for Unpaid Loss Adjustment Expenses - Direct & Assumed	$8,358,000
E. The Page 3 write-in item reserve, "Retroactive Reinsurance Reserve Assumed"	$0
F. Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion (list separately)	$0

Premium Reserves	Amount (in whole dollars)
G. Reserve for Direct and Assumed Unearned Premiums for Long Duration Contracts	$0
H. Reserve for Net Unearned Premiums for Long Duration Contracts	$0
I. Other Premium Reserve items on which the Appointed Actuary is expressing an Opinion (list separately)	$0

Exhibit B: DISCLOSURES

	Amount (in whole dollars)
1. Materiality Standard expressed in $US	$5,596,655
2. Surplus	$55,966,547
3. Anticipated net salvage and subrogation included as a reduction to loss reserves as reported	$400,000
4. Discount included as a reduction to loss reserves and loss expense reserves as reported 4 (a) Nontabular Discount 4 (b) Tabular Discount	$0 $0
5. The net reserves for losses and expenses for the company's share of voluntary and involuntary underwriting pools' and associations' unpaid losses and expenses	$30,000
6. The net reserves for losses and loss adjustment expenses that MMG carries for the following 6 (a) Asbestos 6 (b) Environmental	$0 $0
7. The total claims made extended loss and expense reserve 7 (a) amount reported as loss reserves 7 (b) amount reported as unearned premium reserves	$0 $0
8. Other items on which the Appointed Actuary is providing Relevant Comment (list separately)	$0

* The reserves disclosed in item 6 above, should exclude amounts relating to contracts specifically written to cover asbestos and environmental exposures. Contracts specifically written to cover these exposures include Environmental Impairment Liability (post 1986), Asbestos Abatement, Pollution Legal Liability, Contractor's Pollution Liability, Consultant's Environmental Liability, and Pollution and Remediation Legal Liability.

MMG INSURANCE COMPANY

AMI

STATEMENT OF ACTUARIAL OPINION

MMG INSURANCE COMPANY For the Year Ended December 31, 2006

MMG INSURANCE COMPANY
For the Year Ended December 31, 2006