Chairman's Letter

President's Report

Condensed Financial Highlights

Senior Management

Board of Directors

Chairman's Letter

Presidents Report

Eighteen years ago, you welcomed me as president and CEO. This June I will retire, ending an extraordinary and personally rewarding journey.

I arrived with high hopes, knowing I had an opportunity to lead a small but major player in the medical liability insurance industry in the Upper Midwest. MMIC was doing business in three states with most of its 4,000 physician policyholders located in Minnesota at that time. Now MMIC provides coverage in six states and insures more than 13,000 physicians and ancillary healthcare providers and more than 300 hospitals and facilities. MMIC has been a market leader in its six-state territory since 2002. From carrying out mergers, new technol-ogy and product diversification to building trust, partnerships and long-term financial stability, we have experienced remarkable accomplishments over the last 20 years.

In my report, I will summarize highlights of our 2007 financial, investment and claim results. The charts and graphs will tell the rest of the story. I also will reflection what I think are some of the more significant changes the company has experienced during my time here, including the results of the most recent three-year strategic business plan.

Rate Decreases

Direct written premium decreased 2.6 percent in 2007. This was the first decrease in written premium since 2000. Our rate decreases were primarily due to the moderation of loss frequency. We expect this moderation will continue to have an effect on written premium growth in the near future.

Last year, we saw a significant increase in health systems' acquisition of our policyholder physician practices in Minnesota, North Dakota and Wisconsin. We expect that there will be additional acquisitions in 2008, which will moderately affect future written premium.

New written premium of $3.3 million in 2007 was encouraging and we expect more new opportunities in 2008. Most of the growth came in Wisconsin and Iowa; we expect the same in 2008. Our agent and broker partners contributed nearly 80 percent of last year's new business and now are involved in 60 percent of our medical liability insurance business.

Excellent Claim Results

MMIC continues to have terrific claim results. Loss severity, which is the average indemnity paid, and loss frequency, the number of losses reported per 100 physicians, are the primary drivers in the actuarial development of MMIC rates. Both loss frequency and severity decreased last year. A loss frequency of 4 losses per 100 physicians is down 33 percent from five years ago and is now the lowest in our 27-year history. Even though loss severity dropped significantly to $340,549 from a high of $397,026 in 2006, we are still concerned as MMIC's current average loss severity is still 30 percent higher than a few years ago. We will continue to monitor this trend.

David P. Bounk
President and Chief Executive Officer
The MMIC Group

Today the headlines are filled with articles about companies taking write-offs associated with investments in subprime mortgages. MMIC shareholders can rest assured that at year-end 2007 MMIC's balance sheet had minimal subprime exposure and less than $200,000 was considered a default risk.

* Derived from stand-alone Midwest Medical Insurance Company audited financial statements prepared on a statutory basis.

Reflections

My tenure here has had many challenges and opportunities. I am proud of the accomplishments we have made over the past 18 years. Through our various strategic plans, we set specific goals and objectives for growth, rate adequacy, products, diversification and customer service. The commitment we have all consistently made to honor those plans has helped make MMIC the company it is today.

MMIC has grown both financially and in stature in the medical liability insurance industry. Internally, we have become more customer-focused and more of an advocate for physicians and healthcare providers. We continue to challenge ourselves to find new and better ways of meeting policyholders' needs. Externally, MMIC's reputation as a top-notch company that stands for integrity, stability and trust has made it one of the top six physician-owned insurance companies in the country.

MMIC has maintained an A. M. Best rating of "A" (Excellent) for 15 years. Currently, this is the highest rating a true physician-owned insurer like MMIC can attain from A.M. Best. To determine our rating, A. M. Best conducts a very thorough qualitative and quantitative analysis using more than 100 financial ratios. Earning a high rating means A. M. Best continues to recognize that MMIC's business strategy reflects its commitment to maintaining superior financial strength and to protecting its obligations to policyholders. The A.M. Best rating is the currently highest obtainable validation of MMIC's financial strength.

MMIC has more than doubled its direct written premium since 2001 through the loyalty of its agent and broker partners. MMIC first wrote business with only a few agents and brokers in the late 1980s. In the mid-1990s, we expanded our relationship with them when we began writing hospital business. After PHICO's insolvency and the St. Paul Companies' withdrawal from the medical liability market in the early 2000s, our relationship with agents and brokers grew substantially.

We owe a great deal of gratitude to our agent and broker partners for their efforts in presenting us with new, high-quality business opportunities and then helping us to develop long-term relationships with those policyholders.

Staying Focused With Our Strategic Plan

Our current 2006-2008 strategic business plan focuses on key processes that deliver an enhanced level of customer service. We are enhancing customer service through better service. In 2006, feedback from two surveys--employee and customer satisfaction--rated MMIC high in customer service. As we continued our journey toward superior quality and exceptional customer service in 2007, we participated in the Minnesota Quality Council's program. As Dr. Odland stated, receiving the "Advancement Level" award validated our hard work and commitment to quality management principles. We will use the award process and results to build on an already solid foundation. Employees have plans underway to implement enhancements throughout 2008.

MMIC's commitment to independent physicians always has been a central element of its strategic focus. As the company has grown, so have our efforts to expand and improve our risk management products and services to policyholders. Recognizing that promoting patient safety goes hand-in-hand with minimizing malpractice risk, the Risk Management Department has broadened its focus over the past two years to include patient safety. Risk management efforts include helping policyholders implement their own patient safety and quality initiatives, publishing a newsletter that provides practical and useful information on patient safety issues and presenting educational programs.The goal is to enhance the opportunities to improve quality of care and minimize the potential for risks.

In the late 1990s, MMIC created the Law and Health Policy Department to bring in-house the general counsel respon-sibilities and to follow developments in health policy on behalf of policyholders. MMIC is one of only a few medical liability carriers, if not the only one, to have a department dedicated to health policy issues.

We are a member of the Health Care Liability Alliance, a national coalition to promote liability reform at the federal level and we work with the Physician Insurance Association of America and local medical associations and healthcare-related interest groups to advocate for policyholders. Our aim is to improve the medical liability environment for our policyholders whenever we can and when it is appropriate. Both our risk management efforts and the work of the Law and Health Policy Department will be crucial in the company's future.

Almost 10 years ago, we began to diversify into other insurance products through the MMIC Agency Inc. and into technology products and services through MMIC Technology Solutions Inc. These diversification efforts resulted from your feedback. Many of you said you needed help in these areas. This diversifi cation is working.

The MMIC Agency has created opportunities for numerous policyholders to obtain most or all of their commercial insurance needs from one organization. MMIC Technology Solutions has offered a variety of technology services since its inception. Its focus now is on the sale, implementation and training of Nextgen electronic medical records (EMRs) and practice management software, network and website consulting and physician billing and collections.

The number of policyholders adopting EMRs is growing. Future legislation will help spur physicians to adopt EMRs more quickly. MMIC Technology Solutions is ready for this. In the near future, we will look back and be pleased that MMIC was ahead of its time in understanding the signifi cance of selling and sup-porting the use of EMRs to improve patient care.

MMIC has a strong board of directors. Members take their responsibilities to govern very seriously. They spent much of last year preparing for the leadership change in June, and they will provide continuity for senior staff during this transition. The board's oversight and critical thinking will greatly benefit MMIC in the future. The senior staff pictured in this year's annual report is a pivotal driver of our strategic plans. They will continue to provide a strong foundation for MMIC's success. MMIC employees are some of the best in the insurance industry. Many have been with the company for more than 15 years. With the combined experience of its board, senior staff and employees, MMIC looks forward to an even brighter future for you, our policyholders and physician shareholders.

As my time at MMIC comes to an end, I leave knowing MMIC is stable, successful and poised for a brighter future.

Board of Directors

Michael D. Abrams
Executive Director
Iowa Medical Society
West Des Moines, Iowa

Lee L. Arostegui, M.D.
Emergency Care Consultants P.A.
Minneapolis, Minn.

Robert W. Beattie, M.D.
University of North Dakota
School of Medicine & Health Sciences
Grand Forks, North Dakota

Gail P. Bender, M.D.
Fairview Southdale Medical Oncology Clinic
Edina, Minn.

David P. Bounk
President and CEO MMIC Group
Minneapolis, Minn.

Mary D. Carpenter, M.D.
Family Practice Associates of Winner, Prof., LLC
Winner, South Dakota

Kent E. Carr, M.D.
Mercy Clinics Inc.
Des Moines, Iowa

Sue A. Crook, M.D.
Suburban Radiologic Consultants
Minneapolis, Minn.

Peter J. Daly, M.D.
Summitt Orthopedics
St. Paul, Minn.

Peter J. Dehnel, M.D.
All About Children Pediatrics
Eden Prairie, Minn.

Michael G. Del Core, M.D.
Creighton Cardiac Center
Omaha, Neb.

Anthony C. Jaspers, M.D.
Lake Crystal Clinic
Lake Crystal, Minn.

Eugene L. Kerns, M.D.
Obstetrics and Gynecology Specialists, P.C.
Davenport, Iowa

Mark O. Liaboe, M.D.
Dubuque Internal Medicine, P.C.
Dubuque, Iowa

Patricia J. Lindholm, M.D.
Fergus Falls Medical Group
Fergus Falls, Minn.

Paul C. Matson, M.D.
The Orthopedic and Fracture Clinic
Mankato, Minn.

Robert K. Meiches, M.D. Minnesota Medical Association
Minneapolis, Minn.

Mark D. Odland, M.D.,
Board Chair
Hennepin County Medical Center
Minneapolis, Minn.

George E. Schoephoerster, M.D.CentraCare Health Plaza
St. Cloud, Minn.

Tom D. Throckmorton, M.D.
Northwest Iowa
SurgeonsSpencer, Iowa

Darrell R. Tukua, CPA
Retired Partner, KPMG LLP
Minneapolis, Minn.

John Van Etta, M.D.
St. Luke's Internal Medicine
Duluth, Minn.

William L. Youmans, M.D.
Camden Physicians, Ltd.
St. Louis Park, Minn.