##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

FORM 10-Q

|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|          
|           |  | For the quarter ended June 30, 2002                                                             
|          
|or        
|          
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-14094



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Meadowbrook Insurance Group, Inc.

(Exact name of registrant as specified in its
charter)


|                         |  |                                  
|------------------------ |  | ---------------------------------
|Michigan                 |  | 38-2626206                       
|(State of Incorporation) |  | (IRS Employer Identification No.)

26600 Telegraph Road, Southfield, Michigan
48034

(Address, zip code of principal executive
offices)


(248) 358-1100

(Registrants telephone number, including
area code)




---

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 þ          No o

The aggregate number of shares of the
Registrants Common Stock, $.01 par value, outstanding on
August 13, 2002 was 29,787,194.



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TABLE OF CONTENTS



|                                                                                             |                                                 |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION                                                             
|Item 1 Financial Statements                                                                 
|                                                                                             | CONDENSED CONSOLIDATED STATEMENTS OF INCOME    
|                                                                                             | CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|                                                                                             | CONDENSED CONSOLIDATED BALANCE SHEETS          
|                                                                                             | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                                                                             | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|PART I -- FINANCIAL INFORMATION                                                             
|Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
|PART II -- OTHER INFORMATION                                                                
|Item 1. Legal Proceedings                                                                   
|Item 2. Changes in Securities and Use of Proceeds                                           
|SIGNATURES                                                                                  
|EX-10.1 Amendment to Employment Agreement                                                   
|EX-10.2 Amendment to Employment Agreement                                                   
|Ex-10.3 Amendment to Employment Agreement                                                   
|EX-10.4 Amendment to Employment Agreement                                                   
|EX-10.5 Assignment Agreement                                                                
|Statement re: Computation on Per Share Earnings                                             
|Certification of CEO                                                                        
|Certification of CFO                                                                        



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TABLE OF CONTENTS


|                                   |  |                                                                                           |    |      |       | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | ----- | 
|                                   |  |                                                                                           |    | Page |      
|                                   |  |                                                                                           |    |      |      
|PART I  FINANCIAL
    INFORMATION
|Item 1                            |  | FINANCIAL STATEMENTS                                                                      |    |      |       | 
|                                   |  | Condensed Consolidated Statements of Income
    (unaudited)                               |    |      | 2-3   | 
|                                   |  | Consolidated Statements of Comprehensive Income
    (unaudited)                           |    |      | 4     | 
|                                   |  | Condensed Consolidated Balance Sheets (unaudited)                                         |    |      | 5     | 
|                                   |  | Condensed Consolidated Statements of Cash Flows
    (unaudited)                           |    |      | 6     | 
|                                   |  | Notes to Consolidated Financial Statements
    (unaudited) and Management Representation  |    |      | 7-14  | 
|Item 2                            |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS |    |      | 15-22 | 
|Item 3                            |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK                            |    |      | 22    | 
|PART II  OTHER
    INFORMATION   
|Item 1                            |  | LEGAL PROCEEDINGS                                                                         |    |      | 24    | 
|Item 2                            |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                 |    |      | 24    | 
|Item 4                            |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS                                   |    |      | 24    | 
|Item 6                            |  | EXHIBITS AND REPORTS ON FORM 8-K                                                          |    |      | 25    | 
|SIGNATURES                         |  |                                                                                           | 26 |     

1



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##### Table of Contents








PART I  FINANCIAL
INFORMATION







Item
1     Financial
Statements


MEADOWBROOK INSURANCE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
INCOME

|                                                          |                                       |                                   |     |            |         |  |        |           |         |  
|--------------------------------------------------------- | ------------------------------------- | --------------------------------- | --- | ---------- | ------- |  | ------ | --------- | ------- | -
|                                                          |                                       |                                  
|                                                          |                                       | For the Six Months                |    
|                                                          |                                       | Ended June 30,                    |    
|                                                          |                                       |                                   |    
|                                                          |                                       | 2002                              |     |            | 2001    | 
|                                                          |                                       |                                   |     |            |         | 
|                                                          |                                       |                                  
|                                                          |                                       | (Unaudited)                       |    
|                                                          |                                       | (in thousands)                    |    
|Revenues:                                                 |                                       |                                   |     |            |         |  |        |          
|                                                          | Net premium earned                    |                                   | $   | 82,970     |         |  | $      | 80,817    |        
|                                                          | Net commissions and fees              |                                   |     | 18,932     |         |  |        | 22,745    |        
|                                                          | Net investment income                 |                                   |     | 6,629      |         |  |        | 6,980     |        
|                                                          | Net realized losses on investments    |                                   |     | (301       | )       |  |        | (1,321    | )      
|                                                          | Gain (loss) on sale of subsidiary     |                                   |     | 199        |         |  |        | (850      | )      
|                                                          |                                       |                                   |     |            |         | 
|                                                          |                                       | Total revenues                    |     |            | 108,429 |  |        |           | 108,371 |  
|                                                          |                                       |                                   |     |            |         | 
|Expenses:                                                 |                                       |                                   |     |            |         |  |        |          
|                                                          | Net loss and loss adjustment expenses |                                   |     | 55,096     |         |  |        | 64,613    |        
|                                                          | Salaries and employee benefits        |                                   |     | 18,848     |         |  |        | 23,286    |        
|                                                          | Other operating expenses              |                                   |     | 31,425     |         |  |        | 29,184    |        
|                                                          | Interest on notes payable             |                                   |     | 2,124      |         |  |        | 2,482     |        
|                                                          | Gain on debt reduction                |                                   |     | (359       | )       |  |        |          |        
|                                                          |                                       |                                   |     |            |         | 
|                                                          |                                       | Total expenses                    |     |            | 107,134 |  |        |           | 119,565 |  
|                                                          |                                       |                                   |     |            |         | 
|                                                          |                                       | Income (loss) before income taxes |     |            | 1,295   |  |        |           | (11,194 | )
|Federal income tax expense (benefit)                      |                                       |                                   | 263 |            |         |  | (3,865 | )        
|                                                          |                                       |                                   |     |            |         | 
|                                                          |                                       | Net income (loss)                 |     | $          | 1,032   |  |        | $         | (7,329  | )
|                                                          |                                       |                                   |     |            |         | 
|Earnings per share:                                       |                                       |                                   |     |            |         |  |        |          
|                                                          | Basic                                 |                                   | $   | 0.09       |         |  | $      | (0.86     | )      
|                                                          | Diluted                               |                                   | $   | 0.09       |         |  | $      | (0.86     | )      
|Weighted average number of common shares
    outstanding: |                                       |                                   |     |            |         |  |        |          
|                                                          | Basic                                 |                                   |     | 11,220,758 |         |  |        | 8,512,178 |        
|                                                          | Diluted                               |                                   |     | 11,220,758 |         |  |        | 8,512,838 |        

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

2



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MEADOWBROOK INSURANCE GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF
INCOME

|                                                          |                                       |                                   |     |            |        |  |        |           |         |  
|--------------------------------------------------------- | ------------------------------------- | --------------------------------- | --- | ---------- | ------ |  | ------ | --------- | ------- | -
|                                                          |                                       |                                  
|                                                          |                                       | For the Quarter                   |    
|                                                          |                                       | Ended June 30,                    |    
|                                                          |                                       |                                   |    
|                                                          |                                       | 2002                              |     |            | 2001   | 
|                                                          |                                       |                                   |     |            |        | 
|                                                          |                                       |                                  
|                                                          |                                       | (Unaudited)                       |    
|                                                          |                                       | (in thousands)                    |    
|Revenues:                                                 |                                       |                                   |     |            |        |  |        |          
|                                                          | Net premium earned                    |                                   | $   | 44,313     |        |  | $      | 39,644    |        
|                                                          | Net commissions and fees              |                                   |     | 9,968      |        |  |        | 10,336    |        
|                                                          | Net investment income                 |                                   |     | 3,505      |        |  |        | 3,472     |        
|                                                          | Net realized losses on investments    |                                   |     | (310       | )      |  |        | (1,467    | )      
|                                                          | Loss on sale of subsidiary            |                                   |     |           |        |  |        | (850      | )      
|                                                          |                                       |                                   |     |            |        | 
|                                                          |                                       | Total revenues                    |     |            | 57,476 |  |        |           | 51,135  |  
|                                                          |                                       |                                   |     |            |        | 
|Expenses:                                                 |                                       |                                   |     |            |        |  |        |          
|                                                          | Net loss and loss adjustment expenses |                                   |     | 30,638     |        |  |        | 34,577    |        
|                                                          | Salaries and employee benefits        |                                   |     | 9,235      |        |  |        | 11,910    |        
|                                                          | Other operating expenses              |                                   |     | 17,021     |        |  |        | 14,860    |        
|                                                          | Interest on notes payable             |                                   |     | 874        |        |  |        | 1,163     |        
|                                                          | Gain on debt reduction                |                                   |     | (359       | )      |  |        |          |        
|                                                          |                                       |                                   |     |            |        | 
|                                                          |                                       | Total expenses                    |     |            | 57,409 |  |        |           | 62,510  |  
|                                                          |                                       |                                   |     |            |        | 
|                                                          |                                       | Income (loss) before income taxes |     |            | 67     |  |        |           | (11,375 | )
|Federal income tax benefit                                |                                       |                                   | (55 | )          |        |  | (3,893 | )        
|                                                          |                                       |                                   |     |            |        | 
|                                                          |                                       | Net income (loss)                 |     | $          | 122    |  |        | $         | (7,482  | )
|                                                          |                                       |                                   |     |            |        | 
|Earnings per share:                                       |                                       |                                   |     |            |        |  |        |          
|                                                          | Basic                                 |                                   | $   | 0.01       |        |  | $      | (0.88     | )      
|                                                          | Diluted                               |                                   | $   | 0.01       |        |  | $      | (0.88     | )      
|Weighted average number of common shares
    outstanding: |                                       |                                   |     |            |        |  |        |          
|                                                          | Basic                                 |                                   |     | 13,899,557 |        |  |        | 8,512,194 |        
|                                                          | Diluted                               |                                   |     | 13,902,073 |        |  |        | 8,512,194 |        

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

3



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MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


|                  |                                         |                                                                         |                                        |  |      |       |        |   |     |        |  
|----------------- | --------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------- |  | ---- | ----- | ------ | - | --- | ------ | -
|                  |                                         |                                                                        
|                  |                                         | For the Six Months                                                      |                                       
|                  |                                         | Ended June 30,                                                          |                                       
|                  |                                         |                                                                         |                                       
|                  |                                         | 2002                                                                    |                                        |  | 2001 |      
|                  |                                         |                                                                         |                                        |  |      |      
|                  |                                         |                                                                        
|                  |                                         | (Unaudited)                                                             |                                       
|                  |                                         | (in thousands)                                                          |                                       
|Net income (loss) |                                         | $                                                                       | 1,032                                  |  |      | $     | (7,329 | )
|                  | Other comprehensive income, net of tax: |                                                                         |                                        |  |      |       |        |   |    
|                  |                                         | Unrealized gains on securities                                          |                                        |  | 373  |       |        |   | 633 |       
|                  |                                         | Less: reclassification adjustment for losses
    included in net income |                                        |  | 199  |       |        |   | 27  |       
|                  |                                         |                                                                         |                                        |  |      |      
|                  |                                         |                                                                         | Other comprehensive income, net of tax |  |      | 572   |        |   |     | 660    |  
|                  |                                         |                                                                         |                                        |  |      |      
|                  |                                         |                                                                         | Comprehensive income (loss)            |  | $    | 1,604 |        |   | $   | (6,669 | )
|                  |                                         |                                                                         |                                        |  |      |      

MEADOWBROOK INSURANCE GROUP, INC.



CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


|                  |                                                |                                                                         |                                               |  |       |       |        |   |      |        |  
|----------------- | ---------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------- |  | ----- | ----- | ------ | - | ---- | ------ | -
|                  |                                                |                                                                        
|                  |                                                | For the Quarter                                                         |                                              
|                  |                                                | Ended June 30,                                                          |                                              
|                  |                                                |                                                                         |                                              
|                  |                                                | 2002                                                                    |                                               |  | 2001  |      
|                  |                                                |                                                                         |                                               |  |       |      
|                  |                                                |                                                                        
|                  |                                                | (Unaudited)                                                             |                                              
|                  |                                                | (in thousands)                                                          |                                              
|Net income (loss) |                                                | $                                                                       | 122                                           |  |       | $     | (7,482 | )
|                  | Other comprehensive income (loss), net of tax: |                                                                         |                                               |  |       |       |        |   |     
|                  |                                                | Unrealized gains (losses) on securities                                 |                                               |  | 1,976 |       |        |   | (913 | )     
|                  |                                                | Less: reclassification adjustment for losses
    included in net income |                                               |  | 205   |       |        |   | 123  |       
|                  |                                                |                                                                         |                                               |  |       |      
|                  |                                                |                                                                         | Other comprehensive income (loss), net of tax |  |       | 2,181 |        |   |      | (790   | )
|                  |                                                |                                                                         |                                               |  |       |      
|                  |                                                |                                                                         | Comprehensive income (loss)                   |  | $     | 2,303 |        |   | $    | (8,272 | )
|                  |                                                |                                                                         |                                               |  |       |      

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

4



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MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                                                                                           |                                                                                       |                                            |         |         |              |   |         |         |         | 
|-------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------------ | - | ------- | ------- | ------- | 
|                                                                                                                           |                                                                                       | June 30,                                   |         |         | December 31, |  
|                                                                                                                           |                                                                                       | 2002                                       |         |         | 2001         |  
|                                                                                                                           |                                                                                       |                                            |         |         |              |  
|                                                                                                                           |                                                                                       | (Unaudited)                                |         |         |             
|                                                                                                                           |                                                                                       |                                           
|                                                                                                                           |                                                                                       | (in thousands,                             |        
|                                                                                                                           |                                                                                       | except share data)                         |        
|ASSETS                                                                                                                    
|Invested assets:                                                                                                           |                                                                                       |                                            |         |         |              |   |         |        
|                                                                                                                           | Debt securities available for sale, at fair value
    (cost of $206,987 and $193,020) |                                            | $       | 212,559 |              |   | $       | 197,634 |        
|                                                                                                                           | Equity securities available for sale, at fair
    value (cost of $1,980 and $2,757)   |                                            |         | 1,914   |              |   |         | 2,787   |        
|                                                                                                                           |                                                                                       |                                            |         |         |              |  
|                                                                                                                           |                                                                                       | Total invested assets                      |         |         | 214,473      |   |         |         | 200,421 | 
|Cash and cash equivalents                                                                                                  |                                                                                       |                                            | 58,439  |         |              |   | 33,302  |        
|Premiums and agent balances receivable                                                                                     |                                                                                       |                                            | 77,617  |         |              |   | 78,171  |        
|Reinsurance recoverable on paid and unpaid losses                                                                          |                                                                                       |                                            | 219,156 |         |              |   | 222,458 |        
|Prepaid reinsurance premiums                                                                                               |                                                                                       |                                            | 23,120  |         |              |   | 37,852  |        
|Deferred policy acquisition costs                                                                                          |                                                                                       |                                            | 13,308  |         |              |   | 13,953  |        
|Intangible assets                                                                                                          |                                                                                       |                                            | 28,997  |         |              |   | 28,997  |        
|Other assets                                                                                                               |                                                                                       |                                            | 62,455  |         |              |   | 72,734  |        
|                                                                                                                           |                                                                                       |                                            |         |         |              |  
|                                                                                                                           |                                                                                       | Total assets                               |         | $       | 697,565      |   |         | $       | 687,888 | 
|                                                                                                                           |                                                                                       |                                            |         |         |              |  
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                  
|Liabilities:                                                                                                               |                                                                                       |                                            |         |         |              |   |         |        
|Reserve for losses and loss adjustment expenses                                                                            |                                                                                       | $                                          | 385,914 |         |              | $ | 394,596 |        
|Unearned premiums                                                                                                          |                                                                                       |                                            | 74,926  |         |              |   | 94,002  |        
|Debt                                                                                                                       |                                                                                       |                                            | 43,723  |         |              |   | 54,741  |        
|Reinsurance funds held and balances payable                                                                                |                                                                                       |                                            | 15,000  |         |              |   | 26,887  |        
|Other liabilities                                                                                                          |                                                                                       |                                            | 35,571  |         |              |   | 37,346  |        
|                                                                                                                           |                                                                                       |                                            |         |         |              |  
|                                                                                                                           |                                                                                       | Total liabilities                          |         |         | 555,134      |   |         |         | 607,572 | 
|                                                                                                                           |                                                                                       |                                            |         |         |              |  
|Commitments and contingencies (Note 6)                                                                                     |                                                                                       |                                            |         |         |              |   |         |        
|Shareholders Equity:                                                                                                      |                                                                                       |                                            |         |         |              |   |         |        
|Common stock, $.01 par value; authorized
    50,000,000 shares: 29,787,194 and 8,512,194 shares
    issued and outstanding |                                                                                       |                                            | 298     |         |              |   | 85      |        
|Additional paid-in capital                                                                                                 |                                                                                       |                                            | 128,271 |         |              |   | 67,948  |        
|Retained earnings                                                                                                          |                                                                                       |                                            | 11,067  |         |              |   | 10,034  |        
|Note receivable from officer                                                                                               |                                                                                       |                                            | (850    | )       |              |   | (824    | )      
|Accumulated other comprehensive income                                                                                     |                                                                                       |                                            | 3,645   |         |              |   | 3,073   |        
|                                                                                                                           |                                                                                       |                                            |         |         |              |  
|                                                                                                                           |                                                                                       | Total shareholders equity                 |         |         | 142,431      |   |         |         | 80,316  | 
|                                                                                                                           |                                                                                       |                                            |         |         |              |  
|                                                                                                                           |                                                                                       | Total liabilities and shareholders equity |         | $       | 697,565      |   |         | $       | 687,888 | 
|                                                                                                                           |                                                                                       |                                            |         |         |              |  

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

5



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                           |                                                                |                                           |         |         |         |   |         |         |         |  
|---------------------------------------------------------- | -------------------------------------------------------------- | ----------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                           |                                                                |                                          
|                                                           |                                                                | For the Six Months                        |        
|                                                           |                                                                | Ended June 30,                            |        
|                                                           |                                                                |                                           |        
|                                                           |                                                                | 2002                                      |         |         | 2001    |  
|                                                           |                                                                |                                           |         |         |         |  
|                                                           |                                                                |                                          
|                                                           |                                                                | (Unaudited)                               |        
|                                                           |                                                                | (in thousands)                            |        
|Net cash (used in) provided by operating
    activities    |                                                                | $                                         | (14,016 | )       |         | $ | 6,484   |        
|                                                           |                                                                |                                           |         |         |         |  
|Cash flows (used in) provided by investing
    activities: |                                                                |                                           |         |         |         |   |         |        
|                                                           | Purchase of debt securities available for sale                 |                                           |         | (85,318 | )       |   |         | (76,312 | )      
|                                                           | Purchase of equity securities available for sale               |                                           |         |        |         |   |         | (453    | )      
|                                                           | Proceeds from sale of debt securities available
    for sale   |                                           |         | 70,751  |         |   |         | 44,016  |        
|                                                           | Proceeds from sale of equity securities available
    for sale |                                           |         | 900     |         |   |         | 13,718  |        
|                                                           | Other investing activities                                     |                                           |         | 2,880   |         |   |         | (7,920  | )      
|                                                           |                                                                |                                           |         |         |         |  
|                                                           |                                                                | Net cash used in investing activities     |         |         | (10,787 | ) |         |         | (26,951 | )
|Cash flows (used in) provided by financing
    activities: |                                                                |                                           |         |         |         |   |         |        
|                                                           | Net (payments of) proceeds from bank loan                      |                                           |         | (10,659 | )       |   |         | 450     |        
|                                                           | Net proceeds from public offering                              |                                           |         | 60,526  |         |   |         |        |        
|                                                           | Dividends paid on common stock                                 |                                           |         |        |         |   |         | (511    | )      
|                                                           | Other financing activities                                     |                                           |         | 73      |         |   |         | 2,311   |        
|                                                           |                                                                |                                           |         |         |         |  
|                                                           |                                                                | Net cash provided by financing activities |         |         | 49,940  |   |         |         | 2,250   |  
|                                                           |                                                                |                                           |         |         |         |  
|Increase (decrease) in cash and cash equivalents           |                                                                |                                           | 25,137  |         |         |   | (18,217 | )      
|Cash and cash equivalents, beginning of period             |                                                                |                                           | 33,302  |         |         |   | 56,838  |        
|                                                           |                                                                |                                           |         |         |         |  
|Cash and cash equivalents, end of period                   |                                                                | $                                         | 58,439  |         |         | $ | 38,621  |        
|                                                           |                                                                |                                           |         |         |         |  

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

6



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##### Table of Contents








NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


NOTE 1  Basis of
Presentation

These financial statements and the notes thereto
should be read in conjunction with Meadowbrook Insurance Group,
Inc.s (the Company) audited financial
statements and accompanying notes included in its Annual Report
on Form 10-K for the year ended December 31, 2001.

The consolidated financial statements reflect all
normal recurring adjustments, which were, in the opinion of
management, necessary to present a fair statement of the results
for the interim quarters. The results of operations for the six
months ended June 30, 2002, are not necessarily indicative
of the results expected for the full year.

NOTE 2  New Accounting
Pronouncements

FASB has issued SFAS No. 142 Goodwill
and Other Intangible Assets. SFAS No. 142, for
periods starting December 15, 2001 or thereafter,
eliminates the amortization of goodwill. In addition, the
Company is required to test, at least annually, all existing
goodwill for impairment using a fair value approach, on a
reporting unit basis.

Upon implementation in 2002, the Company is no
longer amortizing goodwill. Goodwill amortization for the six
months and quarter ended June 30, 2001, was approximately
$1.4 million and $896,000, respectively. In accordance with
the transition provisions, the Company completed the first step
of the transitional goodwill impairment test. The Company
evaluated goodwill for impairment during the second quarter of
2002. This evaluation involved the use of a fair value approach
to each reporting unit. Based on this evaluation, management
determined there is no impairment to goodwill.

The following table provides income before the
cumulative effect of a change in accounting principle, net
income, and related per share amounts as of June 30, 2002
and 2001, as reported and adjusted as if the Company had
eliminated the amortization of goodwill effective
January 1, 2001 (in thousands):

|                                   |         |                    |       |      |      |   |        |       |  
|---------------------------------- | ------- | ------------------ | ----- | ---- | ---- | - | ------ | ----- | -
|                                   |         |                   
|                                   |         | For the Six Months |      
|                                   |         | Ended June 30,     |      
|                                   |         |                    |      
|                                   |         | 2002               |       |      | 2001 |  
|                                   |         |                    |       |      |      |  
|Net income (loss), as reported     |         | $                  | 1,032 |      |      | $ | (7,329 | )    
|Amortization expense               |         |                    |      |      |      |   | 1,445  |      
|Tax effect of amortization expense |         |                    |      |      |      |   | (607   | )    
|                                   |         |                    |       |      |      |  
|Net income (loss), as adjusted     |         | $                  | 1,032 |      |      | $ | (6,491 | )    
|                                   |         |                    |       |      |      |  
|Earnings per share, as adjusted    |         |                    |       |      |      |   |        |      
|                                   | Basic   |                    | $     | 0.09 |      |   | $      | (0.76 | )
|                                   | Diluted |                    | $     | 0.09 |      |   | $      | (0.76 | )

|                                   |         |                 |     |      |      |   |        |       |  
|---------------------------------- | ------- | --------------- | --- | ---- | ---- | - | ------ | ----- | -
|                                   |         |                
|                                   |         | For the Quarter |    
|                                   |         | Ended June 30,  |    
|                                   |         |                 |    
|                                   |         | 2002            |     |      | 2001 |  
|                                   |         |                 |     |      |      |  
|Net income (loss), as reported     |         | $               | 122 |      |      | $ | (7,482 | )    
|Amortization expense               |         |                 |    |      |      |   | 896    |      
|Tax effect of amortization expense |         |                 |    |      |      |   | (511   | )    
|                                   |         |                 |     |      |      |  
|Net income (loss), as adjusted     |         | $               | 122 |      |      | $ | (7,097 | )    
|                                   |         |                 |     |      |      |  
|Earnings per share, as adjusted    |         |                 |     |      |      |   |        |      
|                                   | Basic   |                 | $   | 0.01 |      |   | $      | (0.83 | )
|                                   | Diluted |                 | $   | 0.01 |      |   | $      | (0.83 | )

7



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


FASB has issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets. Under SFAS No. 144, for periods starting
January 1, 2002 or thereafter, discontinued operations are
measured at the lower of carrying value or fair value less costs
to sell, rather than on a net realizable value basis. SFAS
No. 144 also broadens the definition of discontinued
operations to include a component of an entity (rather than only
a segment of a business). The adoption of this standard did not
have a material impact on the Companys results of
operations.

NOTE 3  Reinsurance

The insurance company subsidiaries cede insurance
to other insurers under pro rata and excess-of-loss contracts.
These reinsurance arrangements diversify the Companys
business and minimize its exposure to large losses or from
hazards of an unusual nature. The ceding of insurance does not
discharge the original insurer from its primary liability to its
policyholder. In the event that all or any of the reinsuring
companies are unable to meet their obligations, the insurance
company subsidiaries would be liable for such defaulted amounts.
Therefore, the Company is subject to a credit risk with respect
to the obligations of its reinsurers. In order to minimize its
exposure to significant losses from reinsurer insolvencies, the
Company evaluates the financial condition of its reinsurers and
monitors the economic characteristics of the reinsurers on an
ongoing basis. The Company also assumes insurance from other
insurers and reinsurers, both domestic and foreign, under pro
rata and excess-of-loss contracts.

At June 30, 2002, the Company had
reinsurance recoverables for paid and unpaid losses of
$219.2 million. The Company customarily collateralizes
reinsurance balances due from non-admitted reinsurers through
Funds Withheld Trusts or Letters of Credit. The largest
unsecured reinsurance recoverable is due from an admitted
reinsurer with an A++ A.M. Best rating and accounts
for 33.0% of the total recoverable for paid and unpaid losses.

The Companys insurance subsidiaries
maintain an excess reinsurance program designed to protect
against large or unusual loss and loss adjustment expense
activity. The Company determines the appropriate amount of
reinsurance based on the Companys evaluation of the risks
accepted and analysis prepared by consultants and reinsurers and
on market conditions including the availability and pricing of
reinsurance.

Effective April 1, 2002, under the
workers compensation reinsurance treaty, the Company
reinsures each loss in excess of $300,000. The treaty covers
losses in excess of $300,000 up to $20.0 million. In
addition, the Company purchases coverage in excess of
$20.0 million up to $50.0 million to protect itself in
the event of a catastrophe.

Under the liability reinsurance treaty, the
reinsurers are responsible for 100% of the amount of each loss
in excess of $250,000 up to $2.0 million per occurrence.
Facultative reinsurance is purchased for individual risks with
limits above $2.0 million to cover 100% of the excess
amount.

Under the property reinsurance treaty, the
reinsurers are responsible for 100% of the amount of each loss
in excess of $250,000 up to $5.0 million per location for
an occurrence. In addition, the reinsurers are responsible for
100% of the excess of $750,000 up to $20.0 million for a
multi-location loss due to a catastrophe. Additional capacity
for individual risks may be acquired through facultative
reinsurance sources.

In its risk-sharing programs, the Company is also
subject to credit risk with respect to the payment of claims by
its clients captive, rent-a-captive, large deductible
programs, indemnification agreements, and on the portion of risk
exposure either ceded to the captives, or retained by the
clients. The capitalization and credit worthiness of prospective
risk-sharing partners is one of the factors considered by the
Company in entering into and renewing risk-sharing programs. The
Company collateralizes balances due from its risk-sharing
partners through Funds Withheld Trusts or Letters of Credit. The
Company has historically maintained an allowance for the
potential uncollectibility of certain reinsurance balances due
from some risk-sharing partners. On an ongoing basis, an
analysis of these exposures is conducted to determine the
potential exposure to uncollectibility. As of June 30,
2002, management believes this allowance is adequate. To date,

8



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


the Company has not, in the aggregate,
experienced material difficulties in collecting balances from
its risk-sharing partners. No assurance can be given, however,
regarding the future ability of any of the Companys
risk-sharing partners to meet their obligations.

NOTE 4  Shareholders
Equity & Line of Credit

Shareholders
Equity

On June 6, 2002, the Company sold 18,500,000
shares of newly issued common stock at $3.10 per share in a
public offering. On June 21, 2002, the underwriters
exercised their over-allotment option to acquire 2,775,000 of
additional shares of the Companys common stock. After
deducting underwriting discounts, commissions, and expenses, the
Company received net proceeds from the offering of
$60.5 million. The Company utilized $57.5 million of
the $60.5 million raised in its public offering to pay down
its line of credit by $20.0 million and to contribute
$37.5 million to the surplus of its insurance company
subsidiaries.

In conjunction with the public offering, the
Company issued warrants entitling the holders to purchase an
aggregate of 300,000 shares of common stock at $3.10 per share.
The warrants may be exercised at any time from June 6, 2003
through June 6, 2005, at which time any warrants not
exercised will become void.

Also, in conjunction with the public offering,
the Company issued 825,000 stock options at an exercise price of
$3.507 to certain members of the executive management team.

As a result of the Companys public
offering, shareholders equity increased to
$142.4 million, or a book value of $4.78 per common share,
at June 30, 2002 compared to $80.3 million, or a book
value of $9.44 per common share, at December 31, 2001.

Line of
Credit

The Company has a line of credit totaling
$36.3 million, of which $35.9 million was outstanding
at June 30, 2002. The Company drew on this line of credit
primarily to consummate the acquisitions made during 1997
through 1999. The Company also used the line of credit
periodically to fund operating expenses of the non-regulated
subsidiaries.

The line of credit bears interest at a variable
margin over the Prime Rate. Pursuant to the line of credit, the
variable margin over the Prime Rate increases by one-quarter
point every February, June, August, October, and December,
beginning February 1, 2002, until the line of credit is
paid down to $33.0 million, or less. As of June 30,
2002 the Prime Rate was 4.75% and the variable margin was 2.0%.

Pursuant to the debt covenants, which included a
revised pay-down schedule of the Companys line of credit,
the Company made a principal payment of $10.8 million on
June 28, 2002. This revised pay-down schedule requires the
Company to further reduce its line of credit by
$1.0 million on September 30, 2002, and
$11.3 million on December 31, 2002. Concurrent with
the principal payment made on June 28, 2002, the Company
entered into a revised agreement with the banks to further
reduce the line of credit to $28.0 million, pursuant to an
agreement by the lead lender to purchase the co-lenders
outstanding balance. This resulted in a gain on debt reduction
of $359,000, which was to the benefit of the Company. On
July 3, 2002, the Company paid an additional principal
payment of $9.2 million in order to comply with the revised
agreement. The outstanding balance of the line of credit was
$26.6 million after the additional principal payment.

As of June 30, 2002, the Company was in
compliance with all debt covenants.

The line of credit expires and is payable in full
on January 3, 2004, unless extended. Under the terms of the
credit agreement, in the event of default, the banks have the
right to terminate the line of credit and demand full and
immediate repayment. The Company is in the process of
negotiating new terms and a new structure for its future credit
needs.

9



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


NOTE 5  Regulatory Matters and
Rating Agencies

A significant portion of the Companys
consolidated assets represent assets of the Companys
insurance subsidiaries that at this time cannot be transferred
to the holding company in the form of dividends, loans or
advances. The restriction on the transferability to the holding
company from its insurance subsidiaries is dictated by Michigan
insurance regulatory guidelines, which are as follows: The
maximum discretionary dividend that may be declared, based on
data from the preceding calendar year, is the greater of each
insurance companys net income (excluding realized capital
gains) or ten percent of the insurance companys
policyholders surplus (excluding unrealized gains). These
dividends are further limited by a clause in the Michigan law
that prohibits an insurer from declaring dividends except out of
surplus earnings of the company. Earned surplus balances are
calculated on a quarterly basis. Since Star Insurance Company
(Star) is the parent insurance company, its maximum
dividend calculation represents the combined insurance
companies surplus. Based upon the 2001 statutory financial
statements, Star may not pay any dividends to the Company during
2002 without prior approval of the Michigan Office of Financial
and Insurance Services (OFIS).

During the second quarter of 2002, OFIS approved
a plan by which the Company could request future dividends
representing twenty-five percent of Stars most current
annual statutory earnings, without regard to Stars current
earned surplus position. Stars earned surplus position at
June 30, 2002, and December 31, 2001 was negative
$27.5 million and negative $29.1 million,
respectively. No statutory dividends were paid or requested from
Star in 2001 or 2000.

Insurance operations are subject to various
leverage tests (e.g. premium to statutory surplus ratios) which
are evaluated by regulators and rating agencies. The Company
performs three gross written premium leverage ratio valuations;
(1) gross written premium to surplus (2) gross written
premium to surplus, excluding fronted business, and
(3) gross written premium to surplus, excluding fronted
business and including a quota share surplus relief treaty,
which has been cancelled. The Companys target for gross
and net written premium to statutory surplus are 3.0 to 1 and
2.0 to 1, respectively. As previously indicated, the Company
contributed $37.5 million to its insurance company
subsidiaries surplus during the second quarter of 2002. As of
June 30, 2002, on a consolidated basis, gross and net
premium leverage ratios were 2.5 to 1 and 1.7 to 1, respectively.

The National Association of Insurance
Commissioners (NAIC) has adopted a risk-based
capital (RBC) formula to be applied to all property
and casualty insurance companies. The formula measures required
capital and surplus based on an insurance companys
products and investment portfolio and is used as a tool to
evaluate the capital of regulated companies. The RBC formula is
used by state insurance regulators to monitor trends in
statutory capital and surplus for the purpose of initiating
regulatory action. In general under these laws, an insurance
company must submit a report of its RBC level to the insurance
department of its state of domicile as of the end of the
previous calendar year. These laws require increasing degrees of
regulatory oversight and intervention as an insurance
companys RBC declines. The level of regulatory oversight
ranges from requiring the insurance company to inform and obtain
approval from the domiciliary insurance commissioner of a
comprehensive financial plan for increasing its RBC to mandatory
regulatory intervention requiring an insurance company to be
placed under regulatory control in a rehabilitation or
liquidation proceeding.

At December 31, 2001, all of the
Companys insurance subsidiaries were in compliance with
RBC requirements, with the exception of Star. Star reported
statutory surplus of $51.6 million at December 31,
2001, compared to the threshold requiring the minimum regulatory
involvement of $59.5 million in 2001. As a result of being
below the required level, on April 12, 2002, the Company
submitted a RBC Plan to OFIS outlining how it intended to
achieve compliance. On April 29, 2002, OFIS approved the
Plan. At June 30, 2002, Stars statutory surplus
increased $39.1 million to $90.7 million. This
increase reflects the contributed surplus of $37.5 million.
As previously indicated, the Company is within the targeted
gross and net leverage ratios. RBC levels are only measured as
of year end. With the $37.5 contributed statutory surplus, the
reduction of premium writings, and the stabilization of results
seen over the past four quarters, the Company

10



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


anticipates that it will be in compliance with
the required RBC level at the next measurement date of
December 31, 2002.

On June 26, 2002, A.M. Best upgraded Star
and its insurance company subsidiaries financial strength rating
to a B+ (Very Good) with a positive outlook. The
upgrade reflects A.M. Bests positive assessment of the
Companys improved financial condition as a result of the
issuance of 21,275,000 new common shares noted above and its
debt reduction. However, there can be no assurance that A.M.
Best will not change its rating of the Companys insurance
company subsidiaries in the future.

NOTE 6  Commitments and
Contingencies

The Company is involved in litigation arising in
the ordinary course of operations. While the results of
litigation cannot be predicted with certainty, management is of
the opinion, after reviewing these matters with legal counsel,
that the final outcome of such litigation will not have a
material effect upon the Companys financial statements.

NOTE 7  Segment
Information

The Company defines its operations as specialty
risk management operations (also known as the program business
segment) and agency operations based upon differences in
products and services. The separate financial information of
these segments is consistent with the way results are regularly
evaluated by management in deciding how to allocate resources
and in assessing performance. Intersegment revenue is eliminated
in consolidation.

Specialty
Risk Management Operations

The specialty risk management segment focuses on
specialty or niche insurance business in which it provides
services and coverages that are tailored to meet the specific
requirements of defined client groups and their members. This
includes providing services, such as risk management consulting,
claims handling, loss control, and reinsurance brokering, along
with various types of property and casualty insurance coverage,
including workers compensation, general liability and
commercial multiple peril.

Agency
Operations

The agency segment was formed in 1955 as a retail
insurance agency. The agency operations have grown to be one of
the largest agencies in Michigan and, with acquisitions, have
expanded into California. The agency operations produce
primarily commercial insurance, as well as personal property,
casualty, life and accident and health insurance, with more than
fifty insurance carriers from which it earns commission income.

11



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The following table sets forth the segment
results (in thousands):

|                       |                                   |                                   |                                    |        |         |         |   |         |         |         |  
|---------------------- | --------------------------------- | --------------------------------- | ---------------------------------- | ------ | ------- | ------- | - | ------- | ------- | ------- | -
|                       |                                   |                                  
|                       |                                   | For the Six Months                |                                   
|                       |                                   | Ended June 30,                    |                                   
|                       |                                   |                                   |                                   
|                       |                                   | 2002                              |                                    |        | 2001    |        
|                       |                                   |                                   |                                    |        |         |        
|Revenues:              |                                   |                                   |                                    |        |         |         |   |        
|                       | Net earned premiums               |                                   | $                                  | 82,970 |         |         | $ | 80,817  |        
|                       | Management fees                   |                                   |                                    | 11,651 |         |         |   | 13,938  |        
|                       | Investment income                 |                                   |                                    | 6,603  |         |         |   | 6,954   |        
|                       | Net realized loss on investments  |                                   |                                    | (301   | )       |         |   | (1,321  | )      
|                       |                                   |                                   |                                    |        |         |        
|                       |                                   | Specialty risk management segment |                                    |        | 100,923 |         |   |         | 100,388 |        
|                       | Agency operations                 |                                   |                                    | 7,614  |         |         |   | 9,160   |        
|                       | Reconciling items                 |                                   |                                    | 26     |         |         |   | 26      |        
|                       | Gain (loss) on sale of subsidiary |                                   |                                    | 199    |         |         |   | (850    | )      
|                       | Intersegment revenue              |                                   |                                    | (333   | )       |         |   | (353    | )      
|                       |                                   |                                   |                                    |        |         |        
|                       |                                   |                                   | Consolidated revenue               |        | $       | 108,429 |   |         | $       | 108,371 |  
|                       |                                   |                                   |                                    |        |         |        
|Pre-tax income (loss): |                                   |                                   |                                    |        |         |         |   |        
|                       | Specialty risk management         |                                   | $                                  | (217   | )       |         | $ | (12,320 | )      
|                       | Agency operations*                |                                   |                                    | 3,388  |         |         |   | 2,937   |        
|                       | Reconciling items                 |                                   |                                    | (2,075 | )       |         |   | (961    | )      
|                       | Gain (loss) on sale of subsidiary |                                   |                                    | 199    |         |         |   | (850    | )      
|                       |                                   |                                   |                                    |        |         |        
|                       |                                   |                                   | Consolidated pre-tax income (loss) |        | $       | 1,295   |   |         | $       | (11,194 | )
|                       |                                   |                                   |                                    |        |         |        



---



|  |                                                
|- | -----------------------------------------------
|* | Excluding the allocation of corporate overhead.

12



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                       |                                  |                                   |                                    |        |        |        |   |         |        |         |  
|---------------------- | -------------------------------- | --------------------------------- | ---------------------------------- | ------ | ------ | ------ | - | ------- | ------ | ------- | -
|                       |                                  |                                  
|                       |                                  | For the Quarters                  |                                   
|                       |                                  | Ended June 30,                    |                                   
|                       |                                  |                                   |                                   
|                       |                                  | 2002                              |                                    |        | 2001   |       
|                       |                                  |                                   |                                    |        |        |       
|Revenues:              |                                  |                                   |                                    |        |        |        |   |        
|                       | Net earned premiums              |                                   | $                                  | 44,313 |        |        | $ | 39,644  |       
|                       | Management fees                  |                                   |                                    | 6,088  |        |        |   | 6,202   |       
|                       | Investment income                |                                   |                                    | 3,492  |        |        |   | 3,459   |       
|                       | Net realized loss on investments |                                   |                                    | (310   | )      |        |   | (1,466  | )     
|                       |                                  |                                   |                                    |        |        |       
|                       |                                  | Specialty risk management segment |                                    |        | 53,583 |        |   |         | 47,839 |        
|                       | Agency operations                |                                   |                                    | 3,976  |        |        |   | 4,274   |       
|                       | Reconciling items                |                                   |                                    | 13     |        |        |   | 13      |       
|                       | Loss on sale of subsidiary       |                                   |                                    |       |        |        |   | (850    | )     
|                       | Intersegment revenue             |                                   |                                    | (96    | )      |        |   | (141    | )     
|                       |                                  |                                   |                                    |        |        |       
|                       |                                  |                                   | Consolidated revenue               |        | $      | 57,476 |   |         | $      | 51,135  |  
|                       |                                  |                                   |                                    |        |        |       
|Pre-tax income (loss): |                                  |                                   |                                    |        |        |        |   |        
|                       | Specialty risk management        |                                   | $                                  | (1,099 | )      |        | $ | (12,947 | )     
|                       | Agency operations*               |                                   |                                    | 1,694  |        |        |   | 1,367   |       
|                       | Reconciling items                |                                   |                                    | (528   | )      |        |   | 1,055   |       
|                       | Loss on sale of subsidiary       |                                   |                                    |       |        |        |   | (850    | )     
|                       |                                  |                                   |                                    |        |        |       
|                       |                                  |                                   | Consolidated pre-tax income (loss) |        | $      | 67     |   |         | $      | (11,375 | )
|                       |                                  |                                   |                                    |        |        |       



---



|  |                                                
|- | -----------------------------------------------
|* | Excluding the allocation of corporate overhead.

The reconciling item included in the revenue
relates to interest income in the holding company. The following
table sets forth the pre-tax income (loss) reconciling items (in
thousands):

|                         |  |                    |        |   |      |   |        |  
|------------------------ |  | ------------------ | ------ | - | ---- | - | ------ | -
|                         |  |                   
|                         |  | For the Six Months |       
|                         |  | Ended June 30,     |       
|                         |  |                    |       
|                         |  | 2002               |        |   | 2001 |  
|                         |  |                    |        |   |      |  
|Holding Company Expenses |  | $                  | (310   | ) |      | $ | 2,966  |  
|Gain on Debt Reduction   |  |                    | 359    |   |      |   |       |  
|Amortization             |  |                    |       |   |      |   | (1,445 | )
|Interest Expense         |  |                    | (2,124 | ) |      |   | (2,482 | )
|                         |  |                    |        |   |      |  
|                         |  | $                  | (2,075 | ) |      | $ | (961   | )
|                         |  |                    |        |   |      |  

|                         |  |                  |      |   |      |   |        |  
|------------------------ |  | ---------------- | ---- | - | ---- | - | ------ | -
|                         |  |                 
|                         |  | For the Quarters |     
|                         |  | Ended June 30,   |     
|                         |  |                  |     
|                         |  | 2002             |      |   | 2001 |  
|                         |  |                  |      |   |      |  
|Holding Company Expenses |  | $                | (13  | ) |      | $ | 3,115  |  
|Gain on Debt Reduction   |  |                  | 359  |   |      |   |       |  
|Amortization             |  |                  |     |   |      |   | (897   | )
|Interest Expense         |  |                  | (874 | ) |      |   | (1,163 | )
|                         |  |                  |      |   |      |  
|                         |  | $                | (528 | ) |      | $ | 1,055  |  
|                         |  |                  |      |   |      |  

NOTE 8 
Reclassifications

Certain amounts in the 2001 notes to consolidated
financial statements have been reclassified to conform with the
2002 presentation.

13



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##### Table of Contents








PART I  FINANCIAL
INFORMATION


In the opinion of management, the financial
statements reflect all adjustments of a normal recurring nature
necessary for a fair presentation of the interim periods.
Preparation of financial statements under GAAP requires
management to make estimates. Actual results could differ from
those estimates. Interim results are not necessarily indicative
of results expected for the entire year. These financial
statements should be read in conjunction with the Companys
2001 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.

This quarterly report may provide information
including certain statements which constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These include
statements regarding the intent, belief, or current expectations
of the Companys management. Including, but not limited to,
those statements that include the words believes,
expects, anticipates,
estimates, or similar expressions. You are cautioned
that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and
uncertainties, and results could differ materially from those
indicated by such forward-looking statements. Among the
important factors that could cause actual results to differ
materially from those indicated by such forward-looking
statements are: the frequency and severity of claims;
uncertainties inherent in reserve estimates; catastrophic
events; a change in the demand for, pricing of, availability or
collectibility of reinsurance; increased rate pressure on
premiums; obtainment of certain rate increases in current market
conditions; investment rate of return; changes in and adherence
to insurance regulation; actions taken by regulators, rating
agencies or lenders; obtainment of certain processing
efficiencies; changing rates of inflation; general economic
conditions and other risks identified in the Companys
reports and registration statements filed with the Securities
and Exchange Commission. The Company is not under any obligation
to (and expressly disclaims any such obligation to) update or
alter its forward-looking statements whether as a result of new
information, future events or otherwise.

14



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##### Table of Contents



PART I  FINANCIAL
INFORMATION  (Continued)







Item 2Managements Discussion and Analysis of
Financial Condition and Results of OperationsFor the Periods ended June 30, 2002 and 2001

Meadowbrook Insurance Group, Inc. (the
Company) is a publicly traded specialty risk
management company, specializing in alternative market insurance
and risk management solutions for agents, brokers, professional
and trade associations, and insureds of all sizes. The
alternative market includes a wide range of approaches to
financing and managing risk exposures such as captives, risk
retention and risk purchasing groups, governmental pools and
trusts, and self-insurance plans. The alternative market has
developed as a result of the historical volatility in the cost
and availability of traditional commercial insurance coverages,
and usually involves some form of self-insurance or risk-sharing
on the part of the client. The Company develops and manages
alternative risk management programs for defined groups and
their members. The Company also operates as an insurance agency
representing policyholders in placing their insurance coverages
with unaffiliated insurance companies. Management defines its
business segments as specialty risk management operations and
agency operations.

Results of Operations for the Six Months Ended
June 30, 2002 and 2001

Overview

Net income for the six months ended June 30,
2002 was $1.0 million, or $0.09 per share, compared to net
loss of $7.3 million, or $0.86 per share, for the six
months ended June 30, 2001.

Specialty
Risk Management Operations

The following table sets forth the revenues and
results from specialty risk management operations (in thousands):

|             |                                  |                    |      |        |         |   |         |        |         | 
|------------ | -------------------------------- | ------------------ | ---- | ------ | ------- | - | ------- | ------ | ------- | 
|             |                                  |                   
|             |                                  | For the Six Months |     
|             |                                  | Ended June 30,     |     
|             |                                  |                    |     
|             |                                  | 2002               |      |        | 2001    |  
|             |                                  |                    |      |        |         |  
|Revenues:    |                                  |                    |      |        |         |   |         |       
|             | Net earned premiums              |                    | $    | 82,970 |         |   | $       | 80,817 |        
|             | Management fees                  |                    |      | 11,651 |         |   |         | 13,938 |        
|             | Investment income                |                    |      | 6,603  |         |   |         | 6,954  |        
|             | Net realized loss on investments |                    |      | (301   | )       |   |         | (1,321 | )      
|             |                                  |                    |      |        |         |  
|             |                                  | Total revenue      |      | $      | 100,923 |   |         | $      | 100,388 | 
|             |                                  |                    |      |        |         |  
|Pre-tax loss |                                  | $                  | (217 | )      |         | $ | (12,320 | )     
|             |                                  |                    |      |        |         |  

Revenues from specialty risk management
operations increased $535,000, or 0.5%, to $100.9 million
for the six months ended June 30, 2002 from
$100.4 million for the comparable period in 2001. This
increase reflects a $2.2 million, or 2.7% increase in net
earned premiums to $83.0 million in the six months ended
June 30, 2002 from $80.8 million in the comparable
period in 2001. This growth is from a $8.1 million
reduction in net ceded earned premium associated with the
cancellation of a quota share reinsurance treaty for several
workers compensation programs. This increase is also the
result of a $16.5 million growth in existing programs from
increasing policy count, rate increases, and audit premium.
Partially offsetting this growth was a reduction in earned
premium of $9.4 million related to previously discontinued
programs and a decrease of $13.0 million related to
programs terminated for leverage ratio purposes.

Management fees decreased $2.3 million, or
16.5%, to $11.6 million from $13.9 million. This
decrease is the result of a one-time $1.6 million profit
sharing fee recognized in the six months ended June 30,
2001. This decrease is also the result of a $952,000 decrease in
fees for a specific account for which the client took the

15



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##### Table of Contents



PART I  FINANCIAL
INFORMATION  (Continued)


services in-house. Offsetting this decrease was a
net growth in revenue of $262,000 on two specific programs
related to a subsidiary of the Company.

Net investment income decreased $351,000 or 5.0%,
to $6.6 million for the six months ended June 30,
2002, compared to $7.0 million for the comparable period in
2001. This decrease reflects a reduction in average invested
assets and a decrease in pre-tax yields to 5.3% in 2002 from
6.1% in 2001.

Net realized losses on investments were $301,000
for the six months ended June 30, 2002, compared to a
$1.3 million loss for the comparable period in 2001.
Realized losses in the six months ended June 30, 2002, were
primarily related to a $1.5 million loss related to
WorldCom, Inc. bonds. These losses were offset by realized gains
from the sale of other investments. There is approximately
$5.5 million in unrealized gains remaining in the
investment portfolio, as of June 30, 2002, up from
$2.2 million at March 31, 2002. The realized losses in
the second quarter of 2001 were primarily the result of $870,000
and $414,000 impairment charges related to a Connecticut Surety
Company (CSC) Subordinated Surplus Note and captive
investments, respectively.

Specialty risk management operations generated a
pre-tax loss of $217,000 for the six months ended June 30,
2002 compared to a pre-tax loss of $12.3 million for the
comparable period in 2001. The Companys loss and loss
adjustment expense ratio improved by 15.1 points to 70.2% for
the six months ended June 30, 2002 from 85.3% for the same
period in 2001. This improvement reflects the elimination of a
limited group of unprofitable programs, which were discontinued
in late 1999 and early 2000. The improvement in the loss ratio
also reflects the elimination of the surplus relief treaty and
an increase in audit premium recognized in 2002. The
Companys expense ratio was 36.8% for the six months ended
June 30, 2002, compared to 35.6% in the comparable period
in 2001. Due to the run-off of discontinued and terminated
programs, gross premium is declining and, as a result, fixed
costs as a percentage of revenue, are temporarily increasing the
expense ratio.

Agency
Operations

The following table sets forth the revenues and
results from agency operations (in thousands):

|                |  |                    |       |  |      |   |       | 
|--------------- |  | ------------------ | ----- |  | ---- | - | ----- | 
|                |  |                   
|                |  | For the Six Months |      
|                |  | Ended June 30,     |      
|                |  |                    |      
|                |  | 2002               |       |  | 2001 |  
|                |  |                    |       |  |      |  
|Net commission  |  | $                  | 7,614 |  |      | $ | 9,160 | 
|Pre-tax income* |  | $                  | 3,388 |  |      | $ | 2,937 | 



---



|  |                                               
|- | ----------------------------------------------
|* | Excluding the allocation of corporate overhead

Revenue from agency operations, which consists
primarily of agency commission revenue, decreased
$1.6 million, or 16.9%, to $7.6 million for the six
months ended June 30, 2002 from $9.2 million for the
comparable period in 2001. This decrease reflects the sale of a
Florida-based agency effective July 1, 2001. Excluding
revenues related to this agency for the six months ended
June 30, 2001, revenues for the agency operations would
have increased 6.4%.

Agency operations generated pre-tax income of
$3.4 million for the six months ended June 30, 2002,
compared to $2.9 million for the comparable period in 2001.
The improvement in the pre-tax margin is the result of rate
increases, overall expense reductions, and a $850,000 impairment
recorded in the second quarter of 2001, in conjunction with the
sale of the Florida-based agency.

Other
Items

Taxes

Federal income tax expense for the six months
ended June 30, 2002 was $263,000, or 20.3% of income before
taxes. For the same six months last year, the Company reflected
a federal income tax benefit of

16



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##### Table of Contents



PART I  FINANCIAL
INFORMATION  (Continued)


$3.9 million, or 34.5% of loss before taxes.
The fluctuation in the effective tax rate is the result of a
decreased level of tax-exempt interest in proportion to total
underwriting results.

Interest
Expense

Interest expense for the six months ended
June 30, 2002 decreased by $358,000, or 14.4%, to
$2.1 million, from $2.5 million for the comparable
period in 2001. This decrease reflects a reduction in the
interest rate. Interest expense is primarily attributable to the
Companys line of credit. The Company anticipates a further
reduction in interest expense as a result of principal payments
of $10.8 million and $9.2 million made on
June 28, 2002 and July 3, 2002, respectively.

Results of Operations for the Quarters Ended
June 30, 2002 and 2001

Overview

Net income for the quarter ended June 30,
2002 was $122,000, or $0.01 per share, compared to net loss of
$7.5 million, or $0.88 per share, for the quarter ended
June 30, 2001. Revenues for the quarter ended June 30,
2002 increased $6.4 million, or 12.4% to $57.5 million from
$51.1 million for the comparable period in 2001.

Specialty
Risk Management Operations

The following table sets forth the revenues and
results from specialty risk management operations (in thousands):

|             |                                  |                        |        |        |        |   |         |        |        | 
|------------ | -------------------------------- | ---------------------- | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|             |                                  |                       
|             |                                  | For the Quarters Ended |       
|             |                                  | June 30,               |       
|             |                                  |                        |       
|             |                                  | 2002                   |        |        | 2001   |  
|             |                                  |                        |        |        |        |  
|Revenues:    |                                  |                        |        |        |        |   |         |       
|             | Net earned premiums              |                        | $      | 44,313 |        |   | $       | 39,644 |       
|             | Management fees                  |                        |        | 6,088  |        |   |         | 6,202  |       
|             | Investment income                |                        |        | 3,492  |        |   |         | 3,459  |       
|             | Net realized loss on investments |                        |        | (310   | )      |   |         | (1,466 | )     
|             |                                  |                        |        |        |        |  
|             |                                  | Total revenue          |        | $      | 53,583 |   |         | $      | 47,839 | 
|             |                                  |                        |        |        |        |  
|Pre-tax loss |                                  | $                      | (1,099 | )      |        | $ | (12,947 | )     
|             |                                  |                        |        |        |        |  

Revenues from specialty risk management
operations increased $5.8 million, or 12.0%, to
$53.6 million for the quarter ended June 30, 2002 from
$47.8 million for the comparable period in 2001. This
increase reflects a $4.7 million, or 11.8% increase in net
earned premiums to $44.3 million in the quarter ended
June 30, 2002 from $39.6 million in the comparable
period in 2001. This growth is from a $15.4 million
reduction in net ceded earned premium associated with the
cancellation of a quota share reinsurance treaty for several
workers compensation programs. This increase is also the
result of a $1.9 million growth in existing programs from
increasing policy count, rate increases, and audit premium.
Partially offsetting this growth was a reduction in earned
premium of $5.0 million related to previously discontinued
programs and a decrease of $7.6 million related to programs
terminated for leverage ratio purposes.

Management fees decreased $114,000, or 1.8%, to
$6.0 million from $6.2 million. This is the result of
a $475,000 decrease in fees for a specific account for which the
client took the services in-house. Offsetting this decrease was
a net growth in revenue of $139,000 on two specific programs
related to a subsidiary of the Company.

Net investment income increased $33,000 or 1.0%,
to $3.5 million for the quarter ended June 30, 2002,
compared to $3.5 million for the comparable period in 2001.

17



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PART I  FINANCIAL
INFORMATION  (Continued)


Net realized losses on investments were $310,000
for the quarter ended June 30, 2002, compared to a
$1.5 million loss for the comparable period in 2001.
Realized losses in the second quarter of 2002 were primarily
related to a $1.5 million loss related to WorldCom, Inc.
bonds. These losses were offset by realized gains from the sale
of other investments. The realized losses in the second quarter
of 2001 were primarily the result of $870,000 and $414,000
impairment charges related to a CSC Subordinated Surplus Note
and captive investments, respectively.

Specialty risk management operations generated a
pre-tax loss of $1.1 million for the quarter ended
June 30, 2002 compared to a pre-tax loss of
$12.9 million for the comparable period in 2001. The
Companys loss and loss adjustment expense ratio improved
by 19.8 points to 72.6% for the quarter ended June 30,
2002 from 92.4% for the same period in 2001. This improvement is
the result of the establishment of a $3.3 million provision
in 2001 for the exposure on the discontinued surety business.
This improvement is also the result of the elimination of a
limited group of unprofitable programs, which were discontinued
in late 1999 and early 2000. Further impacting the second
quarter 2002 loss ratio, was an adjustment of $800,000 to net
incurred losses related to the surplus relief treaty and an
increase of $672,000 in prior reserves primarily related to two
inactive auto liability programs. The Companys expense
ratio was 35.8% compared to 35.9% in the comparable period in
2001. The cancellation of the surplus relief treaty favorable
impacted the expense ratio in the second quarter by
1.3 points. Due to the run-off of discontinued and
terminated programs, gross premium is declining and, as a
result, fixed costs as a percentage of revenue, are temporarily
increasing the expense ratio.

Agency
Operations

The following table sets forth the revenues and
results from agency operations (in thousands):

|                 |  |                |       |  |      |   |       | 
|---------------- |  | -------------- | ----- |  | ---- | - | ----- | 
|                 |  |               
|                 |  | For the        |      
|                 |  | Quarters Ended |      
|                 |  | June 30,       |      
|                 |  |                |      
|                 |  | 2002           |       |  | 2001 |  
|                 |  |                |       |  |      |  
|Net commission   |  | $              | 3,976 |  |      | $ | 4,274 | 
|Pre-tax income * |  | $              | 1,694 |  |      | $ | 1,367 | 



---



|  |                                               
|- | ----------------------------------------------
|* | Excluding the allocation of corporate overhead

Revenue from agency operations, which consists
primarily of agency commission revenue, decreased $298,000, or
7.0%, to $4.0 million for the quarter ended June 30,
2002 from $4.3 million for the comparable period in 2001.
This decrease reflects the sale of a Florida-based agency
effective July 1, 2001. Excluding revenues related to this
agency for the quarter ended June 30, 2001, revenues for
the agency operations would have increased 16.6%.

Agency operations generated pre-tax income of
$1.7 million for the quarter ended June 30, 2002,
compared to $1.4 million for the comparable period in 2001.
The improvement in the pre-tax margin is the result of rate
increases, overall expense reductions, and a $850,000 impairment
recorded in the second quarter of 2001, in conjunction with the
sale of the Florida-based agency.

Other
Items

Taxes

Federal income tax benefit for the quarter ended
June 30, 2002 was $55,000, or 81.1% of income before taxes.
For the same quarter last year, the Company reflected a federal
income tax benefit of $3.9 million, or 34.2% of loss before
taxes. The tax benefit for the quarter ended June 30, 2002
reflects the fact that tax-exempt interest on investments was
greater than net income excluding tax- exempt interest. The
fluctuation in the effective tax rate is the result of a
decreased level of tax-exempt interest in proportion to total
underwriting results.

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##### Table of Contents



PART I  FINANCIAL
INFORMATION  (Continued)


Interest
Expense

Interest expense for the quarter ended
June 30, 2002 decreased by $289,000, or 24.8%, to $874,000
from $1.2 million for the comparable period in 2001. This
decrease reflects the reduction in the interest rate. Interest
expense is primarily attributable to the Companys line of
credit. The Company anticipates a further reduction in interest
expense as a result of principal payments of $10.8 million
and $9.2 million made on June 28, 2002 and
July 3, 2002, respectively.

Liquidity and Capital Resources

The principal sources of funds for the Company
and its subsidiaries are insurance premiums, investment income,
proceeds from the maturity and sale of invested assets, risk
management fees, and agency commissions. Funds are primarily
used for the payment of claims, commissions, salaries and
employee benefits, other operating expenses, shareholder
dividends, and debt service. The Company generates operating
cash flow from non-regulated subsidiaries in the form of
commission revenue, outside management fees, and intercompany
management fees. These sources of income are used to meet debt
service, shareholders dividends, and other operating
expenses of the holding company and the non-regulated
subsidiaries. Earnings before interest, taxes, depreciation and
amortization from non-regulated subsidiaries were approximately
$7.1 million and $8.3 million for the six months ended
June 30, 2002 and 2001, respectively. These earnings were
available for debt service.

Cash flow used in operations for the quarter
ended June 30, 2002 was $14.0 million, compared to
cash flow provided by operations of $6.5 million for the
comparable quarter in 2001. The decrease in cash flow reflects
the acceleration in the payment of previously reserved claims.
Prior to the Companys recent public offering, the Company
had reduced its gross and net written premium to achieve certain
leverage ratios. As carried reserves are paid and growth in
premium declines, cash and invested assets in the insurance
subsidiaries declined.

On June 6, 2002, the Company sold 18,500,000
shares of newly issued common stock at $3.10 per share in a
public offering. On June 21, 2002, the underwriters
exercised their over-allotment option to acquire 2,775,000 of
additional shares of the Companys common stock. After
deducting underwriting discounts, commissions, and expenses, the
Company received net proceeds from the offering of
$60.5 million. The Company contributed $37.5 million
of the proceeds to its insurance company subsidiaries,
$20.0 million was used to reduce its outstanding balance on
the Companys line of credit, and the remaining balance
will be used for general corporate purposes.

In conjunction with the offering, the Company
issued warrants entitling the holders to purchase an aggregate
of 300,000 shares of common stock at $3.10 per share.
The warrants may be exercised at any time from June 6, 2003
through June 6, 2005, at which time any warrants not
exercised will become void.

Also, in conjunction with the public offering,
the Company issued 825,000 stock options at an exercise
price of $3.507 to certain members of the executive management
team.

At June 30, 2002, the Company had a bank
line of credit that permitted borrowings up to
$36.3 million, of which $35.9 million was outstanding.
The line of credit bears interest at a variable margin over the
Prime Rate. As of June 30, 2002, the Prime Rate was 4.75%
and the variable margin was 2.0%. Pursuant to the line of
credit, the variable margin over the Prime Rate increases by
one-quarter point every February, June, August, October, and
December, beginning February 1, 2002, until the line of
credit is paid down to $33.0 million, or less.

Pursuant to the debt covenants, which included a
revised pay-down schedule of the Companys line of credit,
the Company made a principal payment of $10.8 million on
June 28, 2002. This revised pay-down schedule requires the
Company to further reduce its line of credit by
$1.0 million on September 30, 2002, and
$11.3 million on December 31, 2002. Concurrent with
the principal payment made on June 28, 2002, the Company
entered into a revised agreement with the banks to further
reduce the line of credit to $28.0 million,

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PART I  FINANCIAL
INFORMATION  (Continued)


pursuant to an agreement by the lead lender to
purchase the co-lenders outstanding balance. This resulted
in a gain on debt reduction of $359,000, which was to the
benefit of the Company. On July 3, 2002, the Company paid
an additional principal payment of $9.2 million in order to
comply with the revised agreement. The outstanding balance of
the line of credit was $26.6 million after the additional
principal payment.

As of June 30, 2002, the Company was in
compliance with all debt covenants.

The line of credit expires and is payable in full
on January 3, 2004, unless extended. Under the terms of the
credit agreement, in the event of default, the banks have the
right to terminate the line of credit and demand full and
immediate repayment. The Company is in the process of
negotiating new terms and a new structure for its future credit
needs.

As a result of the Companys public
offering, shareholders equity increased to
$142.4 million, or a book value of $4.78 per common
share, at June 30, 2002 compared to $80.3 million, or
a book value of $9.44 per common share, at
December 31, 2001.

A significant portion of the Companys
consolidated assets represent assets of the Companys
insurance subsidiaries that at this time cannot be transferred
to the holding company in the form of dividends, loans or
advances. The restriction on the transferability to the holding
company from its insurance subsidiaries is dictated by Michigan
insurance regulatory guidelines, which are as follows: The
maximum discretionary dividend that may be declared, based on
data from the preceding calendar year, is the greater of each
insurance companys net income (excluding realized capital
gains) or ten percent of the insurance companys
policyholders surplus (excluding unrealized gains). These
dividends are further limited by a clause in the Michigan law
that prohibits an insurer from declaring dividends except out of
surplus earnings of the company. Earned surplus balances are
calculated on a quarterly basis. Since Star Insurance Company
(Star) is the parent insurance company, its maximum
dividend calculation represents the combined insurance
companies surplus. Based upon the 2001 statutory financial
statements, Star may not pay any dividends to the Company during
2002 without prior approval of the Michigan Office of Financial
and Insurance Services (OFIS).

During the second quarter of 2002, OFIS approved
a plan by which the Company could request future dividends
representing twenty-five percent of Stars most current
annual statutory earnings, without regard to Stars current
earned surplus position. Stars earned surplus position at
June 30, 2002, and December 31, 2001 was negative
$27.5 million and negative $29.1 million,
respectively. No statutory dividends were paid or requested from
Star in 2001 or 2000.

Insurance operations are subject to various
leverage tests (e.g. premium to statutory surplus ratios) which
are evaluated by regulators and rating agencies. The Company
performs three gross written premium leverage ratio valuations;
(1) gross written premium to surplus (2) gross written
premium to surplus, excluding fronted business, and
(3) gross written premium to surplus, excluding fronted
business and including a quota share surplus relief treaty,
which has been cancelled. The Companys target for gross
and net written premium to statutory surplus are 3.0 to 1
and 2.0 to 1, respectively. As previously indicated, the
Company contributed $37.5 million to its insurance company
subsidiaries surplus during the second quarter of 2002. As of
June 30, 2002, on a consolidated basis, gross and net
premium leverage ratios were 2.5 to 1 and 1.7 to 1,
respectively.

Regulatory and Rating Issues

The National Association of Insurance
Commissioners (NAIC) has adopted a risk-based
capital (RBC) formula to be applied to all property
and casualty insurance companies. The formula measures required
capital and surplus based on an insurance companys
products and investment portfolio and is used as a tool to
evaluate the capital of regulated companies. The RBC formula is
used by state insurance regulators to monitor trends in
statutory capital and surplus for the purpose of initiating
regulatory action. In general, under these laws, an insurance
company must submit a report of its RBC level to the insurance
department of its state of domicile as of the end of the
previous calendar year. These laws require increasing degrees of

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##### Table of Contents



PART I  FINANCIAL
INFORMATION  (Continued)


regulatory oversight and intervention as an
insurance companys RBC declines. The level of regulatory
oversight ranges from requiring the insurance company to inform
and obtain approval from the domiciliary insurance commissioner
of a comprehensive financial plan for increasing its RBC to
mandatory regulatory intervention requiring an insurance company
to be placed under regulatory control in a rehabilitation or
liquidation proceeding.

At December 31, 2001, all of the
Companys insurance subsidiaries were in compliance with
RBC requirements, with the exception of Star. Star reported
statutory surplus of $51.6 million at December 31,
2001, compared to the threshold requiring the minimum regulatory
involvement of $59.5 million in 2001. As a result of being
below the required level, on April 12, 2002, the Company
submitted a RBC Plan to OFIS outlining how it intended to
achieve compliance. On April 29, 2002, OFIS approved the
Plan. At June 30, 2002, Stars statutory surplus
increased $39.1 million to $90.7 million. This
increase reflects the contributed surplus of $37.5 million.
As of June 30, 2002, on a consolidated basis, gross and net
premium leverage ratios were 2.5 to 1 and 1.7 to 1,
respectively, which were within the targeted gross and net
leverage ratios. RBC levels are only measured as of year end.
With the $37.5 contributed statutory surplus, the reduction of
premium writings, and the stabilization of results seen over the
past four quarters, the Company anticipates that it will be in
compliance with the required RBC level at the next measurement
date of December 31, 2002.

On June 26, 2002, A.M. Best upgraded
Star and its insurance company subsidiaries financial strength
rating to a B+ (Very Good) with a positive outlook.
The upgrade reflects A.M. Bests positive assessment
of the Companys improved financial condition as a result
of the issuance of 21,275,000 new common shares noted above
and its debt reduction. However, there can be no assurance that
A.M. Best will not change its rating of the Companys
insurance company subsidiaries in the future.

New Accounting Pronouncements

FASB has issued SFAS No. 142 Goodwill
and Other Intangible Assets. SFAS No. 142, for
periods starting December 15, 2001 or thereafter,
eliminates the amortization of goodwill. In addition, the
Company is required to test, at least annually, all existing
goodwill for impairment using a fair value approach, on a
reporting unit basis.

Upon implementation in 2002, the Company is no
longer amortizing goodwill. Goodwill amortization for the six
months and quarter ended June 30, 2001, was approximately
$1.4 million and $896,000, respectively. In accordance with
the transition provisions, the Company completed the first step
of the transitional goodwill impairment test. The Company
evaluated goodwill for impairment during the second quarter of
2002. This evaluation involved the use of a fair value approach
to each reporting unit. Based on this evaluation, management
determined there is no impairment to goodwill.

The following table provides income before the
cumulative effect of a change in accounting principle, net
income, and related per share amounts as of June 30, 2002
and 2001, as reported and adjusted as if the Company had
eliminated the amortization of goodwill effective
January 1, 2001 (in thousands):

|                                   |         |                  |       |      |      |   |        |       |  
|---------------------------------- | ------- | ---------------- | ----- | ---- | ---- | - | ------ | ----- | -
|                                   |         |                 
|                                   |         | For the          |      
|                                   |         | Six Months Ended |      
|                                   |         | June 30,         |      
|                                   |         |                  |      
|                                   |         | 2002             |       |      | 2001 |  
|                                   |         |                  |       |      |      |  
|Net income (loss), as reported     |         | $                | 1,032 |      |      | $ | (7,329 | )    
|Amortization expense               |         |                  |      |      |      |   | 1,445  |      
|Tax effect of amortization expense |         |                  |      |      |      |   | (607   | )    
|                                   |         |                  |       |      |      |  
|Net income (loss), as adjusted     |         | $                | 1,032 |      |      | $ | (6,491 | )    
|                                   |         |                  |       |      |      |  
|Earnings per share, as adjusted    |         |                  |       |      |      |   |        |      
|                                   | Basic   |                  | $     | 0.09 |      |   | $      | (0.76 | )
|                                   | Diluted |                  | $     | 0.09 |      |   | $      | (0.76 | )

21



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PART I  FINANCIAL
INFORMATION  (Continued)


|                                   |         |               |     |      |      |   |        |       |  
|---------------------------------- | ------- | ------------- | --- | ---- | ---- | - | ------ | ----- | -
|                                   |         |              
|                                   |         | For the       |    
|                                   |         | Quarter Ended |    
|                                   |         | June 30,      |    
|                                   |         |               |    
|                                   |         | 2002          |     |      | 2001 |  
|                                   |         |               |     |      |      |  
|Net income (loss), as reported     |         | $             | 122 |      |      | $ | (7,482 | )    
|Amortization expense               |         |               |    |      |      |   | 896    |      
|Tax effect of amortization expense |         |               |    |      |      |   | (511   | )    
|                                   |         |               |     |      |      |  
|Net income (loss), as adjusted     |         | $             | 122 |      |      | $ | (7,097 | )    
|                                   |         |               |     |      |      |  
|Earnings per share, as adjusted    |         |               |     |      |      |   |        |      
|                                   | Basic   |               | $   | 0.01 |      |   | $      | (0.83 | )
|                                   | Diluted |               | $   | 0.01 |      |   | $      | (0.83 | )

FASB has issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets. Under SFAS No. 144, for periods starting
January 1, 2002 or thereafter, discontinued operations are
measured at the lower of carrying value or fair value less costs
to sell, rather than on a net realizable value basis. SFAS
No. 144 also broadens the definition of discontinued
operations to include a component of an entity (rather than only
a segment of a business). The adoption of this standard did not
have a material impact on the Companys results of
operations.

Item
3.     Quantitative and Qualitative
Disclosures About Market Risk

Market risk is the risk of loss arising from
adverse changes in market rates and prices, such as interest
rates as well as other relevant market rate or price changes.
The volatility and liquidity in the markets in which the
underlying assets are traded directly influence market risk. The
following is a discussion of the Companys primary risk
exposures and how those exposures are currently managed as of
June 30, 2002. The Companys market risk sensitive
instruments are primarily related to debt securities and equity
securities, which are available for sale and not held for
trading purposes.

Interest rate risk is managed within the context
of asset and liability management where the target duration of
the investment portfolio is managed to approximate that of the
liabilities as determined by actuarial analysis.

At June 30, 2002, the fair value of the
Companys investment portfolio was $214.5 million,
99.1% of which is invested in debt securities. The remaining
0.9% is invested in preferred stocks. The Companys market
risk to the investment portfolio is interest rate risk
associated with debt securities. The Companys exposure to
equity price risk is not significant. The Companys
investment philosophy is one of maximizing after-tax earnings
and has historically included significant investments in
tax-exempt bonds. During the year, the Company continued to
increase its allocation to taxable securities to maximize
after-tax income and the utilization of the Companys NOL.
For the Companys investment portfolio, there were no
significant changes in the Companys primary market risk
exposures or in how those exposures are managed compared to the
year ended December 31, 2001. The Company does not
anticipate significant changes in the Companys primary
market risk exposures or in how those exposures are managed in
future reporting periods based upon what is known or expected to
be in effect.

A sensitivity analysis is defined as the
measurement of potential loss in future earnings, fair values or
cash flows of market sensitive instruments resulting from one or
more selected hypothetical changes in interest rates and other
market rates or prices over a selected period. In the
Companys sensitivity analysis model, a hypothetical change
in market rates is selected that is expected to reflect
reasonable possible near-term changes in those rates. The term
near term means a period of up to one year from the
date of the consolidated financial statements. In its
sensitivity model, the Company uses fair values to measure its
potential loss of debt securities assuming an upward parallel
shift in interest rates to measure the hypothetical change in
fair values. Based upon this sensitivity model, a 100 basis
point increase in interest rates produces a

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PART I  FINANCIAL
INFORMATION  (Continued)


loss in fair value of market sensitive
instruments of approximately $8.8 million. This loss in
fair value only reflects the impact of interest rate increases
on the fair value of the Companys debt securities. This
loss after tax constitutes 4.1% of shareholders equity.
The other financial instruments, which include cash and cash
equivalents, equity securities, premium receivables, reinsurance
recoverables, line of credit and other assets and liabilities,
when included in the sensitivity model, do not produce a
material loss in fair values.

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PART II  OTHER
INFORMATION







Item 1.     Legal
Proceedings


The information required by this item is included
under Note 6 of the Companys
Form 10-Q for the six months ended June 30, 2002,
which is hereby incorporated by reference.






|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

On June 6, 2002, the Company sold 18,500,000
shares of newly issued common stock at $3.10 per share in a
public offering. Pursuant to a registration statement on
Form S-2 (Reg. No. 333-86548). The registration
statement was declared effective by the Securities and Exchange
Commission on June 5, 2002. The gross proceeds from the
offering were $57.3 million. After deducting underwriting
discounts and commissions, the Company received net proceeds
from the offering of $53.3 million.

On June 21, 2002, the underwriters for the
public offering exercised their over-allotment option. The
underwriters exercised the option to acquire 2,775,000
additional share of the Companys common stock, resulting
in net proceeds of approximately $8.0 million. Total net
proceeds of the Companys public offering were
approximately $61.3 million. Including other related
expenses of approximately $800,000, overall net proceeds were
approximately $60.5 million. The managing underwriter of
the offering was Friedman, Billings, Ramsey & Co., Inc.,
with Ferris, Baker Watts, Inc., and Advest, Inc. also
participating.

The Company utilized $57.5 million of the
$60.5 million raised in its public offering to pay down its
line of credit by $20.0 million and to contribute
$37.5 million to the surplus of its insurance company
subsidiaries.

Item 4.     Submission
of Matters to a Vote of Security Holders

On May 1, 2002, the Company held its Annual
Meeting of Shareholders (Annual Meeting) to consider
and act upon the following proposals:



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) The election of three (3) members of the
    Board of Directors of the Company;                                                                                                 
|
| | (2) Ratification of the appointment of the
    Companys independent accountants, PricewaterhouseCoopers,
    LLP;                                                                  
|
| | (3) Vote upon a proposal to amend the
    Companys Articles of Incorporation to increase the number
    of authorized shares of Common Stock from 30,000,000 to
    50,000,000; and
|
| | (4) Vote upon the adoption of the
    Meadowbrook Insurance Group, Inc. 2002 Stock Option Plan.                                                                                     

The following Directors were up for election at
the Annual Meeting: (1) Robert H. Naftaly;
(2) Robert W. Sturgis; and (3) Bruce E.
Thal. The shareholders re-elected the Directors at the Annual
Meeting; and therefore, each shall continue in office. The vote
tabulation for each Director was as follows:
(1) Robert H. Naftaly  4,594,229 in favor
and 782,467 abstained; (2) Robert W.
Sturgis  4,590,229 in favor and 786,467 abstained;
and (3) Bruce E. Thal  4,586,229 in favor
and 790,467 abstained. Other directors continuing in office
after the meeting were as follows; Robert S. Cubbin,
Joseph S. Dresner, Hugh W. Greenberg, Joseph C.
Henry, Florine Mark, David K. Page, Merton J. Segal,
Irvin F. Swider, Sr., and Herbert Tyner.

The shareholders ratified the appointment of
PricewaterhouseCoopers, LLP by a vote of 5,349,176 in favor,
23,584 against, and 3,936 abstained.

The shareholders voted to amend the bylaws to
increase the authorized common shares of the Company from
30,000,000 to 50,000,000 by a vote of 4,522,487 in favor,
849,773 against, and 4,436 abstained.

The shareholders approved the adoption of the
Meadowbrook Insurance Group, Inc. 2002 Stock Option Plan by a
vote of 4,473,848 in favor, 896,960 against, and 5,888 abstained.

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##### Table of Contents



PART II  OTHER
INFORMATION  (Continued)


Item
6.     Exhibits and Reports on Form
8-K

(A) The following documents are filed as
part of this Report:

|        |      |  |             |                                                                                                                                
|------- | ---- |  | ----------- | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No      |      |  | Description
|        |      |  |            
|        | 10.1 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Merton J. Segal                            
|        | 10.2 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Robert S. Cubbin                           
|        | 10.3 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Joseph C. Henry                            
|        | 10.4 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Michael G. Costello                        
|        | 10.5 |  |             | Assignment Agreement                                                                                                           
|        | 11   |  |             | Statement re computation of per share earnings.                                                                                
|        | 99.1 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|        | 99.2 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.

(B) Reports on Form 8-K:

A report on Form 8-K dated May 16, 2002
was filed in which the earliest event reported was May 9,
2002. This event was reported under Item 5 Other
Events and Item 7(c), Exhibits.

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SIGNATURES


Pursuant to the requirements of the Securities
and Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto
duly authorized.



| |                                  
| | ---------------------------------
| | MEADOWBROOK INSURANCE GROUP, INC.
|
| | By: /s/ JOSEPH C. HENRY          
| |                                  
| | Executive Vice President and     
| | Acting Chief Financial Officer   

Dated: August 14, 2002

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EXHIBIT INDEX

|        |      |  |             |                                                                                                                                
|------- | ---- |  | ----------- | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No.     |      |  | Description
|        |      |  |            
|        | 10.1 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Merton J. Segal                            
|        | 10.2 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Robert S. Cubbin                           
|        | 10.3 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Joseph C. Henry                            
|        | 10.4 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Michael G. Costello                        
|        | 10.5 |  |             | Assignment Agreement                                                                                                           
|        | 11   |  |             | Statement re: computation on per share earnings                                                                                
|        | 99.1 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|        | 99.2 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.