##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington D.C. 20549




---

Form 10-Q

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarter ended March 31,
    2002                                                        
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-14094



---

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 May 8, 2002 was
8,512,194.



---






---

TABLE OF CONTENTS



|                                                                                             |  |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|TABLE OF CONTENTS                                                                           
|PART 1 -- FINANCIAL INFORMATION                                                             
|ITEM 1 FINANCIAL STATEMENTS                                                                 
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME                                                 
|CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME                                              
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                       
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)                                      
|PART I -- FINANCIAL INFORMATION                                                             
|ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                          
|PART II -- OTHER INFORMATION                                                                
|Item 1. Legal Proceedings                                                                   
|Item 6. Exhibits and Reports on Form 8K                                                     
|SIGNATURES                                                                                  
|Articles of Incorporation as Amended                                                        
|Statement Re: Computation on Per Share Earnings                                             



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##### Table of Contents








TABLE OF CONTENTS


|                                                                                                   |                                                                                          |      |       |      | 
|-------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---- | ----- | ---- | 
|                                                                                                   |                                                                                          | Page
|                                                                                                   |                                                                                          |     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|PART I  FINANCIAL
    INFORMATION                                                                
|                                                                                                  
|ITEM 1  FINANCIAL STATEMENTS                                                                      |                                                                                          |      |       |     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Condensed Consolidated Statements of Income
    (unaudited)                              |      |       | 2    | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Consolidated Statements of Comprehensive Income
    (unaudited)                          |      |       | 3    | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Condensed Consolidated Balance Sheets (unaudited)                                        |      |       | 4    | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Condensed Consolidated Statements of Cash Flows
    (unaudited)                          |      |       | 5    | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Notes to Consolidated Financial Statements
    (unaudited) and Management Representation |      |       | 6-12 | 
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|ITEM 2  MANAGEMENTS DISCUSSION
    AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |                                                                                          |      | 13-16 |     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|ITEM 3  QUANTITATIVE AND QUALITATIVE
    DISCLOSURES ABOUT MARKET RISK                            |                                                                                          |      | 16    |     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|PART II  OTHER
    INFORMATION                                                                   
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|ITEM 1  LEGAL PROCEEDINGS                                                                         |                                                                                          |      | 17    |     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|ITEM 6  EXHIBITS AND REPORTS ON
    FORM 8-K                                                      |                                                                                          |      | 17    |     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|SIGNATURES                                                                                         |                                                                                          |      | 18    |     

1



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##### Table of Contents








PART 1  FINANCIAL INFORMATION







ITEM 1


FINANCIAL STATEMENTS


MEADOWBROOK INSURANCE GROUP, INC.




CONDENSED CONSOLIDATED STATEMENTS OF INCOME


For the Quarters Ended March 31,


|                                                          |                                       |                            |     |           |        |  |    |           |        | 
|--------------------------------------------------------- | ------------------------------------- | -------------------------- | --- | --------- | ------ |  | -- | --------- | ------ | 
|                                                          |                                       | 2002                       |     | 2001     
|                                                          |                                       |                            |     |          
|                                                          |                                       |                           
|                                                          |                                       | (Unaudited)               
|                                                          |                                       | (in thousands,            
|                                                          |                                       | except share data)        
|                                                         
|                                                         
|                                                         
|                                                         
|Revenues:                                                 |                                       |                            |     |           |        |  |    |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Net premium earned                    |                            | $   | 38,657    |        |  | $  | 41,173    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Net commissions and fees              |                            |     | 8,964     |        |  |    | 12,409    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Net investment income                 |                            |     | 3,124     |        |  |    | 3,508     |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Net realized gains on investments     |                            |     | 9         |        |  |    | 146       |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Gain on sale of subsidiary            |                            |     | 199       |        |  |    |          |       
|                                                          |                                       |                            |     |           |        |  |    |          
|                                                          |                                       | Total revenues             |     |           | 50,953 |  |    |           | 57,236 | 
|                                                          |                                       |                            |     |           |        |  |    |          
|Expenses:                                                 |                                       |                            |     |           |        |  |    |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Net loss and loss adjustment expenses |                            |     | 24,458    |        |  |    | 30,036    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Salaries and employee benefits        |                            |     | 9,613     |        |  |    | 11,376    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Other operating expenses              |                            |     | 14,404    |        |  |    | 14,324    |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Interest on notes payable             |                            |     | 1,250     |        |  |    | 1,319     |       
|                                                          |                                       |                            |     |           |        |  |    |          
|                                                          |                                       | Total expenses             |     |           | 49,725 |  |    |           | 57,055 | 
|                                                          |                                       |                            |     |           |        |  |    |          
|                                                          |                                       | Income before income taxes |     |           | 1,228  |  |    |           | 181    | 
|                                                         
|                                                         
|                                                         
|                                                         
|Federal income tax expense                                |                                       |                            | 318 |           |        |  | 28 |          
|                                                          |                                       |                            |     |           |        |  |    |          
|                                                          |                                       | Net income                 |     | $         | 910    |  |    | $         | 153    | 
|                                                          |                                       |                            |     |           |        |  |    |          
|Earnings per share:                                       |                                       |                            |     |           |        |  |    |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Basic                                 |                            | $   | 0.11      |        |  | $  | 0.02      |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Diluted                               |                            | $   | 0.11      |        |  | $  | 0.02      |       
|                                                         
|                                                         
|                                                         
|                                                         
|Weighted average number of common shares
    outstanding: |                                       |                            |     |           |        |  |    |          
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Basic                                 |                            |     | 8,512,194 |        |  |    | 8,512,161 |       
|                                                         
|                                                         
|                                                         
|                                                         
|                                                          | Diluted                               |                            |     | 8,512,194 |        |  |    | 8,517,861 |       

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

2



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


For the Quarters Ended March 31,


|           |                                         |                                                                        |                                        |      |        |        |     |  |       |       | 
|---------- | --------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------- | ---- | ------ | ------ | --- |  | ----- | ----- | 
|           |                                         | 2002                                                                   |                                        | 2001
|           |                                         |                                                                        |                                        |     
|           |                                         |                                                                       
|           |                                         | (Unaudited)                                                           
|           |                                         | (in thousands)                                                        
|          
|          
|          
|          
|Net income |                                         | $                                                                      | 910                                    |      |        | $      | 153 | 
|          
|          
|          
|          
|           | Other comprehensive income, net of tax: |                                                                        |                                        |      |        |        |     |  |      
|          
|          
|          
|          
|           |                                         | Unrealized (losses) gains on securities                                |                                        |      | (1,603 | )      |     |  | 1,546 |      
|          
|          
|          
|          
|           |                                         | Less: reclassification adjustment for gains
    included in net income |                                        |      | (6     | )      |     |  | (96   | )    
|           |                                         |                                                                        |                                        |      |        |        |     | 
|           |                                         |                                                                        | Other comprehensive income, net of tax |      |        | (1,609 | )   |  |       | 1,450 | 
|           |                                         |                                                                        |                                        |      |        |        |     | 
|           |                                         |                                                                        | Comprehensive (loss) income            |      | $      | (699   | )   |  | $     | 1,603 | 
|           |                                         |                                                                        |                                        |      |        |        |     | 

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

3



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED BALANCE SHEETS


|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |         |         | 
|------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                                                                                          |                                                                                           | March 31,                                  |         | December 31,
|                                                                                                                          |                                                                                           | 2002                                       |         | 2001        
|                                                                                                                          |                                                                                           |                                            |         |             
|                                                                                                                          |                                                                                           | (Unaudited)                                |         |             
|                                                                                                                          |                                                                                           |                                           
|                                                                                                                          |                                                                                           | (in thousands,                            
|                                                                                                                          |                                                                                           | except share data)                        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|ASSETS                                                                                                                   
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Invested assets:                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Debt securities available for sale, at fair value
    (cost of $184,925
    and $193,020) |                                            | $       | 187,103      |         |   | $       | 197,634 |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                          | Equity securities available for sale, at fair
    value (cost of $2,757
    and $2,757)   |                                            |         | 2,787        |         |   |         | 2,787   |        
|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                          |                                                                                           | Total invested assets                      |         |              | 189,890 |   |         |         | 200,421 | 
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Cash and cash equivalents                                                                                                 |                                                                                           |                                            | 37,699  |              |         |   | 33,302  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Premiums and agent balances receivable                                                                                    |                                                                                           |                                            | 77,786  |              |         |   | 78,171  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Reinsurance recoverable on paid and unpaid losses                                                                         |                                                                                           |                                            | 227,082 |              |         |   | 222,458 |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Prepaid reinsurance premiums                                                                                              |                                                                                           |                                            | 32,111  |              |         |   | 37,852  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Deferred policy acquisition costs                                                                                         |                                                                                           |                                            | 13,851  |              |         |   | 13,953  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Intangible assets                                                                                                         |                                                                                           |                                            | 28,997  |              |         |   | 28,997  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Other assets                                                                                                              |                                                                                           |                                            | 67,343  |              |         |   | 72,734  |        
|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                          |                                                                                           | Total assets                               |         | $            | 674,759 |   |         | $       | 687,888 | 
|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                 
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Liabilities:                                                                                                              |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Reserve for losses and loss adjustment expenses                                                                           |                                                                                           | $                                          | 390,978 |              |         | $ | 394,596 |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Unearned premiums                                                                                                         |                                                                                           |                                            | 87,509  |              |         |   | 94,002  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Debt                                                                                                                      |                                                                                           |                                            | 54,727  |              |         |   | 54,741  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Reinsurance funds held and balances payable                                                                               |                                                                                           |                                            | 27,348  |              |         |   | 26,887  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Other liabilities                                                                                                         |                                                                                           |                                            | 34,588  |              |         |   | 37,346  |        
|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                          |                                                                                           | Total liabilities                          |         |              | 595,150 |   |         |         | 607,572 | 
|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        
|Commitments and contingencies (Note 7)                                                                                    |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Shareholders Equity:                                                                                                     |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Common stock, $.01 par value; authorized
    30,000,000 shares: 8,512,194 and 8,512,194 shares issued and
    outstanding |                                                                                           |                                            | 85      |              |         |   | 85      |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Additional paid-in capital                                                                                                |                                                                                           |                                            | 67,953  |              |         |   | 67,948  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Retained earnings                                                                                                         |                                                                                           |                                            | 10,944  |              |         |   | 10,034  |        
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Note receivable from officer                                                                                              |                                                                                           |                                            | (837    | )            |         |   | (824    | )      
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|                                                                                                                         
|Accumulated other comprehensive income                                                                                    |                                                                                           |                                            | 1,464   |              |         |   | 3,073   |        
|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                          |                                                                                           | Total shareholders equity                 |         |              | 79,609  |   |         |         | 80,316  | 
|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        
|                                                                                                                          |                                                                                           | Total liabilities and shareholders equity |         | $            | 674,759 |   |         | $       | 687,888 | 
|                                                                                                                          |                                                                                           |                                            |         |              |         |   |         |        

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

4



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Quarters Ended March 31,


|                                                           |                                                                |                                                         |        |        |        |   |         |         |         |  
|---------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------ | ------ | - | ------- | ------- | ------- | -
|                                                           |                                                                | 2002                                                    |        | 2001  
|                                                           |                                                                |                                                         |        |       
|                                                           |                                                                |                                                        
|                                                           |                                                                | (Unaudited)                                            
|                                                           |                                                                | (in thousands)                                         
|                                                          
|                                                          
|                                                          
|                                                          
|Net cash used in operating activities                      |                                                                | $                                                       | (6,354 | )      |        | $ | (2,430  | )      
|                                                           |                                                                |                                                         |        |        |        |   |         |        
|Cash flows (used in) provided by investing
    activities: |                                                                |                                                         |        |        |        |   |         |        
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Purchase of debt securities available for sale                 |                                                         |        | (1,495 | )      |   |         | (47,836 | )      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Purchase of equity securities available for sale               |                                                         |        |       |        |   |         | (425    | )      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Proceeds from sale of debt securities available
    for sale   |                                                         |        | 9,541  |        |   |         | 25,281  |        
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Proceeds from sale of equity securities available
    for sale |                                                         |        |       |        |   |         | 1,175   |        
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Other investing activities                                     |                                                         |        | 1,982  |        |   |         | (8,332  | )      
|                                                           |                                                                |                                                         |        |        |        |   |         |        
|                                                           |                                                                | Net cash provided by (used in) investing
    activities |        |        | 10,028 |   |         |         | (30,137 | )
|                                                          
|                                                          
|                                                          
|                                                          
|Cash flows provided by (used in) financing
    activities: |                                                                |                                                         |        |        |        |   |         |        
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Net payments of bank loan                                      |                                                         |        | (14    | )      |   |         | (99     | )      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Dividends paid on common stock                                 |                                                         |        |       |        |   |         | (255    | )      
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Other financing activities                                     |                                                         |        | 737    |        |   |         | 1,895   |        
|                                                           |                                                                |                                                         |        |        |        |   |         |        
|                                                           |                                                                | Net cash provided by financing activities               |        |        | 723    |   |         |         | 1,541   |  
|                                                           |                                                                |                                                         |        |        |        |   |         |        
|Increase (decrease) in cash and cash
    equivalents       |                                                                |                                                         | 4,397  |        |        |   | (31,026 | )      
|                                                          
|                                                          
|                                                          
|                                                          
|Cash and cash equivalents, beginning of period             |                                                                |                                                         | 33,302 |        |        |   | 56,838  |        
|                                                           |                                                                |                                                         |        |        |        |   |         |        
|Cash and cash equivalents, end of period                   |                                                                | $                                                       | 37,699 |        |        | $ | 25,812  |        
|                                                           |                                                                |                                                         |        |        |        |   |         |        

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

5



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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 quarter
ended March 31, 2002, are not necessarily indicative of the
results expected for the full year.

Note 2  New Accounting Pronouncements

Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (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, goodwill would be separately tested for impairment
using a fair-value based approach. As a result, the Company no
longer amortizes goodwill. Goodwill amortization was
approximately $548,000 for the first quarter of 2001.

Effective January 1, 2002 the Company adopted SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144, for periods starting
January 1, 2002 or thereafter, clarifies and revises
existing guidance on accounting for impairment of plant,
property, and equipment, amortized intangibles, and other
long-lived assets not specifically addressed in other accounting
literature. SFAS No. 144 also broadens the presentation 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 significant impact on the Company for
the first quarter of 2002.

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 March 31, 2002, the Company had reinsurance recoverables
for paid and unpaid losses of $227.1 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 35.6% 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 million. In addition, the

6



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Company purchases coverage in excess of $20.0 million up to
$150.0 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 $5.0 million per occurrence.

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 March 31,
2002, management believes that this allowance is adequate. To
date, 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  Line of Credit

The Company has a line of credit totaling $47.5 million, of
which $47.0 million was outstanding at March 31, 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 and to make investments with
the 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 two
months beginning February 1, 2002, until the line of credit
is paid down to $33.0 million. As of March 31, 2002
the Prime Rate was 4.75% and the variable margin was 1.75%.

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 $0.5 million on
March 31, 2002. This revised pay-down schedule requires the
Company to further reduce its line of credit by
$10.8 million on June 30, 2002, $1.0 million on
September 30, 2002, and $11.3 million on
December 31, 2002. As of March 31, 2002, the Company
was in compliance with all debt covenants.

The line of credit expires and is payable in full on
January 3, 2003. 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.

Absent the sale of assets or other capital-raising events, the
Company may not have the liquidity in its non-regulated
subsidiaries to make the required payments pursuant to the
revised pay-down schedule on or after the scheduled payment of
$10.8 million on June 30, 2002. Furthermore, if
repayment is required due to default, the Company currently does
not have sufficient cash to repay the balance. As part of the
line of credit, certain of the Companys non-regulated
subsidiaries guaranteed repayment of the line of credit and the
Company pledged the stock of certain of its non-regulated
subsidiaries as collateral. In the event of default, the banks
would have the right to sell these non-regulated subsidiaries
and apply the proceeds to the balance on the line of credit.

7



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


On April 18, 2002, the Company filed a registration
statement with the Securities and Exchange Commission with
respect to a public offering of its common stock. Proceeds from
the offering will be used to satisfy a portion of the
Companys debt obligations and add to the surplus of its
insurance subsidiaries. However, there can be no assurance these
capital-raising efforts will be successful. If the
capital-raising is unsuccessful, management is of the opinion
the Company has the ability to sell certain of its non-regulated
subsidiaries to satisfy the repayment obligations described
above. There are no restrictions that prohibit the sale of
non-regulated subsidiaries.

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). Stars earned
surplus position at December 31, 2001 was negative
$29.1 million. At March 31, 2002, earned surplus was
negative $27.2 million. No statutory dividends were paid
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s target for
gross and net written premium to statutory surplus are 3.0 to 1
and 2.0 to 1, respectively. Due primarily to large net losses in
2000 and in the first half of 2001, statutory surplus has
diminished to a level where the premium leverage ratios as of
March 31, 2002, on a consolidated basis, were 5.0 to 1 and
3.0 to 1 on a gross and net written premium basis, 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 intends to achieve compliance.
On April 29, 2002, OFIS approved the Plan. At
March 31, 2002, Stars statutory surplus increased
$1.9 million to $53.5 million.

8



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


The Company has received inquiries from various state regulators
requesting information concerning Stars financial
condition. The losses, adverse trends and uncertainties
discussed in this report have been and continue to be reviewed
by the domiciliary state and other insurance regulators of the
Companys insurance subsidiaries. The Company had
previously submitted a Business Plan to reduce its current
leverage ratios and increase the RBC ratio level and continues
to work closely with OFIS to monitor its progress. While the
Companys gross and net written premium have declined
steadily throughout 2001 and the first quarter of 2002, it has
not yet sufficiently reduced its premium leverage ratios nor
complied with the required RBC level. In addition to continued
reductions in premium writings, capital from sources outside the
Company may also be necessary to make sufficient progress
towards reducing its leverage ratios and increasing the RBC
ratio. While the Company has retained an investment-banking firm
to conduct a public offering of its stock, there can be no
assurance the Company will be successful in raising additional
capital, or that proceeds therefrom which would be contributed
to the Companys insurance subsidiaries would result in
sufficient progress towards reducing its leverage ratios and
increasing the RBC ratio. If the regulators determine the
Company has made insufficient progress towards reducing its
leverage ratios and increasing the RBC ratio, they may take
action at any time. While the regulators have taken no actions
to date, regulators could require the Company to take steps to
correct the capital deficiency, require a reduction in permitted
premium writings, or implement some form of regulatory action.

Note 6  Other Matters

In December 1996, Star entered into a five-year joint
underwriting agreement with Connecticut Surety Company
(CSC), whereby Star transferred the underwriting
risk on the majority of the Companys existing surety bond
business. Effective June 1, 2000, CSC no longer assumes
risk on new or renewal business from Star; however, one of
CSCs subsidiaries continues to act as a general agent for
the Company. This new and renewal business is now 100% reinsured
to unaffiliated reinsurers with an A.M. Best rating of
A or better. Effective January 2002, CSC sold the
renewal rights to the business of CSC and its subsidiaries to a
third party, which will now underwrite all new and renewal
business, excluding those bonds which Star must renew due to
statutory requirements.

In December 1998, CSC entered into an agreement with Evergreen
National Indemnity Company to transfer most of its contract
surety business it wrote on behalf of Star. The agreement
provides for the transfer of the underwriting risk on this class
of bonds from CSC to Evergreen National Indemnity Company.

Effective May 26, 2000, CSC executed a Subordinated Surplus
Note in favor of Star in the principal sum of $195,000. Fifty
percent of the principal amount was due on May 26, 2001;
the outstanding balance, together with all unpaid interest, is
due on May 26, 2002. Interest earns at 9% per annum, with
interest payments to be made quarterly, subject to all terms and
conditions of the Note. Effective May 26, 2000 and
July 14, 2000, Connecticut Surety Corporation executed
Promissory Notes in favor of the Company in the amounts of
$30,000 and $270,000, due on May 26, 2003 and July 14,
2003, respectively. Interest earns at 9% per annum, payable
semi-annually beginning on December 31, 2000, subject to
the terms and conditions of the Notes. Furthermore, Star
purchased a portion of CSCs outstanding loan with Fleet
Bank for $124,800. Interest and repayment terms are in
accordance with the original terms between CSC and Fleet Bank.
Other investors executed similar notes with CSC in varying
amounts and also purchased a portion of the CSC loan with Fleet
Bank. Effective June 2001, the Company ceased accruing interest
on these notes.

Effective December 31, 2000, CSC executed a Subordinated
Surplus Note with Star in the principal sum of
$3.8 million. Interest earns at 9% per annum, payable
quarterly beginning April 1, 2001. These loan proceeds were
deposited by CSC into a trust account established for the
benefit of Star in order to collateralize CSCs reinsurance
obligations under the reinsurance agreements described above.
This Subordinated Surplus Note, along with the other notes
described above, were intended to be converted into Voting
Convertible Preferred Stock of CSC, or its parent, as part of
recapitalization of CSC, pursuant to a Letter of Intent dated
December 31, 2000 between CSC, Star, and other investors.
However, Star and the other investors decided not to exercise
their conversion rights. As such, Star remains a surplus note
holder of CSC in the amounts and

9



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


terms described above. In 2001, the Company recorded an
impairment of $870,000, which accounts for any uncollateralized
portion of these notes. Effective June 2001, the Company ceased
accruing interest on this note.

As of September 30, 2001, CSC had statutory capital and
surplus of $5.0 million. On February 6, 2002, the
Connecticut Insurance Department placed CSC into Rehabilitation.

At March 31, 2002, the Company had approximately
$1.8 million of unsecured reinsurance recoveries on unpaid
losses due from CSC in excess of collateral and allowances.
During the second quarter of 2001, the Company recorded a
provision of $4.5 million related to balances due from CSC,
of which $3.5 million was related to reinsurance
recoverable balances.

Note 7  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 8  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
50 insurance carriers from which it earns commission income.

10



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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                          
|                |                                   | Quarters Ended                   
|                |                                   | March 31,                        
|                |                                   |                                  
|                |                                   | 2002                              |                             | 2001  
|                |                                   |                                   |                             |       
|Revenues:       |                                   |                                   |                             |        |        |        |   |       
|               
|               
|               
|               
|                | Net earned premiums               |                                   | $                           | 38,657 |        |        | $ | 41,173 |       
|               
|               
|               
|               
|                | Management fees                   |                                   |                             | 5,563  |        |        |   | 7,736  |       
|               
|               
|               
|               
|                | Investment income                 |                                   |                             | 3,111  |        |        |   | 3,495  |       
|               
|               
|               
|               
|                | Net realized gains on investments |                                   |                             | 9      |        |        |   | 146    |       
|                |                                   |                                   |                             |        |        |        |   |       
|                |                                   | Specialty risk management segment |                             |        | 47,340 |        |   |        | 52,550 |       
|               
|               
|               
|               
|                | Agency operations                 |                                   |                             | 3,638  |        |        |   | 4,886  |       
|               
|               
|               
|               
|                | Reconciling items                 |                                   |                             | 13     |        |        |   | 13     |       
|               
|               
|               
|               
|                | Gain on sale of subsidiary        |                                   |                             | 199    |        |        |   |       |       
|               
|               
|               
|               
|                | Intersegment revenue              |                                   |                             | (237   | )      |        |   | (213   | )     
|                |                                   |                                   |                             |        |        |        |   |       
|                |                                   |                                   | Consolidated revenue        |        | $      | 50,953 |   |        | $      | 57,236 | 
|                |                                   |                                   |                             |        |        |        |   |       
|Pre-tax income: |                                   |                                   |                             |        |        |        |   |       
|               
|               
|               
|               
|                | Specialty risk management         |                                   | $                           | 888    |        |        | $ | 627    |       
|               
|               
|               
|               
|                | Agency operations *               |                                   |                             | 1,694  |        |        |   | 1,570  |       
|               
|               
|               
|               
|                | Reconciling items                 |                                   |                             | (1,553 | )      |        |   | (2,016 | )     
|               
|               
|               
|               
|                | Gain on sale of subsidiary        |                                   |                             | 199    |        |        |   |       |       
|                |                                   |                                   |                             |        |        |        |   |       
|                |                                   |                                   | Consolidated pre-tax income |        | $      | 1,228  |   |        | $      | 181    | 
|                |                                   |                                   |                             |        |        |        |   |       



---



|  |                                                
|- | -----------------------------------------------
|* | 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 reconciling items:

|                         |  |                |        |      |  |   |        |  
|------------------------ |  | -------------- | ------ | ---- |  | - | ------ | -
|                         |  |               
|                         |  | For the       
|                         |  | Quarters Ended
|                         |  | March 31,     
|                         |  |               
|                         |  | 2002           |        | 2001
|                         |  |                |        |     
|Holding Company Expenses |  | $              | (297   | )    |  | $ | (149   | )
|                        
|                        
|                        
|                        
|Amortization             |  |                |       |      |  |   | (548   | )
|                        
|                        
|                        
|                        
|Interest Expense         |  |                | (1,256 | )    |  |   | (1,319 | )
|                         |  |                |        |      |  |   |        |  
|                         |  | $              | (1,553 | )    |  | $ | (2,016 | )
|                         |  |                |        |      |  |   |        |  

Note 9  Reclassifications

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

11



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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. 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; success or lack of success of the Companys
capital raising efforts; 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.

12



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##### Table of Contents



PART I  FINANCIAL INFORMATION 
(Continued)







ITEM 2


MANAGEMENTS DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS


For the Quarters ended March 31, 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, and offers a
broad array of insurance products and services through its
insurance carrier subsidiaries, which are essential elements of
the risk management process. 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 Quarters Ended March 31, 2002
and 2001



| |         
| | --------
| | Overview

Net income for the quarter ended March 31, 2002 was
$910,000, compared to net income of $153,000 for the quarter
ended March 31, 2001. Revenues for the quarter ended
March 31, 2002 decreased $6.2 million, or 11.0% to
$51.0 million from $57.2 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 March 31, 
|               |                                   |                 
|               |                                   | 2002             |     | 2001  
|               |                                   |                  |     |       
|Revenues:      |                                   |                  |     |        |        |   |     |       
|              
|              
|              
|              
|               | Net earned premiums               |                  | $   | 38,657 |        |   | $   | 41,173 |       
|              
|              
|              
|              
|               | Management fees                   |                  |     | 5,563  |        |   |     | 7,736  |       
|              
|              
|              
|              
|               | Investment income                 |                  |     | 3,111  |        |   |     | 3,495  |       
|              
|              
|              
|              
|               | Net realized gains on investments |                  |     | 9      |        |   |     | 146    |       
|               |                                   |                  |     |        |        |   |     |       
|               |                                   | Total revenue    |     | $      | 47,340 |   |     | $      | 52,550 | 
|               |                                   |                  |     |        |        |   |     |       
|Pre-tax income |                                   | $                | 888 |        |        | $ | 627 |       
|               |                                   |                  |     |        |        |   |     |       

Revenues from specialty risk management operations decreased
$5.3 million, or 9.9%, to $47.3 million for the
quarter ended March 31, 2002 from $52.6 million for
the comparable period in 2001. This decrease reflects a
$2.5 million, or 6.1% decrease in net earned premiums to
$38.7 million in the quarter ended March 31, 2002 from
$41.2 million in the comparable period in 2001. This
decrease includes a reduction in earned premium of
$4.4 million related to previously discontinued programs
and a decrease of $6.5 million related to inactive programs
terminated for leverage ratio purposes. These decreases were
offset by a $1.9 million reduction in net ceded earned
premium associated with the Companys decision to cancel a
quota share reinsurance treaty for several workers
compensation programs, and a $6.5 million growth in
existing programs both from increasing policy count and rate
increases. Management fees decreased $2.1 million, or
28.1%, to $5.6 million from

13



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##### Table of Contents



PART I  FINANCIAL INFORMATION 
(Continued)


$7.7 million. This decrease is the result of a one-time
$1.6 million profit sharing fee recognized in the quarter
ended March 31, 2001. This decrease also is the result of a
$475,000 decrease in fees for a specific account for which the
client took the services in-house. Net investment income
decreased $384,000 or 11.0%, to $3.1 million for the
quarter ended March 31, 2002, compared to $3.5 million
for the comparable period in 2001. This decrease reflects a
reduction in average invested assets and a decrease in pre-tax
yields to 5.5% in 2002 from 6.1% in 2001.

Specialty risk management operations generated pre-tax income of
$888,000 for the quarter ended March 31, 2002 compared to
pre-tax income of $627,000 for the comparable period in 2001.
The Companys loss and loss adjustment expense ratio
improved by 11.1 points to 67.4% for the quarter ended
March 31, 2002 from 78.5% for the same period in 2001. This
improvement reflects the elimination of a group of unprofitable
programs, which were previously discontinued. The Companys
expense ratio was 37.8% compared to 35.3% in the comparable
period in 2001. While the actual expenses have been reduced in
connection with the reduction in premium volume, the
Companys fixed costs, such as corporate overhead and
technology, are a higher proportion of the overall expense
structure. In addition, these improvements in underwriting
expenses were offset by the recognition of a $1.6 million
profit sharing fee in the quarter ended March 31, 2001.

Agency Operations

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

|                |  |                  |       |      |  |   |       | 
|--------------- |  | ---------------- | ----- | ---- |  | - | ----- | 
|                |  |                 
|                |  | For the Quarters
|                |  | Ended March 31, 
|                |  |                 
|                |  | 2002             |       | 2001
|                |  |                  |       |     
|Net commission  |  | $                | 3,638 |      |  | $ | 4,886 | 
|               
|               
|               
|               
|Pre-tax income* |  | $                | 1,694 |      |  | $ | 1,570 | 



---

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

Revenue from agency operations, which consists primarily of
agency commission revenue, decreased $1.3 million, or
25.5%, to $3.6 million for the quarter ended March 31,
2002 from $4.9 million for the comparable period in 2001.
This decrease reflects the sale of the Meadowbrook-Villari
Agency effective July 1, 2001. The Meadowbrook-Villari
Agency was a Florida-based insurance agency, which offered
professional liability products and programs, group health and
disability, and property and casualty products. Excluding the
Meadowbrook-Villari Agency revenues for the quarter ended
March 31, 2001, agency revenue would have decreased 2.9%.

Agency operations generated pre-tax income of $1.7 million
for the quarter ended March 31, 2002, compared to
$1.6 million for the comparable period in 2001. The
improvement in the pre-tax margin reflects the sale of
Meadowbrook-Villari and overall expense reductions.

Other Items

Taxes

Federal income tax expense for the quarter ended March 31,
2002 was $318,000, or 25.9% of income before taxes. For the same
quarter last year, the Company reflected a federal income tax
expense of $28,000, or 15.5% of income before taxes. The
increase in the effective tax rate primarily reflects the
reduction in tax-exempt investments.

Interest Expense

Interest expense for the quarter ended March 31, 2002
decreased by $69,000, or 5.2%, to $1,250,000 from $1,319,000 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.

14



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##### Table of Contents



PART I  FINANCIAL INFORMATION 
(Continued)


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 $3.3 million
and $5.7 million for the quarters ended March 31, 2002
and 2001, respectively. These earnings were available for debt
service.

Cash flow used in operations for the quarter ended
March 31, 2002 was $6.4 million, compared to cash flow
used in operations of $2.4 million for the comparable
quarter in 2001. The decrease in cash flow reflects the
acceleration in the payment of previously reserved claims. While
the Company is in the process of a public offering to issue
additional shares, the Company has 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 our insurance subsidiaries have declined.

At March 31, 2002, the Company had a bank line of credit
that permitted borrowings up to $47.5 million of which
$47.0 million was outstanding. The line of credit bears
interest at a variable margin over the Prime Rate. As of
March 31, 2002 the Prime Rate was 4.75% and the variable
margin was 1.75%. 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
$0.5 million on March 31, 2002. This revised pay-down
schedule requires the Company to further reduce its line of
credit by $10.8 million on June 30, 2002,
$1.0 million on September 30, 2002, and
$11.3 million on December 31, 2002. As of
March 31, 2002, the Company was in compliance with all debt
covenants.

Unless an extension is obtained, the Companys line of
credit expires and is payable in full on January 3, 2003.
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.

Absent the sale of assets or other capital-raising events, the
Company may not have the liquidity in its non-regulated
subsidiaries to make the required payments pursuant to the
revised pay-down schedule on or after the scheduled payment of
$10.8 million on June 30, 2002. Furthermore, if
repayment is required due to default, the Company currently does
not have sufficient cash to repay the balance. As part of the
loan agreement, certain of the Companys non-regulated
subsidiaries guaranteed repayment of the line of credit and the
Company pledged the stock of certain of its non-regulated
subsidiaries as collateral. In the event of default, the banks
would have the right to sell these non-regulated subsidiaries
and apply the proceeds to the balance on the line of credit.

On April 18, 2002, the Company filed a registration
statement with the Securities and Exchange Commission with
respect to a public offering of its common stock. Proceeds from
the offering will be used to satisfy a portion of the
Companys debt obligations and add to the surplus of its
insurance subsidiaries. However, there can be no assurance these
capital-raising efforts will be successful. If the
capital-raising is unsuccessful, management is of the opinion
the Company has the ability to sell certain of its non-regulated
subsidiaries to satisfy the repayment obligations described
above. There are no restrictions that prohibit the sale of
non-regulated subsidiaries.

Shareholders equity was $79.6 million, or $9.35 per
common share, at March 31, 2002 compared to
$80.3 million, or $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 cannot be transferred to the holding company in the form of
dividends, loans or advances.

15



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##### Table of Contents



PART I  FINANCIAL INFORMATION 
(Continued)


The restriction on the transferability to the holding company
from its insurance subsidiaries is limited 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 from surplus earnings
of the company. Earned surplus balances are calculated on a
quarterly basis. Since 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 dividend to the Company during
2002 without prior approval of the Michigan Office of Financial
and Insurance Services. Stars earned surplus position at
December 31, 2001 was negative $29.1 million. At
March 31, 2002, earned surplus was negative
$27.2 million. No statutory dividends were paid from Star
in 2001 or 2000.

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
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 the Michigan Office of Financial and Insurance
Services (OFIS) outlining how they intend to achieve
compliance. On April 29, 2002, OFIS approved the Plan. At
March 31, 2002, Stars statutory surplus increased
$1.9 million to $53.5 million.

New Accounting Pronouncements

Effective January 1, 2002, the Company adopted Statement of
Financial Accounting Standards (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, goodwill would be separately tested for impairment
using a fair-value based approach. As a result, the Company no
longer amortizes goodwill. Goodwill amortization was
approximately $548,000 for the first quarter of 2001.

Effective January 1, 2002 the Company adopted SFAS
No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144, for periods starting
January 1, 2002 or thereafter, clarifies and revises
existing guidance on accounting for impairment of plant,
property, and equipment, amortized intangibles, and other
long-lived assets not specifically addressed in other accounting
literature. SFAS No. 144 also broadens the presentation 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 significant impact on the Company for
the first quarter of 2002.






Item 3. Quantitative and Qualitative Disclosures
About Market Risk


No material changes since December 31, 2001 Annual Report
on Form 10-K.

16



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##### Table of Contents








PART II  OTHER INFORMATION







Item 1.     Legal
Proceedings


The information required by this item is included under
Note 7 of the Companys Form 10-Q for
the three months ended March 31, 2002, which is hereby
incorporated by reference.






Item 6.     Exhibits and
Reports on Form 8K


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

|        |     |             |  |                                                
|------- | --- | ----------- |  | -----------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | 3.3 |             |  | Articles of Incorporation as Amended           
|        | 11  |             |  | Statement re computation of per share earnings.

(B) Reports on Form 8-K:



| |      
| | -----
| | None.

17



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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: May 9, 2002

18



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##### Table of Contents



EXHIBIT INDEX

|        |     |             |  |                                                
|------- | --- | ----------- |  | -----------------------------------------------
|Exhibit |     |            
|No.     |     | Description
|        |     |            
|        | 3.3 |             |  | Articles of Incorporation as Amended           
|        | 11  |             |  | Statement re: computation on per share earnings