##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington D.C. 20549




---

FORM 10-Q

|  |  |                                                                                           
|- |  | ------------------------------------------------------------------------------------------
|x |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
	15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934 
|  |  | For the quarter ended September 30, 2001                                                  
|  |  | 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.



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

26600 Telegraph Road, Southfield, Michigan 48034



(Registrants telephone number, including area code):
(248) 358-1100



---

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 x     No 
o

The aggregate number of shares of
the Registrants Common Stock, $.01 par value, outstanding
on November 13, 2001 was 8,512,194.



---






---

TABLE OF CONTENTS



|                                                                                             |  |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART 1 -- FINANCIAL INFORMATION                                                             
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME                                                 
|CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME                                              
|MEADOWBROOK INSURANCE GROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME           
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                       
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                  
|PART I -- FINANCIAL INFORMATION                                                             
|PART I--FINANCIAL INFORMATION                                                               
|ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000                 
|RESULTS OF OPERATIONS FOR THE QUARTERS ENDED SEPTEMBER 30, 2001 AND 2000                    
|PART II -- OTHER INFORMATION                                                                
|SIGNATURES                                                                                  
|EXHIBIT INDEX                                                                               
|Employment Agreement                                                                        
|Computation of 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)                              |      |       | 3-4  | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Consolidated Statements of Comprehensive Income
	(unaudited)                          |      |       | 5-6  | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Condensed Consolidated Balance Sheets (unaudited)                                     |      |       | 7    | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Condensed Consolidated Statements of Cash Flows
	(unaudited)                          |      |       | 8    | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Notes to Consolidated Financial Statements
	(unaudited) and Management Representation |      |       | 9-16 | 
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|ITEM 2  MANAGEMENTS DISCUSSION
	AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |                                                                                       |      | 17-23 |     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|ITEM 3  QUANTITATIVE AND QUALITATIVE
	DISCLOSURES ABOUT MARKET RISK                            |                                                                                       |      | 23    |     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|PART II  OTHER
	INFORMATION                                                                    |                                                                                       |      |       |     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|ITEM 1  LEGAL PROCEEDINGS                                                                      |                                                                                       |      | 24    |     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|ITEM 6  EXHIBITS AND REPORTS ON FORM
	8-K                                                      |                                                                                       |      | 24    |     
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|SIGNATURES                                                                                      |                                                                                       |      | 25    |     

2



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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 Nine Months Ended September 30,


(Unaudited)


|                                                       |                                       |                                   |        |           |         |   |     |           |         | 
|------------------------------------------------------ | ------------------------------------- | --------------------------------- | ------ | --------- | ------- | - | --- | --------- | ------- | 
|                                                       |                                       | 2001                              |        | 2000     
|                                                       |                                       |                                   |        |          
|                                                       |                                       |                                  
|                                                       |                                       | (in thousands)                   
|                                                      
|                                                      
|                                                      
|                                                      
|Revenues:                                              |                                       |                                   |        |           |         |   |     |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net premium earned                    |                                   | $      | 121,490   |         |   | $   | 118,874   |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net commissions and fees              |                                   |        | 31,305    |         |   |     | 30,589    |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net investment income                 |                                   |        | 10,634    |         |   |     | 10,028    |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net realized losses on investments    |                                   |        | (1,663    | )       |   |     | (205      | )      
|                                                       |                                       |                                   |        |           |         |   |     |          
|                                                       |                                       | Total revenues                    |        |           | 161,766 |   |     |           | 159,286 | 
|                                                       |                                       |                                   |        |           |         |   |     |          
|Expenses:                                              |                                       |                                   |        |           |         |   |     |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net loss and loss adjustment expenses |                                   |        | 94,970    |         |   |     | 84,791    |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Salaries and employee benefits        |                                   |        | 33,456    |         |   |     | 31,609    |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other operating expenses              |                                   |        | 40,448    |         |   |     | 37,015    |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Interest on notes payable             |                                   |        | 3,573     |         |   |     | 3,895     |        
|                                                       |                                       |                                   |        |           |         |   |     |          
|                                                       |                                       | Total expenses                    |        |           | 172,447 |   |     |           | 157,310 | 
|                                                       |                                       |                                   |        |           |         |   |     |          
|                                                       |                                       | (Loss) income before income taxes |        |           | (10,681 | ) |     |           | 1,976   | 
|                                                      
|                                                      
|                                                      
|                                                      
|Federal income tax (benefit) expense                   |                                       |                                   | (3,652 | )         |         |   | 249 |          
|                                                       |                                       |                                   |        |           |         |   |     |          
|                                                       |                                       | Net (loss) income                 |        | $         | (7,029  | ) |     | $         | 1,727   | 
|                                                       |                                       |                                   |        |           |         |   |     |          
|Earnings per share:                                    |                                       |                                   |        |           |         |   |     |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Basic                                 |                                   | $      | (0.83     | )       |   | $   | 0.20      |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Diluted                               |                                   | $      | (0.83     | )       |   | $   | 0.20      |        
|                                                      
|                                                      
|                                                      
|                                                      
|Weighted average number of common shares
	outstanding: |                                       |                                   |        |           |         |   |     |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Basic                                 |                                   |        | 8,512,183 |         |   |     | 8,511,776 |        
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Diluted                               |                                   |        | 8,512,183 |         |   |     | 8,511,776 |        

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

3



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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 Quarter Ended September 30,


(Unaudited)


|                                                       |                                            |                            |     |           |        |  |     |           |        | 
|------------------------------------------------------ | ------------------------------------------ | -------------------------- | --- | --------- | ------ |  | --- | --------- | ------ | 
|                                                       |                                            | 2001                       |     | 2000     
|                                                       |                                            |                            |     |          
|                                                       |                                            |                           
|                                                       |                                            | (in thousands)            
|                                                      
|                                                      
|                                                      
|                                                      
|Revenues:                                              |                                            |                            |     |           |        |  |     |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net premium earned                         |                            | $   | 40,673    |        |  | $   | 47,777    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net commissions and fees                   |                            |     | 8,560     |        |  |     | 9,887     |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net investment income                      |                            |     | 3,654     |        |  |     | 3,666     |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net realized gains (losses) on investments |                            |     | 508       |        |  |     | (22       | )     
|                                                       |                                            |                            |     |           |        |  |     |          
|                                                       |                                            | Total revenues             |     |           | 53,395 |  |     |           | 61,308 | 
|                                                       |                                            |                            |     |           |        |  |     |          
|Expenses:                                              |                                            |                            |     |           |        |  |     |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Net loss and loss adjustment expenses      |                            |     | 30,357    |        |  |     | 33,679    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Salaries and employee benefits             |                            |     | 10,170    |        |  |     | 10,611    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Other operating expenses                   |                            |     | 11,264    |        |  |     | 14,497    |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Interest on notes payable                  |                            |     | 1,091     |        |  |     | 1,277     |       
|                                                       |                                            |                            |     |           |        |  |     |          
|                                                       |                                            | Total expenses             |     |           | 52,882 |  |     |           | 60,064 | 
|                                                       |                                            |                            |     |           |        |  |     |          
|                                                       |                                            | Income before income taxes |     |           | 513    |  |     |           | 1,244  | 
|                                                      
|                                                      
|                                                      
|                                                      
|Federal income tax expense                             |                                            |                            | 213 |           |        |  | 536 |          
|                                                       |                                            |                            |     |           |        |  |     |          
|                                                       |                                            | Net income                 |     | $         | 300    |  |     | $         | 708    | 
|                                                       |                                            |                            |     |           |        |  |     |          
|Earnings per share:                                    |                                            |                            |     |           |        |  |     |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Basic                                      |                            | $   | 0.04      |        |  | $   | 0.08      |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Diluted                                    |                            | $   | 0.04      |        |  | $   | 0.08      |       
|                                                      
|                                                      
|                                                      
|                                                      
|Weighted average number of common shares
	outstanding: |                                            |                            |     |           |        |  |     |          
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Basic                                      |                            |     | 8,512,194 |        |  |     | 8,512,008 |       
|                                                      
|                                                      
|                                                      
|                                                      
|                                                       | Diluted                                    |                            |     | 8,512,194 |        |  |     | 8,512,008 |       

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

4



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME


For the Nine Months Ended September 30,


(Unaudited)


|                  |                                         |                                                                              |                                        |      |       |        |       |  |       |       | 
|----------------- | --------------------------------------- | ---------------------------------------------------------------------------- | -------------------------------------- | ---- | ----- | ------ | ----- |  | ----- | ----- | 
|                  |                                         | 2001                                                                         |                                        | 2000
|                  |                                         |                                                                              |                                        |     
|                  |                                         |                                                                             
|                  |                                         | (in thousands)                                                              
|                 
|                 
|                 
|                 
|Net (loss) income |                                         | $                                                                            | (7,029                                 | )    |       | $      | 1,727 | 
|                 
|                 
|                 
|                 
|                  | Other comprehensive income, net of tax: |                                                                              |                                        |      |       |        |       |  |      
|                 
|                 
|                 
|                 
|                  |                                         | Unrealized gains on securities                                               |                                        |      | 5,050 |        |       |  | 1,319 |      
|                 
|                 
|                 
|                 
|                  |                                         | Less: reclassification adjustment for
	(gains) losses included in net income |                                        |      | (405  | )      |       |  | 135   |      
|                  |                                         |                                                                              |                                        |      |       |        |       | 
|                  |                                         |                                                                              | Other comprehensive income, net of tax |      |       | 4,645  |       |  |       | 1,454 | 
|                  |                                         |                                                                              |                                        |      |       |        |       | 
|                  |                                         |                                                                              | Comprehensive (loss) income            |      | $     | (2,384 | )     |  | $     | 3,181 | 
|                  |                                         |                                                                              |                                        |      |       |        |       | 

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

5



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##### Table of Contents








MEADOWBROOK INSURANCE GROUP, INC.


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Quarter Ended September 30,


(Unaudited)


|           |                                         |                                                                              |                                               |      |       |       |     |  |       |       | 
|---------- | --------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------- | ---- | ----- | ----- | --- |  | ----- | ----- | 
|           |                                         | 2001                                                                         |                                               | 2000
|           |                                         |                                                                              |                                               |     
|           |                                         |                                                                             
|           |                                         | (in thousands)                                                              
|          
|          
|          
|          
|Net income |                                         | $                                                                            | 300                                           |      |       | $     | 708 | 
|          
|          
|          
|          
|           | Other comprehensive income, net of tax: |                                                                              |                                               |      |       |       |     |  |      
|          
|          
|          
|          
|           |                                         | Unrealized gains on securities                                               |                                               |      | 4,417 |       |     |  | 1,575 |      
|          
|          
|          
|          
|           |                                         | Less: reclassification adjustment for
	(gains) losses included in net income |                                               |      | (432  | )     |     |  | 14    |      
|           |                                         |                                                                              |                                               |      |       |       |     | 
|           |                                         |                                                                              | Other comprehensive (loss) income, net of tax |      |       | 3,985 |     |  |       | 1,589 | 
|           |                                         |                                                                              |                                               |      |       |       |     | 
|           |                                         |                                                                              | Comprehensive income                          |      | $     | 4,285 |     |  | $     | 2,297 | 
|           |                                         |                                                                              |                                               |      |       |       |     | 

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

6



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED BALANCE SHEETS


|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |         |         | 
|------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                                                                                    |                                                                                    | September 30,                              |         |             
|                                                                                                                    |                                                                                    | 2001                                       |         | December 31,
|                                                                                                                    |                                                                                    | (Unaudited)                                |         | 2000        
|                                                                                                                    |                                                                                    |                                            |         |             
|                                                                                                                    |                                                                                    |                                           
|                                                                                                                    |                                                                                    | (in thousands,                            
|                                                                                                                    |                                                                                    | except share data)                        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|ASSETS                                                                                                             
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Cash and invested assets:                                                                                           |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                    | Debt securities available for sale, at fair value
	(cost of $198,291 and $164,685) |                                            | $       | 206,118      |         |   | $       | 166,790 |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                    | Equity securities available for sale, at fair
	value (cost of $2,918 and $16,445)  |                                            |         | 4,270        |         |   |         | 16,455  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                    | Cash and cash equivalents                                                          |                                            |         | 36,926       |         |   |         | 56,838  |        
|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                    |                                                                                    | Total cash and invested assets             |         |              | 247,314 |   |         |         | 240,083 | 
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Premiums and agent balances receivable                                                                              |                                                                                    |                                            | 80,479  |              |         |   | 79,121  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Reinsurance recoverable on paid and unpaid losses                                                                   |                                                                                    |                                            | 198,840 |              |         |   | 185,387 |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Prepaid reinsurance premiums                                                                                        |                                                                                    |                                            | 45,976  |              |         |   | 55,854  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Deferred policy acquisition costs                                                                                   |                                                                                    |                                            | 13,273  |              |         |   | 6,624   |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Intangible assets                                                                                                   |                                                                                    |                                            | 29,442  |              |         |   | 35,946  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Other assets                                                                                                        |                                                                                    |                                            | 72,960  |              |         |   | 58,168  |        
|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                    |                                                                                    | Total assets                               |         | $            | 688,284 |   |         | $       | 661,183 | 
|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|LIABILITIES AND SHAREHOLDERS
	EQUITY                                                                              
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Liabilities:                                                                                                        |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Reserve for losses and loss adjustment expenses                                                                     |                                                                                    | $                                          | 374,351 |              |         | $ | 341,824 |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Unearned premiums                                                                                                   |                                                                                    |                                            | 104,412 |              |         |   | 94,142  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Debt                                                                                                                |                                                                                    |                                            | 54,205  |              |         |   | 53,013  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Reinsurance funds held and balances payable                                                                         |                                                                                    |                                            | 25,969  |              |         |   | 38,171  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Other liabilities                                                                                                   |                                                                                    |                                            | 46,727  |              |         |   | 48,058  |        
|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                    |                                                                                    | Total liabilities                          |         |              | 605,664 |   |         |         | 575,208 | 
|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |        
|Commitments and contingencies (note 7)                                                                              |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Shareholders Equity:                                                                                               |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Common stock, $.01 par value; authorized
	30,000,000 shares:
	8,512,194 and 8,512,008 shares issued and outstanding |                                                                                    |                                            | 85      |              |         |   | 85      |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Additional paid-in capital                                                                                          |                                                                                    |                                            | 67,762  |              |         |   | 67,928  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Retained earnings                                                                                                   |                                                                                    |                                            | 9,514   |              |         |   | 17,309  |        
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Note receivable from officer                                                                                        |                                                                                    |                                            | (811    | )            |         |   | (772    | )      
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|                                                                                                                   
|Accumulated other comprehensive income                                                                              |                                                                                    |                                            | 6,070   |              |         |   | 1,425   |        
|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                    |                                                                                    | Total shareholders equity                 |         |              | 82,620  |   |         |         | 85,975  | 
|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |        
|                                                                                                                    |                                                                                    | Total liabilities and shareholders equity |         | $            | 688,284 |   |         | $       | 661,183 | 
|                                                                                                                    |                                                                                    |                                            |         |              |         |   |         |        

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

7



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Nine Months Ended September 30,


(Unaudited)


|                                                        |                                                             |                                                      |         |          |         |   |        |         |         |  
|------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------------------------- | ------- | -------- | ------- | - | ------ | ------- | ------- | -
|                                                        |                                                             | 2001                                                 |         | 2000    
|                                                        |                                                             |                                                      |         |         
|                                                        |                                                             |                                                     
|                                                        |                                                             | (in thousands)                                      
|                                                       
|                                                       
|                                                       
|                                                       
|Net cash (used in) provided by operating
	activities    |                                                             | $                                                    | (5,129  | )        |         | $ | 27,678 |        
|                                                        |                                                             |                                                      |         |          |         |   |        |        
|Cash flows (used in) provided by investing
	activities: |                                                             |                                                      |         |          |         |   |        |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Purchase of debt securities available for sale              |                                                      |         | (105,190 | )       |   |        | (56,665 | )      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Purchase of equity securities available for sale            |                                                      |         | (450     | )       |   |        | (669    | )      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Proceeds from sale of debt securities available
	for sale   |                                                      |         | 72,481   |         |   |        | 46,186  |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Proceeds from sale of equity securities available
	for sale |                                                      |         | 13,715   |         |   |        | 931     |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Other investing activities                                  |                                                      |         | 2,752    |         |   |        | (2,821  | )      
|                                                        |                                                             |                                                      |         |          |         |   |        |        
|                                                        |                                                             | Net cash used in investing activities                |         |          | (16,692 | ) |        |         | (13,038 | )
|                                                       
|                                                       
|                                                       
|                                                       
|Cash flows provided by (used in) financing
	activities: |                                                             |                                                      |         |          |         |   |        |        
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Net proceeds from (payments of) bank loan                   |                                                      |         | 1,192    |         |   |        | (6,678  | )      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Dividends paid on common stock                              |                                                      |         | (766     | )       |   |        | (766    | )      
|                                                       
|                                                       
|                                                       
|                                                       
|                                                        | Other financing activities                                  |                                                      |         | 1,483    |         |   |        | (2,022  | )      
|                                                        |                                                             |                                                      |         |          |         |   |        |        
|                                                        |                                                             | Net cash provided by (used in) financing
	activities |         |          | 1,909   |   |        |         | (9,466  | )
|                                                        |                                                             |                                                      |         |          |         |   |        |        
|(Decrease) increase in cash and cash equivalents        |                                                             |                                                      | (19,912 | )        |         |   | 5,174  |        
|                                                       
|                                                       
|                                                       
|                                                       
|Cash and cash equivalents, beginning of period          |                                                             |                                                      | 56,838  |          |         |   | 23,713 |        
|                                                        |                                                             |                                                      |         |          |         |   |        |        
|Cash and cash equivalents, end of period                |                                                             | $                                                    | 36,926  |          |         | $ | 28,887 |        
|                                                        |                                                             |                                                      |         |          |         |   |        |        

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

8



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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 the 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, 2000.

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 nine months
ended September 30, 2001, are not necessarily indicative of
the results expected for the full year.

NOTE 2  New Accounting Pronouncements

Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133
Accounting for Derivative Instruments and Hedging
Activities (as amended by SFAS No. 137 and 138). As
the Company does not customarily use derivative instruments, the
impact of adoption was immaterial to the results of operations
or financial position of the Company.

The Financial Accounting Standards Board (FASB) has
issued SFAS No. 141 Business Combinations. SFAS
No. 141 eliminates the pooling-of-interests
method for business combinations initiated after June 30,
2001. The Company does not anticipate the adoption of SFAS
No. 141 will have a material effect to the result of
operations or financial position of the Company.

FASB has issued SFAS No. 142 Goodwill and Other
Intangible Assets. SFAS No. 142, for periods starting
January 1, 2002 or thereafter, eliminates the amortization
of goodwill. In addition, goodwill would be separately tested
for impairment using a fair-value based approach. The Company
has not yet determined the impact that SFAS No. 142 will
have on its consolidated financial statements and will implement
it in 2002.

FASB has issued 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.
Significant changes include 1) establishing criteria beyond
those previously specified in existing literature for
determining when a long-lived asset is held for sale, and 2)
requiring when the depreciable life of a long-lived asset to be
abandoned is revised. These provisions could be expected to have
the general effect of reducing or delaying recognition of future
impairment losses on assets to be disposed, offset by higher
depreciation during the remaining holding period. However,
management does not expect the adoption of this standard to have
a significant impact on the Companys 2002 financial
results. 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).

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 losses arising from large risks or from hazards
of an unusual nature covered by the reinsurance agreements. The
ceding of insurance does not discharge the original insurer from
its primary liability to its policyholder; and in the event that
any or all 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
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.

9



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(unaudited)


At September 30, 2001, the Company had reinsurance
recoverables for paid and unpaid losses of $198.8 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++
(Superior) A.M. Best Company (A.M. Best)
rating and accounts for 14.6% of the total recoverable for paid
and unpaid losses.

During the nine months ended September 30, 2001, the
Company recorded a provision of $1.3 million related to
balances due from HIH America Compensation & Liability
Company (HIH), a California domiciled insurance
company, which was seized by the California Department of
Insurance.

During the nine months ended September 30, 2001, the
Company recorded a provision of $4.5 million related to
balances due from Connecticut Surety Company, of which
$3.5 million was related to reinsurance recoverable
balances. See Note 6 for additional information.

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.

Under the workers compensation reinsurance program, the
Company reinsures each loss in excess of $100,000 up to a limit
of $20 million, under separate treaties. The first treaty
covers losses in excess of $100,000 up to $250,000, and the
second treaty reinsures losses in excess of $250,000 up to
$20 million. In addition, the Company purchases coverage in
excess of $20 million up to $140 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 program, the reinsurers are responsible for
100% of the amount of each loss in excess of $250,000 up to
$1.0 million per occurrence. Additionally, the property
program provides coverage for losses in excess of
$1.0 million up to $1.75 million per occurrence, and
losses in excess of $1.75 million to $3.0 million per
occurrence.

In its risk-sharing programs, the Company is also subject to
credit risk with respect to the payment of claims by its
clients captive or rent-a-captive reinsurers, large
deductible programs, indemnification agreements and on the
portion of risk exposure either ceded to the captives or
retained by the client. The capitalization and credit worthiness
of prospective risk-sharing partners is one of the factors
considered by the Company when entering into and renewing
risk-sharing programs. The Company typically collateralizes
balances due from its risk-sharing partners through Funds
Withheld Trusts or Letters of Credit. Although to date the
Company has not experienced any material difficulties in
collecting balances from its risk-sharing partners, the Company
does have concerns about the ultimate collectibility of certain
of these balances. Consequently, the Company has an allowance of
$3.6 million for balances due from certain marginally
capitalized risk-sharing partners in the event they are unable
or unwilling to meet their contractual obligations. These
balances are monitored and are evaluated for adequacy on at
least a quarterly basis. No assurance can be given, however,
regarding the future ability of any of the Companys
risk-sharing partners to meet those obligations which are not
collateralized.

NOTE 4  Line of Credit

The Company has a line of credit totaling $48.0 million, of
which $47.5 million was outstanding at September 30,
2001. The Company drew on this line of credit primarily to
consummate the acquisitions made during 1997 through 1999. The
Company also uses the line of credit periodically to fund
operating expenses of the non-regulated subsidiaries and to make
investments with the regulated subsidiaries.

10



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(unaudited)


At December 31, 2000, the Company was obligated to reduce
the credit line to $33 million by April 30, 2001. In
May 2001, the Company received a permanent waiver of this
obligation to reduce the credit line. Concurrent with the
permanent waiver, the Company and its banks agreed to waive all
prior covenant violations of the existing loan agreement and
establish new covenants related to statutory surplus, GAAP net
worth, fixed charge coverage, net and gross premium ratios and a
minimum A.M. Best rating. In addition, the Company agreed to a
revised pay down schedule and an interest rate that increases
one-quarter point every two months beginning June 1, 2001
until the facility is paid down to $33 million. Pursuant to
the revised pay down schedule, proceeds from capital raising
efforts, including any sales of non-regulated subsidiaries, must
first be used to reduce the loan commitment from
$48 million to $33 million. Half of any proceeds in
excess of $15 million from sales of non-regulated
subsidiaries must be used to further reduce the loan commitment.
As disclosed in the Companys Form 10-Q for the
quarter ended June 30, 2001, the banks provided a waiver to
the Company allowing all of the proceeds from the sale of
Meadowbrook-Villari Agency to be contributed to the surplus of
the Companys insurance subsidiaries. If there were no
required or voluntary reductions in the loan facility prior to
September 30, 2001, the Company was required to begin
reducing the loan commitment by $5.0 million per quarter
until the facility is either paid in full, expires on
August 2002, and renegotiated or extended. The scheduled
payment of $5.0 million due on September 30, 2001 was
not made.

The Company may not have the liquidity in the non-regulated
subsidiaries to make the remaining quarterly payments. The
Company is continuing its capital raising efforts and continuing
negotiation with the banks to reset the covenants.

As of September 30, 2001, the Company was in violation of
several covenants. Specifically, the A.M. Best downgrade to
B(Fair) (See Note 5 
Regulatory Matters and Rating Agencies for further discussion)
caused the Company to be below the minimum B+
(Very Good) rating required in the loan agreement.
In addition, the Company is below minimum statutory surplus and
shareholders equity requirements, and is above maximum
debt to total capital requirements. Also, under the provisions
of the loan agreement, the Company, while in default, is
precluded, from paying dividends to shareholders without prior
approval. The Board of Directors did not declare a dividend for
the quarter ended September 30, 2001.

Under the terms of the credit agreement, due to the covenant
violations, the banks have the right to terminate the revolving
credit facility and demand full and immediate repayment. If such
repayment is required, the Company currently does not have
sufficient cash to repay the banks loan. The banks have not
expressed a current intent to require immediate repayment, and
while the banks and the Company continue to discuss new terms or
an agreeable timetable, there can be no assurances that the
banks will not require such repayment. As part of the loan
agreement, the Company pledged the stock of its non-regulated
subsidiaries as collateral. In the event of a default, the banks
have the right to sell the Companys non-regulated
subsidiaries. The cash generated may be insufficient to repay
the debt. While the banks have not expressed a current intent to
exercise these rights, there can be no assurances that they will
not exercise their rights. The banks have taken no formal action
to date with respect to this line of credit.

The Company has retained Goldman, Sachs & Co. (Goldman
Sachs) to review its strategic and capital raising
alternatives. A portion of any capital received will likely be
used to pay down all or a portion of the outstanding balances on
the credit facility. No assurance can be given that these
capital raising efforts will be successful.

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 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 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

11



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(unaudited)


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 2000 statutory financial statements, Star may not pay
any dividends to the Company during 2001 without prior approval
of the Michigan Commissioner of Insurance. Stars earned
surplus position at December 31, 2000 was negative
$25.9 million. At September 30, 2001 earned surplus
was negative $36.7 million. No statutory dividends were
paid in 2000 and 1999.

In March 1998, the National Association of Insurance
Commissioners (NAIC) voted to adopt its Codification
of Statutory Accounting Principles project (referred to
hereafter as codification). Codification is a
modified form of statutory accounting principles that resulted
in a change to the NAIC Accounting Practices and Procedures
Manual previously applicable to insurance enterprises. The
Companys insurance subsidiaries adopted codification
effective January 1, 2001.

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 to 1
and 2 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
September 30, 2001, on a consolidated basis, were 6.5 to 1
and 3.0 to 1 on a gross and net written premium basis,
respectively.

The Company has received inquiries from various state regulators
requesting additional information concerning the Company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 has submitted a business plan to reduce its current
leverage ratios and is working closely with the Michigan Office
of Financial and Insurance Services (OFIS) to
monitor its progress. While the Company has been unsuccessful in
sufficiently reducing its premium leverage ratios, gross and net
written premium have declined in each of the previous two
quarters. As noted elsewhere, additional capital from sources
outside the Company will be necessary to assist in bringing the
leverage ratios back into line more quickly. Continued
reductions in premium writings may also be required. If the
regulators determine that the Company has made insufficient
progress towards reducing its leverage ratios, they may take
action at any time. While the regulators have taken no actions
to date, these actions could include requiring the Company to
propose steps to correct the capital deficiency, requiring a
further reduction in permitted premium writings, or placing the
Company under regulatory control.

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 to be used as a tool to
identify weakly capitalized companies. At December 31, 2000
and 1999, all of the insurance subsidiaries were in compliance
with RBC requirements. Regulatory measures are required when the
RBC ratio falls below 2 to 1 actual surplus to
authorized control level surplus. Star, the parent insurance
company, had actual statutory surplus of $56.2 million and
$70.2 million at December 31, 2000 and 1999,
respectively; the authorized control level RBC was
$27.0 million in 2000 and $19.6 million in 1999.

Management believes, based on current operating results and
forecasted operating trends, that absent a significant capital
contribution to its insurance subsidiaries, it is probable that
as of December 31, 2001 (the next RBC measurement date) the
Companys RBC ratio will fall below 2 to 1, a
level that will require formal regulatory action. While the
Company has engaged Goldman Sachs to assist in its capital
raising strategies, there can be no assurance that the required
capital will be raised by the next RBC measurement date.

12



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(unaudited)


The Companys insurance subsidiaries are rated by A.M.
Best. A.M. Bests rating represents its opinion of the
financial strength of the Companys insurance company
subsidiaries and their capacity to meet the obligations of
insurance policies, and are not directed toward the protection
of investors. A.M. Best assigns ratings along a scale with
ratings at the top end of the scale, in the opinion of A.M.
Best, possessing the strongest capacity for payment of claims,
while companies at the bottom end of the scale possessing the
weakest capacity.

On August 10, 2001, A.M. Best reduced its rating of the
Companys insurance company subsidiaries from
B++ (Very Good) to B
(Fair) and removed the Company from under review. In
February 2001, the Companys rating was lowered from
A- (Excellent) to B++
(Very Good) and put under review with developing
implications. If the Company is unsuccessful in increasing its
capital significantly in the immediate future, the downgrade
could have a material adverse effect on the Companys
ability to market its insurance products, which in turn would
have a material adverse effect on the Companys financial
condition, results of operations, and liquidity. The financial
impact of the rating change cannot be quantified at this time.
There can be no assurance that A.M. Best will not further reduce
its rating of the Companys insurance company subsidiaries
in the future. See also Item 2, Dependence on Key
Programs for a discussion of the impact of the downgrade
on certain programs.

In May 2001, Standard & Poors downgraded Star and
its insurance company subsidiaries from an A to a
BB+ rating. This change in the Companys rating
was primarily the result of Standard & Poors concerns
that the Company might fall below acceptable levels of
regulatory capital as measured by the NAICs risk based
capital ratio. At the Companys request, Standard &
Poors no longer rates the Company.

NOTE 6  Other Matters

Effective December 31, 2000, Connecticut Surety Company
(CSC) executed a Subordinated Surplus Note to one of
the Companys insurance company subsidiaries, Star
Insurance Company, (Star) in the principal sum of
$3.8 million. Interest accrues 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 various reinsurance agreements. This
Subordinated Surplus Note, along with the other notes ($195,000
Subordinated Surplus Note and $300,000 Promissory Notes), were
intended to be converted into Voting Convertible Preferred Stock
of CSC, or its parent, as a part of a recapitalization of CSC,
pursuant to a Letter of Intent dated December 31, 2000
between CSC, Star, and other investors. Upon obtaining the
requisite regulatory approval, it was anticipated that Star
would own greater than 50% of CSC, or its parent company, if it
had fully exercised its conversion rights under the Voting
Convertible Preferred Stock.

The Company believes CSC may be unable to meet all of its
reinsurance and other obligations to the Company. While CSC has
undertaken efforts to raise capital, it has been unsuccessful to
date. The Company has not converted the Subordinated Surplus
Note, nor other notes as described above, into Voting
Convertible Preferred Stock of CSC, or its parent and has
withdrawn its Form A pending before the Connecticut
Department of Insurance.

As of March 31, 2001, without the effect of the investment
noted above, CSC reported capital and surplus of negative
$530,000. As of June 30, 2001, the Company had no facts to
indicate that CSCs capital and surplus position had
materially improved. In view of CSCs lack of apparent
improvement in capital and surplus, its inability to pay surety
bond claims from its cash flow, which related to
reinsurance agreements in effect prior to June 1, 2000, and
its suspension of premium remittances on bonds currently issued,
the Company recorded a charge of $5.5 million at
June 30, 2001.

During the third quarter of 2001, CSC reported statutory capital
and surplus of $5.6 million for the period ending
June 30, 2001, and remitted a portion of premiums past due
to the Company and is current on recent premiums.

13



---



##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(unaudited)


In view of these developments, the Company reduced its allowance
to $4.5 million. This allowance includes a provision of
$3.5 million for reinsurance recoverables, $118,000 for
uncollectible receivables, and $870,000 for impairment in the
Subordinated Surplus Note.

During the third quarter of 2001, two (2) of the
Companys executives resigned from CSCs Board of
Directors.

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 agency operations and
program business 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.

Agency Operations

The agency segment was formed in 1955 as Meadowbrooks
original business. The insurance agency primarily places
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. Effective July 1, 2001, the Company sold the
business of Meadowbrook-Villari Agency of Florida. It is
anticipated that this sale will result in a reduction of
annualized agency revenue of approximately $3.2 million,
but should not have a material impact on the Companys
overall results of operations. The Company recorded a capital
loss of approximately $989,000 in conjunction with the sale.

Program Business

The program business segment is engaged primarily in developing
and managing alternative market risk management programs for
defined client groups and their members. This includes providing
services, such as reinsurance brokering, risk management
consulting, claims handling, and administrative services, along
with various types of property and casualty insurance coverage,
including workers compensation, general liability and
commercial multiple peril. Insurance coverage is primarily
provided to associations or similar groups of members, commonly
referred to as programs. A program is a set of coverages and
services tailored to meet the specific requirements of a group
of clients.

14



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)


(unaudited)


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

|                       |                                    |                                    |   |         |         |   |   |         |         | 
|---------------------- | ---------------------------------- | ---------------------------------- | - | ------- | ------- | - | - | ------- | ------- | 
|                       |                                    |                                   
|                       |                                    | For the Nine Months               
|                       |                                    | Ended September 30,               
|                       |                                    |                                   
|                       |                                    | 2001                               |   | 2000   
|                       |                                    |                                    |   |        
|Revenues:              |                                    |                                    |   |         |         |   |   |        
|                      
|                      
|                      
|                      
|                       | Net earned premiums                |                                    | $ | 121,490 |         |   | $ | 118,874 |        
|                      
|                      
|                      
|                      
|                       | Management fees                    |                                    |   | 19,561  |         |   |   | 18,369  |        
|                      
|                      
|                      
|                      
|                       | Investment income                  |                                    |   | 10,595  |         |   |   | 9,954   |        
|                      
|                      
|                      
|                      
|                       | Net realized losses on investments |                                    |   | (674    | )       |   |   | (170    | )      
|                       |                                    |                                    |   |         |         |   |   |        
|                       |                                    | Program business segment           |   |         | 150,972 |   |   |         | 147,027 | 
|                      
|                      
|                      
|                      
|                       | Agency operations                  |                                    |   | 12,207  |         |   |   | 12,669  |        
|                      
|                      
|                      
|                      
|                       | Reconciling items                  |                                    |   | (951    | )       |   |   | 39      |        
|                      
|                      
|                      
|                      
|                       | Intersegment revenue               |                                    |   | (462    | )       |   |   | (449    | )      
|                       |                                    |                                    |   |         |         |   |   |        
|                       |                                    | Consolidated revenue               |   | $       | 161,766 |   |   | $       | 159,286 | 
|                       |                                    |                                    |   |         |         |   |   |        
|Pre-tax (loss) income: |                                    |                                    |   |         |         |   |   |        
|                      
|                      
|                      
|                      
|                       | Program business                   |                                    | $ | (8,446  | )       |   | $ | 4,421   |        
|                      
|                      
|                      
|                      
|                       | Agency operations                  |                                    |   | 3,998   |         |   |   | 3,088   |        
|                      
|                      
|                      
|                      
|                       | Reconciling items                  |                                    |   | (6,233  | )       |   |   | (5,533  | )      
|                       |                                    |                                    |   |         |         |   |   |        
|                       |                                    | Consolidated pre-tax (loss) income |   | $       | (10,681 | ) |   | $       | 1,976   | 
|                       |                                    |                                    |   |         |         |   |   |        

|                       |                                    |                                    |   |        |        |  |   |        |        | 
|---------------------- | ---------------------------------- | ---------------------------------- | - | ------ | ------ |  | - | ------ | ------ | 
|                       |                                    |                                   
|                       |                                    | For the Quarters                  
|                       |                                    | Ended September 30,               
|                       |                                    |                                   
|                       |                                    | 2001                               |   | 2000  
|                       |                                    |                                    |   |       
|Revenues:              |                                    |                                    |   |        |        |  |   |       
|                      
|                      
|                      
|                      
|                       | Net earned premiums                |                                    | $ | 40,673 |        |  | $ | 47,777 |       
|                      
|                      
|                      
|                      
|                       | Management fees                    |                                    |   | 5,623  |        |  |   | 6,097  |       
|                      
|                      
|                      
|                      
|                       | Investment income                  |                                    |   | 3,641  |        |  |   | 3,567  |       
|                      
|                      
|                      
|                      
|                       | Net realized losses on investments |                                    |   | 647    |        |  |   | 64     |       
|                       |                                    |                                    |   |        |        |  |   |       
|                       |                                    | Program business segment           |   |        | 50,584 |  |   |        | 57,505 | 
|                      
|                      
|                      
|                      
|                       | Agency operations                  |                                    |   | 3,047  |        |  |   | 3,930  |       
|                      
|                      
|                      
|                      
|                       | Reconciling items                  |                                    |   | (127   | )      |  |   | 13     |       
|                      
|                      
|                      
|                      
|                       | Intersegment revenue               |                                    |   | (109   | )      |  |   | (140   | )     
|                       |                                    |                                    |   |        |        |  |   |       
|                       |                                    | Consolidated revenue               |   | $      | 53,395 |  |   | $      | 61,308 | 
|                       |                                    |                                    |   |        |        |  |   |       
|Pre-tax (loss) income: |                                    |                                    |   |        |        |  |   |       
|                      
|                      
|                      
|                      
|                       | Program business                   |                                    | $ | 3,874  |        |  | $ | 2,317  |       
|                      
|                      
|                      
|                      
|                       | Agency operations                  |                                    |   | 1,061  |        |  |   | 702    |       
|                      
|                      
|                      
|                      
|                       | Reconciling items                  |                                    |   | (4,422 | )      |  |   | (1,775 | )     
|                       |                                    |                                    |   |        |        |  |   |       
|                       |                                    | Consolidated pre-tax (loss) income |   | $      | 513    |  |   | $      | 1,244  | 
|                       |                                    |                                    |   |        |        |  |   |       

The pre-tax (loss) income reconciling items represent other
expenses relating to the holding company, amortization, interest
expense, as well as the recorded capital loss in conjunction
with the sale of Meadowbrook-Villari Agency, which are not
allocated among the segments.

NOTE 9  Reclassifications

Certain amounts in the 2000 notes to consolidated financial
statements have been reclassified to conform with the 2001
presentation.

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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 2000 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 banks;
obtainment of certain processing efficiencies; changing rates of
inflation; general economic conditions and other risks
identified in the Companys reports and registration
statements filed with the Securities and Exchange Commission.
The Company is not under any obligation to (and expressly
disclaims any such obligation to) update or alter its
forward-looking statements whether as a result of new
information, future events or otherwise.

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PART IFINANCIAL INFORMATION







ITEM 2


MANAGEMENTS DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS


For the Periods ended September 30, 2001 and 2000


Meadowbrook Insurance Group, Inc. (the Company) is a
program-oriented risk management company specializing in
alternative risk management solutions for agents, brokers,
professional/ trade associations, and insureds of all sizes. The
Company provides a broad array of insurance products and
services through its subsidiaries. The Company owns insurance
carriers, which are essential elements of the risk management
process. Management defines its business segments as agency
operations and program business operations based upon
differences in products and services.






RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000


Overview

Net loss for the nine months ended September 30, 2001 was
($7.0) million, or ($0.83) per share, compared to net income of
$1.7 million, or $0.20 per share, for the nine months ended
September 30, 2000. The net loss in 2001 reflects the
impact of a $4.5 million charge related to management
concerns about the financial condition of Connecticut Surety
Company (CSC) and increased losses on several of the
Companys programs. The charge associated with CSC includes
provisions of $3.5 million for unrecoverable reinsurance,
$118,000 for uncollectible receivables, and $870,000 for
impairment of the investment. The results also reflect a
$1.3 million provision related to balances due from HIH
America Compensation & Liability Company (HIH),
a California domiciled insurance company which was recently
seized by the California Department of Insurance.

Program Business

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

|                      |                                    |                     |        |         |         |   |       |         |         | 
|--------------------- | ---------------------------------- | ------------------- | ------ | ------- | ------- | - | ----- | ------- | ------- | 
|                      |                                    |                    
|                      |                                    | For the Nine Months
|                      |                                    | Ended September 30,
|                      |                                    |                    
|                      |                                    | 2001                |        | 2000   
|                      |                                    |                     |        |        
|Revenues:             |                                    |                     |        |         |         |   |       |        
|                     
|                     
|                     
|                     
|                      | Net earned premiums                |                     | $      | 121,490 |         |   | $     | 118,874 |        
|                     
|                     
|                     
|                     
|                      | Management fees                    |                     |        | 19,561  |         |   |       | 18,369  |        
|                     
|                     
|                     
|                     
|                      | Investment income                  |                     |        | 10,595  |         |   |       | 9,954   |        
|                     
|                     
|                     
|                     
|                      | Net realized losses on investments |                     |        | (674    | )       |   |       | (170    | )      
|                      |                                    |                     |        |         |         |   |       |        
|                      |                                    | Total revenue       |        | $       | 150,972 |   |       | $       | 147,027 | 
|                      |                                    |                     |        |         |         |   |       |        
|Pre-tax (loss) income |                                    | $                   | (8,446 | )       |         | $ | 4,421 |        
|                      |                                    |                     |        |         |         |   |       |        

Revenues from program business increased $3.9 million, or
2.7%, to $151.0 million for the nine months ended
September 30, 2001 from $147.0 million for the
comparable period in 2000. This increase reflects 2.2% growth in
net earned premiums to $121.5 million in the nine months
ended September 30, 2001 from $118.9 million in the
comparable period in 2000, and is the result of growth in
existing programs both from increasing the number of insureds
and from rate increases. These increases were partially offset
by the impact of the purchase of a large quota share reinsurance
treaty for several workers compensation programs and the
decline in written premium from programs previously
discontinued. Management fees grew $1.2 million, or 6.5%,
to $19.6 million from $18.4 million. This increase
resulted from a profit sharing fee of $1.6 million relating
to the good experience achieved on a loss portfolio transfer and
new business growth of $650,000, which amounts were partially
offset by discontinued managed programs. The remaining increase
in total

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Program business generated a pre-tax loss of ($8.4) million for
the nine months ended September 30, 2001 compared to a
$4.4 million pre-tax gain for the comparable period in
2000. The growth in program business revenues was more than
offset by an increase in the Companys loss and loss
adjustment expenses and operating expenses on program business.
The Companys loss and loss adjustment expense ratio was
82.9% for the nine months ended September 30, 2001 compared
to 74.7% for the same period last year. Included in losses for
the nine months ended September 30, 2001 were provisions of
$3.5 million and $1.3 million for exposures on the CSC
and HIH reinsurance balances due, respectively. The impact of
development on prior accident year reserves was
$2.7 million for the nine months ended September 30,
2001. The net development primarily related to programs that
were discontinued in 1999 and 2000.

The Companys expense ratio was 35.6% for the nine months
ended September 30, 2001 compared to 33.0% for the
comparable period in 2000. This increase reflects the reduction
in programs in which the Company retains limited risk, and where
the Company was receiving a ceding commission in excess of the
actual expenses. In the past, this margin had the effect of
reducing the expense ratio.

Agency Operations

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

|                               |  |                     |        |      |  |   |        | 
|------------------------------ |  | ------------------- | ------ | ---- |  | - | ------ | 
|                               |  |                    
|                               |  | For the Nine Months
|                               |  | Ended September 30,
|                               |  |                    
|                               |  | 2001                |        | 2000
|                               |  |                     |        |     
|Revenue from agency operations |  | $                   | 12,207 |      |  | $ | 12,669 | 
|                              
|                              
|                              
|                              
|Pre-tax income                 |  | $                   | 3,998  |      |  | $ | 3,088  | 

Revenue from agency operations, which consists primarily of
agency commission revenue, decreased $462,000, or 3.6%, to
$12.2 million for the nine months ended September 30,
2001 from $12.7 million for the comparable period in 2000.
This decrease reflects the sale of the Meadowbrook-Villari
Agency. Excluding the impact of this sale, agency revenue would
have increased 2.0%. Agency operations generated pre-tax income
of $4.0 million for the nine months ended
September 30, 2001 compared to $3.1 million for the
comparable period in 2000. The improvement in agency operations
reflects the growth in revenue (excluding the sale of
Meadowbrook Villari) and the sale of the Meadowbrook-Villari
Agency. Effective July 1, 2001, the Company sold the
business of Meadowbrook-Villari Agency. It is anticipated that
this sale will result in a reduction of annualized agency
revenue of approximately $3.2 million, but should not have
a material impact on the Companys overall results of
operations. The Company recorded a capital loss of approximately
$989,000 in conjunction with the sale.

Other Items

Taxes

Federal income tax benefit for the nine months ended
September 30, 2001 was $3,652,000, or 34.2% of loss before
taxes. For the same nine months last year, the Company reflected
a federal income tax expense of $249,000 on income before taxes
of $1,976,000. The increase in the effective tax rate primarily
reflects the reduction in tax-exempt investments.

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RESULTS OF OPERATIONS FOR THE QUARTERS ENDED
SEPTEMBER 30, 2001 AND 2000


Overview

Net income for the quarter ended September 30, 2001 was
$300,000 compared to net income of $708,000 for the quarter
ended September 30, 2000.

Program Business

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

|               |                                   |                     |       |        |        |   |       |        |        | 
|-------------- | --------------------------------- | ------------------- | ----- | ------ | ------ | - | ----- | ------ | ------ | 
|               |                                   |                    
|               |                                   | For the Quarters   
|               |                                   | Ended September 30,
|               |                                   |                    
|               |                                   | 2001                |       | 2000  
|               |                                   |                     |       |       
|Revenues:      |                                   |                     |       |        |        |   |       |       
|              
|              
|              
|              
|               | Net earned premiums               |                     | $     | 40,673 |        |   | $     | 47,777 |       
|              
|              
|              
|              
|               | Management fees                   |                     |       | 5,623  |        |   |       | 6,097  |       
|              
|              
|              
|              
|               | Investment income                 |                     |       | 3,641  |        |   |       | 3,567  |       
|              
|              
|              
|              
|               | Net realized gains on investments |                     |       | 647    |        |   |       | 64     |       
|               |                                   |                     |       |        |        |   |       |       
|               |                                   | Total revenue       |       | $      | 50,584 |   |       | $      | 57,505 | 
|               |                                   |                     |       |        |        |   |       |       
|Pre-tax income |                                   | $                   | 3,874 |        |        | $ | 2,317 |       
|               |                                   |                     |       |        |        |   |       |       

Revenues from program business decreased $6.9 million, or
12.0%, to $50.6 million for the quarter ended September 30,
2001 from $57.5 million for the comparable period in 2000.
This decrease reflects a $7.1 million, or 14.9% decrease in
net earned premiums to $40.7 million in the quarter ended
September 30, 2001 from $47.8 million in the comparable
period in 2000, and reflects a $8.7 million reduction in
net earned premium associated with the purchase of a quota share
reinsurance treaty for several workers compensation, a
decrease in earned premium of $4.7 million related to
previously discontinued programs, which amounts were offset by
growth in existing programs both from increasing the number of
insureds and from rate increases. Management fees decreased
$474,000, or 7.8%, to $5.6 million from $6.1 million,
primarily related to claims fees. Net investment income for the
quarter ended September 30, 2001 increased $657,000, or
18.1% from $3.6 million to $4.3 million. This growth
reflects the increase in average invested assets. The pre-tax
yields remained flat at 5.8%.

Program business generated pre-tax income of $3.9 million
for the quarter ended September 30, 2001 compared to
pre-tax income of $2.3 million for the comparable period in
2000. The growth in program business revenues was fully offset
by an increase in the Companys loss and loss adjustment
expense ratio and the expense ratio on program business. The
Companys loss and loss adjustment expense ratio was 78.1%
for the quarter ended September 30, 2001 compared to 73.3%
for the same quarter last year. As indicated in footnote 3 of
the consolidated financial statements, the Company has
historically maintained an allowance for the potential
uncollectibility of certain reinsurance balances due from some
risk-sharing partners. At the end of each quarter an analysis of
these exposures is conducted to determine the potential exposure
to uncollectibility. This quarter, the review concluded that
while certain programs required an increase in the allowance due
to loss results, other programs experienced better than expected
loss results, payments were received from the risk-sharing
partner or the review of the risk-sharing partners
financial condition revealed an improved prospect for
collectibility. As a result, exposure allowances decreased from
$5.7 million at June 30, 2001 to $3.6 million at
September 30, 2001. The allowance for HIH increased
$300,000 from $1.0 million at June 30, 2001 to $1.3
million at September 30, 2001. These changes had a net
effect of reducing incurred loss and loss adjustment expense by
$1.8 million for the quarter ended September 30, 2001.
No assurance can be given, however, regarding the future ability
of any of the Companys risk-sharing partners to meet those
obligations which are not collateralized.

In addition, incurred loss and loss adjustment expenses were
impacted by favorable development on prior accident years of
$650,000 in the quarter ended September 30, 2001. Also, the
effect of increasing the 2001

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The Companys expense ratio was 35.6% for the quarter ended
September 30, 2001 compared to 32.3% for the comparable
period in 2000. This increase reflects the reduction in programs
in which the Company retains limited risk, and was receiving a
ceding commission in excess of the actual expenses. The increase
also reflects an increase in administrative and processing costs
related to implementation of the Companys internet based
initiatives.

Agency Operations

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

|                               |  |                     |       |      |  |   |       | 
|------------------------------ |  | ------------------- | ----- | ---- |  | - | ----- | 
|                               |  |                    
|                               |  | For the Quarters   
|                               |  | Ended September 30,
|                               |  |                    
|                               |  | 2001                |       | 2000
|                               |  |                     |       |     
|Revenue from agency operations |  | $                   | 3,047 |      |  | $ | 3,930 | 
|                              
|                              
|                              
|                              
|Pre-tax income                 |  | $                   | 1,061 |      |  | $ | 702   | 

Revenue from agency operations, which consists primarily of
agency commission revenue, decreased $883,000, or 22.5%, to
$3.0 million for the quarter ended September 30, 2001
from $3.9 million for the comparable period in 2000. This
decrease primarily reflects the sale of Meadowbrook Villari.
Agency operations generated pre-tax income of $1.0 million
for the quarter ended September 30, 2001 compared to
$702,000 for the comparable period in 2000. Effective
July 1, 2001, the Company sold the business of
Meadowbrook-Villari Agency of Florida. It is anticipated that
this sale will result in a reduction of annualized agency
revenue of approximately $3.2 million, but should not have
a material impact on the Companys overall results of
operations. The Company recorded a capital loss of approximately
$989,000 in conjunction with the sale, primarily in the second
quarter of 2001.

Other Items

Taxes

Federal income tax expense for the quarter ended
September 30, 2001 was $213,000, or 41.5% of income before
taxes. For the same quarter last year, the Company reflected a
federal income tax expense of $536,000 on income before taxes of
$1.2 million. The increase in the effective tax rate
primarily reflects the reduction in tax-exempt investments.

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, agency commissions, and management fees from the
Companys insurance subsidiaries. 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 $10.1 million
and $6.3 million for the nine months ended
September 30, 2001 and 2000, respectively. These earnings
were available for debt service.

Cash flows used in operating activities for the nine months
ended September 30, 2001 were $5.1 million, which
compares to $27.7 million of cash flows provided by
operating activities for the comparable period in 2000. The
decrease in cash from operations reflects an increase in paid
claims and underwriting-related

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At December 31, 2000, the Company was obligated to reduce
the credit line to $33 million by April 30, 2001. In
May 2001, the Company received a permanent waiver of this
obligation to reduce the credit line. Concurrent with the
permanent waiver, the Company and its banks agreed to waive all
prior covenant violations of the existing loan agreement and
establish new covenants related to statutory surplus, GAAP net
worth, fixed charge coverage, net and gross premium ratios and a
minimum A.M. Best rating. In addition, the Company agreed to a
revised pay down schedule and an interest rate that increases
one-quarter point every two months beginning June 1, 2001
until the facility is paid down to $33 million. Pursuant to
the revised pay down schedule, proceeds from capital raising
efforts, including any sales of non-regulated subsidiaries, must
first be used to reduce the loan commitment from
$48 million to $33 million. Half of any proceeds in
excess of $15 million from sales of non-regulated
subsidiaries must be used to further reduce the loan commitment.
As disclosed in the Companys Form 10-Q for the
quarter ended June 30, 2001, the banks provided a waiver to
the Company allowing all of the proceeds from the sale of
Meadowbrook-Villari Agency to be contributed to the surplus of
the Companys insurance subsidiaries. If there were no
required or voluntary reductions in the loan facility prior to
September 30, 2001, the Company was required to begin
reducing the loan commitment by $5 million per quarter
until the facility either is paid in full, expires on
August 2002, and is renegotiated or extended. The scheduled
payment of $5.0 million due on September 30, 2001 was
not made. The Company may not have the liquidity in the
non-regulated subsidiaries to make the remaining quarterly
payments. The Company is continuing its capital raising efforts
pending the continuing negotiation with the banks to reset the
covenants.

As of September 30, 2001, the Company was in violation of
several covenants. Specifically, the A.M. Best downgrade to
B(Fair) caused the Company to be below
the minimum B+ (Very Good) required
rating in the loan agreement. In addition, the Company is below
minimum statutory surplus and shareholders equity
requirements, and is above maximum debt to total capital
requirements. Also, under the provisions of the loan agreement,
the Company is precluded from paying dividends to shareholders
while it is in default. The Board of Directors did not declare a
dividend for the quarter ended September 30, 2001. The
Company remains current on its interest service obligations.

Under the terms of the amended agreement, due to the covenant
violations, the banks have the right to terminate the revolving
credit facility and demand full and immediate repayment. If such
repayment is required, the Company currently does not have
sufficient cash to repay the bank loan. The banks have not
expressed a current intent to require immediate repayment, and
while the banks and the Company continue to discuss new terms or
an agreeable timetable, there can be no assurances that the
banks will not require such repayment. As part of the loan
agreement, the Company pledged the stock of its non-regulated
subsidiaries as collateral. In the event of a default, the banks
have the right to sell the Companys non-regulated
subsidiaries. The cash generated may be insufficient to repay
the debt. While the banks have not expressed a current intent to
exercise that right, there can be no assurances that they will
not exercise their right. The banks have taken no formal action
to date with respect to this line of credit.

As noted elsewhere, the Company has retained Goldman Sachs to
review its strategic and capital raising alternatives. A portion
of any capital received will likely be used to pay down the
outstanding balances on the credit facility. No assurance can be
given that these capital raising efforts will be successful.

Shareholders equity was $82.6 million, or $9.71 per
common share, at September 30, 2001 compared to
$86.0 million, or $10.10 per common share, at
December 31, 2000. The decrease in shareholders
equity during the nine months ended September 30, 2001
reflects the Companys net loss and shareholders
dividends, net of unrealized appreciation on available for sale
securities. Changes in shareholders equity related to the
unrealized values of underlying portfolio investments have been
and will continue to be volatile as market prices of debt
securities fluctuate with changes in the interest rate
environment.

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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. The restriction on the
transferability to the holding company from its insurance
subsidiaries is limited by Michigan 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 2000 statutory financial statements, Star may not pay
any dividend to the Company during 2001 without prior approval
of the Michigan Commissioner of Insurance. Stars earned
surplus position at December 31, 2000 was negative
$25.9 million. At September 30, 2001, earned surplus
was negative $36.7 million. No statutory dividends were
paid in 2000 and 1999.

Dependence on Key Programs

The Company provides alternative risk management products and
services to certain large client groups and associations and
then markets them to their individual members. For the nine
months ended September 30, 2001, the Companys top
four programs accounted for 29.9% of the Companys total
net earned premium. The loss or cancellation of any of the
Companys significant programs by the relevant client
groups, or the general availability of commercial market
coverage to members of such groups on more favorable terms than
provided under the Companys programs, could have a
material adverse effect on the Companys results of
operations. Some of the Companys clients require its
insurance companies to retain an A-
(Excellent) or better A.M. Best rating. As
noted previously, the Company was downgraded to B
(Fair) by A.M. Best. The impact of this
downgrade may have a material adverse impact on its ability to
market its insurance products. If the Company is unsuccessful in
increasing its capital significantly in the immediate future,
and its rating remains at the current level, certain programs
and insureds may seek insurance carriers with higher ratings.
While, the financial impact of this rating action cannot be
quantified at this time, this downgrade may result in either a
loss of clients or a requirement to seek another insurance
company with an A.M. Best rating of A-
(Excellent) or better as a fronting or
policy-issuing company. There are costs associated with
providing the Companys insureds with access to a fronting
company that likely cannot be recouped. There can be no
assurance that A.M. Best will not further reduce its rating
of the Companys insurance company subsidiaries in the
future.

New Accounting Pronouncements

Effective January 1, 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133
Accounting for Derivative Instruments and Hedging
Activities (as amended by SFAS No. 137 and 138). As
the Company does not customarily use derivative instruments, the
impact of adoption was immaterial to the results of operations
or financial position of the Company.

The Financial Accounting Standards Board (FASB) has
issued SFAS No. 141 Business Combinations. SFAS
No. 141 eliminates the pooling-of-interests
method for business combinations initiated after June 30,
2001. The Company does not anticipate the adoption of SFAS
No. 141 will have a material effect to the result of
operations or financial position of the Company.

FASB has issued SFAS No. 142 Goodwill and Other
Intangible Assets. SFAS No. 142, for periods starting
January 1, 2002 or thereafter, eliminates the amortization
of goodwill. In addition, goodwill would be separately tested
for impairment using a fair-value based approach. The Company
has not yet determined the impact that SFAS No. 142 will
have on its consolidated financial statements and will implement
it in 2002.

FASB has issued 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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

No material changes since December 31, 2000 Annual Report
on Form 10-K.

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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
nine months ended September 30, 2001, 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
|        |       |            
|        | 10.26 |             |  | Employment Contract between the Company and
	Joseph C. Henry dated September 17, 2001.
|        | 11    |             |  | Statement re computation of per share earnings.                                       



| |     |                     
| | --- | --------------------
| | (B) | Reports on Form 8-K:

None.

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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: November 14, 2001

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EXHIBIT INDEX


|        |       |             |  |                                                                                        
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 10.27 |             |  | Employment Agreement between the Company and
	Joseph C. Henry dated September 17, 2001.
|        | 11    |             |  | Statement re: computation on per share earnings