##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-Q

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarter ended June 30, 2003                                                         
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-14094



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Meadowbrook Insurance Group, Inc.

(Exact name of registrant as specified in its
charter)


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

26600 Telegraph Road, Southfield, Michigan
48034

(Address, zip code of principal executive
offices)


(248) 358-1100

(Registrants telephone number, including
area code)




---

Indicate
by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ          No o

Indicate by check
mark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes þ          No o

The aggregate
number of shares of the Registrants Common Stock, $.01 par
value, outstanding on August 8, 2003 was 29,022,394.



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TABLE OF CONTENTS



|                                                                                             |  |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART 1 -- FINANCIAL INFORMATION                                                             
|Item 1 Financial Statements                                                                 
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME                                                 
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the Quarter Ended June 30,                  
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                             
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                             
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                       
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                             
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                  
|ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                          
|Item 4. Controls and Procedures                                                             
|PART II -- OTHER INFORMATION                                                                
|Item 1. Legal Proceedings                                                                   
|Item 4. Submission of Matters to a Vote of Security Holders                                 
|Item 6. Exhibits and Reports on Form 8-K                                                    
|SIGNATURES                                                                                  
|1st Amendment to Waiver of Restated Credit Agmt                                             
|2nd Amendment to Waiver of Restated Credit Agmt                                             
|Certification of Chief Executive Officer                                                    
|Certification of Senior VP and CFO                                                          
|906 Certification of Chief Executive Officer                                                
|906 Certification of Senior VP and CFO                                                      



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##### Table of Contents



TABLE OF CONTENTS

|                                   |  |                                                                                           |    |      |       | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | ----- | 
|                                   |  |                                                                                           |    | Page |      
|                                   |  |                                                                                           |    |      |      
|PART I  FINANCIAL
    INFORMATION
|Item 1                            |  | Financial Statements                                                                      |    |      |       | 
|                                   |  | Condensed Consolidated Statements of Income
    (unaudited)                               |    |      | 2-3   | 
|                                   |  | Consolidated Statements of Comprehensive Income
    (unaudited)                           |    |      | 4-5   | 
|                                   |  | Condensed Consolidated Balance Sheets (unaudited)                                         |    |      | 6     | 
|                                   |  | Condensed Consolidated Statements of Cash Flows
    (unaudited)                           |    |      | 7     | 
|                                   |  | Notes to Consolidated Financial Statements
    (unaudited) and Management Representation  |    |      | 8-16  | 
|Item 2                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 17-28 | 
|Item 3                            |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |    |      | 28    | 
|Item 4                            |  | Controls and Procedures                                                                   |    |      | 28    | 
|PART II  OTHER
    INFORMATION   
|Item 1                            |  | Legal Proceedings                                                                         |    |      | 29    | 
|Item 4                            |  | Submission of Matters to a Vote of Security
    Holders                                   |    |      | 29    | 
|Item 6                            |  | Exhibits and Reports on Form 8-K                                                          |    |      | 29    | 
|Signatures                         |  |                                                                                           | 30 |     

1



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##### Table of Contents








PART 1  FINANCIAL
INFORMATION







Item
1     Financial
Statements


MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
INCOME


For the Six Months Ended
June 30,


|                                                          |                                                    |                            |       |            |        |  |     |            |         | 
|--------------------------------------------------------- | -------------------------------------------------- | -------------------------- | ----- | ---------- | ------ |  | --- | ---------- | ------- | 
|                                                          |                                                    | 2003                       |       |            | 2002   | 
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    |                           
|                                                          |                                                    | (Unaudited)                |      
|                                                          |                                                    | (in thousands,             |      
|                                                          |                                                    | except share data)         |      
|Revenues:                                                 |                                                    |                            |       |            |        |  |     |           
|                                                          | Net premium earned                                 |                            | $     | 63,614     |        |  | $   | 82,970     |        
|                                                          | Net commissions and fees                           |                            |       | 24,627     |        |  |     | 18,932     |        
|                                                          | Net investment income                              |                            |       | 6,930      |        |  |     | 6,629      |        
|                                                          | Net realized gains (losses) on investments         |                            |       | 579        |        |  |     | (301       | )      
|                                                          | Gain on sale of subsidiary                         |                            |       |           |        |  |     | 199        |        
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    | Total revenues             |       |            | 95,750 |  |     |            | 108,429 | 
|                                                          |                                                    |                            |       |            |        | 
|Expenses:                                                 |                                                    |                            |       |            |        |  |     |           
|                                                          | Net loss and loss adjustment expenses              |                            |       | 41,295     |        |  |     | 55,096     |        
|                                                          | Salaries and employee benefits                     |                            |       | 23,800     |        |  |     | 18,848     |        
|                                                          | Policy acquisition and other underwriting expenses |                            |       | 9,749      |        |  |     | 19,934     |        
|                                                          | Other administrative expenses                      |                            |       | 12,390     |        |  |     | 11,491     |        
|                                                          | Interest on notes payable                          |                            |       | 449        |        |  |     | 2,124      |        
|                                                          | Gain on debt reduction                             |                            |       |           |        |  |     | (359       | )      
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    | Total expenses             |       |            | 87,683 |  |     |            | 107,134 | 
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    | Income before income taxes |       |            | 8,067  |  |     |            | 1,295   | 
|Federal income tax expense                                |                                                    |                            | 2,632 |            |        |  | 263 |           
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    | Net income                 |       | $          | 5,435  |  |     | $          | 1,032   | 
|                                                          |                                                    |                            |       |            |        | 
|Earnings per share:                                       |                                                    |                            |       |            |        |  |     |           
|                                                          | Basic                                              |                            | $     | 0.19       |        |  | $   | 0.09       |        
|                                                          | Diluted                                            |                            | $     | 0.18       |        |  | $   | 0.09       |        
|Weighted average number of common shares
    outstanding: |                                                    |                            |       |            |        |  |     |           
|                                                          | Basic                                              |                            |       | 29,358,267 |        |  |     | 11,220,758 |        
|                                                          | Diluted                                            |                            |       | 29,389,101 |        |  |     | 11,220,758 |        

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

2



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MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED STATEMENTS OF
INCOME


For the Quarter Ended June 30,


|                                                          |                                                    |                            |       |            |        |  |     |            |        | 
|--------------------------------------------------------- | -------------------------------------------------- | -------------------------- | ----- | ---------- | ------ |  | --- | ---------- | ------ | 
|                                                          |                                                    | 2003                       |       |            | 2002   | 
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    |                           
|                                                          |                                                    | (Unaudited)                |      
|                                                          |                                                    | (in thousands,             |      
|                                                          |                                                    | except share data)         |      
|Revenues:                                                 |                                                    |                            |       |            |        |  |     |           
|                                                          | Net premium earned                                 |                            | $     | 36,230     |        |  | $   | 44,313     |       
|                                                          | Net commissions and fees                           |                            |       | 11,271     |        |  |     | 9,968      |       
|                                                          | Net investment income                              |                            |       | 3,577      |        |  |     | 3,505      |       
|                                                          | Net realized gains (losses) on investments         |                            |       | 374        |        |  |     | (310       | )     
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    | Total revenues             |       |            | 51,452 |  |     |            | 57,476 | 
|                                                          |                                                    |                            |       |            |        | 
|Expenses:                                                 |                                                    |                            |       |            |        |  |     |           
|                                                          | Net loss and loss adjustment expenses              |                            |       | 24,109     |        |  |     | 30,638     |       
|                                                          | Salaries and employee benefits                     |                            |       | 11,868     |        |  |     | 9,235      |       
|                                                          | Policy acquisition and other underwriting expenses |                            |       | 5,993      |        |  |     | 10,948     |       
|                                                          | Other administrative expenses                      |                            |       | 5,306      |        |  |     | 6,073      |       
|                                                          | Interest on notes payable                          |                            |       | 212        |        |  |     | 874        |       
|                                                          | Gain on debt reduction                             |                            |       |           |        |  |     | (359       | )     
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    | Total expenses             |       |            | 47,488 |  |     |            | 57,409 | 
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    | Income before income taxes |       |            | 3,964  |  |     |            | 67     | 
|Federal income tax expense (benefit)                      |                                                    |                            | 1,285 |            |        |  | (55 | )         
|                                                          |                                                    |                            |       |            |        | 
|                                                          |                                                    | Net income                 |       | $          | 2,679  |  |     | $          | 122    | 
|                                                          |                                                    |                            |       |            |        | 
|Earnings per share:                                       |                                                    |                            |       |            |        |  |     |           
|                                                          | Basic                                              |                            | $     | 0.09       |        |  | $   | 0.01       |       
|                                                          | Diluted                                            |                            | $     | 0.09       |        |  | $   | 0.01       |       
|Weighted average number of common shares
    outstanding: |                                                    |                            |       |            |        |  |     |           
|                                                          | Basic                                              |                            |       | 29,214,563 |        |  |     | 13,899,557 |       
|                                                          | Diluted                                            |                            |       | 29,261,119 |        |  |     | 13,902,073 |       

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

3



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MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


For the Six Months Ended
June 30,


|           |                                         |                                                                                 |                                        |  |       |       |       |  |     |       | 
|---------- | --------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------- |  | ----- | ----- | ----- |  | --- | ----- | 
|           |                                         | 2003                                                                            |                                        |  | 2002  |      
|           |                                         |                                                                                 |                                        |  |       |      
|           |                                         |                                                                                
|           |                                         | (Unaudited)                                                                     |                                       
|           |                                         | (in thousands)                                                                  |                                       
|Net income |                                         | $                                                                               | 5,435                                  |  |       | $     | 1,032 | 
|           | Other comprehensive income, net of tax: |                                                                                 |                                        |  |       |       |       |  |    
|           |                                         | Unrealized gains on securities                                                  |                                        |  | 2,303 |       |       |  | 373 |      
|           |                                         | Less: reclassification adjustment for
    (gains) losses included in net income |                                        |  | (229  | )     |       |  | 199 |      
|           |                                         |                                                                                 |                                        |  |       |      
|           |                                         |                                                                                 | Other comprehensive income, net of tax |  |       | 2,074 |       |  |     | 572   | 
|           |                                         |                                                                                 |                                        |  |       |      
|           |                                         |                                                                                 | Comprehensive income                   |  | $     | 7,509 |       |  | $   | 1,604 | 
|           |                                         |                                                                                 |                                        |  |       |      

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 STATEMENTS OF COMPREHENSIVE
INCOME


For the Quarter Ended June 30,


|           |                                         |                                                                                 |                                        |  |       |       |     |  |       |       | 
|---------- | --------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------- |  | ----- | ----- | --- |  | ----- | ----- | 
|           |                                         | 2003                                                                            |                                        |  | 2002  |      
|           |                                         |                                                                                 |                                        |  |       |      
|           |                                         |                                                                                
|           |                                         | (Unaudited)                                                                     |                                       
|           |                                         | (in thousands)                                                                  |                                       
|Net income |                                         | $                                                                               | 2,679                                  |  |       | $     | 122 | 
|           | Other comprehensive income, net of tax: |                                                                                 |                                        |  |       |       |     |  |      
|           |                                         | Unrealized gains on securities                                                  |                                        |  | 2,011 |       |     |  | 1,976 |      
|           |                                         | Less: reclassification adjustment for
    (gains) losses included in net income |                                        |  | (88   | )     |     |  | 205   |      
|           |                                         |                                                                                 |                                        |  |       |      
|           |                                         |                                                                                 | Other comprehensive income, net of tax |  |       | 1,923 |     |  |       | 2,181 | 
|           |                                         |                                                                                 |                                        |  |       |      
|           |                                         |                                                                                 | Comprehensive income                   |  | $     | 4,602 |     |  | $     | 2,303 | 
|           |                                         |                                                                                 |                                        |  |       |      

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

5



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                                |                                                                                           |                                            |         |         |              |   |         |         |         | 
|--------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------------ | - | ------- | ------- | ------- | 
|                                                                |                                                                                           | June 30,                                   |         |         | December 31, |  
|                                                                |                                                                                           | 2003                                       |         |         | 2002         |  
|                                                                |                                                                                           |                                            |         |         |              |  
|                                                                |                                                                                           | (Unaudited)                                |         |         |             
|                                                                |                                                                                           |                                           
|                                                                |                                                                                           | (in thousands, except                      |        
|                                                                |                                                                                           | share data)                                |        
|ASSETS                                                         
|Invested assets:                                                |                                                                                           |                                            |         |         |              |   |         |        
|                                                                | Debt securities available for sale, at fair
    value
    (cost of $255,845 and $231,876) |                                            | $       | 271,967 |              |   | $       | 244,861 |        
|                                                                | Equity securities available for sale, at fair
    value
    (cost of $1,980 and $1,980)   |                                            |         | 1,804   |              |   |         | 1,804   |        
|                                                                |                                                                                           |                                            |         |         |              |  
|                                                                |                                                                                           | Total invested assets                      |         |         | 273,771      |   |         |         | 246,665 | 
|Cash and cash equivalents                                       |                                                                                           |                                            | 33,837  |         |              |   | 39,385  |        
|Premiums and agent balances receivable                          |                                                                                           |                                            | 77,599  |         |              |   | 71,420  |        
|Reinsurance recoverable on:                                     |                                                                                           |                                            |         |         |              |   |         |        
|                                                                | Paid losses                                                                               |                                            |         | 19,660  |              |   |         | 20,396  |        
|                                                                | Unpaid losses                                                                             |                                            |         | 181,441 |              |   |         | 181,817 |        
|Prepaid reinsurance premiums                                    |                                                                                           |                                            | 21,169  |         |              |   | 18,115  |        
|Deferred policy acquisition costs                               |                                                                                           |                                            | 17,189  |         |              |   | 12,140  |        
|Deferred federal income taxes                                   |                                                                                           |                                            | 15,529  |         |              |   | 19,099  |        
|Goodwill                                                        |                                                                                           |                                            | 28,997  |         |              |   | 28,997  |        
|Other assets                                                    |                                                                                           |                                            | 39,966  |         |              |   | 36,805  |        
|                                                                |                                                                                           |                                            |         |         |              |  
|                                                                |                                                                                           | Total assets                               |         | $       | 709,158      |   |         | $       | 674,839 | 
|                                                                |                                                                                           |                                            |         |         |              |  
|LIABILITIES AND SHAREHOLDERS
    EQUITY                       
|Liabilities:                                                    |                                                                                           |                                            |         |         |              |   |         |        
|Reserve for losses and loss adjustment expenses                 |                                                                                           | $                                          | 369,075 |         |              | $ | 374,933 |        
|Unearned premiums                                               |                                                                                           |                                            | 100,097 |         |              |   | 68,678  |        
|Debt                                                            |                                                                                           |                                            | 20,785  |         |              |   | 32,497  |        
|Reinsurance funds held and balances payable                     |                                                                                           |                                            | 23,473  |         |              |   | 16,199  |        
|Other liabilities                                               |                                                                                           |                                            | 42,283  |         |              |   | 35,137  |        
|                                                                |                                                                                           |                                            |         |         |              |  
|                                                                |                                                                                           | Total liabilities                          |         |         | 555,713      |   |         |         | 527,444 | 
|                                                                |                                                                                           |                                            |         |         |              |  
|Commitments and contingencies (Note 6)                          |                                                                                           |                                            |         |         |              |   |         |        
|Shareholders Equity:                                           |                                                                                           |                                            |         |         |              |   |         |        
|Common stock, $.01 par value; authorized
    50,000,000 shares: |                                                                                           |                                            |         |         |              |   |         |        
|                                                                | 29,022,394 and 29,591,494 shares issued and
    outstanding                               |                                            |         | 290     |              |   |         | 296     |        
|Additional paid-in capital                                      |                                                                                           |                                            | 125,104 |         |              |   | 127,429 |        
|Retained earnings                                               |                                                                                           |                                            | 18,406  |         |              |   | 12,073  |        
|Note receivable from officer                                    |                                                                                           |                                            | (902    | )       |              |   | (876    | )      
|Accumulated other comprehensive income                          |                                                                                           |                                            | 10,547  |         |              |   | 8,473   |        
|                                                                |                                                                                           |                                            |         |         |              |  
|                                                                |                                                                                           | Total shareholders equity                 |         |         | 153,445      |   |         |         | 147,395 | 
|                                                                |                                                                                           |                                            |         |         |              |  
|                                                                |                                                                                           | Total liabilities and shareholders equity |         | $       | 709,158      |   |         | $       | 674,839 | 
|                                                                |                                                                                           |                                            |         |         |              |  

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 STATEMENTS OF CASH
FLOWS


For the Six Months Ended
June 30,


|                                                           |                                                                |                                                         |        |         |         |   |         |         |         |  
|---------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | - | ------- | ------- | ------- | -
|                                                           |                                                                | 2003                                                    |        |         | 2002    |  
|                                                           |                                                                |                                                         |        |         |         |  
|                                                           |                                                                |                                                        
|                                                           |                                                                | (Unaudited)                                             |       
|                                                           |                                                                | (in thousands)                                          |       
|Net cash provided by (used in) operating
    activities    |                                                                | $                                                       | 30,191 |         |         | $ | (10,795 | )      
|                                                           |                                                                |                                                         |        |         |         |  
|Cash flows (used in) provided by investing
    activities: |                                                                |                                                         |        |         |         |   |         |        
|                                                           | Purchase of debt securities available for sale                 |                                                         |        | (53,453 | )       |   |         | (43,576 | )      
|                                                           | Proceeds from sale of debt securities available
    for sale   |                                                         |        | 29,916  |         |   |         | 25,788  |        
|                                                           | Proceeds from sale of equity securities available
    for sale |                                                         |        |        |         |   |         | 900     |        
|                                                           | Other investing activities                                     |                                                         |        | 900     |         |   |         | 2,880   |        
|                                                           |                                                                |                                                         |        |         |         |  
|                                                           |                                                                | Net cash used in investing activities                   |        |         | (22,637 | ) |         |         | (14,008 | )
|Cash flows (used in) provided by financing
    activities: |                                                                |                                                         |        |         |         |   |         |        
|                                                           | Net payments on bank loan                                      |                                                         |        | (11,712 | )       |   |         | (10,659 | )      
|                                                           | Net proceeds from public offering                              |                                                         |        |        |         |   |         | 60,526  |        
|                                                           | Share repurchases                                              |                                                         |        | (1,562  | )       |   |         |        |        
|                                                           | Other financing activities                                     |                                                         |        | 172     |         |   |         | 73      |        
|                                                           |                                                                |                                                         |        |         |         |  
|                                                           |                                                                | Net cash (used in) provided by financing
    activities |        |         | (13,102 | ) |         |         | 49,940  |  
|                                                           |                                                                |                                                         |        |         |         |  
|(Decrease) increase in cash and cash equivalents           |                                                                |                                                         | (5,548 | )       |         |   | 25,137  |        
|Cash and cash equivalents, beginning of period             |                                                                |                                                         | 39,385 |         |         |   | 33,302  |        
|                                                           |                                                                |                                                         |        |         |         |  
|Cash and cash equivalents, end of period                   |                                                                | $                                                       | 33,837 |         |         | $ | 58,439  |        
|                                                           |                                                                |                                                         |        |         |         |  

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

7



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##### Table of Contents








NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


Note 1  Summary of Significant
Accounting Policies

Basis of
Presentation

The consolidated financial statements include
accounts, after elimination of intercompany accounts and
transactions, of Meadowbrook Insurance Group, Inc. (the
Company), its wholly owned subsidiary Star Insurance
Company (Star), and Stars wholly owned
subsidiaries, Savers Property and Casualty Insurance Company,
Williamsburg National Insurance Company, and Ameritrust
Insurance Corporation (which collectively are referred to as the
Insurance Company Subsidiaries), and American
Indemnity Insurance Company, Ltd. and Preferred Insurance
Company, Ltd. The consolidated financial statements also include
Meadowbrook, Inc. and its subsidiaries, and Crest Financial
Corporation and its subsidiaries.

These financial statements and the notes thereto
should be read in conjunction with the Companys audited
financial statements and accompanying notes included in its
Annual Report on Form 10-K for the year ended
December 31, 2002.

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 period. The results of operations for the six
months ended June 30, 2003, are not necessarily indicative
of the results expected for the full year.

Revenue
Recognition Policy

Premiums written are recognized as earned on a
pro rata basis over the life of the policy term. Unearned
premiums represent the portion of premiums written that are
applicable to the unexpired terms of policies in force.
Provisions for unearned premiums on reinsurance assumed from
others are made on the basis of ceding reports when received.
Certain premiums are subject to retrospective premium
adjustments. The estimated ultimate premium is recognized over
the term of the insurance contract.

Commission income, which includes reinsurance
brokerage, is recorded on the latter of the effective date or
the billing date of the policies on which they were earned.
Commission income is reported net of sub-broker commission
expense. Commission and other adjustments are recorded when they
occur and the Company maintains an allowance for estimated
policy cancellations and commission returns.

Fee income, which includes risk management
consulting, loss control, and claims services, is recognized in
the period the services are provided. The claims processing fees
are recognized as revenue over the estimated life of the claims.
For those contracts that provide services beyond the
contractually defined termination date of the related contracts,
fees are deferred in an amount equal to managements
estimate of the Companys obligation to continue to provide
services.

The Company reviews, on an ongoing basis, the
collectibility of its receivables and establishes an allowance
for estimated uncollectible accounts.

Realized gains or losses on sale or maturity of
investments are determined on the basis of specific costs of the
investments. Dividend and interest income are recognized when
earned. Discount or premium on debt securities purchased at
other than par value is amortized using the constant yield
method. Investments with other than temporary declines in fair
value are written down to estimated fair value and the related
realized losses recognized in income.

Earnings Per
Share

Basic earnings per share are based on the
weighted average number of common shares outstanding during the
period, while diluted earnings per share includes the weighted
average number of common shares and potential dilution from
shares issuable pursuant to stock options using the treasury
stock method.

8



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Outstanding options of 2,092,149 and 2,764,244
for the six months ended June 30, 2003 and 2002,
respectively, have been excluded from the diluted earnings per
share as they were anti-dilutive. Shares issuable pursuant to
stock options included in diluted earnings per share were 30,834
for the six months ended June 30, 2003. There were no
shares issuable pursuant to stock options included in diluted
earnings per share for the six months ended June 30, 2002.
In addition, outstanding warrants of 300,000 for the six months
ended June 30, 2003 and 2002, have been excluded from the
diluted earnings per share as they were anti-dilutive.

Outstanding options of 2,092,149 and 2,337,744
for the quarters ended June 30, 2003 and 2002,
respectively, have been excluded from the diluted earnings per
share as they were anti-dilutive. Shares issuable pursuant to
stock options included in diluted earnings per share were 46,556
and 2,048 for the quarters ended June 30, 2003 and 2002,
respectively. In addition, shares issuable pursuant to
outstanding warrants included in diluted earnings per share were
468 for the quarter ended June 30, 2002. Outstanding
warrants of 300,000 for the quarter ended June 30, 2003
have been excluded from the diluted earnings per share as they
were anti-dilutive.

New
Accounting Pronouncements

The Financial Accounting Standards Board
(FASB) has issued Statement of Financial Accounting
Standards (SFAS) No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure-
an amendment of FASB Statement No. 123, for periods
starting after December 15, 2003, or thereafter. SFAS
No. 148 provides three optional transition methods for
entities that voluntarily adopt the fair value recognition
principles of SFAS No 123, Accounting for Stock-Based
Compensation, and modifies the disclosure requirements of
that Statement. Under the prospective method, stock-based
compensation expense is recognized for awards granted after the
beginning of the fiscal year in which the change is made. The
modified prospective method recognizes stock-based compensation
expense related to new and unvested awards in the year of change
equal to that which would have been recognized had SFAS
No. 123 been adopted as of its effective date, fiscal years
beginning after December 15, 1994. The retrospective
restatement method recognizes stock compensation costs for the
year of change and restates financial statements for all prior
periods presented as though the fair value recognition
provisions of SFAS No. 123 had been adopted as of its
effective date.

The Company, through its 1995 and 2002 Stock
Option Plans (the Plans), may grant options to key
executives and other members of management of the Company and
its subsidiaries in amounts not to exceed 2,000,000 shares of
the Companys common stock allocated for each plan. The
plans are administered by the Compensation Committee (the
Committee) of the Board of Directors. Option shares
may be exercised subject to the terms of the Plans and the terms
prescribed by the Committee at the time of grant. Currently, the
Plans options have either five or ten-year terms and are
exercisable and vest in equal increments over the option term.

As of January 1, 2003, the Company adopted
the requirements of SFAS No. 148 utilizing the prospective
method. Under the prospective method, stock-based compensation
expense is recognized for awards granted after the beginning of
the fiscal year in which the change is made. If compensation
cost for stock option grants

9



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


had been determined based on a fair value method,
net income and earnings per share on a pro forma basis for the
periods ending June 30, 2003 and 2002 would be as follows
(in thousands):

|                                                                                                                                                     |                       |                    |       |      |      |   |       |      | 
|---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------ | ----- | ---- | ---- | - | ----- | ---- | 
|                                                                                                                                                     |                       |                   
|                                                                                                                                                     |                       | For the Six-Months |      
|                                                                                                                                                     |                       | Ended June 30,     |      
|                                                                                                                                                     |                       |                    |      
|                                                                                                                                                     |                       | 2003               |       |      | 2002 |  
|                                                                                                                                                     |                       |                    |       |      |      |  
|Net income, as reported                                                                                                                              |                       | $                  | 5,435 |      |      | $ | 1,032 |     
|Add: Stock-based employee compensation expense
    included in reported income, net of related tax effects                                           |                       |                    | 79    |      |      |   |      |     
|Deduct: Total stock-based employee compensation
    expense determined under fair-value-based methods for all
    awards, net of related tax effects |                       |                    | (515  | )    |      |   | (447  | )   
|                                                                                                                                                     |                       |                    |       |      |      |  
|Pro forma net income                                                                                                                                 |                       | $                  | 4,999 |      |      | $ | 585   |     
|                                                                                                                                                     |                       |                    |       |      |      |  
|Earnings per share:                                                                                                                                  |                       |                    |       |      |      |   |       |     
|                                                                                                                                                     | Basic  as reported   |                    | $     | 0.19 |      |   | $     | 0.09 | 
|                                                                                                                                                     | Basic  pro forma     |                    | $     | 0.17 |      |   | $     | 0.05 | 
|                                                                                                                                                     | Diluted  as reported |                    | $     | 0.18 |      |   | $     | 0.09 | 
|                                                                                                                                                     | Diluted  pro forma   |                    | $     | 0.17 |      |   | $     | 0.05 | 

|                                                                                                                                                     |                       |                  |       |      |      |   |      |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---------------- | ----- | ---- | ---- | - | ---- | ----- | -
|                                                                                                                                                     |                       |                 
|                                                                                                                                                     |                       | For the Quarters |      
|                                                                                                                                                     |                       | Ended June 30,   |      
|                                                                                                                                                     |                       |                  |      
|                                                                                                                                                     |                       | 2003             |       |      | 2002 |  
|                                                                                                                                                     |                       |                  |       |      |      |  
|Net income, as reported                                                                                                                              |                       | $                | 2,679 |      |      | $ | 122  |      
|Add: Stock-based employee compensation expense
    included in reported income, net of related tax effects                                           |                       |                  | 22    |      |      |   |     |      
|Deduct: Total stock-based employee compensation
    expense determined under fair-value-based methods for all
    awards, net of related tax effects |                       |                  | (229  | )    |      |   | (242 | )    
|                                                                                                                                                     |                       |                  |       |      |      |  
|Pro forma net income (loss)                                                                                                                          |                       | $                | 2,472 |      |      | $ | (120 | )    
|                                                                                                                                                     |                       |                  |       |      |      |  
|Earnings per share:                                                                                                                                  |                       |                  |       |      |      |   |      |      
|                                                                                                                                                     | Basic  as reported   |                  | $     | 0.09 |      |   | $    | 0.01  |  
|                                                                                                                                                     | Basic  pro forma     |                  | $     | 0.08 |      |   | $    | (0.01 | )
|                                                                                                                                                     | Diluted  as reported |                  | $     | 0.09 |      |   | $    | 0.01  |  
|                                                                                                                                                     | Diluted  pro forma   |                  | $     | 0.08 |      |   | $    | (0.01 | )

The Black-Scholes valuation model utilized the
following annualized assumptions for all applicable years:
Risk-free interest rate of 2.90% and 4.46% for 2003 and 2002,
respectively. No dividends were declared in periods ended
June 30, 2003 and 2002. The volatility factor for the
expected market price of the Companys common stock of
0.586 and 0.562 in 2003 and 2002, respectively. The weighted
average expected life of options is 5.0 for the 2003 and 2002
grants.

Compensation expense of $120,000 has been
recorded for stock options granted in the six months ended
June 30, 2003 under SFAS. 148. No compensation cost has
been recorded for stock option grants issued during 2002 as the
market value equaled the exercise price at the date of grant.

Note 2  Reinsurance

The Insurance Company Subsidiaries cede insurance
to other insurers under pro-rata and excess-of-loss contracts.
These reinsurance arrangements diversify the Companys
business and minimize its exposure to large losses or from
hazards of an unusual nature. The ceding of insurance does not
discharge the original insurer from its primary liability to its
policyholder. In the event that all or any of the reinsuring
companies are unable to meet their obligations, the Insurance
Company Subsidiaries would be liable for such defaulted

10



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


amounts. Therefore, the Company is subject to a
credit risk with respect to the obligations of its reinsurers.
In order to minimize its exposure to significant losses from
reinsurer insolvencies, the Company evaluates the financial
condition of its reinsurers and monitors the economic
characteristics of the reinsurers on an ongoing basis. The
Company also assumes insurance from other insurers and
reinsurers, both domestic and foreign, under pro-rata and
excess-of-loss contracts.

At June 30, 2003, the Company had
reinsurance recoverables for paid and unpaid losses of
$201.1 million. The Company customarily collateralizes
reinsurance balances due from non-admitted reinsurers through
funds withheld trusts or letters of credit. The largest
unsecured reinsurance recoverable is due from an admitted
reinsurer with an A A.M. Best rating and
accounts for 39.0% of the total recoverable for paid and unpaid
losses.

The Company maintains an excess-of-loss
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. To date,
there have been no material disputes with the Companys
excess-of-loss reinsurers. No assurance can be given, however,
regarding the future ability of any of the Companys
excess-of-loss reinsurers to meet their obligations.

Under the workers compensation reinsurance
program, the Company reinsures each loss in excess of $300,000
up to a limit of $50.0 million, under separate treaties.
The first treaty reinsures losses in excess of $300,000 up to a
maximum of $1.0 million. The second treaty reinsures losses
in excess of $1.0 million up to a maximum of
$2.0 million. The third treaty reinsures losses in excess
of $2.0 million up to a maximum coverage including the
Companys retention of $5.0 million. The fourth treaty
reinsures losses in excess of $5.0 million up to a maximum
of $10.0 million. The fifth treaty reinsures losses in
excess of $10.0 million up to a maximum of
$20.0 million. The sixth treaty reinsures losses in excess
of $20.0 million for coverage up to a maximum of
$50.0 million.

Under the liability reinsurance treaty, the
reinsurers are responsible for 100% of the amount of each loss
in excess of $350,000 up to a maximum of $2.0 million per
occurrence. A clash layer reinsures losses in excess of
$2.0 million up to a maximum coverage with the
Companys retention of $5.0 million. Clash coverage
protects the Company against two casualty policies responding to
the same occurrence or coverage to claims settled above stated
policy limits.

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

In its risk-sharing programs, the Company is also
subject to credit risk with respect to the payment of claims by
its clients captive, rent-a-captive, large deductible
programs, indemnification agreements, and on the portion of risk
exposure either ceded to the captives, or retained by the
clients. The capitalization and credit worthiness of prospective
risk-sharing partners is one of the factors considered by the
Company in entering into and renewing risk-sharing programs. The
Company collateralizes balances due from its risk-sharing
partners through funds withheld trusts or letters of credit. At
June 30, 2003, the Company had risk exposure in excess of
collateral in the amount of $12.7 million, on these
programs, for which the Company has an allowance of
$7.6 million, related to these exposures. 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. As of June 30, 2003,
management believes that this allowance is adequate. To date,
the Company has not, in the aggregate, experienced material
difficulties in collecting balances from its risk-sharing
partners. No assurance can be given, however, regarding the
future ability of any of the

11



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Companys risk-sharing partners to meet
their obligations. At June 30, 2003, the exposure amount in
litigation with former risk-sharing partners which is not
reserved or collateralized is $2.1 million.

Note 3  Debt

The Company has a credit agreement which includes
a term loan and a revolving line of credit. This credit
agreement consists of a $20.0 million term loan and a
revolving line of credit for up to $8.0 million. The
Company uses the revolving line of credit to meet short-term
working capital needs. At June 30, 2003, the Companys
term loan had an outstanding balance of $16.5 million. The
Company had no outstanding balance on the revolving line of
credit at June 30, 2003. At December 31, 2002, the
outstanding balance on the term loan and revolving line of
credit was $18.8 million and $5.3 million,
respectively. The term loan calls for quarterly amortization
through July 1, 2006, at which time the term loan will be
paid in full. The quarterly amortization requires payments of
$1.0 million on April 1, 2003 and July 1, 2003;
$1.5 million on October 1, 2003; and $1.2 million
for the remaining quarterly amortization payments in 2004, 2005,
and 2006, with a final payment of $1.5 million on
July 1, 2006. The revolving line of credit will expire on
July 1, 2004, and is thereafter renewable on an annual
basis.

The Company made principal payments of
$1.2 million on January 1, 2003, and $1.0 million
on April 1, 2003 and July 1, 2003, on the term loan.

Both the term loan and revolving line of credit
provide for interest at a variable rate based, at the
Companys option, upon either the prime rate or
eurocurrency rate. The applicable margin, which ranges from 200
to 300 basis points above eurocurrency rates, is determined
by the level of the fixed charge coverage ratio. Of all the
covenants, the most restrictive covenant is the fixed charge
coverage ratio. The fixed charge coverage ratio, as defined by
the credit facility, is the ratio of the non-regulated earnings
before interest and taxes for the four preceding fiscal quarters
to the sum of fixed charges which include interest expense,
principal payments payable, stock repurchases, and dividends
declared during the period. Any unused portion of the revolving
credit as of the date of determination reduces the sum of these
fixed charges. At June 30, 2003, this ratio was 3.3 to 1.0,
compared to the covenant minimum of 1.2 to 1.0.

As of June 30, 2003, the Company was in
compliance with all debt covenants.

In addition, a non-insurance premium finance
subsidiary of the Company maintains a line of credit with a
bank, which permits borrowings up to 80% of the accounts
receivable, which collateralize the line of credit. At
June 30, 2003, this line of credit had an outstanding
balance of $4.3 million.

On January 14, 2003, the Company paid in
full a $3.5 million subordinated promissory note, due
June 30, 2003.

Note 4  Shareholders
Equity

At June 30, 2003, shareholders equity
was $153.4 million, or $5.29 per common share,
compared to $147.4 million, or $4.98 per common share, at
December 31, 2002.

On September 17, 2002, the Companys
Board of Directors authorized management to repurchase up to
1,000,000 shares of the Companys common stock in
market transactions for a period not to exceed twenty-four
months. On August 6, 2003, the Companys Board of
Directors authorized management to repurchase up to an
additional 1,000,000 shares of the Companys common
stock under the existing share repurchase plan. As of
June 30, 2003, the Company repurchased and retired
764,800 shares of common stock for a total cost of
approximately $2.0 million. For the quarter ended
June 30, 2003, the Company repurchased and retired
341,300 shares of common stock for a total cost of
approximately $1.0 million. As of August 8, 2003, the
Company repurchased and retired 764,800 shares of common
stock for a total cost of approximately $2.0 million.

12



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 5  Regulatory Matters and
Rating Agencies

A significant portion of the Companys
consolidated assets represent assets of the Insurance Company
Subsidiaries that at this time, without prior approval of the
Michigan Office of Financial and Insurance Services
(OFIS), 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
Company Subsidiaries is dictated by Michigan insurance
regulatory guidelines which, in general, 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 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
Company Subsidiaries surplus. Based upon the 2002
statutory financial statements, Star may only pay dividends to
the Company during 2003 with the prior approval of OFIS.
Stars earned surplus position at December 31, 2002
was negative $24.3 million. At June 30, 2003, earned
surplus was negative $27.4 million. No statutory dividends
were paid from Star in 2002.

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 targets for gross and net written premium to
statutory surplus are 3.0 to 1 and 2.0 to 1, respectively. As of
June 30, 2003, on a statutory consolidated basis, gross and
net premium leverage ratios were 2.3 to 1.0 and 1.7 to 1.0,
respectively.

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

At December 31, 2002, all of the Insurance
Company Subsidiaries were in compliance with RBC requirements.
Star reported statutory surplus of $93.8 million at
December 31, 2002, compared to the threshold requiring the
minimum regulatory involvement of $49.7 million in 2002. At
June 30, 2003, Stars statutory surplus was
$90.8 million.

The Insurance Company Subsidiaries A.M.
Best financial strength rating is a B+ (Very Good)
with a positive outlook. A positive outlook is placed on a
companys rating if its financial and market trends are
favorable, relative to its current rating level.

Note 6  Commitments and
Contingencies

The Company is involved in litigation arising in
the ordinary course of operations. The Company vigorously
defends such litigation. 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.

13



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 7  Segment
Information

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

Specialty
Risk Management Operations

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

Agency
Operations

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

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

|                |                                            |                                   |                             |        |        |       |   |        |         |       | 
|--------------- | ------------------------------------------ | --------------------------------- | --------------------------- | ------ | ------ | ----- | - | ------ | ------- | ----- | 
|                |                                            |                                  
|                |                                            | For the Six Months                |                            
|                |                                            | Ended June 30,                    |                            
|                |                                            |                                   |                            
|                |                                            | 2003                              |                             |        | 2002   |      
|                |                                            |                                   |                             |        |        |      
|Revenues:       |                                            |                                   |                             |        |        |       |   |       
|                | Net earned premiums                        |                                   | $                           | 63,614 |        |       | $ | 82,970 |        
|                | Management fees                            |                                   |                             | 10,188 |        |       |   | 6,582  |        
|                | Claim fees                                 |                                   |                             | 8,137  |        |       |   | 3,539  |        
|                | Loss control fees                          |                                   |                             | 1,126  |        |       |   | 1,335  |        
|                | Reinsurance brokerage                      |                                   |                             | 161    |        |       |   | 195    |        
|                | Investment income                          |                                   |                             | 6,904  |        |       |   | 6,603  |        
|                | Net realized gains (losses) on investments |                                   |                             | 579    |        |       |   | (301   | )      
|                |                                            |                                   |                             |        |        |      
|                |                                            | Specialty risk management segment |                             |        | 90,709 |       |   |        | 100,923 |      
|                | Agency operations                          |                                   |                             | 7,822  |        |       |   | 7,614  |        
|                | Reconciling items                          |                                   |                             | 26     |        |       |   | 26     |        
|                | Gain on sale of subsidiary                 |                                   |                             |       |        |       |   | 199    |        
|                | Intersegment revenue                       |                                   |                             | (2,807 | )      |       |   | (333   | )      
|                |                                            |                                   |                             |        |        |      
|                |                                            | Consolidated revenue              |                             | $      | 95,750 |       |   | $      | 108,429 |      
|                |                                            |                                   |                             |        |        |      
|Pre-tax income: |                                            |                                   |                             |        |        |       |   |       
|                | Specialty risk management                  |                                   | $                           | 5,517  |        |       | $ | (217   | )      
|                | Agency operations*                         |                                   |                             | 3,600  |        |       |   | 3,388  |        
|                | Reconciling items                          |                                   |                             | (1,050 | )      |       |   | (2,075 | )      
|                | Gain on sale of subsidiary                 |                                   |                             |       |        |       |   | 199    |        
|                |                                            |                                   |                             |        |        |      
|                |                                            |                                   | Consolidated pre-tax income |        | $      | 8,067 |   |        | $       | 1,295 | 
|                |                                            |                                   |                             |        |        |      



---



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

14



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                |                                            |                                   |                             |        |        |       |   |        |        |    | 
|--------------- | ------------------------------------------ | --------------------------------- | --------------------------- | ------ | ------ | ----- | - | ------ | ------ | -- | 
|                |                                            |                                  
|                |                                            | For the Quarters                  |                            
|                |                                            | Ended June 30,                    |                            
|                |                                            |                                   |                            
|                |                                            | 2003                              |                             |        | 2002   |      
|                |                                            |                                   |                             |        |        |      
|Revenues:       |                                            |                                   |                             |        |        |       |   |       
|                | Net earned premiums                        |                                   | $                           | 36,230 |        |       | $ | 44,313 |       
|                | Management fees                            |                                   |                             | 4,840  |        |       |   | 3,421  |       
|                | Claim fees                                 |                                   |                             | 3,755  |        |       |   | 1,805  |       
|                | Loss control fees                          |                                   |                             | 549    |        |       |   | 739    |       
|                | Reinsurance brokerage                      |                                   |                             | 106    |        |       |   | 123    |       
|                | Investment income                          |                                   |                             | 3,564  |        |       |   | 3,492  |       
|                | Net realized gains (losses) on investments |                                   |                             | 374    |        |       |   | (310   | )     
|                |                                            |                                   |                             |        |        |      
|                |                                            | Specialty risk management segment |                             |        | 49,418 |       |   |        | 53,583 |   
|                | Agency operations                          |                                   |                             | 3,675  |        |       |   | 3,976  |       
|                | Reconciling items                          |                                   |                             | 13     |        |       |   | 13     |       
|                | Intersegment revenue                       |                                   |                             | (1,654 | )      |       |   | (96    | )     
|                |                                            |                                   |                             |        |        |      
|                |                                            | Consolidated revenue              |                             | $      | 51,452 |       |   | $      | 57,476 |   
|                |                                            |                                   |                             |        |        |      
|Pre-tax income: |                                            |                                   |                             |        |        |       |   |       
|                | Specialty risk management                  |                                   | $                           | 2,881  |        |       | $ | (1,099 | )     
|                | Agency operations*                         |                                   |                             | 1,548  |        |       |   | 1,694  |       
|                | Reconciling items                          |                                   |                             | (465   | )      |       |   | (528   | )     
|                |                                            |                                   |                             |        |        |      
|                |                                            |                                   | Consolidated pre-tax income |        | $      | 3,964 |   |        | $      | 67 | 
|                |                                            |                                   |                             |        |        |      



---



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

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

|                         |  |                    |        |   |      |   |        |  
|------------------------ |  | ------------------ | ------ | - | ---- | - | ------ | -
|                         |  |                   
|                         |  | For the Six Months |       
|                         |  | Ended June 30,     |       
|                         |  |                    |       
|                         |  | 2003               |        |   | 2002 |  
|                         |  |                    |        |   |      |  
|Holding company expenses |  | $                  | (461   | ) |      | $ | (310   | )
|Gain on debt reduction   |  |                    |       |   |      |   | 359    |  
|Amortization             |  |                    | (140   | ) |      |   |       |  
|Interest expense         |  |                    | (449   | ) |      |   | (2,124 | )
|                         |  |                    |        |   |      |  
|                         |  | $                  | (1,050 | ) |      | $ | (2,075 | )
|                         |  |                    |        |   |      |  

|                         |  |                  |      |   |      |   |      |  
|------------------------ |  | ---------------- | ---- | - | ---- | - | ---- | -
|                         |  |                 
|                         |  | For the Quarters |     
|                         |  | Ended June 30,   |     
|                         |  |                  |     
|                         |  | 2003             |      |   | 2002 |  
|                         |  |                  |      |   |      |  
|Holding company expenses |  | $                | (183 | ) |      | $ | (13  | )
|Gain on debt reduction   |  |                  |     |   |      |   | 359  |  
|Amortization             |  |                  | (70  | ) |      |   |     |  
|Interest expense         |  |                  | (212 | ) |      |   | (874 | )
|                         |  |                  |      |   |      |  
|                         |  | $                | (465 | ) |      | $ | (528 | )
|                         |  |                  |      |   |      |  

Note
8  Reclassifications

Certain amounts in the notes and consolidated
financial statements have been reclassified to conform to the
2003 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
2002 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.

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

16



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##### Table of Contents








ITEM 2


MANAGEMENTS DISCUSSION AND ANALYSIS
OF


FINANCIAL CONDITION AND RESULTS OF
OPERATIONS


For the Periods ended June 30, 2003 and
2002


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

Results of Operations for the Six Months Ended
June 30, 2003 and 2002

Overview

Net income for the six months ended June 30,
2003 was $5.4 million, or $0.18 per dilutive share,
compared to net income of $1.0 million, or $0.09 per
dilutive share, for the six months ended June 30, 2002.
This improvement reflects the addition of new fee-for-service
agreements and the Companys continued expense control
initiatives. These initiatives have allowed the Company to
leverage its fixed costs.

Revenues for the six months ended June 30,
2003 decreased $12.7 million, or 11.7%, to
$95.7 million from $108.4 million for the comparable
period in 2002.

Specialty
Risk Management Operations

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

|                      |                                         |                    |       |        |        |   |      |        |         | 
|--------------------- | --------------------------------------- | ------------------ | ----- | ------ | ------ | - | ---- | ------ | ------- | 
|                      |                                         |                   
|                      |                                         | For the Six Months |      
|                      |                                         | Ended June 30,     |      
|                      |                                         |                    |      
|                      |                                         | 2003               |       |        | 2002   |  
|                      |                                         |                    |       |        |        |  
|Revenues:             |                                         |                    |       |        |        |   |      |       
|                      | Net earned premiums                     |                    | $     | 63,614 |        |   | $    | 82,970 |        
|                      | Management fees                         |                    |       | 10,188 |        |   |      | 6,582  |        
|                      | Claim fees                              |                    |       | 8,137  |        |   |      | 3,539  |        
|                      | Loss control fees                       |                    |       | 1,126  |        |   |      | 1,335  |        
|                      | Reinsurance brokerage                   |                    |       | 161    |        |   |      | 195    |        
|                      | Investment income                       |                    |       | 6,904  |        |   |      | 6,603  |        
|                      | Net realized gain (loss) on investments |                    |       | 579    |        |   |      | (301   | )      
|                      |                                         |                    |       |        |        |  
|                      |                                         | Total revenue      |       | $      | 90,709 |   |      | $      | 100,923 | 
|                      |                                         |                    |       |        |        |  
|Pre-tax income (loss) |                                         | $                  | 5,517 |        |        | $ | (217 | )     
|                      |                                         |                    |       |        |        |  

Revenues from specialty risk management
operations decreased $10.2 million, or 10.1%, to
$90.7 million for the six months ended June 30, 2003,
from $100.9 million for the comparable period in 2002. This
decrease reflects a $19.4 million, or 23.3% decrease in net
earned premiums to $63.6 million in the six months ended
June 30, 2003, from $83.0 million in the comparable
period in 2002. This decrease is the result of a reduction in
earned premium of $27.4 million related to programs discontinued
in 1999 and programs terminated for leverage ratio purposes.
Offsetting the overall decrease in net earned premiums is a
$6.9 million increase in

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##### Table of Contents



earned premium related to existing programs and
new business and a $1.1 million reduction in ceded earned
premium associated with the cancellation in 2002 of the surplus
relief treaty related to several workers compensation
programs.


Management fees increased $3.6 million, or
54.8%, to $10.2 million for the six months ended
June 30, 2003, from $6.6 million for the comparable
period in 2002. Claim fees increased $4.6 million, or
129.9%, to $8.1 million from $3.5 million for the
comparable period in 2002. The increase in management fees and
claim fees reflects the previously mentioned addition of new
fee-for-service agreements of $3.4 million and
$5.3 million, respectively. This increase in management
fees and claim fees is partially offset by a decrease in
discontinued programs and the result of the conversion of an
existing fee-based program into an insured program within the
Companys underwriting subsidiary. Loss control fees
decreased $209,000, or 15.7%, to $1.1 million from
$1.3 million for the comparable period in 2002. This
decrease is mainly the result of the conversion of an existing
fee-based program into an insured program.

Net investment income increased $301,000, or
4.6%, to $6.9 million for the six months ended
June 30, 2003, compared to $6.6 million for the
comparable period in 2002. This increase reflects a
$59.1 million, or 24.9% increase in average invested assets
and cash and cash equivalents, to $296.8 million for the
six months ended June 30, 2003, from $237.7 million
for the comparable period in 2002. The increase in average
invested assets and cash and cash equivalents, primarily
reflects net assets invested of $37.5 million from the
proceeds received from the Companys public offering in
June 2002. In addition, the increase in average invested assets
and cash and cash equivalents, was the result of growth in
premiums, collection of reinsurance recoverables, and the
cancellation of the surplus relief treaty in 2002. The pre-tax
yield for June 30, 2003 was 4.6%, compared to 5.6% for the
comparable period in 2002.

Specialty risk management operations generated
pre-tax income of $5.5 million for the six months
ended June 30, 2003, compared to pre-tax loss of $217,000
for the comparable period in 2002. This improvement reflects the
favorable impact of the previously indicated fee-for-service
agreements and improved underwriting results. The generally
accepted accounting principles (GAAP) combined ratio
was 106.0% for the six months ended June 30, 2003,
compared to 107.0% for the same period in 2002.

Net loss and loss adjustment expenses
(LAE) decreased $13.8 million, or 25.1%, to
$41.3 million for the six months ended June 30, 2003,
from $55.1 million for the same period in 2002. The
Companys loss and LAE ratio for both periods in 2003 and
2002 was 70.2%. This ratio is the unconsolidated net loss and
LAE in relation to net earned premium.

The Companys expense ratio improved
1.0 percentage point to 35.8% for the six months ended
June 30, 2003, from 36.8% for the same period in 2002. This
ratio is the unconsolidated policy acquisition and other
underwriting expenses in relation to net earned premium. The
improvement reflects the ability to leverage fixed costs and a
reduction in gross commissions. This improvement is partially
offset by an increase in insurance related assessments.

Agency
Operations

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

|                |  |                    |       |  |      |   |       | 
|--------------- |  | ------------------ | ----- |  | ---- | - | ----- | 
|                |  |                   
|                |  | For the Six Months |      
|                |  | Ended              |      
|                |  | June 30,           |      
|                |  |                    |      
|                |  | 2003               |       |  | 2002 |  
|                |  |                    |       |  |      |  
|Net commission  |  | $                  | 7,822 |  |      | $ | 7,614 | 
|Pre-tax income* |  | $                  | 3,600 |  |      | $ | 3,388 | 



---



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

Revenue from agency operations, which consists
primarily of agency commission revenue, increased $208,000, or
2.7%, to $7.8 million for the six months ended
June 30, 2003, from $7.6 million for the comparable
period in 2002. This increase is primarily the result of rate
increases, increases in contingent

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##### Table of Contents



commissions, and an increase in revenue from new
producers. This increase is partially offset by the recognition
of $220,000 in 2002 related to the sale of a book of
business and accounts that did not renew with the agency.


Agency operations generated pre-tax income of
$3.6 million for the six months ended June 30,
2003, compared to $3.4 million for the comparable period in
2002. The improvement in the pre-tax margin is primarily
attributable to overall expense reductions.

Other Items

Reserves

At June 30, 2003, managements best
estimate for the ultimate liability for loss and LAE reserves,
net of reinsurance recoverables, was $187.6 million.
Management established a reasonable range of reserves of
approximately $175.7 million to $200.0 million. This
range was established primarily by considering the various
indications derived from standard actuarial techniques and other
appropriate reserve considerations. The following table sets
forth this range by line of business.

|                          |  |         |         |  |         |   |         |          |  |   |         | 
|------------------------- |  | ------- | ------- |  | ------- | - | ------- | -------- |  | - | ------- | 
|                          |  | Minimum |         |  | Maximum |   |         |         
|                          |  | Reserve |         |  | Reserve |   |         | Selected | 
|Line of Business          |  | Range   |         |  | Range   |   |         | Reserves | 
|                          |  |         |         |  |         |   |         |          | 
|Workers Compensation(1)  |  | $       | 93,668  |  |         | $ | 104,795 |          |  | $ | 99,604  | 
|Commercial Multiple Peril |  |         | 35,822  |  |         |   | 44,304  |          |  |   | 39,558  | 
|Commercial Automobile     |  |         | 29,639  |  |         |   | 32,479  |          |  |   | 30,635  | 
|Other                     |  |         | 16,531  |  |         |   | 18,435  |          |  |   | 17,837  | 
|                          |  |         |         |  |         |   |         |          | 
|Net Reserves              |  | $       | 175,660 |  |         | $ | 200,013 |          |  | $ | 187,634 | 
|                          |  |         |         |  |         |   |         |          | 



---



|    |                          
|--- | -------------------------
|(1) | Includes Residual Markets

Reserves are reviewed by internal and/or
independent actuaries for adequacy on a quarterly basis. When
reviewing reserves, the Company analyzes historical data and
estimates the impact of numerous factors such as (i) per
claim information; (ii) Company and industry historical
loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the imposition of damages, and
changes in political attitudes; and (iv) trends in general
economic conditions, including the effects of inflation. This
process assumes that past experience, adjusted for the effects
of current developments and anticipated trends, is an
appropriate basis for predicting future events. There is no
precise method for subsequently evaluating the impact of any
specific factor on the adequacy of reserves, because the
eventual deficiency or redundancy is affected by multiple
factors.

The key assumptions used in managements
selection of ultimate reserves included the underlying actuarial
methodologies, a review of current pricing and underwriting
initiatives, an evaluation of reinsurance costs and retention
levels, and a detailed claims analysis with an emphasis on how
aggressive claims handling may be impacting the paid and
incurred loss data trends embedded in the traditional actuarial
methods. With respect to the ultimate estimates for losses and
LAE, the key assumptions remained consistent for the
six months ended June 30, 2003 and the years ended
December 31, 2002 and 2001.

For the six months ended June 30, 2003, the
Company reported an increase in net ultimate loss estimates for
accident years 2002 and prior to be $2.3 million, or 1.2%
of $193.1 million of net loss and LAE reserves at
December 31, 2002. The increase in net ultimate loss
estimates reflected revisions in the estimated reserves as a
result of actual claims activity in calendar year 2003 that
differed from the projected activity. There were no

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##### Table of Contents



significant changes in the key assumptions
utilized in the analysis and calculations of the Companys
reserves during 2003. The major components of this change in
ultimates are as follows:


|                          |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |       |       |  |   |          |  |  |   |        |  |  |   |         | 
|------------------------- |  | ------------ | ------- | --------------- | ------- | - | ----------- | ----- |  | - | ----------- | - |  | ------- | ------ |  | ----- | - | ----- | ----- |  | - | -------- |  |  | - | ------ |  |  | - | ------- | 
|                          |  |              |         |                 |         |   |             |      
|                          |  |              |         | Incurred Losses |         |   | Paid Losses |       |  |  
|                          |  | Reserves at  |         |                 |         |   |             |       |  |   | Reserves at |  
|                          |  | December 31, |         |                 | Current |   |             | Prior |  |   | Total       |   |  | Current |        |  | Prior |   |       | Total |  |   | June 30, | 
|Line of Business          |  | 2002         |         |                 | Year    |   |             | Year  |  |   | Incurred    |   |  | Year    |        |  | Year  |   |       | Paid  |  |   | 2003     | 
|                          |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |       |       |  |   |          | 
|Workers Compensation     |  | $            | 88,888  |                 |         | $ | 19,873      |       |  | $ | (1,798      | ) |  | $       | 18,075 |  |       | $ | 882   |       |  | $ | 18,245   |  |  | $ | 19,127 |  |  | $ | 87,836  | 
|Residual Markets          |  |              | 9,496   |                 |         |   | 2,891       |       |  |   | 1,677       |   |  |         | 4,568  |  |       |   | 804   |       |  |   | 1,492    |  |  |   | 2,296  |  |  |   | 11,768  | 
|Commercial Multiple Peril |  |              | 42,936  |                 |         |   | 5,104       |       |  |   | 1,483       |   |  |         | 6,587  |  |       |   | 84    |       |  |   | 9,881    |  |  |   | 9,965  |  |  |   | 39,558  | 
|Commercial Automobile     |  |              | 35,547  |                 |         |   | 5,381       |       |  |   | 1,289       |   |  |         | 6,670  |  |       |   | 1,326 |       |  |   | 10,256   |  |  |   | 11,582 |  |  |   | 30,635  | 
|Other                     |  |              | 16,249  |                 |         |   | 5,795       |       |  |   | (400        | ) |  |         | 5,395  |  |       |   | 737   |       |  |   | 3,070    |  |  |   | 3,807  |  |  |   | 17,837  | 
|                          |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |       |       |  |   |          | 
|Net Reserves              |  |              | 193,116 |                 |         | $ | 39,044      |       |  | $ | 2,251       |   |  | $       | 41,295 |  |       | $ | 3,833 |       |  | $ | 42,944   |  |  | $ | 46,777 |  |  |   | 187,634 | 
|                          |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |       |       |  |   |          | 
|Reinsurance Recoverable   |  |              | 181,817 |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |       |       |  |   |          |  |  |   |        |  |  |   | 181,441 | 
|                          |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |       |       |  |   |          | 
|Consolidated              |  | $            | 374,933 |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |       |       |  |   |          |  |  |   |        |  |  | $ | 369,075 | 
|                          |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |       |       |  |   |          | 

|                          |  |              |         |              |                |   |         |                     |  |  |       |   
|------------------------- |  | ------------ | ------- | ------------ | -------------- | - | ------- | ------------------- |  |  | ----- | --
|                          |  |              |         | Re-estimated |                |   |        
|                          |  | Reserves at  |         |              | reserves at    |   |         | Development as a    | 
|                          |  | December 31, |         |              | June 30, 2003  |   |         | percentage of       | 
|Line of Business          |  | 2002         |         |              | on prior years |   |         | prior year reserves | 
|                          |  |              |         |              |                |   |         |                     | 
|Workers Compensation     |  | $            | 88,888  |              |                | $ | 87,090  |                     |  |  | (2.0  | )%
|Commercial Multiple Peril |  |              | 42,936  |              |                |   | 44,419  |                     |  |  | 3.50  | % 
|Commercial Automobile     |  |              | 35,547  |              |                |   | 36,836  |                     |  |  | 3.60  | % 
|Other                     |  |              | 16,249  |              |                |   | 15,848  |                     |  |  | (2.50 | )%
|                          |  |              |         |              |                |   |         |                     | 
|Sub-total                 |  |              | 183,620 |              |                |   | 184,193 |                     |  |  | 0.3   | % 
|Residual Markets          |  |              | 9,496   |              |                |   | 11,173  |                     |  |  | 17.7  | % 
|                          |  |              |         |              |                |   |         |                     | 
|Total Net Reserves        |  | $            | 193,116 |              |                | $ | 195,366 |                     |  |  | 1.20  | % 
|                          |  |              |         |              |                |   |         |                     | 

Workers Compensation Excluding Residual
Markets

The projected net ultimate loss estimate for the
workers compensation line of business excluding residual
markets decreased $1.8 million, or 2.0% of net
workers compensation reserves. This net overall decrease
reflects an increase of $733,000 in accident year 2002 and a
reduction of $2.5 million in the ultimate estimate for loss
and loss adjustment for accident year 2001 and prior. The
reduction in loss and allocated expense reserves primarily
reflects a decrease in net ultimate loss estimates of $900,000
in accident year 2001 and $2.0 million in accident year
2000. The increase in ultimate loss estimates for accident year
2002 reflects higher than expected emergence of claim activity,
while the decreases in ultimate loss estimates for accident
years 2001 and 2000 reflect lower than expected emergence of
claim activity during the six months ended June 30, 2003.
The change in ultimate net loss estimates for all other accident
years was insignificant.

Commercial Multiple Peril

The commercial multiple peril line of business
had an increase in net ultimate loss estimates of
$1.5 million, or 3.5% of net commercial multiple peril
reserves. The net increase was $523,000, $538,000, and $512,000
in accident years 2001, 1999, and 1994, respectively. These
increases in ultimate loss estimates reflect higher than
expected emergence in claim activity during the six months ended
June 30, 2003. The change in ultimate net loss estimates
for all other accident years was insignificant.

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##### Table of Contents



Commercial Automobile

The commercial automobile line of business had an
increase in net ultimate loss estimates of $1.3 million, or
3.6% of net commercial automobile reserves. The increase in net
ultimate loss estimates reflects an increase of
$1.5 million in accident year 2001, primarily from one
commercial trucking program which was terminated during 2001.
This increase in ultimate loss estimates reflects higher than
expected emergence in claim activity during the six months ended
June 30, 2003. The change in ultimate net loss estimates
for all other accident years was insignificant.

Other

The other lines of business had a decrease in net
ultimate loss estimates of $400,000, or 2.5% of net reserves on
the other lines of business. The change reflects a reduction of
$690,000 in accident year 2002, primarily from the property line
of business. This decrease in ultimate loss estimates reflects
lower than expected emergence in claim activity during the six
months ended June 30, 2003. This was partially offset by an
increase in net ultimate loss estimates of $302,000 in the
medical line of business primarily in accident years 2000 and
1998. The change in ultimate net loss estimates for all other
accident years was insignificant.

Residual Markets

The projected net ultimate loss estimate for the
Companys share of the workers compensation residual
markets increased $1.7 million, or 17.7% of net residual
markets reserves. This change reflects the impact of a reporting
lag from the residual markets. This reporting lag resulted in an
increase of $1.9 million in the ultimate estimate for loss
and allocated loss adjustment in accident year 2002. There is a
corresponding change in ultimate premiums of $1.6 million
which is reflected in accident year 2003, as compared to the
above mentioned $1.9 million of losses which is reflected
in accident year 2002. The change in ultimate net loss estimates
for all other accident years was insignificant.

Salary and
Employee Benefits and Other Administrative
Expenses

Salary and employee benefits for the six months
ended June 30, 2003, increased $5.0 million, or 26.3%,
to $23.8 million, from $18.8 million for the
comparable period in 2002. This increase is primarily the result
of the hiring of employees to handle new fee-for-service
agreements. In addition, this increase reflects both merit
increases and a slight increase in staffing levels. Other
administrative expenses increased $899,000, or 7.8%, to
$12.4 million, from $11.5 million for the comparable
period in 2002. The increase in administrative expenses is also
attributable to the new fee-for-service agreements. Salary and
employee benefits and administrative expenses include both
corporate overhead and the holding company expenses included in
the reconciling items of the Companys segment information.

Interest
Expense

Interest expense for the six months ended
June 30, 2003, decreased by $1.7 million, or 78.9%, to
$449,000, from $2.1 million for the comparable period in
2002. Interest expense is primarily attributable to the
Companys term loan and revolving line of credit. This
decrease reflects both the reduction in the average outstanding
balance and a reduction in the average interest rate. The
average outstanding balance during the six months ending
June 30, 2003, was $26.6 million, compared to
$53.7 million for the same period in 2002. The average
interest rate in 2003 was 3.4%, compared to 7.9% in 2002. The
applicable margin in the agreement, which ranges from 200 to 300
basis points above eurocurrency rates, is determined by the
level of the fixed charge coverage ratio. The fixed charge
coverage ratio, as defined by the credit facility, is the ratio
of the non-regulated earnings before interest and taxes for the
four preceding fiscal quarters to the sum of fixed charges which
include interest expense, principal payments payable, stock
repurchases, and dividends declared during the period. Any
unused portion of the revolving credit as of the date of
determination reduces the sum of these fixed charges. At
June 30, 2003, this ratio was 3.3 to 1.0, compared to the
covenant minimum of 1.2 to 1.0.

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Taxes

Federal income tax expense for the six months
ended June 30, 2003 was $2.6 million, or 32.6% of income
before taxes. For the same period last year, the Company
reflected a federal income tax expense of $263,000, or 20.3% of
income before taxes. The increase in tax expense is the result
of an increase in earnings. The Companys effective tax
rate differs from the 34% statutory rate primarily due to
tax-exempt investment income. The overall change in the
effective rate in comparison to the six months ended
June 30, 2002 is related to changes in the proportion of
tax-exempt investment income to total underwriting results.

At June 30, 2003, the Company had a deferred
tax asset of $15.5 million, $5.9 million of which is
related to a net operating loss carryforward (NOL).
Realization of the deferred tax asset is dependent on generating
sufficient taxable income to absorb both the applicable
reversing temporary differences and the NOL. At June 30,
2003, management concluded that the positive evidence supporting
the generation of future taxable income sufficient to realize
the deferred tax asset outweighed the negative evidence of the
cumulative losses reported for the periods ended
December 31, 2001, 2000, and 1999. This conclusion was
based upon:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The current market conditions that supported the
    cumulative premium rate increases of 55.0% since the beginning
    of 2000 is expected to continue;                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | For the six months ending June 30, 2003,
    loss reserves continue to stabilize with a calendar year 2003
    loss and LAE ratio of 70.2% and net ultimate loss estimates on
    loss and LAE on prior year accident years of $2.3 million,
    or 1.2% of $193.1 million of net loss and LAE reserves at
    December 31, 2002;                                                                                                                                                                                                  
|
| |  | The completion of the Companys exit of
    certain discontinued unprofitable programs. Exposures related to
    these programs were fully earned during the first half of 2002.
    Furthermore, the uncertainty of future reserve development
    appears to have been reduced by aggressive claims handling which
    reduced the number of pending claims, reserve strengthening in
    2002, and a claim by claim review conducted by the
    Companys corporate claims department during the fourth
    quarter of 2002; and
|
| |  | Alternative tax strategies, which could generate
    capital gains from the potential sale of assets and/or
    subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                      

Other Than
Temporary Impairments

The Companys policy on other than
temporarily impaired securities is to determine impairment based
on analysis of the following factors: market value less than 80%
of amortized cost for a six month period; rating downgrade or
other credit event, e.g., failure to pay interest when due;
financial condition and near-term prospects of the issuer,
including any specific events which may influence the operations
of the issuer such as changes in technology or discontinuance of
a business segment; prospects for the issuers industry
segment; intent and ability of the Company to retain the
investment for a period of time sufficient to allow for
anticipated recovery in market value. Investments which are
determined to be impaired are written down to their estimated
net realizable value. At June 30, 2003, the Company did not
hold any securities in its investment portfolio that were
impaired. As of June 30, 2003, gross unrealized gains and
losses on securities were $16.5 million and ($570,000),
respectively.

Results of Operations for the Quarters Ended
June 30, 2003 and 2002

Overview

Net income for the quarter ended June 30,
2003 was $2.7 million, or $0.09 per dilutive share,
compared to net income of $122,000, or $0.01 per dilutive share,
for the quarter ended June 30, 2002. This improvement
reflects the addition of new fee-for-service agreements and the
Companys continued expense control initiatives. These
initiatives have allowed the Company to leverage its fixed costs.

Revenues for the quarter ended June 30, 2003
decreased $6.0 million, or 10.5%, to $51.5 million
from $57.5 million for the comparable period in 2002.

22



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##### Table of Contents



Specialty
Risk Management Operations

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

|                      |                                            |                  |       |        |        |   |        |        |        | 
|--------------------- | ------------------------------------------ | ---------------- | ----- | ------ | ------ | - | ------ | ------ | ------ | 
|                      |                                            |                 
|                      |                                            | For the Quarters |      
|                      |                                            | Ended June 30,   |      
|                      |                                            |                  |      
|                      |                                            | 2003             |       |        | 2002   |  
|                      |                                            |                  |       |        |        |  
|Revenues:             |                                            |                  |       |        |        |   |        |       
|                      | Net earned premiums                        |                  | $     | 36,230 |        |   | $      | 44,313 |       
|                      | Management fees                            |                  |       | 4,840  |        |   |        | 3,421  |       
|                      | Claim fees                                 |                  |       | 3,755  |        |   |        | 1,805  |       
|                      | Loss control fees                          |                  |       | 549    |        |   |        | 739    |       
|                      | Reinsurance brokerage                      |                  |       | 106    |        |   |        | 123    |       
|                      | Investment income                          |                  |       | 3,564  |        |   |        | 3,492  |       
|                      | Net realized gains (losses) on investments |                  |       | 374    |        |   |        | (310   | )     
|                      |                                            |                  |       |        |        |  
|                      |                                            | Total revenue    |       | $      | 49,418 |   |        | $      | 53,583 | 
|                      |                                            |                  |       |        |        |  
|Pre-tax income (loss) |                                            | $                | 2,881 |        |        | $ | (1,099 | )     
|                      |                                            |                  |       |        |        |  

Revenues from specialty risk management
operations decreased $4.2 million, or 7.8%, to
$49.4 million for the quarter ended June 30, 2003,
from $53.6 million for the comparable period in 2002. This
decrease reflects an $8.1 million, or 18.2% decrease in net
earned premiums to $36.2 million in the quarter ended
June 30, 2003, from $44.3 million in the comparable
period in 2002. This decrease is the result of a reduction in
earned premium of $9.4 million related to programs
discontinued in 1999 and programs terminated for leverage ratio
purposes. In addition to the overall decrease in net earned
premium, is a $6.2 million increase in ceded earned premium
associated with the cancellation in 2002 of the surplus relief
treaty related to several workers compensation programs.
Offsetting the overall decrease in net earned premiums is a
$7.5 million increase in earned premium related to existing
programs and new business.

Management fees increased $1.4 million, or
41.5%, to $4.8 million for the quarter ended June 30,
2003, from $3.4 million for the comparable period in 2002.
Claim fees increased $2.0 million, or 108.0%, to
$3.8 million from $1.8 million for the comparable
period in 2002. The increase in management fees and claim fees
reflects the previously mentioned addition of new
fee-for-service agreements of $1.6 million and
$2.4 million, respectively. This increase in management
fees and claim fees is partially offset by a decrease in
discontinued programs and the result of the conversion of an
existing fee-based program into an insured program within the
Companys underwriting subsidiary. Loss control fees
decreased $190,000, or 25.7%, to $549,000 from $739,000 for the
comparable period in 2002. This decrease is mainly the result of
the conversion of an existing fee-based program into an insured
program.

Net investment income increased $72,000, or 2.1%,
to $3.6 million for the quarter ended June 30, 2003,
compared to $3.5 million for the comparable period in 2002.
This increase reflects a $65.8 million, or 28.0% increase
in average invested assets and cash and cash equivalents, to
$300.4 million for the quarter ended June 30, 2003,
from $234.6 million for the comparable period in 2002. The
increase in average invested assets and cash and cash
equivalents, primarily reflects net assets invested of
$37.5 million from the proceeds received from the
Companys public offering in June 2002. In addition, the
increase in average invested assets and cash and cash
equivalents, was the result of growth in premiums, collection of
reinsurance recoverables, and the cancellation of the surplus
relief treaty in 2002. The pre-tax yield for June 30, 2003
was 4.6%, compared to 5.6% for the comparable period in 2002.

Specialty risk management operations generated
pre-tax income of $2.9 million for the quarter ended
June 30, 2003, compared to pre-tax loss of
$1.1 million for the comparable period in 2002. This
improvement reflects the favorable impact of the previously
indicated fee-for-service agreements and improved underwriting

23



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##### Table of Contents



results. The GAAP combined ratio was 106.4% for
the quarter ended June 30, 2003, compared to 108.4% for the
same period in 2002.


Net loss and LAE decreased $6.5 million, or
21.3%, to $24.1 million for the quarter ended June 30,
2003, from $30.6 million for the same period in 2002. The
Companys loss and LAE ratio decreased by
1.5 percentage points to 71.1% for the quarter ended
June 30, 2003, from 72.6% for the same period in 2002. This
ratio is the unconsolidated net loss and LAE in relation to net
earned premium. This improvement in the loss and LAE ratio
reflects rate increases achieved in 2002 and 2003, the
cancellation of the surplus relief treaty, and the absence of
earned premium from discontinued programs. The loss and LAE
ratio for the quarter ended June 30, 2003, was impacted by
a net loss of $1.0 million, or 2.8 percentage points,
resulting from property damage caused by storms in the Midwest
during May 2003.

The Companys expense ratio improved
0.5 percentage points to 35.3% for the quarter ended
June 30, 2003, from 35.8% for the same period in 2002. This
ratio is the unconsolidated policy acquisition and other
underwriting expenses in relation to net earned premium. The
improvement reflects the ability to leverage fixed costs and a
reduction in gross commissions. This improvement is offset by an
increase in insurance related assessments.

Agency
Operations

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

|                |  |                  |       |  |      |   |       | 
|--------------- |  | ---------------- | ----- |  | ---- | - | ----- | 
|                |  |                 
|                |  | For the Quarters |      
|                |  | Ended June 30,   |      
|                |  |                  |      
|                |  | 2003             |       |  | 2002 |  
|                |  |                  |       |  |      |  
|Net commission  |  | $                | 3,675 |  |      | $ | 3,976 | 
|Pre-tax income* |  | $                | 1,548 |  |      | $ | 1,694 | 



---



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

Revenue from agency operations, which consists
primarily of agency commission revenue, decreased $301,000, or
7.6%, to $3.7 million for the quarter ended June 30,
2003, from $4.0 million for the comparable period in 2002.
This decrease is primarily the result of $220,000 recognized in
2002 related to the sale of a book of business. The remaining
decrease is the result of accounts that did not renew with the
agency, offset by rate increases, increases in contingent
commissions, and an increase in revenue from new producers.

Agency operations generated pre-tax income of
$1.5 million for the quarter ended June 30, 2003,
compared to $1.7 million for the comparable period in 2002.
The decrease in the pre-tax margin is the result of the loss of
a large account.

Other Items

Reserves

For the quarter ended June 30, 2003, the
Company reported an increase in net ultimate loss estimates for
accident years 2002 and prior to be $1.9 million, or 1.0%
of $193.1 million of net loss and LAE reserves at
December 31, 2002. There were no significant changes in the
key assumptions utilized in the analysis and calculations of the
Companys reserves during 2003.

Salary and
Employee Benefits and Other Administrative
Expenses

Salary and employee benefits for the quarter
ended June 30, 2003 increased $2.6 million, or 28.5%,
to $11.9 million, from $9.2 million for the comparable
period in 2002. This increase is primarily the result of the
hiring of employees to handle new fee-for-service agreements. In
addition, this increase reflects both merit increases and a
slight increase in staffing levels. Other administrative
expenses decreased $767,000, or 12.6%, to $5.3 million,
from $6.1 million for the comparable period in 2002. This
decrease is primarily due to a reduction in policyholders
dividends of $1.3 million based on a reduction in
anticipated policyholder dividend

24



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##### Table of Contents



payments. Offsetting this decrease is an increase
in administrative expenses attributable to the new
fee-for-service agreements. Salary and employee benefits and
administrative expenses include both corporate overhead and the
holding company expenses included in the reconciling items of
the Companys segment information.


Interest
Expense

Interest expense for the quarter ended
June 30, 2003 decreased by $662,000, or 75.7%, to $212,000,
from $874,000 for the comparable period in 2002. Interest
expense is primarily attributable to the Companys term
loan and revolving line of credit. This decrease reflects both
the reduction in the average outstanding balance and a reduction
in the average interest rate. The average outstanding balance
during the quarter ended June 30, 2003, was
$20.9 million, compared to $53.7 million for the same
period in 2002. The average interest rate in 2003 was 4.1%,
compared to 6.5% in 2002. The applicable margin in the
agreement, which ranges from 200 to 300 basis points above
eurocurrency rates, is determined by the level of the fixed
charge coverage ratio. The fixed charge coverage ratio, as
defined by the credit facility, is the ratio of the
non-regulated earnings before interest and taxes for the four
preceding fiscal quarters to the sum of fixed charges which
include interest expense, principal payments payable, stock
repurchases, and dividends declared during the period. Any
unused portion of the revolving credit as of the date of
determination reduces the sum of these fixed charges. This ratio
at June 30, 2003, was 3.3 to 1.0, compared to the covenant
minimum of 1.2 to 1.0.

Taxes

Federal income tax expense for the quarter ended
June 30, 2003 was $1.3 million, or 32.4% of income
before taxes. For the same quarter last year, the Company
reflected a federal income tax benefit of $55,000, or 81.1% of
income before taxes. The increase in tax expense is the result
of an increase in earnings. The Companys effective tax
rate differs from the 34% statutory rate primarily due to
tax-exempt investment income. The overall change in the
effective rate in comparison to the quarter ended June 30,
2002 is related to changes in the proportion of tax-exempt
investment income to total underwriting results.

Liquidity and Capital Resources

The principal sources of funds for the Company
and its subsidiaries are insurance premiums, investment income,
proceeds from the maturity and sale of invested assets, risk
management fees, and agency commissions. Funds are primarily
used for the payment of claims, commissions, salaries and
employee benefits, other operating expenses, shareholder
dividends, and debt service. The Company generates operating
cash flow from non-regulated subsidiaries in the form of
commission revenue, outside management fees, and intercompany
management fees. These sources of income are used to meet debt
service, shareholders dividends, and other operating
expenses of the holding company and the non-regulated
subsidiaries, which have been set forth in the table below for
the periods ending June 30, 2003 and 2002.

|                           |                                                                                  |                  |       |       |      |   |       |       |  
|-------------------------- | -------------------------------------------------------------------------------- | ---------------- | ----- | ----- | ---- | - | ----- | ----- | -
|                           |                                                                                  |                 
|                           |                                                                                  | For the          |      
|                           |                                                                                  | Six Months Ended |      
|                           |                                                                                  | June 30,         |      
|                           |                                                                                  |                  |      
|                           |                                                                                  | 2003             |       |       | 2002 |  
|                           |                                                                                  |                  |       |       |      |  
|Net income                 |                                                                                  | $                | 5,435 |       |      | $ | 1,032 |      
|                           |                                                                                  |                  |       |       |      |  
|Regulated Subsidiaries     |                                                                                  |                  |       |       |      |   |       |      
|                           | Net income (loss)                                                                |                  | $     | 2,258 |      |   | $     | (634  | )
|                           |                                                                                  |                  |       |       |      |  
|Non-regulated Subsidiaries |                                                                                  |                  |       |       |      |   |       |      
|                           | Net income                                                                       |                  | $     | 3,177 |      |   | $     | 1,666 |  
|                           | Interest, depreciation, and amortization                                         |                  |       | 1,431 |      |   |       | 3,424 |  
|                           |                                                                                  |                  |       |       |      |  
|                           | Non-regulated net income, excluding interest,
    depreciation, and amortization |                  | $     | 4,608 |      |   | $     | 5,090 |  
|                           |                                                                                  |                  |       |       |      |  

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|                           |                                                                                  |                |       |       |      |   |     |        |  
|-------------------------- | -------------------------------------------------------------------------------- | -------------- | ----- | ----- | ---- | - | --- | ------ | -
|                           |                                                                                  |               
|                           |                                                                                  | For the        |      
|                           |                                                                                  | Quarters Ended |      
|                           |                                                                                  | June 30,       |      
|                           |                                                                                  |                |      
|                           |                                                                                  | 2003           |       |       | 2002 |  
|                           |                                                                                  |                |       |       |      |  
|Net income                 |                                                                                  | $              | 2,679 |       |      | $ | 122 |       
|                           |                                                                                  |                |       |       |      |  
|Regulated Subsidiaries     |                                                                                  |                |       |       |      |   |     |       
|                           | Net income (loss)                                                                |                | $     | 1,392 |      |   | $   | (1,163 | )
|                           |                                                                                  |                |       |       |      |  
|Non-regulated Subsidiaries |                                                                                  |                |       |       |      |   |     |       
|                           | Net income                                                                       |                | $     | 1,287 |      |   | $   | 1,285  |  
|                           | Interest, depreciation, and amortization                                         |                |       | 684   |      |   |     | 1,612  |  
|                           |                                                                                  |                |       |       |      |  
|                           | Non-regulated net income, excluding interest,
    depreciation, and amortization |                | $     | 1,971 |      |   | $   | 2,897  |  
|                           |                                                                                  |                |       |       |      |  

Cash flow provided by operations for the six
months ended June 30, 2003 was $30.2 million, compared
to cash flow used in operations of $10.8 million for the
comparable quarter in 2002. The increase in cash flow from
operations primarily reflects growth in written premiums.

The Company has a credit agreement which includes
a term loan and a revolving line of credit. This credit
agreement consists of a $20.0 million term loan and a
revolving line of credit for up to $8.0 million. The
Company uses the revolving line of credit to meet short-term
working capital needs. At June 30, 2003, the Companys
term loan had an outstanding balance of $16.5 million. The
Company had no outstanding balance on the revolving line of
credit at June 30, 2003. At December 31, 2002, the
outstanding balance on the term loan and revolving line of
credit was $18.8 million and $5.3 million,
respectively. The term loan calls for quarterly amortization
through July 1, 2006, at which time the term loan will be
paid in full. The quarterly amortization requires payments of
$1.0 million on April 1, 2003 and July 1, 2003;
$1.5 million on October 1, 2003; and $1.2 million
for the remaining quarterly amortization payments in 2004, 2005,
and 2006, with a final payment of $1.5 million on
July 1, 2006. The revolving line of credit will expire on
July 1, 2004, and is thereafter renewable on an annual
basis.

The Company made principal payments of
$1.2 million on January 1, 2003, and $1.0 million
on April 1, 2003 and July 1, 2003, on the term loan.

Both the term loan and revolving line of credit
provide for interest at a variable rate based, at the
Companys option, upon either the prime rate or
eurocurrency rate. The applicable margin, which ranges from 200
to 300 basis points above eurocurrency rates, is determined
by the level of the fixed charge coverage ratio. Of all the
covenants, the most restrictive covenant is the fixed charge
coverage ratio. The fixed charge coverage ratio, as defined by
the credit facility, is the ratio of the non-regulated earnings
before interest and taxes for the four preceding fiscal quarters
to the sum of fixed charges which include interest expense,
principal payments payable, stock repurchases, and dividends
declared during the period. Any unused portion of the revolving
credit as of the date of determination reduces the sum of these
fixed charges. At June 30, 2003, this ratio was 3.3 to 1.0,
compared to the covenant minimum of 1.2 to 1.0.

As of June 30, 2003, the Company was in
compliance with all debt covenants.

In addition, a non-insurance premium finance
subsidiary of the Company maintains a line of credit with a
bank, which permits borrowings up to 80% of the accounts
receivable, which collateralize the line of credit. At
June 30, 2003, this line of credit had an outstanding
balance of $4.3 million.

On January 14, 2003, the Company paid in
full a $3.5 million subordinated promissory note, due
June 30, 2003.

At June 30, 2003, shareholders equity
was $153.4 million, or $5.29 per common share,
compared to $147.4 million, or $4.98 per common share, at
December 31, 2002.

On September 17, 2002, the Companys
Board of Directors authorized management to repurchase up to
1,000,000 shares of the Companys common stock in market
transactions for a period not to exceed twenty-

26



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##### Table of Contents



four months. On August 6, 2003, the
Companys Board of Directors authorized management to
repurchase up to an additional 1,000,000 shares of the
Companys common stock under the existing share repurchase
plan. As of June 30, 2003, the Company repurchased and
retired 764,800 shares of common stock for a total cost of
approximately $2.0 million. For the quarter ended June 30,
2003, the Company repurchased and retired 341,300 shares of
common stock for a total cost of approximately
$1.0 million. As of August 8, 2003, the Company
repurchased and retired 764,800 shares of common stock for a
total cost of approximately $2.0 million.


A significant portion of the Companys
consolidated assets represent assets of the Insurance Company
Subsidiaries that at this time, without prior approval of the
Michigan Office of Financial and Insurance Services
(OFIS), 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
Company Subsidiaries is limited by Michigan insurance regulatory
guidelines which, in general, 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 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 Company
Subsidiaries surplus. Based upon the 2002 statutory
financial statements, Star may only pay dividends to the Company
during 2003 with the prior approval of OFIS. Stars earned
surplus position at December 31, 2002 was negative
$24.3 million. At June 30, 2003, earned surplus was
negative $27.4 million. No statutory dividends were paid in
2002.

Regulatory and Rating Issues

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

At December 31, 2002, all of the Insurance
Company Subsidiaries were in compliance with RBC requirements.
Star reported statutory surplus of $93.8 million at
December 31, 2002, compared to the threshold requiring the
minimum regulatory involvement of $49.7 million in 2002. At
June 30, 2003, Stars statutory surplus was
$90.8 million. Statutory accounting principles differ in
some respects from generally accepted accounting principles
(GAAP). These differences, among other differences,
include the costs of acquiring and renewing business. Under
statutory accounting principles these acquisition costs are
expensed as premium is written, while under GAAP these costs are
deferred and recognized as premium is earned over the terms of
the policies or reinsurance treaties to which the costs relate.
At June 30, 2003, deferred policy acquisition costs
increased $5.0 million, or 41.6%, to $17.2 million,
compared to $12.1 million at December 31, 2002. This
increase reflects the increase in gross unearned premiums of
$31.4 million, or 45.7%, to $100.1 million at
June 30, 2003, compared to $68.7 million at
December 31, 2002.

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 targets for gross and net written premium to
statutory surplus are 3.0 to 1 and 2.0 to 1, respectively. As of
June 30, 2003, on a statutory consolidated basis, gross and
net premium leverage ratios were 2.3 to 1.0 and 1.7 to
1.0, respectively.

27



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##### Table of Contents



The Insurance Company Subsidiaries A.M.
Best financial strength rating is a B+ (Very Good)
with a positive outlook. A positive outlook is placed on a
companys rating if its financial and market trends are
favorable, relative to its current rating level.

New Accounting Pronouncements

The Financial Accounting Standards Board
(FASB) has issued Statement of Financial Accounting
Standards (SFAS) No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure-
an amendment of FASB Statement No. 123, for periods
starting after December 15, 2003, or thereafter. SFAS
No. 148 provides three optional transition methods for
entities that decide to voluntarily adopt the fair value
recognition principles of SFAS No. 123, Accounting
for Stock-Based Compensation, and modifies the disclosure
requirements of that Statement. Under the prospective method,
stock-based compensation expense is recognized for awards
granted after the beginning of the fiscal year in which the
change is made. The modified prospective method recognizes
stock-based compensation expense related to new and unvested
awards in the year of change equal to that which would have been
recognized had SFAS No. 123 been adopted as of its
effective date, fiscal years beginning after December 15,
1994. The retrospective restatement method recognizes stock
compensation costs for the year of change and restates financial
statements for all prior periods presented as though the fair
value recognition provisions of SFAS No. 123 had been
adopted as of its effective date.

As of January 1, 2003, the Company adopted
the requirements of SFAS No. 148 utilizing the prospective
method. Under SFAS. 148, compensation expense of $120,000 and
$34,000, has been recorded for stock options granted in the six
months and quarter ended June 30, 2003, respectively. No
compensation cost has been recorded for stock option grants
issued during 2002 as the market value equaled the exercise
price at the date of grant.






Item
3.     Quantitative and Qualitative
Disclosures About Market Risk


No material changes since December 31, 2002
Annual Report on Form 10-K.






Item
4.     Controls and
Procedures


The Company carried out an evaluation, as of
June 30, 2003, under the supervision and with the
participation of the Companys management, including the
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Companys
Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures are
effective to ensure that all material information relating to
the Company (including its consolidated subsidiaries) required
to be included in this quarterly report has been made known in a
timely manner. There have been no significant changes in the
Companys internal controls or in other factors that could
significantly affect these internal controls during the quarter
ended June 30, 2003.

28



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PART II  OTHER
INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

The information required by this item is included
under Note 6 of the Companys
Form 10-Q for the six months ended June 30, 2003,
which is hereby incorporated by reference.






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

On May 19, 2003, the Company held its Annual
Meeting of Shareholders (Annual Meeting) to consider
and act upon the following proposals:



| |                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------
| | (1) The election of four (4) members to
    the Board of Directors of the Company, and                            
|
| | (2) Ratification of the appointment of the
    Companys independent accountants, PricewaterhouseCoopers,
    LLP.

The following Directors stood for election at the
Annual Meeting: (1) Robert S. Cubbin;
(2) Hugh W. Greenberg; (3) Florine Mark; and
(4) Irwin F. Swider, Sr. The shareholders re-elected
the Directors at the Annual Meeting and therefore, each shall
continue in office. The vote tabulation for each Director was:
(1) Robert S. Cubbin  27,770,185 in favor
and 230,173 abstained; (2) Hugh W.
Greenberg  27,781,604 in favor and
218,754 abstained; (3) Florine Mark 
27,765,815 in favor and 234,543 abstained; and
(4) Irvin F. Swider, Sr.  27,765,813 for
and 234,545 abstained. Other Directors continuing in office
after the meeting were as follows: Joseph S. Dresner, Ralph
Milo, Robert H. Naftaly, David K. Page, Merton J.
Segal, Robert W. Sturgis, Bruce E. Thal and Herbert
Tyner.

The shareholders ratified the appointment of
PricewaterhouseCoopers, LLP by a vote of 27,931,699 in favor,
35,197 against and 33,462 abstained.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

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

|        |      |  |             |                                                                                                                                                                                                                                        
|------- | ---- |  | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No.     |      |  | Description
|        |      |  |            
|        | 10.1 |  |             | First Amendment to and Waiver of Restated Credit
    Agreement between Meadowbrook Insurance Group, Inc. and Comerica
    Bank, dated May 23, 2003.                                                                                    
|        | 10.2 |  |             | Second Amendment to Restated Credit Agreement
    between Meadowbrook Insurance Group, Inc. and Comerica Bank,
    dated June 30, 2003.                                                                                                
|        | 31.1 |  |             | Certification of Robert S. Cubbin, Chief
    Executive Officer of the Corporation, pursuant to Securities
    Exchange Act Rule 13a-14(a).                                                                                             
|        | 31.2 |  |             | Certification of Karen M. Spaun, Senior Vice
    President and Chief Financial Officer of the Corporation,
    pursuant to Securities Exchange Act Rule 13a-14(a).                                                                     
|        | 32.1 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Robert S. Cubbin,
    Chief Executive Officer of the Corporation.                            
|        | 32.2 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Karen M. Spaun,
    Senior Vice President and Chief Financial Officer of the
    Corporation.

(B) Reports on Form 8-K:

The Registrant filed a Current Report on
Form 8-K dated May 12, 2003 for the purpose of
furnishing the Companys first quarter 2003 earnings
release.

29



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##### Table of Contents








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/ KAREN M. SPAUN

| |                          
| | -------------------------
| |                          
| | Senior Vice President and
| | Chief Financial Officer  

Dated: August 14, 2003

30



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EXHIBIT INDEX

|        |      |  |             |                                                                                                                                                                                                                                        
|------- | ---- |  | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No.     |      |  | Description
|        |      |  |            
|        | 10.1 |  |             | First Amendment to and Waiver of Restated Credit
    Agreement between Meadowbrook Insurance Group, Inc. and Comerica
    Bank, dated May 23, 2003.                                                                                    
|        | 10.2 |  |             | Second Amendment to Restated Credit Agreement
    between Meadowbrook Insurance Group, Inc. and Comerica Bank,
    dated June 30, 2003.                                                                                                
|        | 31.1 |  |             | Certification of Robert S. Cubbin, Chief
    Executive Officer of the Corporation, pursuant to Securities
    Exchange Act Rule 13a-14(a).                                                                                             
|        | 31.2 |  |             | Certification of Karen M. Spaun, Senior Vice
    President and Chief Financial Officer of the Corporation,
    pursuant to Securities Exchange Act Rule 13a-14(a).                                                                     
|        | 32.1 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Robert S. Cubbin,
    Chief Executive Officer of the Corporation.                            
|        | 32.2 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Karen M. Spaun,
    Senior Vice President and Chief Financial Officer of the
    Corporation.