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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 September 30,
    2002                                                
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-14094



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Meadowbrook Insurance Group, Inc.

(Exact name of registrant as specified in its
charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Michigan                 |  | 38-2626206                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

26600 Telegraph Road, Southfield, Michigan
48034

(Address, zip code of principal executive
offices)


(248) 358-1100

(Registrants telephone number, including
area code)




---

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

The aggregate number of shares of the
Registrants Common Stock, $.01 par value, outstanding on
November 12, 2002 was 29,629,994.



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TABLE OF CONTENTS



|                                                                                                                                               |  |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART 1 -- FINANCIAL INFORMATION                                                                                                               
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME                                                                                                   
|CONDENSED CONSOLIDATED STATEMENTS OF INCOME                                                                                                   
|CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME                                                                                               
|CONDENSED CONSOLIDATED BALANCE SHEETS                                                                                                         
|CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                               
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                    
|ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For the Periods ended September 30, 2002 and 2001
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                            
|Item 4. Controls and Procedures                                                                                                               
|PART II -- OTHER INFORMATION                                                                                                                  
|Item 1. Legal Proceedings                                                                                                                     
|Item 6. Exhibits and Reports on Form 8-K                                                                                                      
|SIGNATURES                                                                                                                                    
|Form of Certification for Quarterly Reports on Form 10-Q                                                                                      
|Form of Certification for Quarterly Reports on Form 10-Q                                                                                      
|EXHIBIT INDEX                                                                                                                                 
|Computation on Per Share Earnings                                                                                                             
|Certification of CEO Pursuant to Section 906                                                                                                  
|Certification of Chief Financial Officer                                                                                                      



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TABLE OF CONTENTS

|                                   |  |                                                                                           |       |      |       | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------- | ----- | ---- | ----- | 
|                                   |  |                                                                                           |       | Page |      
|                                   |  |                                                                                           |       |      |      
|PART I  FINANCIAL
    INFORMATION
|Item 1                            |  | Financial Statements                                                                      |       |      |       | 
|                                   |  | Condensed Consolidated Statements of Income
    (unaudited)                               |       |      | 2-3   | 
|                                   |  | Consolidated Statements of Comprehensive Income
    (unaudited)                           |       |      | 4     | 
|                                   |  | Condensed Consolidated Balance Sheets (unaudited)                                         |       |      | 5     | 
|                                   |  | Condensed Consolidated Statements of Cash Flows
    (unaudited)                           |       |      | 6     | 
|                                   |  | Notes to Consolidated Financial Statements
    (unaudited) and Management Representation  |       |      | 7-15  | 
|Item 2                            |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |       |      | 16-24 | 
|Item 3                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                            |       |      | 24    | 
|Item 4                            |  | Controls and Procedures                                                                   |       |      | 24    | 
|PART II  OTHER
    INFORMATION   
|Item 1                            |  | Legal Proceedings                                                                         |       |      | 25    | 
|Item 6                            |  | Exhibits and Reports on Form 8-K                                                          |       |      | 25    | 
|Signatures                         |  |                                                                                           | 26    |     
|Certification of Quarterly Report  |  |                                                                                           | 27-28 |     

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 Nine Months Ended
September 30,


|                                                          |                                            |                          |      |            |         |   |        |           |         |  
|--------------------------------------------------------- | ------------------------------------------ | ------------------------ | ---- | ---------- | ------- | - | ------ | --------- | ------- | -
|                                                          |                                            | 2002                     |      |            | 2001    |  
|                                                          |                                            |                          |      |            |         |  
|                                                          |                                            |                         
|                                                          |                                            | (Unaudited)              |     
|                                                          |                                            | (in thousands,           |     
|                                                          |                                            | except per share data)   |     
|Revenues:                                                 |                                            |                          |      |            |         |   |        |          
|                                                          | Net premium earned                         |                          | $    | 114,310    |         |   | $      | 121,490   |        
|                                                          | Net commissions and fees                   |                          |      | 27,586     |         |   |        | 31,305    |        
|                                                          | Net investment income                      |                          |      | 10,380     |         |   |        | 10,634    |        
|                                                          | Net realized gains (losses) on investments |                          |      | 325        |         |   |        | (674      | )      
|                                                          | Gain (loss) on sale of subsidiary          |                          |      | 199        |         |   |        | (989      | )      
|                                                          |                                            |                          |      |            |         |  
|                                                          |                                            | Total revenues           |      |            | 152,800 |   |        |           | 161,766 |  
|                                                          |                                            |                          |      |            |         |  
|Expenses:                                                 |                                            |                          |      |            |         |   |        |          
|                                                          | Net loss and loss adjustment expenses      |                          |      | 79,735     |         |   |        | 94,970    |        
|                                                          | Salaries and employee benefits             |                          |      | 27,978     |         |   |        | 33,456    |        
|                                                          | Other operating expenses                   |                          |      | 44,347     |         |   |        | 40,448    |        
|                                                          | Interest on notes payable                  |                          |      | 2,706      |         |   |        | 3,573     |        
|                                                          | Gain on debt reduction                     |                          |      | (359       | )       |   |        |          |        
|                                                          |                                            |                          |      |            |         |  
|                                                          |                                            | Total expenses           |      |            | 154,407 |   |        |           | 172,447 |  
|                                                          |                                            |                          |      |            |         |  
|                                                          |                                            | Loss before income taxes |      |            | (1,607  | ) |        |           | (10,681 | )
|Federal income tax benefit                                |                                            |                          | (748 | )          |         |   | (3,652 | )        
|                                                          |                                            |                          |      |            |         |  
|                                                          |                                            | Net loss                 |      | $          | (859    | ) |        | $         | (7,029  | )
|                                                          |                                            |                          |      |            |         |  
|Earnings per share:                                       |                                            |                          |      |            |         |   |        |          
|                                                          | Basic                                      |                          | $    | (0.05      | )       |   | $      | (0.83     | )      
|                                                          | Diluted                                    |                          | $    | (0.05      | )       |   | $      | (0.83     | )      
|Weighted average number of common shares
    outstanding: |                                            |                          |      |            |         |   |        |          
|                                                          | Basic                                      |                          |      | 17,477,035 |         |   |        | 8,512,183 |        
|                                                          | Diluted                                    |                          |      | 17,477,035 |         |   |        | 8,512,183 |        

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
September 30,


|                                                          |                                       |                                   |        |            |        |   |     |           |        | 
|--------------------------------------------------------- | ------------------------------------- | --------------------------------- | ------ | ---------- | ------ | - | --- | --------- | ------ | 
|                                                          |                                       | 2002                              |        |            | 2001   |  
|                                                          |                                       |                                   |        |            |        |  
|                                                          |                                       |                                  
|                                                          |                                       | (Unaudited)                       |       
|                                                          |                                       | (in thousands, except             |       
|                                                          |                                       | per share data)                   |       
|Revenues:                                                 |                                       |                                   |        |            |        |   |     |          
|                                                          | Net premium earned                    |                                   | $      | 31,340     |        |   | $   | 40,673    |       
|                                                          | Net commissions and fees              |                                   |        | 8,654      |        |   |     | 8,560     |       
|                                                          | Net investment income                 |                                   |        | 3,751      |        |   |     | 3,654     |       
|                                                          | Net realized gains on investments     |                                   |        | 626        |        |   |     | 647       |       
|                                                          | Loss on sale of subsidiary            |                                   |        |           |        |   |     | (139      | )     
|                                                          |                                       |                                   |        |            |        |  
|                                                          |                                       | Total revenues                    |        |            | 44,371 |   |     |           | 53,395 | 
|                                                          |                                       |                                   |        |            |        |  
|Expenses:                                                 |                                       |                                   |        |            |        |   |     |          
|                                                          | Net loss and loss adjustment expenses |                                   |        | 24,639     |        |   |     | 30,357    |       
|                                                          | Salaries and employee benefits        |                                   |        | 9,130      |        |   |     | 10,170    |       
|                                                          | Other operating expenses              |                                   |        | 12,922     |        |   |     | 11,264    |       
|                                                          | Interest on notes payable             |                                   |        | 582        |        |   |     | 1,091     |       
|                                                          |                                       |                                   |        |            |        |  
|                                                          |                                       | Total expenses                    |        |            | 47,273 |   |     |           | 52,882 | 
|                                                          |                                       |                                   |        |            |        |  
|                                                          |                                       | (Loss) income before income taxes |        |            | (2,902 | ) |     |           | 513    | 
|Federal income tax (benefit) expense                      |                                       |                                   | (1,011 | )          |        |   | 213 |          
|                                                          |                                       |                                   |        |            |        |  
|                                                          |                                       | Net (loss) income                 |        | $          | (1,891 | ) |     | $         | 300    | 
|                                                          |                                       |                                   |        |            |        |  
|Earnings per share:                                       |                                       |                                   |        |            |        |   |     |          
|                                                          | Basic                                 |                                   | $      | (0.06      | )      |   | $   | 0.04      |       
|                                                          | Diluted                               |                                   | $      | (0.06      | )      |   | $   | 0.04      |       
|Weighted average number of common shares
    outstanding: |                                       |                                   |        |            |        |   |     |          
|                                                          | Basic                                 |                                   |        | 29,785,580 |        |   |     | 8,512,194 |       
|                                                          | Diluted                               |                                   |        | 29,785,580 |        |   |     | 8,512,194 |       

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

3



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME


For the Nine Months Ended
September 30,


|         |                                         |                                                                        |                                        |   |       |       |        |   |       |        |  
|-------- | --------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------- | - | ----- | ----- | ------ | - | ----- | ------ | -
|         |                                         | 2002                                                                   |                                        |   | 2001  |      
|         |                                         |                                                                        |                                        |   |       |      
|         |                                         |                                                                       
|         |                                         | (Unaudited)                                                            |                                       
|         |                                         | (in thousands)                                                         |                                       
|Net loss |                                         | $                                                                      | (859                                   | ) |       | $     | (7,029 | )
|         | Other comprehensive income, net of tax: |                                                                        |                                        |   |       |       |        |   |      
|         |                                         | Unrealized gains on securities                                         |                                        |   | 5,678 |       |        |   | 5,050 |       
|         |                                         | Less: reclassification adjustment for gains
    included in net income |                                        |   | (264  | )     |        |   | (405  | )     
|         |                                         |                                                                        |                                        |   |       |      
|         |                                         |                                                                        | Other comprehensive income, net of tax |   |       | 5,414 |        |   |       | 4,645  |  
|         |                                         |                                                                        |                                        |   |       |      
|         |                                         |                                                                        | Comprehensive income (loss)            |   | $     | 4,555 |        |   | $     | (2,384 | )
|         |                                         |                                                                        |                                        |   |       |      

MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

For the Quarter Ended
September 30,


|                  |                                         |                                                                        |                                        |   |       |       |     |  |       |       | 
|----------------- | --------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------- | - | ----- | ----- | --- |  | ----- | ----- | 
|                  |                                         | 2002                                                                   |                                        |   | 2001  |      
|                  |                                         |                                                                        |                                        |   |       |      
|                  |                                         |                                                                       
|                  |                                         | (Unaudited)                                                            |                                       
|                  |                                         | (in thousands)                                                         |                                       
|Net (loss) income |                                         | $                                                                      | (1,891                                 | ) |       | $     | 300 | 
|                  | Other comprehensive income, net of tax: |                                                                        |                                        |   |       |       |     |  |      
|                  |                                         | Unrealized gains on securities                                         |                                        |   | 5,305 |       |     |  | 4,417 |      
|                  |                                         | Less: reclassification adjustment for gains
    included in net income |                                        |   | (463  | )     |     |  | (432  | )    
|                  |                                         |                                                                        |                                        |   |       |      
|                  |                                         |                                                                        | Other comprehensive income, net of tax |   |       | 4,842 |     |  |       | 3,985 | 
|                  |                                         |                                                                        |                                        |   |       |      
|                  |                                         |                                                                        | Comprehensive income                   |   | $     | 2,951 |     |  | $     | 4,285 | 
|                  |                                         |                                                                        |                                        |   |       |      

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

4



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                                |                                                                                       |                                                            |         |         |              |   |         |         |         | 
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------- | ------- | ------------ | - | ------- | ------- | ------- | 
|                                                                |                                                                                       | September 30,                                              |         |         | December 31, |  
|                                                                |                                                                                       | 2002                                                       |         |         | 2001         |  
|                                                                |                                                                                       |                                                            |         |         |              |  
|                                                                |                                                                                       | (Unaudited)                                                |         |         |             
|                                                                |                                                                                       |                                                           
|                                                                |                                                                                       | (in thousands,                                             |        
|                                                                |                                                                                       | except share data)                                         |        
|ASSETS                                                         
|Invested assets:                                                |                                                                                       |                                                            |         |         |              |   |         |        
|                                                                | Debt securities available for sale, at fair value
    (cost of $238,892 and $193,020) |                                                            | $       | 251,836 |              |   | $       | 197,634 |        
|                                                                | Equity securities available for sale, at fair
    value (cost of $1,980 and $2,757)   |                                                            |         | 1,870   |              |   |         | 2,787   |        
|                                                                |                                                                                       |                                                            |         |         |              |  
|                                                                |                                                                                       | Total invested assets                                      |         |         | 253,706      |   |         |         | 200,421 | 
|Cash and cash equivalents                                       |                                                                                       |                                                            | 52,970  |         |              |   | 33,302  |        
|Premiums and agent balances receivable                          |                                                                                       |                                                            | 72,327  |         |              |   | 78,171  |        
|Reinsurance recoverable on paid and unpaid losses               |                                                                                       |                                                            | 205,529 |         |              |   | 222,458 |        
|Prepaid reinsurance premiums                                    |                                                                                       |                                                            | 21,119  |         |              |   | 37,852  |        
|Deferred policy acquisition costs                               |                                                                                       |                                                            | 12,757  |         |              |   | 13,953  |        
|Deferred federal income taxes                                   |                                                                                       |                                                            | 20,266  |         |              |   | 24,506  |        
|Intangible assets                                               |                                                                                       |                                                            | 28,997  |         |              |   | 28,997  |        
|Other assets                                                    |                                                                                       |                                                            | 38,472  |         |              |   | 48,228  |        
|                                                                |                                                                                       |                                                            |         |         |              |  
|                                                                |                                                                                       | Total assets                                               |         | $       | 706,143      |   |         | $       | 687,888 | 
|                                                                |                                                                                       |                                                            |         |         |              |  
|LIABILITIES AND SHAREHOLDERS
    EQUITY                       
|Liabilities:                                                    |                                                                                       |                                                            |         |         |              |   |         |        
|Reserve for losses and loss adjustment expenses                 |                                                                                       | $                                                          | 387,304 |         |              | $ | 394,596 |        
|Unearned premiums                                               |                                                                                       |                                                            | 71,424  |         |              |   | 94,002  |        
|Debt                                                            |                                                                                       |                                                            | 34,577  |         |              |   | 54,741  |        
|Reinsurance funds held and balances payable                     |                                                                                       |                                                            | 17,091  |         |              |   | 26,887  |        
|Other liabilities                                               |                                                                                       |                                                            | 50,488  |         |              |   | 37,346  |        
|                                                                |                                                                                       |                                                            |         |         |              |  
|                                                                |                                                                                       | Total liabilities                                          |         |         | 560,884      |   |         |         | 607,572 | 
|                                                                |                                                                                       |                                                            |         |         |              |  
|Commitments and contingencies (Note 6)                          |                                                                                       |                                                            |         |         |              |   |         |        
|Shareholders Equity:                                           |                                                                                       |                                                            |         |         |              |   |         |        
|Common stock, $.01 par value; authorized
    50,000,000 shares: |                                                                                       |                                                            |         |         |              |   |         |        
|                                                                |                                                                                       | 29,744,894 and 8,512,194 shares issued and
    outstanding |         |         | 297          |   |         |         | 85      | 
|Additional paid-in capital                                      |                                                                                       |                                                            | 128,094 |         |              |   | 67,948  |        
|Retained earnings                                               |                                                                                       |                                                            | 9,244   |         |              |   | 10,034  |        
|Note receivable from officer                                    |                                                                                       |                                                            | (863    | )       |              |   | (824    | )      
|Accumulated other comprehensive income                          |                                                                                       |                                                            | 8,487   |         |              |   | 3,073   |        
|                                                                |                                                                                       |                                                            |         |         |              |  
|                                                                |                                                                                       | Total shareholders equity                                 |         |         | 145,259      |   |         |         | 80,316  | 
|                                                                |                                                                                       |                                                            |         |         |              |  
|                                                                |                                                                                       | Total liabilities and shareholders equity                 |         | $       | 706,143      |   |         | $       | 687,888 | 
|                                                                |                                                                                       |                                                            |         |         |              |  

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

5



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


For the Nine Months Ended
September 30,


|                                                           |                                            |                                           |        |          |         |   |         |          |         |  
|---------------------------------------------------------- | ------------------------------------------ | ----------------------------------------- | ------ | -------- | ------- | - | ------- | -------- | ------- | -
|                                                           |                                            | 2002                                      |        |          | 2001    |  
|                                                           |                                            |                                           |        |          |         |  
|                                                           |                                            |                                          
|                                                           |                                            | (Unaudited)                               |       
|                                                           |                                            | (in thousands)                            |       
|Net cash provided by (used in) operating
    activities    |                                            | $                                         | 879    |          |         | $ | (5,129  | )       
|                                                           |                                            |                                           |        |          |         |  
|Cash flows (used in) provided by investing
    activities: |                                            |                                           |        |          |         |   |         |         
|                                                           | Purchase of debt securities                |                                           |        | (123,036 | )       |   |         | (105,190 | )      
|                                                           | Purchase of equity securities              |                                           |        |         |         |   |         | (450     | )      
|                                                           | Proceeds from sale of debt securities      |                                           |        | 96,881   |         |   |         | 72,481   |        
|                                                           | Proceeds from sale of equity securities    |                                           |        | 900      |         |   |         | 13,715   |        
|                                                           | Other investing activities                 |                                           |        | 3,342    |         |   |         | 2,752    |        
|                                                           |                                            |                                           |        |          |         |  
|                                                           |                                            | Net cash used in investing activities     |        |          | (21,913 | ) |         |          | (16,692 | )
|Cash flows provided by (used in) financing
    activities: |                                            |                                           |        |          |         |   |         |         
|                                                           | Proceeds from bank loans                   |                                           |        | 8,702    |         |   |         | 11,096   |        
|                                                           | Payments on bank loans                     |                                           |        | (28,506  | )       |   |         | (9,904   | )      
|                                                           | Net proceeds from issuance of common stock |                                           |        | 60,525   |         |   |         |         |        
|                                                           | Dividends paid on common stock             |                                           |        |         |         |   |         | (766     | )      
|                                                           | Other financing activities                 |                                           |        | (19      | )       |   |         | 1,483    |        
|                                                           |                                            |                                           |        |          |         |  
|                                                           |                                            | Net cash provided by financing activities |        |          | 40,702  |   |         |          | 1,909   |  
|                                                           |                                            |                                           |        |          |         |  
|Increase (decrease) in cash and cash
    equivalents       |                                            |                                           | 19,668 |          |         |   | (19,912 | )       
|Cash and cash equivalents, beginning of period             |                                            |                                           | 33,302 |          |         |   | 56,838  |         
|                                                           |                                            |                                           |        |          |         |  
|Cash and cash equivalents, end of period                   |                                            | $                                         | 52,970 |          |         | $ | 36,926  |         
|                                                           |                                            |                                           |        |          |         |  

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

6



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##### Table of Contents








NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)


Note 1  Basis of
Presentation

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, Ameritrust Insurance
Corporation, and American Indemnity Insurance Company, Ltd.,
which collectively are referred to as the insurance company
subsidiaries. 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, 2001.

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

Note 2  New Accounting
Pronouncements

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

Upon implementation of SFAS No. 142 in 2002,
the Company is no longer amortizing goodwill. Goodwill
amortization for the nine months and quarter ended
September 30, 2001, was approximately $1.9 million and
$445,000, respectively. In accordance with the transition
provisions, the Company completed the first step of the
transitional goodwill impairment test. The Company evaluated
goodwill for impairment during the second quarter of 2002. This
evaluation involved the use of a fair value approach to each
reporting unit. Based on this evaluation, management determined
there is no impairment to goodwill.

The following table provides net (loss) income
and related per share amounts as of September 30, 2002 and
2001, as reported and adjusted as if the Company had eliminated
the amortization of goodwill effective January 1, 2001 (in
thousands, except share data):

|                                   |         |                   |      |       |      |   |        |       |  
|---------------------------------- | ------- | ----------------- | ---- | ----- | ---- | - | ------ | ----- | -
|                                   |         |                  
|                                   |         | For the           |     
|                                   |         | Nine Months Ended |     
|                                   |         | September 30,     |     
|                                   |         |                   |     
|                                   |         | 2002              |      |       | 2001 |  
|                                   |         |                   |      |       |      |  
|Net loss, as reported              |         | $                 | (859 | )     |      | $ | (7,029 | )    
|Amortization expense               |         |                   |     |       |      |   | 1,890  |      
|Tax effect of amortization expense |         |                   |     |       |      |   | (713   | )    
|                                   |         |                   |      |       |      |  
|Net loss, as adjusted              |         | $                 | (859 | )     |      | $ | (5,852 | )    
|                                   |         |                   |      |       |      |  
|Earnings per share, as adjusted    |         |                   |      |       |      |   |        |      
|                                   | Basic   |                   | $    | (0.05 | )    |   | $      | (0.69 | )
|                                   | Diluted |                   | $    | (0.05 | )    |   | $      | (0.69 | )

7



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                                   |         |               |        |       |      |   |      |      | 
|---------------------------------- | ------- | ------------- | ------ | ----- | ---- | - | ---- | ---- | 
|                                   |         |              
|                                   |         | For the       |       
|                                   |         | Quarter Ended |       
|                                   |         | September 30, |       
|                                   |         |               |       
|                                   |         | 2002          |        |       | 2001 |  
|                                   |         |               |        |       |      |  
|Net (loss) income, as reported     |         | $             | (1,891 | )     |      | $ | 300  |     
|Amortization expense               |         |               |       |       |      |   | 445  |     
|Tax effect of amortization expense |         |               |       |       |      |   | (105 | )   
|                                   |         |               |        |       |      |  
|Net (loss) income, as adjusted     |         | $             | (1,891 | )     |      | $ | 640  |     
|                                   |         |               |        |       |      |  
|Earnings per share, as adjusted    |         |               |        |       |      |   |      |     
|                                   | Basic   |               | $      | (0.06 | )    |   | $    | 0.08 | 
|                                   | Diluted |               | $      | (0.06 | )    |   | $    | 0.08 | 

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

Note 3  Reinsurance

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

At September 30, 2002, the Company had
reinsurance recoverables for paid and unpaid losses of
$205.5 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 26.9% of the total recoverable for paid and unpaid
losses.

The Companys insurance subsidiaries
maintain 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.

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

Under the liability reinsurance treaty, the
reinsurers are responsible for 100% of the amount of each loss
in excess of $250,000 up to $2.0 million per occurrence.
Additionally, the Company has a $3.0 million in excess of
$2.0 million clash coverage, which protects against the
following: the combination of indemnity loss and loss adjustment
expense exceeding $2.0 million: two or more policies, or
insureds responding to the same

8



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


loss; and extra contractual obligations incurred
in excess of policy limits. Facultative reinsurance, which is an
agreement between an insurer and a reinsurer involving a
specific risk, is purchased for individual risks with limits
above $2.0 million to cover 100% of the occurrence excess
amount.

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

In its risk-sharing programs, the Company is also
subject to credit risk with respect to the payment of claims by
its clients captive, rent-a-captive, large deductible
programs, indemnification agreements, and on the portion of risk
exposure either ceded to the captives, or retained by the
clients. The capitalization and credit worthiness of prospective
risk-sharing partners is one of the factors considered by the
Company in entering into and renewing risk-sharing programs. The
Company collateralizes balances due from its risk-sharing
partners through Funds Withheld Trusts or Letters of Credit. The
Company has historically maintained an allowance for the
potential uncollectibility of certain reinsurance balances due
from some risk-sharing partners. On an ongoing basis, an
analysis of these exposures is conducted to determine the
potential exposure to uncollectibility. As of September 30,
2002, management believes this allowance is adequate. To date,
the Company has not, in the aggregate, experienced material
difficulties in ultimately collecting balances from its
risk-sharing partners. No assurance can be given, however,
regarding the future ability of any of the Companys
risk-sharing partners to meet their obligations.

Note 4  Shareholders
Equity and Debt

Shareholders
Equity

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

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

Also in 2002, the Company issued 825,000 stock
options at an exercise price of $3.507 to certain members of the
executive management team. The Company measures compensation
expense under APB No. 25 and has adopted the disclosure
requirements of SFAS No. 123 Accounting for
Stock-Based Compensation.

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.
As of September 30, 2002, the Company repurchased and
retired 42,300 shares of common stock for a total cost of
approximately $114,000. As of November 12, 2002, the
Company repurchased and retired 157,200 shares of common stock
for a total cost of approximately $373,000.

As a result of the Companys public
offering, shareholders equity increased to
$145.3 million, or a book value of $4.88 per common share,
at September 30, 2002 compared to $80.3 million, or a
book value of $9.44 per common share, at December 31, 2001.

Term Loan and
Revolving Line of Credit

On September 25, 2002, the Company
successfully executed a revised credit agreement with its
existing bank. The revised agreement includes a
$20.0 million term loan and a revolving line of credit for
up to

9



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


$8.0 million. The term loan calls for
quarterly amortization of the principal beginning on
October 1, 2002 until July 1, 2006, at which time the
term loan will be paid in full. The quarterly amortization
requires payments of $1.2 million on October 1, 2002
and January 1, 2003; $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. No additional
advances are available under the term loan. The revolving line
of credit will expire on July 1, 2004, and is thereafter
renewable on an annual basis. As of September 30, 2002, the
Company has an outstanding balance of $20.0 million and
$6.6 million on the term loan and revolving line of credit,
respectively.

Pursuant to the term loan agreement, the Company
made a principal payment of $1.2 million on October 1,
2002. Subsequently, the Company made additional principal
payments in the aggregate of $6.3 million to the revolving
line of credit.

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. 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. The
effective interest rate at September 30, 2002, was 4.78%.

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
September 30, 2002, $4.5 million was outstanding under
this line. The Company also has an outstanding subordinated
promissory note payable in the amount of $3.5 million, due
June 30, 2003.

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

Note 5  Regulatory Matters and
Rating Agencies

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

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

Insurance operations are subject to various
leverage tests (e.g. premium to statutory surplus ratios) which
are evaluated by regulators and rating agencies. The Company
performs three gross written premium leverage ratio valuations:
(1) gross written premium to surplus, (2) gross
written premium to surplus, excluding fronted business, and
(3) gross written premium to surplus, excluding fronted
business and including a quota share surplus relief treaty,
which has been cancelled in 2002. The Companys target for
gross and net written

10



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


premium to statutory surplus are 3.0 to 1 and 2.0
to 1, respectively. As previously indicated, the Company
contributed $37.5 million to its insurance company
subsidiaries surplus during the second quarter of 2002. As of
September 30, 2002, on a consolidated basis, gross and net
premium leverage ratios were 2.2 to 1.0 and 1.6 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 under these laws, an insurance
company must submit a report of its RBC level to the insurance
department of its state of domicile as of the end of the
previous calendar year. These laws require increasing degrees of
regulatory oversight and intervention as an insurance
companys RBC declines. The level of regulatory oversight
ranges from requiring the insurance company to inform and obtain
approval from the domiciliary insurance commissioner of a
comprehensive financial plan for increasing its RBC to mandatory
regulatory intervention requiring an insurance company to be
placed under regulatory control in a rehabilitation or
liquidation proceeding.

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

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

Note 6  Commitments and
Contingencies

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

Note 7  Segment
Information

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

Specialty
Risk Management Operations

The specialty risk management segment focuses on
specialty or niche insurance business in which it provides
services and coverages that are tailored to meet the specific
requirements of defined client groups and

11



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


their members. This includes providing services,
such as risk management consulting, claims handling, loss
control, and reinsurance brokering, along with various types of
property and casualty insurance coverage, including
workers compensation, general liability and commercial
multiple peril.

Agency
Operations

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

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

|              |                                         |                                   |   |         |         |   |   |         |         |  
|------------- | --------------------------------------- | --------------------------------- | - | ------- | ------- | - | - | ------- | ------- | -
|              |                                         |                                  
|              |                                         | For the Nine Months               |  
|              |                                         | Ended                             |  
|              |                                         | September 30,                     |  
|              |                                         |                                   |  
|              |                                         | 2002                              |   |         | 2001    |  
|              |                                         |                                   |   |         |         |  
|Revenues:     |                                         |                                   |   |         |         |   |   |        
|              | Net earned premiums                     |                                   | $ | 114,310 |         |   | $ | 121,490 |        
|              | Management fees                         |                                   |   | 17,238  |         |   |   | 19,561  |        
|              | Investment income                       |                                   |   | 10,341  |         |   |   | 10,595  |        
|              | Net realized gain (loss) on investments |                                   |   | 325     |         |   |   | (674    | )      
|              |                                         |                                   |   |         |         |  
|              |                                         | Specialty risk management segment |   |         | 142,214 |   |   |         | 150,972 |  
|              | Agency operations                       |                                   |   | 10,727  |         |   |   | 12,207  |        
|              | Reconciling items                       |                                   |   | 39      |         |   |   | 39      |        
|              | Gain (loss) on sale of subsidiary       |                                   |   | 199     |         |   |   | (989    | )      
|              | Intersegment revenue                    |                                   |   | (379    | )       |   |   | (463    | )      
|              |                                         |                                   |   |         |         |  
|              |                                         | Consolidated revenue              |   | $       | 152,800 |   |   | $       | 161,766 |  
|              |                                         |                                   |   |         |         |  
|Pre-tax loss: |                                         |                                   |   |         |         |   |   |        
|              | Specialty risk management               |                                   | $ | (3,642  | )       |   |   | (8,446  | )      
|              | Agency operations *                     |                                   |   | 4,663   |         |   |   | 3,998   |        
|              | Reconciling items                       |                                   |   | (2,827  | )       |   |   | (5,244  | )      
|              | Gain (loss) on sale of subsidiary       |                                   |   | 199     |         |   |   | (989    | )      
|              |                                         |                                   |   |         |         |  
|              |                                         | Consolidated pre-tax loss         |   | $       | (1,607  | ) |   | $       | (10,681 | )
|              |                                         |                                   |   |         |         |  



---



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

12



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                       |                                  |                                    |   |        |        |   |   |        |        | 
|---------------------- | -------------------------------- | ---------------------------------- | - | ------ | ------ | - | - | ------ | ------ | 
|                       |                                  |                                   
|                       |                                  | For the Quarters                   |  
|                       |                                  | Ended                              |  
|                       |                                  | September 30,                      |  
|                       |                                  |                                    |  
|                       |                                  | 2002                               |   |        | 2001   |  
|                       |                                  |                                    |   |        |        |  
|Revenues:              |                                  |                                    |   |        |        |   |   |       
|                       | Net earned premiums              |                                    | $ | 31,340 |        |   | $ | 40,673 |       
|                       | Management fees                  |                                    |   | 5,587  |        |   |   | 5,623  |       
|                       | Investment income                |                                    |   | 3,738  |        |   |   | 3,641  |       
|                       | Net realized gain on investments |                                    |   | 626    |        |   |   | 647    |       
|                       |                                  |                                    |   |        |        |  
|                       |                                  | Specialty risk management segment  |   |        | 41,291 |   |   |        | 50,584 | 
|                       | Agency operations                |                                    |   | 3,113  |        |   |   | 3,047  |       
|                       | Reconciling items                |                                    |   | 13     |        |   |   | 13     |       
|                       | Loss on sale of subsidiary       |                                    |   |       |        |   |   | (139   | )     
|                       | Intersegment revenue             |                                    |   | (46    | )      |   |   | (110   | )     
|                       |                                  |                                    |   |        |        |  
|                       |                                  | Consolidated revenue               |   | $      | 44,371 |   |   | $      | 53,395 | 
|                       |                                  |                                    |   |        |        |  
|Pre-tax (loss) income: |                                  |                                    |   |        |        |   |   |       
|                       | Specialty risk management        |                                    | $ | (3,425 | )      |   | $ | 3,874  |       
|                       | Agency operations *              |                                    |   | 1,275  |        |   |   | 1,061  |       
|                       | Reconciling items                |                                    |   | (752   | )      |   |   | (4,283 | )     
|                       | Loss on sale of subsidiary       |                                    |   |       |        |   |   | (139   | )     
|                       |                                  |                                    |   |        |        |  
|                       |                                  | Consolidated pre-tax (loss) income |   | $      | (2,902 | ) |   | $      | 513    | 
|                       |                                  |                                    |   |        |        |  



---



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

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

|                         |  |                     |        |   |      |   |        |  
|------------------------ |  | ------------------- | ------ | - | ---- | - | ------ | -
|                         |  |                    
|                         |  | For the Nine Months |       
|                         |  | Ended               |       
|                         |  | September 30,       |       
|                         |  |                     |       
|                         |  | 2002                |        |   | 2001 |  
|                         |  |                     |        |   |      |  
|Holding company expenses |  | $                   | (480   | ) |      | $ | 219    |  
|Gain on debt reduction   |  |                     | 359    |   |      |   |       |  
|Amortization             |  |                     |       |   |      |   | (1,890 | )
|Interest expense         |  |                     | (2,706 | ) |      |   | (3,573 | )
|                         |  |                     |        |   |      |  
|                         |  | $                   | (2,827 | ) |      | $ | (5,244 | )
|                         |  |                     |        |   |      |  

|                         |  |                  |      |   |      |   |        |  
|------------------------ |  | ---------------- | ---- | - | ---- | - | ------ | -
|                         |  |                 
|                         |  | For the Quarters |     
|                         |  | Ended            |     
|                         |  | September 30,    |     
|                         |  |                  |     
|                         |  | 2002             |      |   | 2001 |  
|                         |  |                  |      |   |      |  
|Holding company expenses |  | $                | (170 | ) |      | $ | (2,747 | )
|Amortization             |  |                  |     |   |      |   | (445   | )
|Interest expense         |  |                  | (582 | ) |      |   | (1,091 | )
|                         |  |                  |      |   |      |  
|                         |  | $                | (752 | ) |      | $ | (4,283 | )
|                         |  |                  |      |   |      |  

13



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Note 8  Reclassifications

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

14



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##### Table of Contents



PART I  FINANCIAL
INFORMATION

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

This quarterly report may provide information
including certain statements which constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These include
statements regarding the intent, belief, or current expectations
of the Companys management, including, but not limited to,
those statements that 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.

15



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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 September 30, 2002
and 2001


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

Results of Operations for the Nine Months
Ended September 30, 2002 and 2001



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

Net loss for the nine months ended
September 30, 2002 was ($859,000), or ($0.05) per
share, compared to net loss of ($7.0 million), or
($0.83) per share, for the nine months ended
September 30, 2001. Revenues for the nine months ended
September 30, 2002 decreased $9.0 million, or 5.5%, to
$152.8 million from $161.8 million for the comparable
period in 2001.



| |                                     
| | ------------------------------------
| | Specialty Risk Management Operations

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

|             |                                            |                   |        |         |         |   |        |         |         | 
|------------ | ------------------------------------------ | ----------------- | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|             |                                            |                  
|             |                                            | For the           |       
|             |                                            | Nine Months Ended |       
|             |                                            | September 30,     |       
|             |                                            |                   |       
|             |                                            | 2002              |        |         | 2001    |  
|             |                                            |                   |        |         |         |  
|Revenues:    |                                            |                   |        |         |         |   |        |        
|             | Net earned premiums                        |                   | $      | 114,310 |         |   | $      | 121,490 |        
|             | Management fees                            |                   |        | 17,238  |         |   |        | 19,561  |        
|             | Investment income                          |                   |        | 10,341  |         |   |        | 10,595  |        
|             | Net realized gains (losses) on investments |                   |        | 325     |         |   |        | (674    | )      
|             |                                            |                   |        |         |         |  
|             |                                            | Total revenue     |        | $       | 142,214 |   |        | $       | 150,972 | 
|             |                                            |                   |        |         |         |  
|Pre-tax loss |                                            | $                 | (3,642 | )       |         | $ | (8,446 | )      
|             |                                            |                   |        |         |         |  

Revenues from specialty risk management
operations decreased $8.8 million, or 5.8%, to
$142.2 million for the nine months ended September 30,
2002 from $151.0 million for the comparable period in 2001.
This decrease reflects a $7.2 million, or 5.9%, decrease in
net earned premiums to $114.3 million in the nine months
ended September 30, 2002 from $121.5 million in the
comparable period in 2001. This decrease is the result of a
reduction in earned premium of $13.8 million related to
previously discontinued programs and a decrease of
$26.6 million related to programs terminated for leverage
ratio purposes. Offsetting this decrease is a $25.8 million
reduction in net ceded earned premium associated with the
cancellation in 2002 of the surplus relief treaty relating to
several workers compensation programs and growth in
existing programs of $7.4 million, primarily due to rate
increases.

Management fees decreased $2.3 million, or
11.8%, to $17.2 million from $19.5 million. This
decrease is the result of a one-time $1.6 million profit
sharing fee recognized in the nine months ended
September 30,

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##### Table of Contents



2001. This decrease is also the result of a
$1.3 million decrease in fees for a specific account for
which the client moved the services in-house. Offsetting this
decrease was net growth in existing programs of $512,000.


Net investment income decreased $254,000 or 2.4%,
to $10.3 million for the nine months ended
September 30, 2002, compared to $10.6 million for the
comparable period in 2001. This decrease reflects a decrease in
pre-tax yields to 5.2% in 2002 from 5.8% in 2001.

Net realized gains on investments were $325,000
for the nine months ended September 30, 2002, compared to a
($674,000) loss for the comparable period in 2001. The realized
losses in the nine months ended September 30, 2001, were
primarily the result of impairment charges of $870,000 and
$414,000, related to a Connecticut Surety Company
(CSC) Subordinated Surplus Note and captive
investments, respectively. As of September 30, 2002, there
is approximately $13.5 million and $627,000 remaining in
the investment portfolio in gross unrealized gains and gross
unrealized losses, respectively. As of December 31, 2001,
there was approximately $5.4 million and $711,000 in gross
unrealized gains and gross unrealized losses, respectively.

Specialty risk management operations generated a
pre-tax loss of ($3.6) million for the nine months ended
September 30, 2002 compared to a pre-tax loss of
($8.4) million for the comparable period in 2001. The
Companys loss and loss adjustment expense ratio improved
by 9.1 points to 73.8% for the nine months ended
September 30, 2002, from 82.9% for the same period in 2001.
Results for the nine months ended September 30, 2002, were
impacted by a third quarter $6.5 million pre-tax charge to
strengthen reserves and related expenses, primarily related to
discontinued programs. This is a result of a change in the
selected loss development factors applied to discontinued
business based upon an actuarial judgement that actual incurred
losses are exceeding prior expectations which were established
at December 31, 2001 and in the two interim quarters of
2002. This change represents approximately a 3.1% increase in
overall loss reserves. This increase in incurred losses reflect
a higher level of reported and paid claims, as well as an
increase in underlying case reserves on discontinued business.
Management believes the increase in incurred losses is the
result of recent changes in claims management on discontinued
programs that include claim audits, centralization of claims
handling, and aggressively closing claim files. These actions
caused changes in payment and development patterns, which no
longer follow the Companys or industry development
patterns. The traditional actuarial methods may be causing these
actions to be viewed as an indication of a need for higher
expected ultimate loss selections rather than stronger
underlying case reserves. Management believes that reserves are
adequate, these reserves are based on assumptions about past and
future events. However, there can be no assurance that changes
in claims settlements, legislative activity, or changes in
inflation and economic conditions may cause the need to adjust
these reserves. The accident year loss and loss adjustment
expense ratio is 67.5%. The improvement in the loss ratio in
2002 from 2001 reflects the $13.8 million reduction in
earned premium associated with unprofitable discontinued
business. This improvement also reflects the elimination of the
surplus relief treaty and the impact of rate increases. The
Companys expense ratio was 36.6% for the nine months ended
September 30, 2002, compared to 35.6% in the comparable
period in 2001. Due to the run-off of discontinued and
terminated programs, gross premium is declining and, as a
result, fixed costs as a percentage of revenue temporarily
increase the expense ratio, pending growth in gross written
premium.

Agency
Operations

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

|                |  |                   |        |  |      |   |        | 
|--------------- |  | ----------------- | ------ |  | ---- | - | ------ | 
|                |  |                  
|                |  | For the           |       
|                |  | Nine Months Ended |       
|                |  | September 30,     |       
|                |  |                   |       
|                |  | 2002              |        |  | 2001 |  
|                |  |                   |        |  |      |  
|Net commission  |  | $                 | 10,727 |  |      | $ | 12,207 | 
|Pre-tax income* |  | $                 | 4,663  |  |      | $ | 3,998  | 



---



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

Revenue from agency operations, which consists
primarily of agency commission revenue, decreased
$1.5 million, or 12.1%, to $10.7 million for the nine
months ended September 30, 2002 from $12.2 million for

17



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##### Table of Contents



the comparable period in 2001. This decrease
reflects the sale of a Florida-based agency effective
July 1, 2001. Excluding revenues related to this agency for
the nine months ended September 30, 2001, revenues for the
agency operations would have increased 5.1%.


Agency operations generated pre-tax income of
$4.7 million for the nine months ended September 30,
2002, compared to $4.0 million for the comparable period in
2001. The improvement in the pre-tax margin is the result of
rate increases, overall expense reductions, and a $989,000
impairment recorded in 2001, in conjunction with the sale of the
Florida-based agency.

Other Items

Interest
Expense

Interest expense for the nine months ended
September 30, 2002 decreased $867,000, or 24.3%, to
$2.7 million, from $3.6 million for the comparable
period in 2001. 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 interest rates. On September 25,
2002, the Company entered into a new agreement with more
favorable interest terms than the previous agreement. The
Company anticipates a further reduction in interest expense as a
result of principal payments, as well as the revised interest
costs associated with the new agreement. The applicable margin
in the new 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. The
effective interest rate at September 30, 2002, was 4.78%.

Taxes

Federal income tax benefit for the nine months
ended September 30, 2002 was $748,000, or 46.6% of loss
before taxes. For the same nine months last year, the Company
reflected a federal income tax benefit of $3.7 million, or
34.2% of loss before taxes. The Companys effective tax
rate differs from the 34% statutory rate primarily due to
tax-exempt investment income. Changes in the effective rate over
prior periods are related to changes in the proportion of
tax-exempt investment income to total underwriting results and
lower amortization of goodwill resulting from the adoption of
Statement of Financial Accounting Standards (SFAS)
No. 142 Goodwill and Other Intangible Assets.

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

Overview

Net loss for the quarter ended September 30,
2002 was ($1.9) million, or ($0.06) per share, compared to net
income of $300,000, or $0.04 per share, for the quarter ended
September 30, 2001. Revenues for the quarter ended
September 30, 2002 decreased $9.0 million, or 16.9%,
to $44.4 million from $53.4 million for the comparable
period in 2001.

18



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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 |       
|                      |                                   | September 30,  |       
|                      |                                   |                |       
|                      |                                   | 2002           |        |        | 2001   |  
|                      |                                   |                |        |        |        |  
|Revenues:             |                                   |                |        |        |        |   |       |       
|                      | Net earned premiums               |                | $      | 31,340 |        |   | $     | 40,673 |       
|                      | Management fees                   |                |        | 5,587  |        |   |       | 5,623  |       
|                      | Investment income                 |                |        | 3,738  |        |   |       | 3,641  |       
|                      | Net realized gains on investments |                |        | 626    |        |   |       | 647    |       
|                      |                                   |                |        |        |        |  
|                      |                                   | Total revenue  |        | $      | 41,291 |   |       | $      | 50,584 | 
|                      |                                   |                |        |        |        |  
|Pre-tax (loss) income |                                   | $              | (3,425 | )      |        | $ | 3,874 |       
|                      |                                   |                |        |        |        |  

Revenues from specialty risk management
operations decreased $9.3 million, or 18.4%, to
$41.3 million for the quarter ended September 30,
2002, from $50.6 million for the comparable period in 2001.
This decrease reflects a $9.3 million, or 22.9%, decrease
in net earned premiums to $31.3 million in the quarter
ended September 30, 2002 from $40.6 million in the
comparable period in 2001. This decrease is the result of a
reduction in earned premium of $4.8 million related to
previously discontinued programs, a decrease of
$12.4 million related to programs terminated for leverage
ratio purposes, and a reduction in earned premium of
approximately $800,000 in existing programs due to leverage
purposes. Offsetting this decrease is a $8.7 million
reduction in net ceded earned premium associated with the
cancellation in 2002 of a surplus relief treaty relating to
several workers compensation programs. Management fees
remained relatively flat for the quarter ended
September 30, 2002, compared to the same period in 2001.

Net investment income was $3.7 million for
the quarter ended September 30, 2002, compared to
$3.6 million for the comparable period in 2001. Net
realized gains on investments were $626,000 for the quarter
ended September 30, 2002, compared to $647,000 for the
comparable period in 2001.

Specialty risk management operations generated a
pre-tax loss of ($3.4) million for the quarter ended
September 30, 2002, compared to pre-tax income of
$3.9 million for the comparable period in 2001. The
Companys loss and loss adjustment expense ratio increased
by 5.2 points to 83.3% for the quarter ended September 30,
2002 from 78.1% for the same period in 2001. Results for the
quarter ended September 30, 2002 were impacted by a
$4.3 million after-tax charge to strengthen reserves and
related expenses, primarily related to discontinued programs.
This is a result of a change in the selected loss development
factors applied to discontinued business based upon an actuarial
judgement that actual incurred losses are exceeding prior
expectations which were established at December 31, 2001
and in the two interim quarters of 2002. This change represents
approximately a 3.1% increase in overall loss reserves. This
increase in incurred losses reflect a higher level of reported
and paid claims, as well as an increase in underlying case
reserves on discontinued business. Management believes the
increase in incurred losses is the result of recent changes in
claims management on discontinued programs that include claim
audits, centralization of claims handling, and aggressively
closing claim files. These actions caused changes in payment and
development patterns, which no longer follow the Companys
or industry development patterns. The traditional actuarial
methods may be causing these actions to be viewed as an
indication of a need for higher expected ultimate loss
selections rather than stronger underlying case reserves.
Management believes that reserves are adequate, these reserves
are based on assumptions about past and future events. However,
there can be no assurance that changes in claims settlements,
legislative activity, or changes in inflation and economic
conditions may cause the need to adjust these reserves. The
Companys expense ratio was 36.2% compared to 35.6% in the
comparable period in 2001. Due to the run-off of discontinued
and terminated programs, gross premium is declining and, as a
result, fixed costs as a percentage of revenue temporarily
increase the expense ratio, pending growth in gross written
premium.

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##### Table of Contents



Agency
Operations

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

|                |  |                        |       |  |      |   |       | 
|--------------- |  | ---------------------- | ----- |  | ---- | - | ----- | 
|                |  |                       
|                |  | For the Quarters Ended |      
|                |  | September 30,          |      
|                |  |                        |      
|                |  | 2002                   |       |  | 2001 |  
|                |  |                        |       |  |      |  
|Net commission  |  | $                      | 3,113 |  |      | $ | 3,047 | 
|Pre-tax income* |  | $                      | 1,275 |  |      | $ | 1,061 | 



---



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

Revenue from agency operations, which consists
primarily of agency commission revenue, increased $66,000, or
2.2%, to $3.1 million for the quarter ended
September 30, 2002 from $3.0 million for the
comparable period in 2001.

Agency operations generated pre-tax income of
$1.3 million for the quarter ended September 30, 2002,
compared to $1.1 million for the comparable period in 2001.
The improvement in the pre-tax margin is the result of rate
increases and overall expense reductions.

Other Items

Interest
Expense

Interest expense for the quarter ended
September 30, 2002 decreased $509,000, or 46.7%, to
$582,000 from $1.1 million for the comparable period in
2001. 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 interest rates. The average
outstanding balance during the third quarter of 2002 was
$27.0 million compared to $47.5 million in the
comparable period in 2001. On September 25, 2002, the
Company entered into a new agreement with more favorable
interest terms than the previous agreement. The Company
anticipates a further reduction in interest expense as a result
of principal payments, as well as the revised interest costs
associated with the new agreement. The applicable margin in the
new agreement, which ranges from 200 to 300 basis points
above eurocurrency rates, is determined by the level of the
fixed charge coverage ratio. The effective interest rate at
September 30, 2002, was 4.78%.



| |      
| | -----
| | Taxes

Federal income tax benefit for the quarter ended
September 30, 2002 was $1.0 million, or 34.8% of loss
before taxes. For the same quarter last year, the Company
reflected a federal income tax expense of $213,000, or 41.5% of
income before taxes. The Companys effective tax rate
differs from the 34% statutory rate primarily due to tax-exempt
investment income. Changes in the effective rate over prior
periods are related to changes in the proportion of tax-exempt
investment income to total underwriting results and lower
amortization of goodwill resulting from the adoption of SFAS
No. 142 Goodwill and Other Intangible Assets.

Liquidity and Capital Resources

The principal sources of funds for the Company
and its subsidiaries are insurance premiums, investment income,
proceeds from the maturity and sale of invested assets, risk
management fees, and agency commissions. Funds are primarily
used for the payment of claims, commissions, salaries and
employee benefits, other operating expenses, shareholder
dividends, and debt service. The Company generates operating
cash flow from non-regulated subsidiaries in the form of
commission revenue, outside management fees, and intercompany
management fees. These sources of income are used to meet debt
service, shareholders dividends, and other operating
expenses of the holding company and the non-regulated
subsidiaries. Earnings before interest, taxes, depreciation and
amortization from non-regulated subsidiaries were approximately
$7.7 million and $10.1 million for the
nine months ended September 30, 2002 and 2001,
respectively. These earnings were available for debt service.

20



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##### Table of Contents



Cash flow provided by operations for the
nine months ended September 30, 2002 was $879,000,
compared to cash flow used in operations of $5.1 million
for the comparable period in 2001. The increase in cash flow
from operations primarily reflects an increase in earnings, the
acceleration of collections on reinsurance recoverables, the
one-time cash receipt of $8.2 million associated with the
cancellation of the surplus relief treaty, and increased
collections on premium and agent receivable balances.

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

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

Also in 2002, the Company issued
825,000 stock options at an exercise price of $3.507 to
certain members of the executive management team. The Company
measures compensation expense under APB No. 25 and has
adopted the disclosure requirements of SFAS No. 123
Accounting for Stock-Based Compensation.

On September 25, 2002, the Company
successfully executed a revised credit agreement with its
existing bank. The revised agreement includes a
$20.0 million term loan and a revolving line of credit for
up to $8.0 million. The term loan calls for quarterly
amortization of the principal beginning on October 1, 2002
until July 1, 2006, at which time the term loan will be
paid in full. The quarterly amortization requires payments of
$1.2 million on October 1, 2002 and January 1,
2003; $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. No additional advances
are available under the term loan. The revolving line of credit
will expire on July 1, 2004, and is thereafter renewable on
an annual basis. As of September 30, 2002, the Company has
an outstanding balance of $20.0 million and
$6.6 million on the term loan and revolving line of credit,
respectively.

Pursuant to the term loan agreement, the Company
made a principal payment of $1.2 million on October 1,
2002. Subsequently, the Company made additional principal
payments in the aggregate of $6.3 million to the revolving
line of credit.

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. The effective
interest rate at September 30, 2002, was 4.78%.

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. At September 30,
2002, $4.5 million was outstanding under this line. The
Company also has an outstanding subordinated promissory note
payable in the amount of $3.5 million, due June 30,
2003.

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

As a result of the Companys public
offering, shareholders equity increased to
$145.3 million, or a book value of $4.88 per common
share, at September 30, 2002 compared to
$80.3 million, or a book value of $9.44 per common
share, at December 31, 2001.

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. As of September 30, 2002, the Company repurchased
and retired 42,300 shares of common stock

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##### Table of Contents



for a total cost of approximately $114,000. As of
November 12, 2002, the Company repurchased and retired
157,200 shares of common stock for a total cost of
approximately $373,000.


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

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

Insurance operations are subject to various
leverage tests (e.g. premium to statutory surplus ratios) which
are evaluated by regulators and rating agencies. The Company
performs three gross written premium leverage ratio valuations:
(1) gross written premium to surplus, (2) gross
written premium to surplus, excluding fronted business, and
(3) gross written premium to surplus, excluding fronted
business and including a quota share surplus relief treaty,
which has been cancelled in 2002. The Companys target for
gross and net written premium to statutory surplus are
3.0 to 1 and 2.0 to 1, respectively. As previously
indicated, the Company contributed $37.5 million to its
insurance company subsidiaries surplus during the second quarter
of 2002. As of September 30, 2002, on a consolidated basis,
gross and net premium leverage ratios were 2.2 to 1.0 and
1.6 to 1.0, respectively.

Regulatory and Rating Issues

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

At December 31, 2001, all of the
Companys insurance subsidiaries were in compliance with
RBC requirements, with the exception of Star. Star reported
statutory surplus of $51.6 million at December 31,
2001, compared to the threshold requiring the minimum regulatory
involvement of $59.5 million in 2001. As a result, on
April 12, 2002 the Company submitted a RBC Plan to OFIS
outlining how it intended to achieve compliance. On
April 29, 2002, OFIS approved the Plan. As of
September 30, 2002, Stars statutory surplus increased
$39.1 million to $90.7 million. This increase reflects
the contributed surplus of $37.5 million. As of
September 30, 2002, on a consolidated basis, gross and net
premium leverage ratios were 2.2 to 1.0 and 1.6 to
1.0, respectively, which were below the statutory gross and net
leverage ratios. RBC levels are only measured

22



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##### Table of Contents



as of year end. With the $37.5 million
contributed statutory surplus and the reduction of premium
writings, the Company anticipates that it will be in compliance
with the required RBC level at the next measurement date of
December 31, 2002.


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

New Accounting Pronouncements

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

Upon implementation of SFAS No. 142 in 2002,
the Company is no longer amortizing goodwill. Goodwill
amortization for the nine months and quarter ended
September 30, 2001, was approximately $1.9 million and
$445,000, respectively. In accordance with the transition
provisions, the Company completed the first step of the
transitional goodwill impairment test. The Company evaluated
goodwill for impairment during the second quarter of 2002. This
evaluation involved the use of a fair value approach to each
reporting unit. Based on this evaluation, management determined
there is no impairment to goodwill.

The following table provides net (loss) income
and related per share amounts as of September 30, 2002 and
2001, as reported and adjusted as if the Company had eliminated
the amortization of goodwill effective January 1, 2001 (in
thousands, except share data):

|                                   |         |                   |      |       |      |   |        |       |  
|---------------------------------- | ------- | ----------------- | ---- | ----- | ---- | - | ------ | ----- | -
|                                   |         |                  
|                                   |         | For the           |     
|                                   |         | Nine Months Ended |     
|                                   |         | September 30,     |     
|                                   |         |                   |     
|                                   |         | 2002              |      |       | 2001 |  
|                                   |         |                   |      |       |      |  
|Net loss, as reported              |         | $                 | (859 | )     |      | $ | (7,029 | )    
|Amortization expense               |         |                   |     |       |      |   | 1,890  |      
|Tax effect of amortization expense |         |                   |     |       |      |   | (713   | )    
|                                   |         |                   |      |       |      |  
|Net loss, as adjusted              |         | $                 | (859 | )     |      | $ | (5,852 | )    
|                                   |         |                   |      |       |      |  
|Earnings per share, as adjusted    |         |                   |      |       |      |   |        |      
|                                   | Basic   |                   | $    | (0.05 | )    |   | $      | (0.69 | )
|                                   | Diluted |                   | $    | (0.05 | )    |   | $      | (0.69 | )

|                                   |         |               |        |       |      |   |      |      | 
|---------------------------------- | ------- | ------------- | ------ | ----- | ---- | - | ---- | ---- | 
|                                   |         |              
|                                   |         | For the       |       
|                                   |         | Quarter Ended |       
|                                   |         | September 30, |       
|                                   |         |               |       
|                                   |         | 2002          |        |       | 2001 |  
|                                   |         |               |        |       |      |  
|Net (loss) income, as reported     |         | $             | (1,891 | )     |      | $ | 300  |     
|Amortization expense               |         |               |       |       |      |   | 445  |     
|Tax effect of amortization expense |         |               |       |       |      |   | (105 | )   
|                                   |         |               |        |       |      |  
|Net (loss) income, as adjusted     |         | $             | (1,891 | )     |      | $ | 640  |     
|                                   |         |               |        |       |      |  
|Earnings per share, as adjusted    |         |               |        |       |      |   |      |     
|                                   | Basic   |               | $      | (0.06 | )    |   | $    | 0.08 | 
|                                   | Diluted |               | $      | (0.06 | )    |   | $    | 0.08 | 

FASB has issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets. Under SFAS No. 144, for periods starting
January 1, 2002 or thereafter, discontinued operations are
measured at the lower of carrying value or fair value less costs
to sell, rather than on a net realizable value basis. SFAS

23



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##### Table of Contents



No. 144 also broadens the definition of
discontinued operations to include a component of an entity
(rather than only a segment of a business). The adoption of this
standard did not have a material impact on the Companys
results of operations.







Item
3.     Quantitative and Qualitative
Disclosures About Market Risk


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

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

At September 30, 2002, the fair value of the
Companys investment portfolio was $253.7 million,
99.3% of which is invested in debt securities. The remaining
0.7% is invested in preferred stocks. The Companys market
risk to the investment portfolio is interest rate risk
associated with debt securities. The Companys exposure to
equity price risk is not significant. The Companys
investment philosophy is one of maximizing after-tax earnings
and has historically included significant investments in
tax-exempt bonds. During the year, the Company continued to
increase its allocation to taxable securities to maximize
after-tax income and utilization of the Companys net
operating losses. For the Companys investment portfolio,
there were no significant changes in the Companys primary
market risk exposures or in how those exposures are managed
compared to the year ended December 31, 2001. The Company
does not anticipate significant changes in the Companys
primary market risk exposures or in how those exposures are
managed in future reporting periods based upon what is known or
expected to be in effect.

A sensitivity analysis is defined as the
measurement of potential loss in future earnings, fair values or
cash flows of market sensitive instruments resulting from one or
more selected hypothetical changes in interest rates and other
market rates or prices over a selected period. In the
Companys sensitivity analysis model, a hypothetical change
in market rates is selected that is expected to reflect
reasonable possible near-term changes in those rates. The term
near term means a period of up to one year from the
date of the consolidated financial statements. In its
sensitivity model, the Company uses fair values to measure its
potential loss of debt securities assuming an upward parallel
shift in interest rates to measure the hypothetical change in
fair values. Based upon this sensitivity model, a 100 basis
point increase in interest rates produces a loss in fair value
of market sensitive instruments of approximately
$9.2 million. This loss in fair value only reflects the
impact of interest rate increases on the fair value of the
Companys debt securities. This loss after tax constitutes
4.2% of shareholders equity. The other financial
instruments, which include cash and cash equivalents, equity
securities, premium receivables, reinsurance recoverables, line
of credit and other assets and liabilities, when included in the
sensitivity model, do not produce a material loss in fair values.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Within 90 days prior to the date of this
report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including the Chief Executive Officer and Acting
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
Acting 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 subsequent to the date of the most
recent evaluation by the Companys Chief Executive Officer
and Acting Chief Financial Officer.

24



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##### Table of Contents








PART II  OTHER
INFORMATION







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

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






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

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

|        |      |  |             |                                                                                                                                
|------- | ---- |  | ----------- | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No.     |      |  | Description
|        |      |  |            
|        | 11   |  |             | Statement re: computation of per share earnings.                                                                               
|        | 99.1 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|        | 99.2 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.

(B) Reports on Form 8-K:

The Company filed a Current Report on
Form 8-K on September 20, 2002 enclosing its press
release announcing the authorization of a stock repurchase plan.
This event was reported under Item 5 Other
Events and Item 7(c), Exhibits.

The Company filed a Current Report on
Form 8-K on October 1, 2002 in connection with the
announcement of its successful renegotiation of its credit
facility. This event was reported under Item 5 Other
Events and Item 7(c), Exhibits.

25



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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/ JOSEPH C. HENRY

| |                               
| | ------------------------------
| |                               
| | Joseph C. Henry               
| | Executive Vice President and  
| | Acting Chief Financial Officer

Dated: November 13, 2002

26



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##### Table of Contents








Form of Certification for Quarterly Reports on
Form 10-Q


I, Robert S. Cubbin, Chief Executive Officer,
certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on
    Form 10-Q of Meadowbrook Insurance Group, Inc.;                                                                                                                                                                                                                                                      
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report;                   
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |    |                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                        
| | -----------------------
| | /s/ ROBERT S. CUBBIN   
| |                        
| | Robert S. Cubbin       
| | Chief Executive Officer

Date: November 13, 2002

27



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##### Table of Contents








Form of Certification for Quarterly Reports on
Form 10-Q


I, Joseph C. Henry, Executive Vice President and
Acting Chief Financial Officer, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on
    Form 10-Q of Meadowbrook Insurance Group, Inc.;                                                                                                                                                                                                                                                      
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report;                   
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.



| |                               
| | ------------------------------
| | /s/ JOSEPH C. HENRY           
| |                               
| | Joseph C. Henry               
| | Executive Vice President and  
| | Acting Chief Financial Officer

Date: November 13, 2002

28



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##### Table of Contents








EXHIBIT INDEX


|        |      |  |             |                                                                                                                                
|------- | ---- |  | ----------- | -------------------------------------------------------------------------------------------------------------------------------
|Exhibit |      |  |            
|No.     |      |  | Description
|        |      |  |            
|        | 11   |  |             | Statement re: computation on per share earnings                                                                                
|        | 99.1 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.
|        | 99.2 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002.