##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington D.C.
    20549
      Form 10-Q
   þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarter ended September
    30, 2008oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   Commission File Number 1-14094
  Meadowbrook Insurance Group,
    Inc.
 (Exact name of Registrant as
    specified in its charter)
   Michigan

38-2626206(State of
    Incorporation)

(IRS Employer
    Identification No.)    26255
    American Drive,
 Southfield, Michigan 48034
 (Address, zip code of principal
    executive offices)
   (248) 358-1100
 (Registrants telephone
    number, including area code)
   þ o
  Rule 12b-2
  Large accelerated
    filer o

Accelerated
    filer þ

Non-accelerated
    filer o

Smaller reporting
    company o    Rule 12b-2 o þ




---



##### 



TABLE OF
    CONTENTS
   
 PagePART I  FINANCIAL
    INFORMATIONITEM 1



FINANCIAL STATEMENTSConsolidated Balance Sheets (unaudited)

2Consolidated Statements of Income (unaudited)

3Consolidated Statements of Comprehensive Income
    (unaudited)

5Consolidated Statement of Cash Flows
    (unaudited)

6Notes to Consolidated Financial Statements
    (unaudited)

7-27ITEM 2



MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

28-48ITEM 3



QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK

48ITEM 4



CONTROLS AND PROCEDURES

50PART II  OTHER INFORMATIONITEM 1



LEGAL PROCEEDINGS

51ITEM 1A  RISK FACTORS

51ITEM 2



UNREGISTERED SALES OF EQUITY SECURITIES AND USE
    OF PROCEEDS

51ITEM 4



SUBMISSION OF MATTERS TO A VOTE OF SECURITY
    HOLDERS

51ITEM 6



EXHIBITS

52SIGNATURES

53EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION   1




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  CONSOLIDATED
    BALANCE SHEETS
  September 30,


December 31,2008


2007(Unaudited)(In thousands, except share data)ASSETSInvestmentsDebt securities available for sale, at fair value (amortized
    cost of $939,697 and $604,829)

$
923,959


$
610,756Equity securities available for sale, at fair value (amortized
    cost of $32,948 and $0)


28,671



Cash and cash equivalents


102,207



40,845Accrued investment income


10,665



6,473Premiums and agent balances receivable, net


130,536



87,341Reinsurance recoverable on:Paid losses


3,813



1,053Unpaid losses


253,936



198,461Prepaid reinsurance premiums


35,869



17,763Deferred policy acquisition costs


58,033



26,926Deferred federal income taxes


39,648



14,936Goodwill


108,590



43,497Other intangible assets


48,616



17,078Other assets


62,385



48,837Total assets

$
1,806,928


$
1,113,966LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesLosses and loss adjustment expenses

$
879,712


$
540,002Unearned premiums


293,236



153,927Debt


62,625



Debentures


80,930



55,930Accounts payable and accrued expenses


26,016



22,604Reinsurance funds held and balances payable


26,442



16,416Payable to insurance companies


3,240



6,231Other liabilities


12,142



16,962Total liabilities


1,384,343



812,072Shareholders EquityCommon stock, $0.01 stated value; authorized
    75,000,000 shares; 57,644,022 and 36,996,287 shares
    issued and outstanding


576



370Additional paid-in capital


316,002



194,621Retained earnings


120,496



104,274Note receivable from officer


(857
)


(870
)Accumulated other comprehensive (loss) income


(13,632
)


3,499Total shareholders equity


422,585



301,894Total liabilities and shareholders equity

$
1,806,928


$
1,113,966    2




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##### Table of Contents



PART 1 
    FINANCIAL INFORMATION  ITEM 1
    FINANCIAL
    STATEMENTS  MEADOWBROOK
    INSURANCE GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF INCOME
 For the Nine Months Ended September 30,
  2008


2007(Unaudited)(In thousands, except share data)RevenuesPremiums earnedGross

$
306,205


$
251,605Ceded


(58,909
)


(51,873
)Net earned premiums


247,296



199,732Net commissions and fees


33,972



35,613Net investment income


24,687



19,173Net realized losses


(7,467
)


(186
)Total revenues


298,488



254,332ExpensesLosses and loss adjustment expenses


193,805



144,880Reinsurance recoveries


(48,670
)


(31,512
)Net losses and loss adjustment expenses


145,135



113,368Salaries and employee benefits


43,954



42,181Policy acquisition and other underwriting expenses


45,333



39,739Other administrative expenses


24,847



23,882Amortization expense


4,645



1,309Interest expense


4,898



4,631Total expenses


268,812



225,110Income before taxes and equity earnings


29,676



29,222Federal and state income tax expense


10,128



8,829Equity earnings of affiliates


143



271Net income

$
19,691


$
20,664Earnings Per ShareBasic

$
0.49


$
0.65Diluted

$
0.48


$
0.65Weighted average number of common sharesBasic


40,524,956



31,666,032Diluted


40,657,894



31,761,244Dividends paid per common share

$
0.06


$
    3




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF INCOME
 For the Three Months Ended September 30,
  2008


2007(Unaudited)(In thousands, except share data)RevenuesPremiums earnedGross

$
126,690


$
84,791Ceded


(22,447
)


(17,454
)Net earned premiums


104,243



67,337Net commissions and fees


12,309



13,319Net investment income


10,622



6,788Net realized losses


(7,290
)


(200
)Total revenues


119,884



87,244ExpensesLosses and loss adjustment expenses


85,647



43,498Reinsurance recoveries


(21,715
)


(6,483
)Net losses and loss adjustment expenses


63,932



37,015Salaries and employee benefits


17,056



15,750Policy acquisition and other underwriting expenses


19,470



12,927Other administrative expenses


8,055



8,890Amortization expense


1,531



622Interest expense


2,333



1,476Total expenses


112,377



76,680Income before taxes and equity earnings


7,507



10,564Federal and state income tax expense


3,338



3,219Equity earnings of affiliates


26



210Net income

$
4,195


$
7,555Earnings Per ShareBasic

$
0.09


$
0.21Diluted

$
0.09


$
0.21Weighted average number of common sharesBasic


47,465,462



35,293,796Diluted


47,595,572



35,378,119Dividends paid per common share

$
0.02


$
    4




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
 CONSOLIDATED
    STATEMENTS OF COMPREHENSIVE INCOMEFor the Nine Months Ended September 30,  2008


2007(Unaudited)(In thousands)Net income

$
19,691


$
20,664Other comprehensive income, net of tax:Unrealized (losses) gains on securities


(21,894
)


344Net deferred derivative losses  hedging activity


(170
)


(176
)Less: reclassification adjustment for losses included in net
    income


4,933



19Other comprehensive (losses) gains, net of tax


(17,131
)


187Comprehensive income

$
2,560


$
20,851   MEADOWBROOK
    INSURANCE GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF COMPREHENSIVE INCOME
    For the Three Months Ended September 30,
  2008


2007(Unaudited)(In thousands)Net income

$
4,195


$
7,555Other comprehensive income, net of tax:Unrealized (losses) gains on securities


(17,218
)


4,520Net deferred derivative losses  hedging activity


(285
)


(289
)Less: reclassification adjustment for losses (gains) included in
    net income


4,759



(2
)Other comprehensive losses, net of tax


(12,744
)


4,229Comprehensive (loss) income

$
(8,549
)

$
11,784    5




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  CONSOLIDATED
    STATEMENTS OF CASH FLOWS
 For the
    Nine Months Ended September 30,
  2008


2007(Unaudited)(In thousands)Cash Flows From Operating ActivitiesNet income

$
19,691


$
20,664Adjustments to reconcile net income to net cash provided by
    operating activities:Amortization of other intangible assets


4,645



1,309Amortization of deferred debenture issuance costs


375



236Depreciation of furniture, equipment, and building


2,590



2,280Net accretion of discount and premiums on bonds


2,211



2,031Loss on sale of investments, net


7,589



30Gain on sale of fixed assets


(66
)


(66
)Stock-based employee compensation






2Incremental tax benefits from stock options exercised


(80
)


(656
)Long-term incentive plan expense


594



596Deferred income tax expense (benefit)


867



(1,058
)Changes in operating assets and liabilities:Decrease (increase) in:Premiums and agent balances receivable


(6,699
)


(13,138
)Reinsurance recoverable on paid and unpaid losses


(12,713
)


4,701Prepaid reinsurance premiums


(412
)


4,484Deferred policy acquisition costs


(3,671
)


115Other assets


10,628



686Increase (decrease) in:Losses and loss adjustment expenses


50,178



27,907Unearned premiums


13,050



6,628Payable to insurance companies


(2,991
)


390Reinsurance funds held and balances payable


(3,885
)


(2,318
)Other liabilities


(4,108
)


(2,599
)Total adjustments


58,102



31,560Net cash provided by operating activities


77,793



52,224Cash Flows From Investing ActivitiesPurchase of debt securities available for sale


(291,299
)


(293,932
)Proceeds from sales and maturities of debt securities available
    for sale


326,063



213,633Capital expenditures


(2,331
)


(2,289
)Purchase of books of business


(544
)


(75
)Acquisition of U.S. Specialty Underwriters, Inc.(1)


(20,971
)


(12,644
)Merger with ProCentury, net of cash acquired


(81,467
)


Other investing activities


(2,048
)


(110
)Net cash used in investing activities


(72,597
)


(95,417
)Cash Flows From Financing ActivitiesProceeds from lines of credit


73,000



19,025Payment of lines of credit


(10,375
)


(26,025
)Book overdrafts


(293
)


218Dividend paid on common stock


(2,644
)


Stock options exercised


4



(315
)Cash payment for payroll taxes associated with long-term
    incentive plan net stock issuance






(1,841
)Incremental tax benefits from stock options exercised


80



656Net proceeds received from public equity offering






58,585Share repurchases


(3,523
)


Other financing activities


(83
)


(194
)Net cash provided by financing activities


56,166



50,109Net increase in cash and cash equivalents


61,362



6,916Cash and cash equivalents, beginning of period


40,845



42,876Cash and cash equivalents, end of period

$
102,207


$
49,792Supplemental Disclosure of Non-Cash Investing and Financing
    Activities:Common stock portion of purchase price for acquisition of U.S.
    Specialty Underwriters, Inc.

$



$
10,000Common stock portion of purchase price for merger with
    ProCentury Corporation

$
122,725


$
     (1)
    
    Effective January 31, 2008, the Company exercised its
    option to purchase the remainder of the economics related to the
    acquisition of the USSU business.   6




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  NOTE 1 
    Summary of Significant Accounting Policies
  Basis
    of Presentation and Management Representation
  Note 2
    ~
    ProCentury Merger
        Form 10-K,
   7




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Revenue
    Recognition
                   8




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Earnings
    Per Share
        Recent
    Accounting Pronouncements
  , Fair Value
    Measurements Note 6  Fair Value
    Measurements.
  The Fair Value Option for Financial Assets and
    Financial Liabilities  Including an amendment of FASB
    Statement No. 115 instrument-by-instrument
  Business Combinations
 9




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of Accounting Research
    Bulletin No. 51
  Disclosures about Derivative Instruments and Hedging
    Activities Accounting for
    Derivative Instruments and Hedging Activities.
  FAS 142-3, Determination of the Useful Life of Intangible
    Assets. FAS 142-3 Goodwill and Other Intangible
    Assets.
  The Hierarchy of Generally Accepted Accounting
    Principles. The Meaning of Present Fairly in
    Conformity With Generally Accepted Accounting Principles.
  Accounting for Financial Guarantee Insurance
    Contracts-an interpretation of FASB Statement
    No. 60. Accounting and Reporting by Insurance
    Enterprises. Accounting for
    Contingencies.
 10




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    NOTE 2 
    ProCentury
    Merger  30-day
          Business
    Combinations,
  Cash consideration portion of purchase price

$
99,073Value of equity issued for stock consideration portion of
    purchase price


122,725Transaction related costs of Meadowbrook


5,383Purchase price

$
227,181    11




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    September 30, 2008(In thousands)ASSETSCash

$
23,248Investments


412,542Agent balances


36,497Deferred policy acquisition costs


27,435Federal income taxes recoverable


7,386Deferred taxes


16,551Reinsurance recoverables


45,522Prepaid insurance premiums


17,695Goodwill


48,812Other intangible assets


26,000Other assets


28,176Total Assets

$
689,864LIABILITIESLosses and loss adjustment expenses

$
289,533Unearned premiums


126,259Reinsurance funds held and balances payable


13,911Debentures


25,000Other liabilities


7,980Total Liabilities


462,683Purchase price

$
227,181     Three Months Ended


Nine Months EndedSeptember 30,


September 30,2008


2007


2008


2007(In thousands)Revenues

$
138,108


$
148,492


$
421,710


$
437,573Expenses(1)


143,323



129,659



394,991



383,036Income before taxes and equity earnings


(5,215
)


18,833



26,719



54,537Income tax expense


(844
)


5,729



9,057



16,538Net income

$
(4,371
)

$
13,104


$
17,662


$
37,999     (1)
    
    The pro forma results for the three months and nine months ended
    September 30, 2008, include approximately $7.0 million
    in expenses related to transaction costs and restructuring
    charges ProCentury incurred in conjunction with the Merger. 12




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   NOTE 3 
    Stock
    Options, Long Term Incentive Plan, and Deferred Compensation
    Plan  Stock
    Options
      Weighted-AverageExerciseOptions


PriceOutstanding as of December 31, 2007


132,052


$
14.51Exercised


(31,745
)

$
2.17Expired and/or forfeited


(35,557
)

$
22.75Outstanding as of September 30, 2008


64,750


$
16.03Exercisable as of September 30, 2008


64,250


$
16.11     Options Outstanding


Options ExercisableWeighted-


Weighted-





Weighted-Average


Average





AverageRemaining


Exercise





ExerciseRange of Exercise Prices

Options


Life (Years)


Price


Options


Price$6.48


1,500



1.2


$
6.48



1,000


$
6.48$10.91 to $24.6875


63,250



0.3


$
16.26



63,250


$
16.2664,750



0.3


$
16.03



64,250


$
16.11     Long
    Term Incentive Plan
   13




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    2004-2006 2007-2009 2004-2006
  Deferred
    Compensation Plan
    NOTE 4 
    Reinsurance  Accounting and
    Reporting for Reinsurance for Short-Duration and Long-Duration
    Contracts.
      rent-a-captive
 14




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                   15




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
                     16




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              NOTE 5 
    Debt
  Credit
    Facilities
       17




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Senior
    Debentures
          Junior
    Subordinated Debentures
           18




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
              NOTE 6 
    Fair
    Value Measurements  Accounting for Certain
    Investments in Debt and Equity Securities. Accounting for
    Derivative Instruments and Hedging Activities.
      
    Level 1  Observable unadjusted quoted prices in
    active markets for identical securities. 19




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
     
    Level 2  Observable inputs other than quoted
    prices in active markets for identical securities, including:
    quoted prices in active markets for similar securities; quoted
    prices for identical or similar securities in markets that are
    not active; inputs other than quoted prices that are observable
    for the security, e.g., interest rates, yield curves observable
    at commonly quoted intervals, volatilities, prepayment speeds,
    credit risks, default rates; inputs derived from or corroborated
    by observable market data by correlation or other means.      
    Level 3  Unobservable inputs, including the
    reporting entitys own data, e.g., cash flow estimates, as
    long as there are no contrary data indicating market
    participants would use different assumptions.        Fair Value Measurements UsingQuoted Prices


Significantin Active


Other


SignificantMarkets for


Observable


UnobservableIdentical Assets


Inputs


InputsTotal


(Level 1)


(Level 2)


(Level 3)Available-for-Sale Securities

$
952,630


$
26,672


$
915,056


$
10,902Derivative  interest rate swaps

$
(806
)

$



$
(806
)

$
  20




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Fair ValueMeasurementUsing SignificantUnobservableInputs - Level 3Balance as of June 30, 2008

$
1,621Total gains or losses (realized/unrealized):Included in earnings


17Included in other comprehensive income


25Purchases, issuances and settlements(1)


9,239Transfers in and out of Level 3


Balance as of September 30, 2008

$
10,902The amount of total gains or losses for the period included in
    earnings (or changes in net assets) attributable to the change
    in unrealized gains or losses relating to assets still held at
    the reporting date

$
25   Fair ValueMeasurementUsing SignificantUnobservableInputs - Level 3Balance as of December 31, 2007

$
Total gains or losses (realized/unrealized):Included in earnings


18Included in other comprehensive income


(27
)Purchases, issuances and settlements(1)


10,911Transfers in and out of Level 3


Balance as of September 30, 2008

$
10,902The amount of total gains or losses for the period included in
    earnings (or changes in net assets) attributable to the change
    in unrealized gains or losses relating to assets still held at
    the reporting date

$
(27
)     (1)
    
    Relates to the invested assets acquired in conjunction with the
    ProCentury Merger, and a $6.1 million purchase of MBS.  NOTE 7 
    Derivative
    Instruments   21




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for Derivative
    Instruments and Hedging Activities,
  non-amortizing,
  non-amortizing,
  non-amortizing,
  non-amortizing,
  non-amortizing,
    non-amortizing,
 22




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  non-amortizing,
        NOTE 8 
    Shareholders
    Equity  Note 2 ~ ProCentury Merger
       23




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    NOTE 9 
    Segment
    Information    Specialty
    Risk Management Operations
     24




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Agency
    Operations
      For the Nine MonthsEnded September 30,2008


2007RevenuesNet earned premiums

$
247,296


$
199,732Management fees


17,178



18,663Claims fees


6,789



6,788Loss control fees


1,602



1,632Reinsurance placement


571



603Investment income


24,177



18,514Net realized losses


(7,467
)


(186
)Specialty risk management


290,146



245,746Agency operations


8,640



9,074Miscellaneous income


510



659Intersegment revenue


(807
)


(1,147
)Consolidated revenue

$
298,489


$
254,332Pre-tax income:Specialty risk management

$
40,695


$
35,867Agency operations(1)


1,328



1,578Non-allocated expenses


(12,347
)


(8,223
)Consolidated pre-tax income

$
29,676


$
29,222   For the Three MonthsEnded September 30,2008


2007RevenuesNet earned premiums

$
104,243


$
67,337Management fees


6,972



8,376Claims fees


2,304



2,337Loss control fees


467



489Reinsurance placement


177



185Investment income


10,455



6,593Net realized losses


(7,290
)


(200
)Specialty risk management


117,328



85,117Agency operations


2,631



2,329Miscellaneous income


166



195Intersegment revenue


(241
)


(397
)Consolidated revenue

$
119,884


$
87,244Pre-tax income:Specialty risk management

$
12,166


$
13,700Agency operations(1)


391



(143
)Non-allocated expenses


(5,050
)


(2,993
)Consolidated pre-tax income

$
7,507


$
10,564  25




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    (1)
    
    The Companys agency operations include an allocation of
    corporate overhead, which includes expenses associated with
    accounting, information services, legal, and other corporate
    services. The corporate overhead allocation excludes those
    expenses specific to the holding company. For the nine months
    ended September 30, 2008 and 2007, the allocation of
    corporate overhead to the agency operations segment was
    $2.1 million and $2.3 million, respectively. For the
    three months ended September 30, 2008 and 2007, the
    allocation of corporate overhead to the agency operations
    segment was $401,000 and $920,000, respectively.    For the Nine MonthsEnded September 30,2008


2007Holding company expenses

$
(2,804
)

$
(2,283
)Amortization


(4,645
)


(1,309
)Interest expense


(4,898
)


(4,631
)$
(12,347
)

$
(8,223
)   For the Three MonthsEnded September 30,2008


2007Holding company expenses

$
(1,186
)

$
(895
)Amortization


(1,531
)


(622
)Interest expense


(2,333
)


(1,476
)$
(5,050
)

$
(2,993
)   NOTE 10 
    Income
    Taxes  Accounting for Uncertainty in Income Taxes 
    an interpretation of FASB Statement No. 109
        NOTE 11 
    Commitments
    and Contingencies   26




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##### Table of Contents



MEADOWBROOK
    INSURANCE GROUP, INC.
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Accounting for
    Contingencies,
  NOTE 12 
    U.S.
    Specialty Underwriters, Inc. Acquisition         27




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##### Table of Contents



ITEM 2MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
    RESULTS OF OPERATIONS
  For the
    Periods ended September 30, 2008 and 2007
  Forward-Looking
    Statements
  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
    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; ability to obtain 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; attainment of certain
    processing efficiencies; changing rates of inflation; general
    economic conditions and other risks identified in our reports
    and registration statements filed with the Securities and
    Exchange Commission. We are not under any obligation to (and
    expressly disclaim any such obligation to) update or alter our
    forward-looking statements whether as a result of new
    information, future events or otherwise.
  Business
    Overview
    30-day
     28




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##### Table of Contents



Critical
    Accounting Policies
  Form 10-K
  RESULTS
    OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND
    2007
  Executive
    Overview
             29




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##### Table of Contents



30-day
    Results
    of Operations
       30




---



##### Table of Contents



Specialty
    Risk Management Operations
    For the Nine MonthsEndedSeptember 30,2008


2007Revenue:Net earned premiums

$
247,296


$
199,732Management fees


17,178



18,663Claims fees


6,789



6,788Loss control fees


1,602



1,632Reinsurance placement


571



603Investment income


24,177



18,514Net realized losses


(7,467
)


(186
)Total revenue

$
290,146


$
245,746Pre-tax income:Specialty risk management operations

$
40,695


$
35,867            31




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##### Table of Contents



Other
    Items ~ Reserves
    Agency
    Operations
    For the Nine MonthsEndedSeptember 30,2008


2007Net commission

$
8,640


$
9,074Pre-tax income(1)

$
1,328


$
1,578     (1)
    
    Our agency operations include an allocation of corporate
    overhead, which includes expenses associated with accounting,
    information services, legal, and other corporate services. The
    corporate overhead allocation excludes those expenses specific
    to the holding company. For the nine months ended
    September 30, 2008 and 2007, the allocation of corporate
    overhead to the agency operations segment was $2.1 million
    and $2.3 million, respectively.   32




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##### Table of Contents



Other
    Items
  Reserves
    Minimum


MaximumReserve


Reserve


SelectedLine of Business

Range


Range


ReservesWorkers Compensation(1)

$
161,580


$
179,024


$
172,944Commercial Multiple Peril/General Liability


281,758



335,657



312,114Commercial Automobile


84,216



94,176



90,686Other


46,849



52,785



50,032Total Net Reserves

$
574,403


$
661,642


$
625,776     (1)
    
    Includes Residual Markets     33




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##### Table of Contents



AdditionalReserves at


Reserves at


Total


Incurred Losses(1)


Paid Losses(1)


Reserves atDecember 31,


August 1,


Beginning


Current


Prior


Total


Current


Prior


Total


September 30,Line of Business

2007


2008


Reserves


Year


Years


Incurred


Year


Years


Paid


2008Workers Compensation

$
141,359


$
3,259


$
144,618


$
46,156


$
(7,778
)

$
38,378


$
3,707


$
30,643


$
34,350


$
148,646Residual Markets


25,428







25,428



5,965



(2,268
)


3,697



1,662



3,165



4,827



24,298Commercial Multiple Peril/General Liability


87,812



203,613



291,425



38,658



6,531



45,189



1,992



22,508



24,500



312,114Commercial Automobile


69,426



17,234



86,660



37,807



(4,145
)


33,662



8,186



21,450



29,636



90,686Other


17,516



23,633



41,149



28,873



(3,599
)


25,274



11,364



5,027



16,391



50,032Net Reserves


341,541



247,739



589,280


$
157,459


$
(11,259
)

$
146,200


$
26,911


$
82,793


$
109,704



625,776Reinsurance Recoverable


198,461



41,793



240,254



























253,936Consolidated

$
540,002


$
289,532


$
829,534


























$
879,712   Re-estimatedReserves at


DevelopmentAdditional





September 30,


as aReserves at


Reserves at


Total


2008 on


Percentage ofDecember 31,


August 1,


Beginning


Prior Years


Prior YearLine of Business

2007


2008


Reserves


(1)


ReservesWorkers Compensation

$
141,359


$
3,259


$
144,618


$
136,840



− 5.4
%Commercial Multiple Peril/General Liability


87,812



203,613



291,425



297,956



2.2
%Commercial Automobile


69,426



17,234



86,660



82,515



− 4.8
%Other


17,516



23,633



41,149



37,550



− 8.7
%Sub-total


316,113



247,739



563,852



554,861



− 1.6
%Residual Markets


25,428







25,428



23,160



− 8.9
%Total Net Reserves

$
341,541


$
247,739


$
589,280


$
578,021



− 1.9
%     (1)
    
    Paid and Incurred Loss & LAE activity includes that
    related to ProCentury of $247.7 million of net
    loss & LAE reserves added at August 1, 2008.
    Therefore, incurred and paid loss & LAE activity on
    these reserves do not constitute a full calendar year.  Workers Compensation Excluding Residual
    Markets
  Commercial Multiple Peril and General
    Liability
 34




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##### Table of Contents



Commercial Automobile
  Other
  Residual Markets
  Salaries
    and Employee Benefits and Other Administrative
    Expenses
        Amortization
    Expense
   35




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##### Table of Contents



Interest
    Expense
  Liquidity and Capital Resources
  Income
    Taxes
    Other
    Than Temporary Impairments
      and/or
 36




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##### Table of Contents



September 30, 2008Less Than 12 Months


Greater Than 12 Months


TotalFair Value of





Fair Value of





Fair Value ofInvestments





Investments





Investmentswith


Gross


with


Gross


with


GrossUnrealized


Unrealized


Unrealized


Unrealized


Unrealized


UnrealizedLosses


Losses


Losses


Losses


Losses


LossesDebt Securities:Debt securities issued by U.S. government and agencies

$
8,372


$
(105
)

$



$



$
8,372


$
(105
)Obligations of states and political subdivisions


325,976



(10,938
)


4,099



(260
)


330,075



(11,198
)Corporate securities


81,283



(3,904
)


9,617



(2,223
)


90,900



(6,127
)Mortgage and asset-backed securities


85,778



(3,346
)


20,518



(1,098
)


106,296



(4,444
)Equity Securities


27,845



(4,285
)










27,845



(4,285
)Totals

$
529,254


$
(22,578
)

$
34,234


$
(3,581
)

$
563,488


$
(26,159
)   December 31, 2007Less Than 12 Months


Greater Than 12 Months


TotalFair Value of





Fair Value of





Fair Value ofInvestments





Investments





Investmentswith


Gross


with


Gross


with


GrossUnrealized


Unrealized


Unrealized


Unrealized


Unrealized


UnrealizedLosses


Losses


Losses


Losses


Losses


LossesDebt Securities:Debt securities issued by U.S. government and agencies

$



$



$
5,963


$
(29
)

$
5,963


$
(29
)Obligations of states and political subdivisions


19,400



(68
)


45,177



(255
)


64,577



(323
)Corporate securities


15,564



(415
)


30,601



(513
)


46,165



(928
)Mortgage and asset-backed securities


9,116



(95
)


47,963



(520
)


57,079



(615
)Totals

$
44,080


$
(578
)

$
129,704


$
(1,317
)

$
173,784


$
(1,895
)     RESULTS
    OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AND
    2007
  Results
    of Operations
     37




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##### Table of Contents



Specialty
    Risk Management Operations
    For the Three MonthsEnded September 30,2008


2007Revenue:Net earned premiums

$
104,243


$
67,337Management fees


6,972



8,376Claims fees


2,304



2,337Loss control fees


467



489Reinsurance placement


177



185Investment income


10,455



6,593Net realized losses


(7,290
)


(200
)Total revenue

$
117,328


$
85,117Pre-tax income:Specialty risk management operations

$
12,166


$
13,700      38




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##### Table of Contents



39




---



##### Table of Contents



Agency
    Operations
    For the Three Months Ended September 30,2008


2007Net commission

$
2,631


$
2,329Pre-tax income(1)

$
391


$
(143
)     (1)
    
    Our agency operations include an allocation of corporate
    overhead, which includes expenses associated with accounting,
    information services, legal, and other corporate services. The
    corporate overhead allocation excludes those expenses specific
    to the holding company. For the three months ended
    September 30, 2008 and 2007, the allocation of corporate
    overhead to the agency operations segment was $401,000 and
    $920,000, respectively.      Other
    Items
  Salary
    and Employee Benefits and Other Administrative
    Expenses
       40




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##### Table of Contents



Amortization
    Expense
    Interest
    Expense
  Liquidity and Capital Resources
  Income
    Taxes
    LIQUIDITY
    AND CAPITAL RESOURCES
         41




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##### Table of Contents



Other
    Items
  Debentures
    InterestYear


Year





Rate at


PrincipalDescription

Callable


Due


Interest Rate Terms


09/30/08(1)


AmountJunior subordinated debentures


2008



2033



Three-month LIBOR, plus 4.05
%


7.81
%

$
10,310Senior debentures


2009



2034



Three-month LIBOR, plus 4.00
%


6.80
%


13,000Senior debentures


2009



2034



Three-month LIBOR, plus 4.20
%


7.01
%


12,000Junior subordinated debentures


2010



2035



Three-month LIBOR, plus 3.58
%


6.40
%


20,620Junior subordinated debentures(2)


2007



2032



Three-month LIBOR, plus 4.00
%


6.81
%


15,000Junior subordinated debentures(2)


2008



2033



Three-month LIBOR, plus 4.10
%


6.90
%


10,000Total


$
80,930     (1)
    
    The underlying three-month LIBOR rate varies as a result of the
    interest rate reset dates used in determining the three-month
    LIBOR rate, which varies for each long-term debt item each
    quarter.(2)
    
    Represents the junior subordinated debentures acquired in
    conjunction with the Merger.          Interest
    Rate Swaps
   42




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##### Table of Contents



Accounting for Derivative
    Instruments and Hedging Activities,
  non-amortizing,
  non-amortizing,
  non-amortizing,
  non-amortizing,
  non-amortizing,
    non-amortizing,
  non-amortizing,
 43




---



##### Table of Contents



Credit
    Facilities
        Investment
    Portfolio
      Shareholders
    Equity
   44




---



##### Table of Contents



Procentury
    Merger
  30-day
    USSU
    Acquisition
     45




---



##### Table of Contents



Adjusted
    Expense Ratio
    For the Three MonthsFor the Nine Months Ended September 30,


Ended September 30,2008


2007


2008


2007Net earned premiums

$
247,296


$
199,732


$
104,243


$
67,337Less: Consolidated net loss and LAE


145,135



113,368



63,932



37,015Intercompany claim fees


11,243



9,945



4,508



3,297Unconsolidated net loss and LAE


156,378



123,313



68,440



40,312Consolidated policy acquisition and other underwriting expenses


45,400



39,739



19,537



12,927Intercompany administrative and other underwriting fees


30,741



28,246



12,821



9,916Unconsolidated policy acquisition and other underwriting expenses


76,141



67,985



32,358



22,843Underwriting income

$
14,777


$
8,434


$
3,445


$
4,182GAAP combined ratio as reported


94.0
%


95.7
%


96.7
%


93.8
%Specialty risk management operations pre-tax income

$
40,695


$
35,867


$
12,166


$
13,700Less: Underwriting income


14,777



8,434



3,445



4,182Net investment income and capital gains


17,220



18,987



3,332



6,588Fee-based operations pre-tax income


8,698



8,446



5,389



2,930Agency operations pre-tax income


1,328



1,578



391



(143
)Total fee-for-service pre-tax income

$
10,026


$
10,024


$
5,780


$
2,787GAAP expense ratio as reported


30.8
%


34.0
%


31.0
%


33.9
%Adjustment to include pre-tax income from total fee-for-service
    income(1)


4.1
%


5.0
%


5.5
%


4.1
%GAAP expense ratio as adjusted


26.7
%


29.0
%


25.5
%


29.8
%GAAP loss and LAE ratio as reported


63.2
%


61.7
%


65.7
%


59.9
%GAAP combined ratio as adjusted


89.9
%


90.7
%


91.2
%


89.7
%Reconciliation of consolidated pre-tax income:Specialty risk management operations pre-tax income:Fee-based operations pre-tax income

$
8,698


$
8,446


$
5,389


$
2,930Underwriting income


14,777



8,434



3,445



4,182Net investment income and capital gains


17,220



18,987



3,332



6,588Total specialty risk management operations pre-tax income


40,695



35,867



12,166



13,700Agency operations pre-tax income


1,328



1,578



391



(143
)Less: Holding company expenses


2,804



2,283



1,186



895Interest expense


4,898



4,631



2,333



1,476Amortization expense


4,645



1,309



1,531



622Consolidated pre-tax income

$
29,676


$
29,222


$
7,507


$
10,564     (1)
    
    Adjustment to include pre-tax income from total fee-for-service
    income is calculated by dividing total
    fee-for-service
    income by net earned premiums. 46




---



##### Table of Contents



Contractual
    Obligations and Commitments
    Convertible
    Note
    Recent
    Accounting Pronouncements
  , Fair Value
    Measurements.
  The Fair Value Option for Financial Assets and
    Financial Liabilities  Including an amendment of FASB
    Statement No. 115. instrument-by-instrument
  Business Combinations.
  Noncontrolling Interests in Consolidated Financial
    Statements  an amendment of Accounting Research
    Bulletin No. 51
  Disclosures about Derivative Instruments and Hedging
    Activities.
 47




---



##### Table of Contents



FAS 142-3, Determination of the Useful Life of Intangible
    Assets. FAS 142-3 Goodwill and Other Intangible
    Assets.
  The Hierarchy of Generally Accepted Accounting
    Principles. The Meaning of Present Fairly in
    Conformity With
  Accounting for Financial Guarantee Insurance
    Contracts-an interpretation of FASB Statement
    No. 60. Accounting for Contingencies.
  ITEM 3.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     48




---



##### Table of Contents



Rates Down


Rates


Rates Up100bps


Unchanged


100bpsFair Value

$
966,863


$
923,959


$
884,392Yield to Maturity or Call


4.35
%


5.39
%


6.27
%Effective Duration


4.70



5.10



5.20         Accounting for
    Derivative Instruments and Hedging Activities,
 49




---



##### Table of Contents



ITEM 4.
    CONTROLS
    AND PROCEDURES  Evaluation
    of Disclosure Controls and Procedures.
  Rule 13a-15(e) Form 10-Q,
    Changes
    in Internal Control over Financial Reporting
       50




---



##### Table of Contents



PART II 
    OTHER INFORMATION  ITEM 1.
    LEGAL
    PROCEEDINGS  Commitments and Contingencies Form 10-Q
  ITEM 1A.
    RISK
    FACTORS  Form 10-K
  ITEM 2.
    UNREGISTERED
    SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    Total Number


Maximumof Shares


Number ofPurchased as


Shares that mayPart of Publicly


yet beTotal


Average


Announced


RepurchasedNumber of


Price Paid


Plans or


Under the PlansPeriod

Shares


Per Share


Programs


or ProgramsJuly 1  July 31, 2008





$








August 1  August 31, 2008


500,000


$
7.01



500,000



2,500,000September 1  September 30, 2008





$








2,500,000Total


500,000


$
7.01



500,000   ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS       51




---



##### Table of Contents



ITEM 6.
    EXHIBITS    ExhibitNo.

Description10
.1

Credit Agreement, dated July 31, 2008, between Meadowbrook
    Insurance Group, Inc., as the Borrower, Bank of America, N.A.,
    as Administrative Agent and L/C Issuer, KeyBank National
    Association, JPMorgan Chase Bank, N.A. and RBS Citizens N.A., as
    Co-Syndication Agents, the other lenders party hereto, and Banc
    of America Securities LLC, as Sole Lead Arranger and Sole Book
    Manager (incorporated by reference to Exhibit 10.1 from
    Current Report on
    Form 8-K
    filed on July 31, 2008).10
.2

Revolving Credit Note, dated July 31, 2008, between
    Meadowbrook Insurance Group, Inc. and RBS Citizens, National
    Association, D/B/A Charter One (incorporated by reference to
    Exhibit 10.2 from Current Report on
    Form 8-K
    filed on July 31, 2008).10
.3

Term Note, dated July 31, 2008, between Meadowbrook
    Insurance Group, Inc. and RBS Citizens, National Association,
    D/B/A Charter One (incorporated by reference to
    Exhibit 10.3 from Current Report on
    Form 8-K
    filed on July 31, 2008).10
.4

10.4 Revolving Credit Note, dated July 31, 2008, between
    Meadowbrook Insurance Group, Inc. and The PrivateBank and
    Trust Company (incorporated by reference to
    Exhibit 10.4 from Current Report on
    Form 8-K
    filed on July 31, 2008).10
.5

Term Note, dated July 31, 2008, between Meadowbrook
    Insurance Group, Inc. and The PrivateBank and Trust Company
    (incorporated by reference to Exhibit 10.5 from Current
    Report on
    Form 8-K
    filed on July 31, 2008).10
.6

Amended and Restated Executive Employment Agreement, dated
    July 31, 2008, by and between ProCentury Corporation and
    Christopher J. Timm (incorporated by reference to
    Exhibit 10.2 from Current Report on
    Form 8-K,
    filed on July 31, 2008, by ProCentury Corporation).10
.7

Consulting Agreement, dated October 1, 2008, by and among
    Meadowbrook Insurance Group, Inc., Meadowbrook, Inc., and Merton
    J. Segal (incorporated by reference to Exhibit 10.1 from
    Current Report on
    Form 8-K
    filed on September 8, 2008).31
.1

Certification of Robert S. Cubbin, Chief Executive Officer of
    the Corporation, pursuant to Securities Exchange Act
    Rule 13a-14(a).31
.2

Certification of Karen M. Spaun, Senior Vice President and Chief
    Financial Officer of the Corporation, pursuant to Securities
    Exchange Act
    Rule 13a-14(a).32
.1

Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002, signed by Robert S. Cubbin, Chief Executive Officer of
    the Corporation.32
.2

Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002, signed by Karen M. Spaun, Senior Vice President and
    Chief Financial Officer of the Corporation.  52




---



##### Table of Contents



SIGNATURES    Meadowbrook Insurance Group, Inc.
  By:
    /s/  Karen
    M. Spaun      53




---



##### Table of Contents



EXHIBIT INDEX
  ExhibitNo.

Description10
.1

Credit Agreement, dated July 31, 2008, between Meadowbrook
    Insurance Group, Inc., as the Borrower, Bank of America, N.A.,
    as Administrative Agent and L/C Issuer, KeyBank National
    Association, JPMorgan Chase Bank, N.A. and RBS Citizens N.A., as
    Co-Syndication Agents, the other lenders party hereto, and Banc
    of America Securities LLC, as Sole Lead Arranger and Sole Book
    Manager (incorporated by reference to Exhibit 10.1 from
    Current Report on
    Form 8-K
    filed on July 31, 2008).10
.2

Revolving Credit Note, dated July 31, 2008, between
    Meadowbrook Insurance Group, Inc. and RBS Citizens, National
    Association, D/B/A Charter One (incorporated by reference to
    Exhibit 10.2 from Current Report on
    Form 8-K
    filed on July 31, 2008).10
.3

Term Note, dated July 31, 2008, between Meadowbrook
    Insurance Group, Inc. and RBS Citizens, National Association,
    D/B/A Charter One (incorporated by reference to
    Exhibit 10.3 from Current Report on
    Form 8-K
    filed on July 31, 2008).10
.4

Revolving Credit Note, dated July 31, 2008, between
    Meadowbrook Insurance Group, Inc. and The PrivateBank and
    Trust Company (incorporated by reference to
    Exhibit 10.4 from Current Report on
    Form 8-K
    filed on July 31, 2008).10
.5

Term Note, dated July 31, 2008, between Meadowbrook
    Insurance Group, Inc. and The PrivateBank and Trust Company
    (incorporated by reference to Exhibit 10.5 from Current
    Report on
    Form 8-K
    filed on July 31, 2008).10
.6

Amended and Restated Executive Employment Agreement, dated
    July 31, 2008, by and between ProCentury Corporation and
    Christopher J. Timm (incorporated by reference to
    Exhibit 10.2 from Current Report on
    Form 8-K,
    filed on July 31, 2008, by ProCentury Corporation).10
.7

Consulting Agreement, dated October 1, 2008, by and among
    Meadowbrook Insurance Group, Inc., Meadowbrook, Inc., and Merton
    J. Segal (incorporated by reference to Exhibit 10.1 from
    Current Report on
    Form 8-K
    filed on September 8, 2008).31
.1

Certification of Robert S. Cubbin, Chief Executive Officer of
    the Corporation, pursuant to Securities Exchange Act
    Rule 13a-14(a).31
.2

Certification of Karen M. Spaun, Senior Vice President and Chief
    Financial Officer of the Corporation, pursuant to Securities
    Exchange Act
    Rule 13a-14(a).32
.1

Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002, signed by Robert S. Cubbin, Chief Executive Officer of
    the Corporation.32
.2

Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002, signed by Karen M. Spaun, Senior Vice President and
    Chief Financial Officer of the Corporation.  54