##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington D.C. 20549




---

Form 10-Q

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

Commission File Number 1-14094

Meadowbrook Insurance Group, Inc.

(Exact name of registrant as specified in its
charter)


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

26600 Telegraph Road, Southfield, Michigan
48034

(Address, zip code of principal executive
offices)


(248) 358-1100

(Registrants telephone number, including
area code)




---

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

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

The aggregate number of shares of the
Registrants Common Stock, $.01 par value, outstanding on
November 6, 2003 was 29,022,435.



---






---

TABLE OF CONTENTS



|                                                  |                                                 |  |  |  |  |  |  | 
|------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  |  | 
|PART 1 -- FINANCIAL INFORMATION                  
|                                                  | Item 1. Financial Statements                   
|                                                  | CONDENSED CONSOLIDATED BALANCE SHEETS          
|                                                  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                                  | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|PART II -- OTHER INFORMATION                     
|Item 1. Legal Proceedings                        
|Item 2. Changes in Securities and Use of Proceeds
|Item 6. Exhibits and Reports on Form 8-K         
|SIGNATURES                                       
|EXHIBIT INDEX                                    
|TPS Indenture                                    
|Third Amendment to Restated Credit Agreement     
|TPS Purchase Agreement                           
|TPS Amended and Restated Declaration of Trust    
|TPS Guaranty Agreement                           
|Certification of Robert S. Cubbin, CEO           
|Certification of Karen M. Spaun, SVP and CFO     
|906 Certification of Robrt S. Cubbin, CEO        
|906 Certification of Karen M. Spaun, SVP and CFO 



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##### Table of Contents



TABLE OF CONTENTS

|                                   |  |                                                                                           |    |      |       | 
|---------------------------------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | ----- | 
|                                   |  |                                                                                           |    | Page
|                                   |  |                                                                                           |    |     
|PART I  FINANCIAL
    INFORMATION
|ITEM 1.                            |  | FINANCIAL STATEMENTS                                                                      |    |      |       | 
|                                   |  | Condensed Consolidated Statements of Income
    (unaudited)                               |    |      | 2-3   | 
|                                   |  | Consolidated Statements of Comprehensive Income
    (unaudited)                           |    |      | 4-5   | 
|                                   |  | Condensed Consolidated Balance Sheets (unaudited)                                         |    |      | 6     | 
|                                   |  | Condensed Consolidated Statements of Cash Flows
    (unaudited)                           |    |      | 7     | 
|                                   |  | Notes to Consolidated Financial Statements
    (unaudited) and Management Representation  |    |      | 8-17  | 
|ITEM 2.                            |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS |    |      | 18-30 | 
|ITEM 3.                            |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
    MARKET RISK                            |    |      | 30    | 
|ITEM 4.                            |  | CONTROLS AND PROCEDURES                                                                   |    |      | 30    | 
|PART II  OTHER
    INFORMATION   
|ITEM 1.                            |  | LEGAL PROCEEDINGS                                                                         |    |      | 31    | 
|ITEM 2.                            |  | CHANGES IN SECURITIES AND USE OF PROCEEDS                                                 |    |      | 31    | 
|ITEM 6.                            |  | EXHIBITS AND REPORTS ON FORM 8-K                                                          |    |      | 31    | 
|SIGNATURES                         |  |                                                                                           | 32 |     

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,                    
|                                                          |                                                    |                                  
|                                                          |                                                    | 2003                              |       | 2002      
|                                                          |                                                    |                                   |       |           
|                                                          |                                                    |                                  
|                                                          |                                                    | (Unaudited)                      
|                                                          |                                                    | (In thousands,                   
|                                                          |                                                    | except share data)               
|Revenues:                                                 |                                                    |                                   |       |            |         |  |      |           
|                                                          | Net premium earned                                 |                                   | $     | 103,801    |         |  | $    | 114,310    |        
|                                                          | Net commissions and fees                           |                                   |       | 35,430     |         |  |      | 27,586     |        
|                                                          | Net investment income                              |                                   |       | 10,127     |         |  |      | 10,380     |        
|                                                          | Net realized gains on investments                  |                                   |       | 878        |         |  |      | 325        |        
|                                                          | Gain on sale of subsidiary                         |                                   |       |           |         |  |      | 199        |        
|                                                          |                                                    |                                   |       |            |         |  |      |           
|                                                          |                                                    | Total revenues                    |       |            | 150,236 |  |      |            | 152,800 |  
|                                                          |                                                    |                                   |       |            |         |  |      |           
|Expenses:                                                 |                                                    |                                   |       |            |         |  |      |           
|                                                          | Net loss and loss adjustment expenses              |                                   |       | 67,652     |         |  |      | 79,735     |        
|                                                          | Salaries and employee benefits                     |                                   |       | 36,172     |         |  |      | 27,978     |        
|                                                          | Policy acquisition and other underwriting expenses |                                   |       | 15,745     |         |  |      | 26,879     |        
|                                                          | Other administrative expenses                      |                                   |       | 18,206     |         |  |      | 17,468     |        
|                                                          | Interest on notes payable                          |                                   |       | 656        |         |  |      | 2,706      |        
|                                                          | Gain on debt reduction                             |                                   |       |           |         |  |      | (359       | )      
|                                                          |                                                    |                                   |       |            |         |  |      |           
|                                                          |                                                    | Total expenses                    |       |            | 138,431 |  |      |            | 154,407 |  
|                                                          |                                                    |                                   |       |            |         |  |      |           
|                                                          |                                                    | Income (loss) before income taxes |       |            | 11,805  |  |      |            | (1,607  | )
|Federal income tax expense (benefit)                      |                                                    |                                   | 3,870 |            |         |  | (748 | )         
|                                                          |                                                    |                                   |       |            |         |  |      |           
|                                                          |                                                    | Net income (loss)                 |       | $          | 7,935   |  |      | $          | (859    | )
|                                                          |                                                    |                                   |       |            |         |  |      |           
|Earnings per share:                                       |                                                    |                                   |       |            |         |  |      |           
|                                                          | Basic                                              |                                   | $     | 0.27       |         |  | $    | (0.05      | )      
|                                                          | Diluted                                            |                                   | $     | 0.27       |         |  | $    | (0.05      | )      
|Weighted average number of common shares
    outstanding: |                                                    |                                   |       |            |         |  |      |           
|                                                          | Basic                                              |                                   |       | 29,245,087 |         |  |      | 17,477,035 |        
|                                                          | Diluted                                            |                                   |       | 29,287,573 |         |  |      | 17,477,035 |        

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,                    
|                                                          |                                                    |                                  
|                                                          |                                                    | 2003                              |       | 2002      
|                                                          |                                                    |                                   |       |           
|                                                          |                                                    |                                  
|                                                          |                                                    | (Unaudited)                      
|                                                          |                                                    | (In thousands,                   
|                                                          |                                                    | except share data)               
|Revenues:                                                 |                                                    |                                   |       |            |        |  |        |           
|                                                          | Net premium earned                                 |                                   | $     | 40,187     |        |  | $      | 31,340     |       
|                                                          | Net commissions and fees                           |                                   |       | 10,803     |        |  |        | 8,654      |       
|                                                          | Net investment income                              |                                   |       | 3,197      |        |  |        | 3,751      |       
|                                                          | Net realized gains on investments                  |                                   |       | 299        |        |  |        | 626        |       
|                                                          |                                                    |                                   |       |            |        |  |        |           
|                                                          |                                                    | Total revenues                    |       |            | 54,486 |  |        |            | 44,371 |  
|                                                          |                                                    |                                   |       |            |        |  |        |           
|Expenses:                                                 |                                                    |                                   |       |            |        |  |        |           
|                                                          | Net loss and loss adjustment expenses              |                                   |       | 26,357     |        |  |        | 24,639     |       
|                                                          | Salaries and employee benefits                     |                                   |       | 12,372     |        |  |        | 9,130      |       
|                                                          | Policy acquisition and other underwriting expenses |                                   |       | 5,996      |        |  |        | 6,945      |       
|                                                          | Other administrative expenses                      |                                   |       | 5,816      |        |  |        | 5,977      |       
|                                                          | Interest on notes payable                          |                                   |       | 207        |        |  |        | 582        |       
|                                                          |                                                    |                                   |       |            |        |  |        |           
|                                                          |                                                    | Total expenses                    |       |            | 50,748 |  |        |            | 47,273 |  
|                                                          |                                                    |                                   |       |            |        |  |        |           
|                                                          |                                                    | Income (loss) before income taxes |       |            | 3,738  |  |        |            | (2,902 | )
|Federal income tax expense (benefit)                      |                                                    |                                   | 1,238 |            |        |  | (1,011 | )         
|                                                          |                                                    |                                   |       |            |        |  |        |           
|                                                          |                                                    | Net income (loss)                 |       | $          | 2,500  |  |        | $          | (1,891 | )
|                                                          |                                                    |                                   |       |            |        |  |        |           
|Earnings per share:                                       |                                                    |                                   |       |            |        |  |        |           
|                                                          | Basic                                              |                                   | $     | 0.09       |        |  | $      | (0.06      | )     
|                                                          | Diluted                                            |                                   | $     | 0.09       |        |  | $      | (0.06      | )     
|Weighted average number of common shares
    outstanding: |                                                    |                                   |       |            |        |  |        |           
|                                                          | Basic                                              |                                   |       | 29,022,419 |        |  |        | 29,785,580 |       
|                                                          | Diluted                                            |                                   |       | 29,169,826 |        |  |        | 29,785,580 |       

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

3



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MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

|                  |                                         |                                                                        |                                        |      |      |       |      |   |       |       | 
|----------------- | --------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------- | ---- | ---- | ----- | ---- | - | ----- | ----- | 
|                  |                                         |                                                                       
|                  |                                         | For the Nine                                                          
|                  |                                         | Months Ended                                                          
|                  |                                         | September 30,                                                         
|                  |                                         |                                                                       
|                  |                                         | 2003                                                                   |                                        | 2002
|                  |                                         |                                                                        |                                        |     
|                  |                                         |                                                                       
|                  |                                         | (Unaudited)                                                           
|                  |                                         | (In thousands)                                                        
|Net income (loss) |                                         | $                                                                      | 7,935                                  |      |      | $     | (859 | )
|                  | Other comprehensive income, net of tax: |                                                                        |                                        |      |      |       |      |   |      
|                  |                                         | Unrealized gains on securities                                         |                                        |      | 297  |       |      |   | 5,678 |      
|                  |                                         | Less: reclassification adjustment for gains
    included in net income |                                        |      | (236 | )     |      |   | (264  | )    
|                  |                                         |                                                                        |                                        |      |      |       |      |  
|                  |                                         |                                                                        | Other comprehensive income, net of tax |      |      | 61    |      |   |       | 5,414 | 
|                  |                                         |                                                                        |                                        |      |      |       |      |  
|                  |                                         |                                                                        | Comprehensive income                   |      | $    | 7,996 |      |   | $     | 4,555 | 
|                  |                                         |                                                                        |                                        |      |      |       |      |  

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

4



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME

|                  |                                                |                                                                        |                                               |      |        |        |        |   |       |       | 
|----------------- | ---------------------------------------------- | ---------------------------------------------------------------------- | --------------------------------------------- | ---- | ------ | ------ | ------ | - | ----- | ----- | 
|                  |                                                |                                                                       
|                  |                                                | For the Quarter Ended                                                 
|                  |                                                | September 30,                                                         
|                  |                                                |                                                                       
|                  |                                                | 2003                                                                   |                                               | 2002
|                  |                                                |                                                                        |                                               |     
|                  |                                                |                                                                       
|                  |                                                | (Unaudited)                                                           
|                  |                                                | (In thousands)                                                        
|Net income (loss) |                                                | $                                                                      | 2,500                                         |      |        | $      | (1,891 | )
|                  | Other comprehensive income (loss), net of tax: |                                                                        |                                               |      |        |        |        |   |      
|                  |                                                | Unrealized (losses) gains on securities                                |                                               |      | (2,006 | )      |        |   | 5,305 |      
|                  |                                                | Less: reclassification adjustment for gains
    included in net income |                                               |      | (7     | )      |        |   | (463  | )    
|                  |                                                |                                                                        |                                               |      |        |        |        |  
|                  |                                                |                                                                        | Other comprehensive (loss) income, net of tax |      |        | (2,013 | )      |   |       | 4,842 | 
|                  |                                                |                                                                        |                                               |      |        |        |        |  
|                  |                                                |                                                                        | Comprehensive income                          |      | $      | 487    |        |   | $     | 2,951 | 
|                  |                                                |                                                                        |                                               |      |        |        |        |  

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

5



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |         |         | 
|--------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                                                                                            |                                                                                                 | September 30,                              |         | December 31,
|                                                                                                                            |                                                                                                 | 2003                                       |         | 2002        
|                                                                                                                            |                                                                                                 |                                            |         |             
|                                                                                                                            |                                                                                                 | (Unaudited)                                |         |             
|                                                                                                                            |                                                                                                 |                                           
|                                                                                                                            |                                                                                                 | (In thousands,                            
|                                                                                                                            |                                                                                                 | except share data)                        
|ASSETS                                                                                                                     
|Invested assets:                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        
|                                                                                                                            | Debt securities available for sale, at fair value
    (amortized cost of $255,374 and $231,876) |                                            | $       | 268,454      |         |   | $       | 244,861 |        
|                                                                                                                            | Equity securities available for sale, at fair
    value (cost of $1,980 and $1,980)             |                                            |         | 1,804        |         |   |         | 1,804   |        
|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                                                                                 | Total invested assets                      |         |              | 270,258 |   |         |         | 246,665 | 
|Cash and cash equivalents                                                                                                   |                                                                                                 |                                            | 44,662  |              |         |   | 39,385  |        
|Premiums and agent balances receivable                                                                                      |                                                                                                 |                                            | 88,611  |              |         |   | 71,420  |        
|Reinsurance recoverable on:                                                                                                 |                                                                                                 |                                            |         |              |         |   |         |        
|                                                                                                                            | Paid losses                                                                                     |                                            |         | 21,522       |         |   |         | 20,396  |        
|                                                                                                                            | Unpaid losses                                                                                   |                                            |         | 175,866      |         |   |         | 181,817 |        
|Prepaid reinsurance premiums                                                                                                |                                                                                                 |                                            | 22,323  |              |         |   | 18,115  |        
|Deferred policy acquisition costs                                                                                           |                                                                                                 |                                            | 18,973  |              |         |   | 12,140  |        
|Deferred federal income taxes                                                                                               |                                                                                                 |                                            | 15,507  |              |         |   | 19,099  |        
|Goodwill                                                                                                                    |                                                                                                 |                                            | 28,997  |              |         |   | 28,997  |        
|Other assets                                                                                                                |                                                                                                 |                                            | 39,026  |              |         |   | 36,805  |        
|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                                                                                 | Total assets                               |         | $            | 725,745 |   |         | $       | 674,839 | 
|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                   
|Liabilities:                                                                                                                |                                                                                                 |                                            |         |              |         |   |         |        
|Reserve for losses and loss adjustment expenses                                                                             |                                                                                                 | $                                          | 362,351 |              |         | $ | 374,933 |        
|Unearned premiums                                                                                                           |                                                                                                 |                                            | 111,631 |              |         |   | 68,678  |        
|Debt                                                                                                                        |                                                                                                 |                                            | 19,303  |              |         |   | 32,497  |        
|Mandatorily redeemable trust preferred securities                                                                           |                                                                                                 |                                            | 10,000  |              |         |   |        |        
|Reinsurance funds held and balances payable                                                                                 |                                                                                                 |                                            | 20,940  |              |         |   | 16,199  |        
|Other liabilities                                                                                                           |                                                                                                 |                                            | 47,532  |              |         |   | 35,137  |        
|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                                                                                 | Total liabilities                          |         |              | 571,757 |   |         |         | 527,444 | 
|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        
|Commitments and contingencies (Note 7)                                                                                      |                                                                                                 |                                            |         |              |         |   |         |        
|Shareholders Equity:                                                                                                       |                                                                                                 |                                            |         |              |         |   |         |        
|Common stock, $.01 par value; authorized
    50,000,000 shares: 29,022,435 and 29,591,494 shares issued
    and outstanding |                                                                                                 |                                            | 290     |              |         |   | 296     |        
|Additional paid-in capital                                                                                                  |                                                                                                 |                                            | 125,143 |              |         |   | 127,429 |        
|Retained earnings                                                                                                           |                                                                                                 |                                            | 20,905  |              |         |   | 12,073  |        
|Note receivable from officer                                                                                                |                                                                                                 |                                            | (884    | )            |         |   | (876    | )      
|Accumulated other comprehensive income                                                                                      |                                                                                                 |                                            | 8,534   |              |         |   | 8,473   |        
|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                                                                                 | Total shareholders equity                 |         |              | 153,988 |   |         |         | 147,395 | 
|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        
|                                                                                                                            |                                                                                                 | Total liabilities and shareholders equity |         | $            | 725,745 |   |         | $       | 674,839 | 
|                                                                                                                            |                                                                                                 |                                            |         |              |         |   |         |        

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

6



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                           |                                                                                     |                                                         |        |         |         |   |        |          |         |  
|---------------------------------------------------------- | ----------------------------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | - | ------ | -------- | ------- | -
|                                                           |                                                                                     |                                                        
|                                                           |                                                                                     | For the Nine Months                                    
|                                                           |                                                                                     | Ended September 30,                                    
|                                                           |                                                                                     |                                                        
|                                                           |                                                                                     | 2003                                                    |        | 2002   
|                                                           |                                                                                     |                                                         |        |        
|                                                           |                                                                                     |                                                        
|                                                           |                                                                                     | (Unaudited)                                            
|                                                           |                                                                                     | (In thousands)                                         
|Net cash provided by operating activities                  |                                                                                     | $                                                       | 31,572 |         |         | $ | 879    |         
|                                                           |                                                                                     |                                                         |        |         |         |   |        |         
|Cash flows (used in) provided by investing
    activities: |                                                                                     |                                                         |        |         |         |   |        |         
|                                                           | Purchase of debt securities available for sale                                      |                                                         |        | (70,715 | )       |   |        | (123,036 | )      
|                                                           | Proceeds from sale of debt securities available
    for sale                        |                                                         |        | 47,293  |         |   |        | 96,881   |        
|                                                           | Proceeds from sale of equity securities available
    for sale                      |                                                         |        |        |         |   |        | 900      |        
|                                                           | Other investing activities                                                          |                                                         |        | 998     |         |   |        | 3,342    |        
|                                                           |                                                                                     |                                                         |        |         |         |   |        |         
|                                                           |                                                                                     | Net cash used in investing activities                   |        |         | (22,424 | ) |        |          | (21,913 | )
|Cash flows (used in) provided by financing
    activities: |                                                                                     |                                                         |        |         |         |   |        |         
|                                                           | Net payments on bank loan                                                           |                                                         |        | (13,194 | )       |   |        | (19,804  | )      
|                                                           | Net proceeds from public offering                                                   |                                                         |        |        |         |   |        | 60,525   |        
|                                                           | Net proceeds from issuance of mandatorily
    redeemable trust preferred securities |                                                         |        | 9,700   |         |   |        |         |        
|                                                           | Share repurchases                                                                   |                                                         |        | (1,562  | )       |   |        |         |        
|                                                           | Other financing activities                                                          |                                                         |        | 1,185   |         |   |        | (19      | )      
|                                                           |                                                                                     |                                                         |        |         |         |   |        |         
|                                                           |                                                                                     | Net cash (used in) provided by financing
    activities |        |         | (3,871  | ) |        |          | 40,702  |  
|                                                           |                                                                                     |                                                         |        |         |         |   |        |         
|Increase in cash and cash equivalents                      |                                                                                     |                                                         | 5,277  |         |         |   | 19,668 |         
|Cash and cash equivalents, beginning of period             |                                                                                     |                                                         | 39,385 |         |         |   | 33,302 |         
|                                                           |                                                                                     |                                                         |        |         |         |   |        |         
|Cash and cash equivalents, end of period                   |                                                                                     | $                                                       | 44,662 |         |         | $ | 52,970 |         
|                                                           |                                                                                     |                                                         |        |         |         |   |        |         

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

7



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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited)

Note 1  Summary of Significant
Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation

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

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

The condensed consolidated financial statements
reflect all normal recurring adjustments, which were, in the
opinion of management, necessary to present a fair statement of
the results for the interim period. The results of operations
for the nine months ended September 30, 2003, are not
necessarily indicative of the results expected for the full year.



| |                           
| | --------------------------
| | Revenue Recognition Policy

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

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

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

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

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

8



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Earnings Per
Share

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

Outstanding options of 2,090,149 and 2,761,804
for the nine months ended September 30, 2003 and 2002,
respectively, have been excluded from the diluted earnings per
share as they were anti-dilutive. Shares issuable pursuant to
stock options included in diluted earnings per share were 42,486
for the nine months ended September 30, 2003. There
were no shares issuable pursuant to stock options included in
diluted earnings per share for the nine months ended
September 30, 2002. In addition, outstanding warrants of
300,000 for the nine months ended September 30, 2003
and 2002, have been excluded from the diluted earnings per share
as they were anti-dilutive.

Outstanding options of 1,129,649 and 2,761,804
for the quarters ended September 30, 2003 and 2002,
respectively, have been excluded from the diluted earnings per
share as they were anti-dilutive. Shares issuable pursuant to
stock options included in diluted earnings per share were
121,605 for the quarter ended September 30, 2003. There
were no shares issuable pursuant to stock options included in
diluted earnings per share for the quarter ended
September 30, 2002. In addition, shares issuable pursuant
to outstanding warrants included in diluted earnings per share
were 25,802 for the quarter ended September 30, 2003.
Outstanding warrants of 300,000 for the quarter ended
September 30, 2002 have been excluded from the diluted
earnings per share as they were anti-dilutive.

New
Accounting Pronouncements

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

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

9



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


As of January 1, 2003, the Company adopted
the requirements of SFAS No. 148 utilizing the prospective
method. Under the prospective method, stock-based compensation
expense is recognized for awards granted after the beginning of
the fiscal year in which the change is made. If compensation
cost for stock option grants had been determined based on a fair
value method, net income and earnings per share on a pro forma
basis for the periods ending September 30, 2003 and 2002
would be as follows (in thousands):

|                                                                                                                                                     |                       |                     |       |      |  |   |        |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------- | ----- | ---- |  | - | ------ | ----- | -
|                                                                                                                                                     |                       |                    
|                                                                                                                                                     |                       | For the Nine-Months
|                                                                                                                                                     |                       | Ended September 30,
|                                                                                                                                                     |                       |                    
|                                                                                                                                                     |                       | 2003                |       | 2002
|                                                                                                                                                     |                       |                     |       |     
|Net income (loss), as reported                                                                                                                       |                       | $                   | 7,935 |      |  | $ | (859   | )    
|Add: Stock-based employee compensation expense
    included in reported income, net of related tax effects                                           |                       |                     | 102   |      |  |   |       |      
|Deduct: Total stock-based employee compensation
    expense determined under fair-value-based methods for all
    awards, net of related tax effects |                       |                     | (699  | )    |  |   | (777   | )    
|                                                                                                                                                     |                       |                     |       |      |  |   |        |      
|Pro forma net income (loss)                                                                                                                          |                       | $                   | 7,338 |      |  | $ | (1,636 | )    
|                                                                                                                                                     |                       |                     |       |      |  |   |        |      
|Earnings per share:                                                                                                                                  |                       |                     |       |      |  |   |        |      
|                                                                                                                                                     | Basic  as reported   |                     | $     | 0.27 |  |   | $      | (0.05 | )
|                                                                                                                                                     | Basic  pro forma     |                     | $     | 0.25 |  |   | $      | (0.09 | )
|                                                                                                                                                     | Diluted  as reported |                     | $     | 0.27 |  |   | $      | (0.05 | )
|                                                                                                                                                     | Diluted  pro forma   |                     | $     | 0.25 |  |   | $      | (0.09 | )

|                                                                                                                                                     |                       |                     |       |      |  |   |        |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------- | ----- | ---- |  | - | ------ | ----- | -
|                                                                                                                                                     |                       |                    
|                                                                                                                                                     |                       | For the Quarters   
|                                                                                                                                                     |                       | Ended September 30,
|                                                                                                                                                     |                       |                    
|                                                                                                                                                     |                       | 2003                |       | 2002
|                                                                                                                                                     |                       |                     |       |     
|Net income (loss), as reported                                                                                                                       |                       | $                   | 2,500 |      |  | $ | (1,891 | )    
|Add: Stock-based employee compensation expense
    included in reported income, net of related tax effects                                           |                       |                     | 23    |      |  |   |       |      
|Deduct: Total stock-based employee compensation
    expense determined under fair-value-based methods for all
    awards, net of related tax effects |                       |                     | (184  | )    |  |   | (329   | )    
|                                                                                                                                                     |                       |                     |       |      |  |   |        |      
|Pro forma net income (loss)                                                                                                                          |                       | $                   | 2,339 |      |  | $ | (2,220 | )    
|                                                                                                                                                     |                       |                     |       |      |  |   |        |      
|Earnings per share:                                                                                                                                  |                       |                     |       |      |  |   |        |      
|                                                                                                                                                     | Basic  as reported   |                     | $     | 0.09 |  |   | $      | (0.06 | )
|                                                                                                                                                     | Basic  pro forma     |                     | $     | 0.08 |  |   | $      | (0.07 | )
|                                                                                                                                                     | Diluted  as reported |                     | $     | 0.09 |  |   | $      | (0.06 | )
|                                                                                                                                                     | Diluted  pro forma   |                     | $     | 0.08 |  |   | $      | (0.07 | )

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

Compensation expense of $155,000 has been
recorded for stock options granted in the nine months ended
September 30, 2003 under SFAS. 148. No compensation
cost has been recorded for stock option grants issued during
2002 as the market value equaled the exercise price at the date
of grant.

On May 15, 2003, the FASB issued SFAS
No. 150 Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. The
statement requires issuers to classify as liabilities (or assets
in some circumstances) three classes of freestanding financial
instruments that embody obligations for the issuer. Generally,
the statement is effective for financial instruments entered
into or modified after May 31,

10



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


2003 and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003.
The adoption of this statement did not have an impact on our
financial statements.

In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 clarifies the requirements of SFAS
No. 5, Accounting for Contingencies, relating
to a guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. For certain guarantees
issued after December 31, 2002, FIN No. 45 requires a
guarantor to recognize, upon issuance of a guarantee, a
liability for the fair value of the obligations it assumes under
the guarantee. Guarantees issued prior to January 1, 2003
are not subject to liability recognition, but are subject to
expanded disclosure requirements. The adoption of FIN
No. 45 did not have a material impact on our financial
statements.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities. The
primary objective of FIN No. 46 is to provide guidance on
the identification of, and financial reporting for, entities
over which control is achieved through means other than voting
rights; such entities are known as variable interest entities.
FIN No. 46 requires variable interest entities to be
consolidated by the primary beneficiary of the variable interest
entities and expands disclosure requirements for both variable
interest entities that are consolidated as well as those within
which an enterprise holds a significant variable interest. FIN
No. 46 is required to be adopted by December 31, 2003.
We are currently evaluating the impact FIN No. 46 will have
on our financial statements.

Note 2  Reinsurance

The Insurance Company Subsidiaries cede insurance
to other insurers under pro-rata and excess-of-loss contracts.
These reinsurance arrangements diversify the Companys
business and minimize its exposure to large losses or from
hazards of an unusual nature. The ceding of insurance does not
discharge the original insurer from its primary liability to its
policyholder. In the event that all or any of the reinsuring
companies are unable to meet their obligations, the Insurance
Company Subsidiaries would be liable for such defaulted 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, 2003, the Company had
reinsurance recoverables for paid and unpaid losses of
$197.4 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 36.4% of the total recoverable for paid and unpaid losses.

The Company maintains an excess-of-loss
reinsurance program designed to protect against large or unusual
loss and loss adjustment expense activity. The Company
determines the appropriate amount of reinsurance based on the
Companys evaluation of the risks accepted and analysis
prepared by consultants and reinsurers and on market conditions
including the availability and pricing of reinsurance. To date,
there have been no material disputes with the Companys
excess-of-loss reinsurers. No assurance can be given, however,
regarding the future ability of any of the Companys
excess-of-loss reinsurers to meet their obligations.

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

11



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NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


a maximum of $20.0 million. The sixth treaty
reinsures losses in excess of $20.0 million for coverage up
to a maximum of $50.0 million.

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

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

In its risk-sharing programs, the Company is also
subject to credit risk with respect to the payment of claims by
its clients captive, rent-a-captive, large deductible
programs, indemnification agreements, and on the portion of risk
exposure either ceded to the captives, or retained by the
clients. The capitalization and credit worthiness of prospective
risk-sharing partners is one of the factors considered by the
Company in entering into and renewing risk-sharing programs. The
Company collateralizes balances due from its risk-sharing
partners through funds withheld trusts or letters of credit. At
September 30, 2003, the Company had risk exposure in excess
of collateral in the amount of $10.8 million, on these
programs, for which the Company has an allowance of
$6.9 million, related to these exposures. The Company has
historically maintained an allowance for the potential
uncollectibility of certain reinsurance balances due from some
risk-sharing partners. At the end of each quarter, an analysis
of these exposures is conducted to determine the potential
exposure to uncollectibility. As of September 30, 2003,
management believes that this allowance is adequate. To date,
the Company has not, in the aggregate, experienced material
difficulties in collecting balances from its risk-sharing
partners. No assurance can be given, however, regarding the
future ability of any of the Companys risk-sharing
partners to meet their obligations. At September 30, 2003,
the exposure amount in litigation with former risk-sharing
partners which is not reserved or collateralized is $0.5
million. During the third quarter, a settlement agreement was
reached with a risk sharing partner that was previously in
litigation. The agreement included receipt of cash and a
collateralized note receivable approximating net book value. As
a result of this agreement, exposure in excess of collateral
amounts and related allowances have been reduced by
$1.3 million and $600,000, respectively.

Note 3  Debt

The Company has a credit agreement which includes
a term loan and a revolving line of credit. This credit
agreement consists of a $20.0 million term loan and a
revolving line of credit for up to $8.0 million. The
Company uses the revolving line of credit to meet short-term
working capital needs. At September 30, 2003, the
Companys term loan had an outstanding balance of
$15.5 million. The Company had no outstanding balance on
the revolving line of credit at September 30, 2003. At
December 31, 2002, the outstanding balance on the term loan
and revolving line of credit was $18.8 million and
$5.3 million, respectively. The term loan calls for
quarterly amortization through July 1, 2006, at which time
the term loan will be paid in full. The quarterly amortization
requires payments of $1.0 million on April 1, 2003 and
July 1, 2003; $1.5 million on October 1, 2003;
and $1.2 million for the remaining quarterly amortization
payments in 2004, 2005, and 2006, with a final payment of
$1.5 million on July 1, 2006. The revolving line of
credit will expire on July 1, 2004, and is thereafter
renewable on an annual basis.

The Company made principal payments of
$1.2 million on January 1, 2003, $1.0 million on
April 1, 2003 and July 1, 2003, and $1.5 million
on October 1, 2003, on the term loan.

Both the term loan and revolving line of credit
provide for interest at a variable rate based, at the
Companys option, upon either the prime rate or
eurocurrency rate. The applicable margin, which ranges from

12



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


200 to 300 basis points above eurocurrency rates,
is determined by the level of the fixed charge coverage ratio.
Of all the covenants, the most restrictive covenant is the fixed
charge coverage ratio. The fixed charge coverage ratio, as
defined by the credit facility, is the ratio of the
non-regulated earnings before interest and taxes for the four
preceding fiscal quarters to the sum of fixed charges which
include interest expense, principal payments payable, stock
repurchases, and dividends declared during the period. Any
unused portion of the revolving credit as of the date of
determination reduces the sum of these fixed charges. At
September 30, 2003, this ratio was 4.6 to 1.0, compared to
the covenant minimum of 1.2 to 1.0.

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

In addition, a non-insurance premium finance
subsidiary of the Company maintains a line of credit with a
bank, which permits borrowings up to 80% of the accounts
receivable, which collateralize the line of credit. At
September 30, 2003, this line of credit had an outstanding
balance of $3.8 million.

Note 4  Mandatorily Redeemable
Trust Preferred Securities

On September 30, 2003, a subsidiary trust of
the Company issued $10.0 million of mandatorily redeemable
trust preferred securities (TPS) to a trust formed
by an institutional investor. The Companys trust received
a total of $9.7 million in net proceeds, after the
deduction of approximately $300,000 of commissions paid to the
placement agents in the transaction. These costs have been
capitalized and are included in other assets on the balance
sheet. Issuance costs will be amortized over seven years as a
component of interest expense. The Company estimates that the
fair value of the TPS issued approximates the gross proceeds of
cash received at the time of issuance.

The gross proceeds from the issuance of the TPS
were used to purchase floating rate junior subordinated
deferrable interest debentures (the Debentures)
issued by the Company. The TPS have financial terms similar to
those of the Debentures. The Debentures mature in 30 years
and provide for interest at the three-month LIBOR plus 4.05%,
payable quarterly beginning in December 2003. The Debentures are
callable by the Company at par beginning in October, 2008.

The Debentures are unsecured obligations of the
Company and are junior to the right of payment to all future
senior indebtedness of the Company. The Company has guaranteed
that the payments made to the Trust will be distributed by the
Trust to the holders of the TPS.

The Company contributed $6.3 million of the
proceeds from the issuance of the Debentures to its insurance
company subsidiaries and the remaining balance will be used for
general corporate purposes.

Note 5  Shareholders
Equity

At September 30, 2003, shareholders
equity was $154.0 million, or $5.31 per common share,
compared to $147.4 million, or $4.98 per common share, at
December 31, 2002.

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

Note 6  Regulatory Matters and
Rating Agencies

A significant portion of the Companys
consolidated assets represent assets of the Insurance Company
Subsidiaries that at this time, without prior approval of the
Michigan Office of Financial and Insurance

13



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Services (OFIS), cannot be
transferred to the holding company in the form of dividends,
loans or advances. The restriction on the transferability to the
holding company from its Insurance Company Subsidiaries is
dictated by Michigan insurance regulatory guidelines which, in
general, are as follows: the maximum discretionary dividend that
may be declared, based on data from the preceding calendar year,
is the greater of each insurance companys net income
(excluding realized capital gains) or ten percent of the
insurance companys surplus (excluding unrealized gains).
These dividends are further limited by a clause in the Michigan
law that prohibits an insurer from declaring dividends, except
from surplus earnings of the company. Earned surplus balances
are calculated on a quarterly basis. Since Star is the parent
insurance company, its maximum dividend calculation represents
the combined Insurance Company Subsidiaries surplus. Based
upon the 2002 statutory financial statements, Star may only pay
dividends to the Company during 2003 with the prior approval of
OFIS. Stars earned surplus position at December 31,
2002 was negative $24.3 million. At September 30,
2003, earned surplus was negative $26.2 million. No
statutory dividends were paid from Star in 2002.

Insurance operations are subject to various
leverage tests (e.g. premium to statutory surplus ratios), which
are evaluated by regulators and rating agencies. The
Companys targets for gross and net written premium to
statutory surplus are 3.0 to 1 and 2.0 to 1, respectively. As of
September 30, 2003, on a statutory consolidated basis,
gross and net premium leverage ratios were 2.4 to 1.0 and 1.8 to
1.0, respectively.

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

At December 31, 2002, all of the Insurance
Company Subsidiaries were in compliance with RBC requirements.
Star reported statutory surplus of $93.8 million at
December 31, 2002, compared to the threshold requiring the
minimum regulatory involvement of $49.7 million in 2002. At
September 30, 2003, Stars statutory surplus was
$98.2 million.

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

Note 7  Commitments and
Contingencies

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

Note 8  Segment
Information

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

14



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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

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



| |                  
| | -----------------
| | Agency Operations

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

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

|                       |                                   |                                   |                                    |         |         |         |   |         |         |         |  
|---------------------- | --------------------------------- | --------------------------------- | ---------------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                       |                                   |                                  
|                       |                                   | For the Nine Months              
|                       |                                   | Ended September 30,              
|                       |                                   |                                  
|                       |                                   | 2003                              |                                    | 2002   
|                       |                                   |                                   |                                    |        
|Revenues:              |                                   |                                   |                                    |         |         |         |   |        
|                       | Net earned premiums               |                                   | $                                  | 103,801 |         |         | $ | 114,310 |        
|                       | Management fees                   |                                   |                                    | 14,710  |         |         |   | 9,590   |        
|                       | Claim fees                        |                                   |                                    | 11,600  |         |         |   | 5,416   |        
|                       | Loss control fees                 |                                   |                                    | 1,729   |         |         |   | 1,972   |        
|                       | Reinsurance brokerage             |                                   |                                    | 218     |         |         |   | 260     |        
|                       | Investment income                 |                                   |                                    | 10,119  |         |         |   | 10,341  |        
|                       | Net realized gains on investments |                                   |                                    | 878     |         |         |   | 325     |        
|                       |                                   |                                   |                                    |         |         |         |   |        
|                       |                                   | Specialty risk management segment |                                    |         | 143,055 |         |   |         | 142,214 |        
|                       | Agency operations                 |                                   |                                    | 11,349  |         |         |   | 10,727  |        
|                       | Reconciling items                 |                                   |                                    | 8       |         |         |   | 39      |        
|                       | Gain on sale of subsidiary        |                                   |                                    |        |         |         |   | 199     |        
|                       | Intersegment revenue              |                                   |                                    | (4,176  | )       |         |   | (379    | )      
|                       |                                   |                                   |                                    |         |         |         |   |        
|                       |                                   |                                   | Consolidated revenue               |         | $       | 150,236 |   |         | $       | 152,800 |  
|                       |                                   |                                   |                                    |         |         |         |   |        
|Pre-tax income (loss): |                                   |                                   |                                    |         |         |         |   |        
|                       | Specialty risk management         |                                   | $                                  | 8,341   |         |         | $ | (3,642  | )      
|                       | Agency operations*                |                                   |                                    | 5,065   |         |         |   | 4,663   |        
|                       | Reconciling items                 |                                   |                                    | (1,601  | )       |         |   | (2,827  | )      
|                       | Gain on sale of subsidiary        |                                   |                                    |        |         |         |   | 199     |        
|                       |                                   |                                   |                                    |         |         |         |   |        
|                       |                                   |                                   | Consolidated pre-tax income (loss) |         | $       | 11,805  |   |         | $       | (1,607  | )
|                       |                                   |                                   |                                    |         |         |         |   |        



---



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

15



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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                       |                                   |                                   |                                    |        |        |        |   |        |        |        |  
|---------------------- | --------------------------------- | --------------------------------- | ---------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ------ | -
|                       |                                   |                                  
|                       |                                   | For the Quarters                 
|                       |                                   | Ended September 30,              
|                       |                                   |                                  
|                       |                                   | 2003                              |                                    | 2002  
|                       |                                   |                                   |                                    |       
|Revenues:              |                                   |                                   |                                    |        |        |        |   |       
|                       | Net earned premiums               |                                   | $                                  | 40,187 |        |        | $ | 31,340 |       
|                       | Management fees                   |                                   |                                    | 4,522  |        |        |   | 3,008  |       
|                       | Claim fees                        |                                   |                                    | 3,463  |        |        |   | 1,877  |       
|                       | Loss control fees                 |                                   |                                    | 603    |        |        |   | 637    |       
|                       | Reinsurance brokerage             |                                   |                                    | 57     |        |        |   | 65     |       
|                       | Investment income                 |                                   |                                    | 3,215  |        |        |   | 3,738  |       
|                       | Net realized gains on investments |                                   |                                    | 299    |        |        |   | 626    |       
|                       |                                   |                                   |                                    |        |        |        |   |       
|                       |                                   | Specialty risk management segment |                                    |        | 52,346 |        |   |        | 41,291 |       
|                       | Agency operations                 |                                   |                                    | 3,527  |        |        |   | 3,113  |       
|                       | Reconciling items                 |                                   |                                    | (18    | )      |        |   | 13     |       
|                       | Intersegment revenue              |                                   |                                    | (1,369 | )      |        |   | (46    | )     
|                       |                                   |                                   |                                    |        |        |        |   |       
|                       |                                   |                                   | Consolidated revenue               |        | $      | 54,486 |   |        | $      | 44,371 |  
|                       |                                   |                                   |                                    |        |        |        |   |       
|Pre-tax income (loss): |                                   |                                   |                                    |        |        |        |   |       
|                       | Specialty risk management         |                                   | $                                  | 2,824  |        |        | $ | (3,425 | )     
|                       | Agency operations*                |                                   |                                    | 1,465  |        |        |   | 1,275  |       
|                       | Reconciling items                 |                                   |                                    | (551   | )      |        |   | (752   | )     
|                       |                                   |                                   |                                    |        |        |        |   |       
|                       |                                   |                                   | Consolidated pre-tax income (loss) |        | $      | 3,738  |   |        | $      | (2,902 | )
|                       |                                   |                                   |                                    |        |        |        |   |       



---



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

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

|                            |  |                     |        |      |  |   |        |  
|--------------------------- |  | ------------------- | ------ | ---- |  | - | ------ | -
|                            |  |                    
|                            |  | For the Nine Months
|                            |  | Ended September 30,
|                            |  |                    
|                            |  | 2003                |        | 2002
|                            |  |                     |        |     
|Holding company expenses    |  | $                   | (689   | )    |  | $ | (480   | )
|Gain on debt reduction      |  |                     |       |      |  |   | 359    |  
|Amortization of intangibles |  |                     | (256   | )    |  |   |       |  
|Interest expense            |  |                     | (656   | )    |  |   | (2,706 | )
|                            |  |                     |        |      |  |   |        |  
|                            |  | $                   | (1,601 | )    |  | $ | (2,827 | )
|                            |  |                     |        |      |  |   |        |  

|                            |  |                     |      |      |  |   |      |  
|--------------------------- |  | ------------------- | ---- | ---- |  | - | ---- | -
|                            |  |                    
|                            |  | For the Quarters   
|                            |  | Ended September 30,
|                            |  |                    
|                            |  | 2003                |      | 2002
|                            |  |                     |      |     
|Holding company expenses    |  | $                   | (228 | )    |  | $ | (170 | )
|Amortization of intangibles |  |                     | (116 | )    |  |   |     |  
|Interest expense            |  |                     | (207 | )    |  |   | (582 | )
|                            |  |                     |      |      |  |   |      |  
|                            |  | $                   | (551 | )    |  | $ | (752 | )
|                            |  |                     |      |      |  |   |      |  

Note 9  Reclassifications

Certain amounts in the notes and consolidated
financial statements have been reclassified to conform to the
2003 presentation.

16



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##### Table of Contents



PART I  FINANCIAL
INFORMATION

In the opinion of management, the financial
statements reflect all adjustments of a normal recurring nature
necessary for a fair presentation of the interim periods.
Preparation of financial statements under GAAP requires
management to make estimates. Actual results could differ from
those estimates. Interim results are not necessarily indicative
of results expected for the entire year. These financial
statements should be read in conjunction with the Companys
2002 Annual Report on Form 10-K, as filed with the
Securities and Exchange Commission.

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

17



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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, 2003
and 2002


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

Results of Operations for the Nine Months
Ended September 30, 2003 and 2002



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

Net income for the nine months ended
September 30, 2003 was $7.9 million, or $0.27 per
dilutive share, compared to net loss of ($859,000), or ($0.05)
per dilutive share, for the nine months ended September 30,
2002. This improvement reflects the absence of reserve
strengthening on discontinued programs, the addition of new
fee-for-service agreements and the Companys continued
expense control initiatives. The new management fee revenue and
expense controls have allowed the Company to leverage its fixed
costs.

Revenues for the nine months ended
September 30, 2003 decreased $2.6 million, or 1.7%, to
$150.2 million from $152.8 million for the comparable
period in 2002.

Specialty Risk
Management Operations

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

|                      |                                  |                     |       |         |         |   |        |         |         | 
|--------------------- | -------------------------------- | ------------------- | ----- | ------- | ------- | - | ------ | ------- | ------- | 
|                      |                                  |                    
|                      |                                  | For the Nine Months
|                      |                                  | Ended September 30,
|                      |                                  |                    
|                      |                                  | 2003                |       | 2002   
|                      |                                  |                     |       |        
|Revenues:             |                                  |                     |       |         |         |   |        |        
|                      | Net earned premiums              |                     | $     | 103,801 |         |   | $      | 114,310 |        
|                      | Management fees                  |                     |       | 14,710  |         |   |        | 9,590   |        
|                      | Claim fees                       |                     |       | 11,600  |         |   |        | 5,416   |        
|                      | Loss control fees                |                     |       | 1,729   |         |   |        | 1,972   |        
|                      | Reinsurance brokerage            |                     |       | 218     |         |   |        | 260     |        
|                      | Investment income                |                     |       | 10,119  |         |   |        | 10,341  |        
|                      | Net realized gain on investments |                     |       | 878     |         |   |        | 325     |        
|                      |                                  |                     |       |         |         |   |        |        
|                      |                                  | Total revenue       |       | $       | 143,055 |   |        | $       | 142,214 | 
|                      |                                  |                     |       |         |         |   |        |        
|Pre-tax income (loss) |                                  | $                   | 8,341 |         |         | $ | (3,642 | )      
|                      |                                  |                     |       |         |         |   |        |        

Revenues from specialty risk management
operations increased $841,000, or 0.6%, to $143.1 million
for the nine months ended September 30, 2003, from
$142.2 million for the comparable period in 2002.

Net earned premiums decreased $10.5 million,
or 9.2%, to $103.8 million in the nine months ended
September 30, 2003, from $114.3 million in the
comparable period in 2002. This decrease is the result of a

18



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##### Table of Contents



reduction in earned premium of $34.3 million
related to programs discontinued in 1999 and programs terminated
for leverage ratio purposes. Offsetting the overall decrease in
net earned premiums is a $14.4 million increase in earned
premium related to existing programs and $9.4 million in
new business.


Management fees increased $5.1 million, or
53.4%, to $14.7 million for the nine months ended
September 30, 2003, from $9.6 million for the
comparable period in 2002. Claim fees increased
$6.2 million, or 114.2%, to $11.6 million from
$5.4 million for the comparable period in 2002. The
increase in management fees and claim fees reflects the
previously mentioned addition of new fee-for-service agreements
of $4.8 million and $7.3 million, respectively. This
increase in management fees and claim fees is partially offset
by a decrease in discontinued programs and the result of the
conversion of an existing fee-based program into an insured
program within the Companys underwriting subsidiary. Loss
control fees decreased $243,000, or 12.3%, to $1.7 million
from $2.0 million for the comparable period in 2002. This
decrease is mainly the result of the conversion of an existing
fee-based program into an insured program.

Net investment income decreased $222,000, or
2.1%, to $10.1 million in 2003, from $10.3 million in
2002. Average invested assets increased $32.8 million, or
12.5%, to $295.7 million in 2003, from $262.9 million
in 2002. The average investment yield for the third quarter of
2003 was 4.6% compared to 5.3% in 2002. The current pre-tax book
yield is 4.37% and current pre-tax reinvested yield is 3.04%.
The decrease in investment yields reflects the decline in the
macro level of interest rates and the tightening of yield
spreads relative to U.S. Treasuries in most sectors of the
domestic taxable bond market. The average increase in invested
assets reflects $37.5 million in proceeds from the public
offering in June 2002 and cash flows from underwriting
activities.

Specialty risk management operations generated
pre-tax income of $8.3 million for the nine months ended
September 30, 2003, compared to pre-tax loss of
$3.6 million for the comparable period in 2002. This
improvement reflects the favorable impact of the previously
indicated fee-for-service agreements and improved underwriting
results. The generally accepted accounting principles
(GAAP) combined ratio was 105.1% for the nine months
ended September 30, 2003, compared to 110.4% for the same
period in 2002.

Net loss and loss adjustment expenses
(LAE) decreased $12.0 million, or 15.2%, to
$67.7 million for the nine months ended September 30,
2003, from $79.7 million for the same period in 2002. The
Companys loss and LAE ratio decreased by
3.4 percentage points to 70.4% for the nine months ended
September 30, 2003, from 73.8% for the same period in 2002.
This ratio is the unconsolidated net loss and LAE in relation to
net earned premium. This improvement in the loss and LAE ratio
reflects rate increases achieved in 2002 and 2003, the
cancellation of the surplus relief treaty, and the absence of
reserve strengthening and earned premiums from discontinued
programs.

The Companys expense ratio improved
1.9 percentage points to 34.7% for the nine months ended
September 30, 2003, from 36.6% for the same period in 2002.
This ratio is the unconsolidated policy acquisition and other
underwriting expenses in relation to net earned premium. The
improvement reflects the ability to leverage fixed costs and a
reduction in gross commissions. This improvement is partially
offset by an increase in insurance related assessments.

Agency
Operations

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

|                |  |                     |        |      |  |   |        | 
|--------------- |  | ------------------- | ------ | ---- |  | - | ------ | 
|                |  |                    
|                |  | For the Nine Months
|                |  | Ended September 30,
|                |  |                    
|                |  | 2003                |        | 2002
|                |  |                     |        |     
|Net commission  |  | $                   | 11,349 |      |  | $ | 10,727 | 
|Pre-tax income* |  | $                   | 5,065  |      |  | $ | 4,663  | 



---



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

Revenue from agency operations, which consists
primarily of agency commission revenue, increased $622,000, or
5.8%, to $11.3 million for the nine months ended
September 30, 2003, from $10.7 million for the

19



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##### Table of Contents



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


Agency operations generated pre-tax income of
$5.1 million for the nine months ended September 30,
2003, compared to $4.7 million for the comparable period in
2002. The improvement in the pre-tax margin is primarily
attributable to overall expense reductions.



| |            
| | -----------
| | Other Items



| |         
| | --------
| | Reserves

At September 30, 2003, managements
best estimate for the ultimate liability for loss and LAE
reserves, net of reinsurance recoverables, was
$186.5 million. Management established a reasonable range
of reserves of approximately $174.0 million to
$201.0 million. This range was established primarily by
considering the various indications derived from standard
actuarial techniques and other appropriate reserve
considerations. The following table sets forth this range by
line of business.

|                          |  |         |         |         |  |          |         |  |  |   |         | 
|------------------------- |  | ------- | ------- | ------- |  | -------- | ------- |  |  | - | ------- | 
|                          |  | Minimum |         | Maximum |  |         
|                          |  | Reserve |         | Reserve |  | Selected
|Line of Business          |  | Range   |         | Range   |  | Reserves
|                          |  |         |         |         |  |         
|Workers Compensation(1)  |  | $       | 96,686  |         |  | $        | 108,060 |  |  | $ | 102,185 | 
|Commercial Multiple Peril |  |         | 35,530  |         |  |          | 44,646  |  |  |   | 39,230  | 
|Commercial Automobile     |  |         | 25,538  |         |  |          | 28,342  |  |  |   | 26,816  | 
|Other                     |  |         | 16,261  |         |  |          | 19,966  |  |  |   | 18,254  | 
|                          |  |         |         |         |  |          |         |  |  |   |         | 
|Net Reserves              |  | $       | 174,015 |         |  | $        | 201,014 |  |  | $ | 186,485 | 
|                          |  |         |         |         |  |          |         |  |  |   |         | 



---



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

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

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

20



---



##### Table of Contents



For the nine months ended September 30,
2003, the Company reported an increase in net ultimate loss
estimates for accident years 2002 and prior to be
$1.3 million, or 0.7% of $193.1 million of net loss
and LAE reserves at December 31, 2002. The increase in net
ultimate loss estimates reflected revisions in the estimated
reserves as a result of actual claims activity in calendar year
2003 that differed from the projected activity. There were no
significant changes in the key assumptions utilized in the
analysis and calculations of the Companys reserves during
2003. The major components of this change in ultimates are as
follows:

|                          |  |              |         |                 |  |             |        |             |  |         |        |       |  |       |        |               |  |   |        |  |  |   |        |  |  |   |        |  |  |   |         | 
|------------------------- |  | ------------ | ------- | --------------- |  | ----------- | ------ | ----------- |  | ------- | ------ | ----- |  | ----- | ------ | ------------- |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------- | 
|                          |  |              |         |                 |  |             |        |            
|                          |  |              |         | Incurred Losses |  | Paid Losses |        |            
|                          |  | Reserves at  |         |                 |  |             |        | Reserves at
|                          |  | December 31, |         | Current         |  | Prior       |        | Total       |  | Current |        | Prior |  | Total |        | September 30,
|Line of Business          |  | 2002         |         | Year            |  | Year        |        | Incurred    |  | Year    |        | Year  |  | Paid  |        | 2003         
|                          |  |              |         |                 |  |             |        |             |  |         |        |       |  |       |        |              
|Workers Compensation     |  | $            | 88,888  |                 |  | $           | 32,826 |             |  | $       | (2,402 | )     |  | $     | 30,424 |               |  | $ | 4,354  |  |  | $ | 26,185 |  |  | $ | 30,539 |  |  | $ | 88,773  | 
|Residual Markets          |  |              | 9,496   |                 |  |             | 7,442  |             |  |         | (126   | )     |  |       | 7,316  |               |  |   | 1,915  |  |  |   | 1,485  |  |  |   | 3,400  |  |  |   | 13,412  | 
|Commercial Multiple Peril |  |              | 42,936  |                 |  |             | 8,485  |             |  |         | 3,410  |       |  |       | 11,895 |               |  |   | 357    |  |  |   | 15,244 |  |  |   | 15,601 |  |  |   | 39,230  | 
|Commercial Automobile     |  |              | 35,547  |                 |  |             | 8,244  |             |  |         | 27     |       |  |       | 8,271  |               |  |   | 2,236  |  |  |   | 14,766 |  |  |   | 17,002 |  |  |   | 26,816  | 
|Other                     |  |              | 16,249  |                 |  |             | 9,320  |             |  |         | 426    |       |  |       | 9,746  |               |  |   | 3,015  |  |  |   | 4,726  |  |  |   | 7,741  |  |  |   | 18,254  | 
|                          |  |              |         |                 |  |             |        |             |  |         |        |       |  |       |        |               |  |   |        |  |  |   |        |  |  |   |        |  |  |   |         | 
|Net Reserves              |  |              | 193,116 |                 |  | $           | 66,317 |             |  | $       | 1,335  |       |  | $     | 67,652 |               |  | $ | 11,877 |  |  | $ | 62,406 |  |  | $ | 74,283 |  |  |   | 186,485 | 
|                          |  |              |         |                 |  |             |        |             |  |         |        |       |  |       |        |               |  |   |        |  |  |   |        |  |  |   |        |  |  |   |         | 
|Reinsurance Recoverable   |  |              | 181,817 |                 |  |             |        |             |  |         |        |       |  |       |        |               |  |   |        |  |  |   |        |  |  |   |        |  |  |   | 175,866 | 
|                          |  |              |         |                 |  |             |        |             |  |         |        |       |  |       |        |               |  |   |        |  |  |   |        |  |  |   |        |  |  |   |         | 
|Consolidated              |  | $            | 374,933 |                 |  |             |        |             |  |         |        |       |  |       |        |               |  |   |        |  |  |   |        |  |  |   |        |  |  | $ | 362,351 | 
|                          |  |              |         |                 |  |             |        |             |  |         |        |       |  |       |        |               |  |   |        |  |  |   |        |  |  |   |        |  |  |   |         | 

|                          |  |              |         |              |  |               |         |  |  |  |      |   
|------------------------- |  | ------------ | ------- | ------------ |  | ------------- | ------- |  |  |  | ---- | --
|                          |  |              |         | Re-estimated |  | Development  
|                          |  |              |         | Reserves at  |  | as a         
|                          |  | Reserves at  |         | September,   |  | Percentage of
|                          |  | December 31, |         | 2003 on      |  | Prior Year   
|Line of Business          |  | 2002         |         | Prior Years  |  | Reserves     
|                          |  |              |         |              |  |              
|Workers Compensation     |  | $            | 88,888  |              |  | $             | 86,486  |  |  |  | (2.7 | )%
|Commercial Multiple Peril |  |              | 42,936  |              |  |               | 46,346  |  |  |  | 7.9  | % 
|Commercial Automobile     |  |              | 35,547  |              |  |               | 35,574  |  |  |  | 0.1  | % 
|Other                     |  |              | 16,249  |              |  |               | 16,672  |  |  |  | 2.6  | % 
|                          |  |              |         |              |  |               |         |  |  |  |      |   
|Sub-total                 |  |              | 183,620 |              |  |               | 185,078 |  |  |  | 0.8  | % 
|Residual Markets          |  |              | 9,496   |              |  |               | 9,370   |  |  |  | (1.3 | )%
|                          |  |              |         |              |  |               |         |  |  |  |      |   
|Total Net Reserves        |  | $            | 193,116 |              |  | $             | 194,448 |  |  |  | 0.7  | % 
|                          |  |              |         |              |  |               |         |  |  |  |      |   



| |                                                     
| | ----------------------------------------------------
| | Workers Compensation Excluding Residual
    Markets

The projected net ultimate loss estimate for the
workers compensation line of business excluding residual
markets decreased $2.4 million, or 2.7% of net
workers compensation reserves. This net overall decrease
reflects an increase of $868,000 in accident year 2002 and a
reduction of $2.9 million in the ultimate estimate for loss
and loss adjustment for accident year 2001 and prior. The
reduction in loss and allocated expense reserves primarily
reflects a decrease in net ultimate loss estimates of
$1.7 million in accident year 2001 and $1.4 million in
accident year 2000. The increase in ultimate loss estimates for
accident year 2002 reflects higher than expected emergence of
claim activity, while the decreases in ultimate loss estimates
for accident years 2001 and 2000 reflect lower than expected
emergence of claim activity during the nine months ended
September 30, 2003.



| |                          
| | -------------------------
| | Commercial Multiple Peril

The commercial multiple peril line of business
had an increase in net ultimate loss estimates of
$3.4 million, or 7.9% of net commercial multiple peril
reserves. The net increase was $804,000, $651,000,
$1.2 million and $1.2 million in accident years 2001,
2000, 1999, and 1994, respectively. These increases in ultimate
loss estimates reflect higher than expected emergence in claim
activity during the nine months ended September 30, 2003.
The 2002 accident year resulted in a $356,000 decrease in
ultimate loss estimates. The change in ultimate net loss
estimates for all other accident years was insignificant.

21



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##### Table of Contents





| |                      
| | ---------------------
| | Commercial Automobile

The projected net ultimate loss estimate for the
commercial automobile line of business increased $27,000, or
0.1% of net commercial automobile reserves. This net overall
increase reflects a reduction of $1.1 million, $690,000,
and $201,000 in accident years 2002, 2000, and 1999,
respectively. The reduction in accident year 2002 primarily
reflects lower than expected claims activity in automobile
physical damage. These reductions were offset by an increase of
$2.3 million in the ultimate estimate for loss and loss
adjustment for accident year 2001. The increases in accident
year 2001 reflect a $1.2 million increase from one
commercial trucking program which was terminated during 2001,
and the remaining increases reflect changes in case reserves on
programs that experienced decreases in net ultimate estimates in
accident years 2000 and 1999. The change in ultimate net loss
estimates for all other accident years was insignificant.



| |      
| | -----
| | Other

The other lines of business had an increase in
net ultimate loss estimates of $423,000, or 2.6% of net reserves
on the other lines of business. The change reflects a reduction
of $591,000 in accident year 2002, primarily from the property
line of business. This decrease in ultimate loss estimates
reflects lower than expected emergence in claim activity during
the nine months ended September 30, 2003. This was
partially offset by an increase in net ultimate loss estimates
of $474,000 in the medical line of business primarily in
accident year 2000 and $475,000 in accident year 1995 primarily
related to legal expenses related to the recovery of losses on
the surety line of business. The change in ultimate net loss
estimates for all other accident years was insignificant.



| |                 
| | ----------------
| | Residual Markets

The change in ultimate net loss estimates for all
accident years was insignificant.



| |                                                                   
| | ------------------------------------------------------------------
| | Salary and Employee Benefits and Other
    Administrative Expenses

Salary and employee benefits for the nine months
ended September 30, 2003, increased $8.2 million, or
29.3%, to $36.2 million, from $28.0 million for the
comparable period in 2002. This increase is primarily the result
of the hiring of employees to handle new fee-for-service
agreements. In addition, this increase reflects both merit
increases and variable compensation related to profitability,
and a slight increase in staffing levels to support new managed
programs. Other administrative expenses increased $738,000, or
4.2%, to $18.2 million, from $17.5 million for the
comparable period in 2002. The increase in administrative
expenses is also attributable to the new fee-for-service
agreements. Salary and employee benefits and administrative
expenses include both corporate overhead and the holding company
expenses included in the reconciling items of the Companys
segment information.



| |                 
| | ----------------
| | Interest Expense

Interest expense for the nine months ended
September 30, 2003, decreased by $2.0 million, or
75.8%, to $656,000, from $2.7 million for the comparable
period in 2002. Interest expense is primarily attributable to
the Companys term loan and revolving line of credit. This
decrease reflects both the reduction in the average outstanding
balance and a reduction in the average interest rate. The
average outstanding balance during the nine months ending
September 30, 2003, was $25.9 million, compared to
$47.8 million for the same period in 2002. The average
interest rate in 2003 was 3.4%, compared to 7.5% in 2002. The
applicable margin in the agreement, which ranges from 200 to 300
basis points above eurocurrency rates, is determined by the
level of the fixed charge coverage ratio. The fixed charge
coverage ratio, as defined by the credit facility, is the ratio
of the non-regulated earnings before interest and taxes for the
four preceding fiscal quarters to the sum of fixed charges which
include interest expense, principal payments payable, stock
repurchases, and dividends declared during the period. Any
unused portion of the revolving credit as of the date of
determination reduces the sum of these fixed charges. At
September 30, 2003, this ratio was 4.6 to 1.0, compared to
the covenant minimum of 1.2 to 1.0.

22



---



##### Table of Contents



On September 30, 2003, a subsidiary trust of
the Company issued $10.0 million of mandatorily redeemable
trust preferred securities (TPS) to a trust formed
by an institutional investor. The Companys trust received
a total of $9.7 million in net proceeds, after the
deduction of approximately $300,000 of commissions paid to the
placement agents in the transaction. The gross proceeds from the
issuance of the TPS were used to purchase floating rate junior
subordinated deferrable interest debentures (the
Debentures) issued by the Company. The TPS have
financial terms similar to those of the Debentures. The
Debentures mature in 30 years and provide for interest at
the three-month LIBOR plus 4.05%, payable quarterly beginning in
December 2003.



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

Federal income tax expense for the nine months
ended September 30, 2003 was $3.9 million, or 32.8% of
income before taxes. For the same period last year, the Company
reflected a federal income tax benefit of ($748,000), or 46.6%
of loss before taxes. The increase in tax expense is the result
of an increase in earnings. The Companys effective tax
rate differs from the 34% statutory rate primarily due to
tax-exempt investment income. The overall change in the
effective rate in comparison to the nine months ended
September 30, 2002 is related to changes in the proportion
of tax-exempt investment income to total underwriting results.

At September 30, 2003, the Company had a
deferred tax asset of $15.5 million, $4.9 million of
which is related to a net operating loss carryforward
(NOL). Realization of the deferred tax asset is
dependent on generating sufficient taxable income to absorb both
the applicable reversing temporary differences and the NOL. At
September 30, 2003, management concluded that the positive
evidence supporting the generation of future taxable income
sufficient to realize the deferred tax asset outweighed the
negative evidence of the cumulative losses reported for the
periods ended December 31, 2001, 2000, and 1999. This
conclusion was based upon:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The current market conditions that supported the
    cumulative premium rate increases of 63.9% since the beginning
    of 2000 is expected to continue;                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | For the nine months ending September 30,
    2003, loss reserves continue to stabilize with a calendar year
    2003 loss and LAE ratio of 70.4% and net ultimate loss estimates
    on loss and LAE on prior year accident years of
    $1.3 million, or 0.7% of $193.1 million of net loss
    and LAE reserves at December 31, 2002;                                                                                                                                                                                            
|
| |  | The completion of the Companys exit of
    certain discontinued unprofitable programs. Exposures related to
    these programs were fully earned during the first half of 2002.
    Furthermore, the uncertainty of future reserve development
    appears to have been reduced by aggressive claims handling which
    reduced the number of pending claims, reserve strengthening in
    2002, and a claim by claim review conducted by the
    Companys corporate claims department during the fourth
    quarter of 2002; and
|
| |  | Alternative tax strategies, which could generate
    capital gains from the potential sale of assets and/or
    subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                      



| |                                 
| | --------------------------------
| | Other Than Temporary Impairments

The Companys policy on other than
temporarily impaired securities is to determine impairment based
on analysis of the following factors: market value less than 80%
of amortized cost for a six month period; rating downgrade or
other credit event, e.g., failure to pay interest when due;
financial condition and near-term prospects of the issuer,
including any specific events which may influence the operations
of the issuer such as changes in technology or discontinuance of
a business segment; prospects for the issuers industry
segment; intent and ability of the Company to retain the
investment for a period of time sufficient to allow for
anticipated recovery in market value. Investments which are
determined to be impaired are written down to their estimated
net realizable value. At September 30, 2003, the Company
did not hold any securities in its investment portfolio that
were impaired. As of September 30, 2003, gross unrealized
gains and losses on securities were $13.7 million and
($795,000), respectively. As of September 30, 2002, gross
unrealized gains and losses on securities were
$13.5 million and ($624,000), respectively.

23



---



##### Table of Contents



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



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

Net income for the quarter ended
September 30, 2003 was $2.5 million, or $0.09 per
dilutive share, compared to net loss of ($1.9 million), or
($0.06) per dilutive share, for the quarter ended
September 30, 2002. This improvement reflects the absence
of reserve strengthening on previously discontinued programs,
the addition of new fee-for-service agreements and the
Companys continued expense control initiatives. These
initiatives have allowed the Company to leverage its fixed costs.

Revenues for the quarter ended September 30,
2003 increased $10.1 million, or 22.8%, to
$54.5 million from $44.4 million for the comparable
period in 2002.

Specialty Risk
Management Operations

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

|                      |                                   |                     |       |        |        |   |        |        |        | 
|--------------------- | --------------------------------- | ------------------- | ----- | ------ | ------ | - | ------ | ------ | ------ | 
|                      |                                   |                    
|                      |                                   | For the Quarters   
|                      |                                   | Ended September 30,
|                      |                                   |                    
|                      |                                   | 2003                |       | 2002  
|                      |                                   |                     |       |       
|Revenues:             |                                   |                     |       |        |        |   |        |       
|                      | Net earned premiums               |                     | $     | 40,187 |        |   | $      | 31,340 |       
|                      | Management fees                   |                     |       | 4,522  |        |   |        | 3,008  |       
|                      | Claim fees                        |                     |       | 3,463  |        |   |        | 1,877  |       
|                      | Loss control fees                 |                     |       | 603    |        |   |        | 637    |       
|                      | Reinsurance brokerage             |                     |       | 57     |        |   |        | 65     |       
|                      | Investment income                 |                     |       | 3,215  |        |   |        | 3,738  |       
|                      | Net realized gains on investments |                     |       | 299    |        |   |        | 626    |       
|                      |                                   |                     |       |        |        |   |        |       
|                      |                                   | Total revenue       |       | $      | 52,346 |   |        | $      | 41,291 | 
|                      |                                   |                     |       |        |        |   |        |       
|Pre-tax income (loss) |                                   | $                   | 2,824 |        |        | $ | (3,425 | )     
|                      |                                   |                     |       |        |        |   |        |       

Revenues from specialty risk management
operations increased $11.0 million, or 26.8%, to
$52.3 million for the quarter ended September 30,
2003, from $41.3 million for the comparable period in 2002. This
increase reflects an $8.8 million, or 28.2% increase in net
earned premiums to $40.2 million in the quarter ended
September 30, 2003, from $31.3 million in the
comparable period in 2002. This increase reflects earned
premiums on new business written in 2003 of $6.3 million
and growth in existing business of $9.5 million primarily
from rate increases and growth in policies. Offsetting this
increase is a reduction in earned premium of $6.9 million
related to programs discontinued in 1999 and programs terminated
for leverage ratio purposes.

Management fees increased $1.5 million, or
50.3%, to $4.5 million for the quarter ended
September 30, 2003, from $3.0 million for the
comparable period in 2002. Claim fees increased
$1.6 million, or 84.5%, to $3.5 million from
$1.9 million for the comparable period in 2002. The
increase in management fees and claim fees reflects the
previously mentioned addition of new fee-for-service agreements
of $1.3 million and $2.0 million, respectively. This
increase in management fees and claim fees is partially offset
by a decrease in discontinued programs and the result of the
conversion of an existing fee-based program into an insured
program within the Companys underwriting subsidiary. Loss
control fees decreased $34,000, or 5.3%, to $603,000 from
$637,000 for the comparable period in 2002. This decrease is
mainly the result of the conversion of an existing fee-based
program into an insured program.

Net investment income decreased $523,000, or
14.0%, to $3.2 million in 2003, from $3.7 million in
2002. Average invested assets increased $16.7 million, or
5.8%, to $306.5 million in 2003, from $289.8 million
in 2002. The average investment yield for the third quarter of
2003 was 4.2% compared to 5.2% in 2002. The current pre-tax book
yield is 4.37% and current pre-tax reinvested yield is 3.04%.
The decrease in investment

24



---



##### Table of Contents



yields reflects the decline in the macro level of
interest rates and the tightening of yield spreads relative to
U.S. Treasuries in most sectors of the domestic taxable bond
market. During the third quarter, the Company began to shift
towards tax exempt securities in efforts to maximize after-tax
net investment income. The effective tax rate on investment
income decreased from 31.2% in 2002 to 31.0% in the third
quarter of 2003. The average increase in invested assets
reflects cash flows from underwriting activities (primarily the
cancellation of the surplus treaty and growth in 2003 gross
written premiums).


Specialty risk management operations generated
pre-tax income of $2.8 million for the quarter ended
September 30, 2003, compared to pre-tax loss of ($3.4
million) for the comparable period in 2002. This improvement
reflects the favorable impact of the previously indicated
fee-for-service agreements and improved underwriting results.
The GAAP combined ratio was 103.5% for the quarter ended
September 30, 2003, compared to 119.5% for the same period
in 2002.

Net loss and LAE increased $1.8 million, or
7.0%, to $26.4 million for the quarter ended
September 30, 2003, from $24.6 million for the same
period in 2002. The Companys loss and LAE ratio decreased
by 12.7 percentage points to 70.6% for the quarter ended
September 30, 2003, from 83.3% for the same period in 2002.
This ratio is the unconsolidated net loss and LAE in relation to
net earned premium. This improvement in the loss and LAE ratio
reflects rate increases achieved in 2002 and 2003, the
cancellation of the surplus relief treaty, and the absence of
reserve strengthening and earned premiums from discontinued
programs.

The Companys expense ratio improved
3.3 percentage points to 32.9% for the quarter ended
September 30, 2003, from 36.2% for the same period in 2002.
This ratio is the unconsolidated policy acquisition and other
underwriting expenses in relation to net earned premium. The
improvement reflects a reduction in gross commissions, a
$437,000 adjustment related to commissions returned on a
previously terminated program, and the ability to leverage fixed
costs. This improvement is offset by an increase in insurance
related assessments.

Agency
Operations

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

|                |  |                  |       |      |  |   |       | 
|--------------- |  | ---------------- | ----- | ---- |  | - | ----- | 
|                |  |                 
|                |  | For the Quarters
|                |  | Ended           
|                |  | September 30,   
|                |  |                 
|                |  | 2003             |       | 2002
|                |  |                  |       |     
|Net commission  |  | $                | 3,527 |      |  | $ | 3,113 | 
|Pre-tax income* |  | $                | 1,465 |      |  | $ | 1,275 | 



---



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

Revenue from agency operations, which consists
primarily of agency commission revenue, increased $414,000, or
13.3%, to $3.5 million for the quarter ended
September 30, 2003, from $3.1 million for the
comparable period in 2002. This increase is primarily the result
of $146,000 contingent commission relating to the California
agency operation, and the remaining increase reflects revenue
from new producers.

Agency operations generated pre-tax income of
$1.5 million for the quarter ended September 30, 2003,
compared to $1.3 million for the comparable period in 2002.
The increase in the pre-tax margin is the result of the above
mentioned contingent commission, offset by the loss of a few
accounts in the Michigan agencies.

Other Items



| |         
| | --------
| | Reserves

For the quarter ended September 30, 2003,
the Company reported an decrease in net ultimate loss estimates
for accident years 2002 and prior to be $(0.9 million), or
(0.5)% of $193.1 million of net loss and LAE reserves at
December 31, 2002. There were no significant changes in the key
assumptions utilized in the analysis and calculations of the
Companys reserves during 2003.

25



---



##### Table of Contents





| |                                                                   
| | ------------------------------------------------------------------
| | Salary and Employee Benefits and Other
    Administrative Expenses

Salary and employee benefits for the quarter
ended September 30, 2003 increased $3.3 million, or
35.5%, to $12.4 million, from $9.1 million for the
comparable period in 2002. This increase is primarily the result
of the hiring of employees to handle new fee-for-service
agreements. In addition, this increase reflects both merit
increases and variable compensation related to profitability,
and a slight increase in staffing levels to support new managed
programs. Other administrative expenses for the quarter ended
September 30, 2003 decreased $161,000. This decrease in
administrative expenses is attributable to a reduction in
policyholder dividends and the 2002 write-off of receivable
balances on a previously discontinued program, offset by the new
fee-for-service agreements. Salary and employee benefits and
administrative expenses include both corporate overhead and the
holding company expenses included in the reconciling items of
the Companys segment information.



| |                 
| | ----------------
| | Interest Expense

Interest expense for the quarter ended
September 30, 2003 decreased by $375,000, or 64.4%, to
$207,000, from $582,000 for the comparable period in 2002.
Interest expense is primarily attributable to the Companys
term loan and revolving line of credit. This decrease reflects
both the reduction in the average outstanding balance and a
reduction in the average interest rate. The average outstanding
balance during the quarter ended September 30, 2003, was
$20.0 million, compared to $34.6 million for the same
period in 2002. The average interest rate in 2003 was 4.1%,
compared to 6.7% in 2002. The applicable margin in the
agreement, which ranges from 200 to 300 basis points above
eurocurrency rates, is determined by the level of the fixed
charge coverage ratio. The fixed charge coverage ratio, as
defined by the credit facility, is the ratio of the
non-regulated earnings before interest and taxes for the four
preceding fiscal quarters to the sum of fixed charges which
include interest expense, principal payments payable, stock
repurchases, and dividends declared during the period. Any
unused portion of the revolving credit as of the date of
determination reduces the sum of these fixed charges. This ratio
at September 30, 2003, was 4.6 to 1.0, compared to the
covenant minimum of 1.2 to 1.0.

On September 30, 2003, a subsidiary trust of
the Company issued $10.0 million of mandatorily redeemable
trust preferred securities (TPS) to a trust formed
by an institutional investor. The Companys trust received
a total of $9.7 million in net proceeds, after the deduction of
approximately $300,000 of commissions paid to the placement
agents in the transaction. The gross proceeds from the issuance
of the TPS were used to purchase floating rate junior
subordinated deferrable interest debentures (the
Debentures) issued by the Company. The TPS have
financial terms similar to those of the Debentures. The
Debentures mature in 30 years and provide for interest at
the three-month LIBOR plus 4.05%, payable quarterly beginning in
December 2003.



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

Federal income tax expense for the quarter ended
September 30, 2003 was $1.2 million, or 33.1% of income
before taxes. For the same quarter last year, the Company
reflected a federal income tax benefit of ($1.0 million),
or 34.8% of loss before taxes. The increase in tax expense is
the result of an increase in earnings. The Companys
effective tax rate differs from the 34% statutory rate primarily
due to tax-exempt investment income. The overall change in the
effective rate in comparison to the quarter ended
September 30, 2002 is related to changes in the proportion
of tax-exempt investment income to total underwriting results.

Liquidity and Capital Resources

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

26



---



##### Table of Contents



dividends, and other operating expenses of the
holding company and the non-regulated subsidiaries, which have
been set forth in the table below for the periods ending
September 30, 2003 and 2002.


|                           |                                                                                  |                     |       |       |  |   |      |        |  
|-------------------------- | -------------------------------------------------------------------------------- | ------------------- | ----- | ----- |  | - | ---- | ------ | -
|                           |                                                                                  |                    
|                           |                                                                                  | For the Nine Months
|                           |                                                                                  | Ended September 30,
|                           |                                                                                  |                    
|                           |                                                                                  | 2003                |       | 2002 
|                           |                                                                                  |                     |       |      
|Net income (loss)          |                                                                                  | $                   | 7,935 |       |  | $ | (859 | )     
|                           |                                                                                  |                     |       |       |  |   |      |       
|Regulated Subsidiaries     |                                                                                  |                     |       |       |  |   |      |       
|                           | Net income (loss)                                                                |                     | $     | 3,029 |  |   | $    | (2,426 | )
|                           |                                                                                  |                     |       |       |  |   |      |       
|Non-regulated Subsidiaries |                                                                                  |                     |       |       |  |   |      |       
|                           | Net income                                                                       |                     | $     | 4,906 |  |   | $    | 1,567  |  
|                           | Interest, depreciation, and amortization                                         |                     |       | 2,190 |  |   |      | 4,648  |  
|                           |                                                                                  |                     |       |       |  |   |      |       
|                           | Non-regulated net income, excluding interest,
    depreciation, and amortization |                     | $     | 7,096 |  |   | $    | 6,215  |  
|                           |                                                                                  |                     |       |       |  |   |      |       

|                           |                                                                                  |                     |       |       |  |   |        |        |  
|-------------------------- | -------------------------------------------------------------------------------- | ------------------- | ----- | ----- |  | - | ------ | ------ | -
|                           |                                                                                  |                    
|                           |                                                                                  | For the Quarters   
|                           |                                                                                  | Ended September 30,
|                           |                                                                                  |                    
|                           |                                                                                  | 2003                |       | 2002 
|                           |                                                                                  |                     |       |      
|Net income (loss)          |                                                                                  | $                   | 2,500 |       |  | $ | (1,891 | )     
|                           |                                                                                  |                     |       |       |  |   |        |       
|Regulated Subsidiaries     |                                                                                  |                     |       |       |  |   |        |       
|                           | Net income (loss)                                                                |                     | $     | 771   |  |   | $      | (1,792 | )
|                           |                                                                                  |                     |       |       |  |   |        |       
|Non-regulated Subsidiaries |                                                                                  |                     |       |       |  |   |        |       
|                           | Net income (loss)                                                                |                     | $     | 1,729 |  |   | $      | (99    | )
|                           | Interest, depreciation, and amortization                                         |                     |       | 759   |  |   |        | 1,224  |  
|                           |                                                                                  |                     |       |       |  |   |        |       
|                           | Non-regulated net income, excluding interest,
    depreciation, and amortization |                     | $     | 2,488 |  |   | $      | 1,125  |  
|                           |                                                                                  |                     |       |       |  |   |        |       

Cash flow provided by operations for the nine
months ended September 30, 2003 was $31.6 million,
compared to cash flow provided by operations of $879,000 for the
comparable period in 2002. The increase in cash flow from
operations primarily reflects an increase in earnings and growth
in written premiums.

On September 30, 2003, a subsidiary trust of
the Company issued $10.0 million of mandatorily redeemable
trust preferred securities (TPS) to a trust formed
by an institutional investor. The Companys trust received
a total of $9.7 million in net proceeds, after the deduction of
approximately $300,000 of commissions paid to the placement
agents in the transaction. The Company contributed
$6.3 million of the proceeds to its insurance company
subsidiaries and the remaining balance will be used for general
corporate purposes. The Debenture matures in 30 years and
provides for interest at the three-month LIBOR plus 4.05%,
payable quarterly beginning in December 2003.

The Company has a credit agreement which includes
a term loan and a revolving line of credit. This credit
agreement consists of a $20.0 million term loan and a
revolving line of credit for up to $8.0 million. The
Company uses the revolving line of credit to meet short-term
working capital needs. At September 30, 2003, the
Companys term loan had an outstanding balance of $15.5
million. The Company had no outstanding balance on the revolving
line of credit at September 30, 2003. At December 31,
2002, the outstanding balance on the term loan and revolving
line of credit was $18.8 million and $5.3 million,
respectively. The term loan calls for quarterly amortization
through July 1, 2006, at which time the term loan will be
paid in full. The quarterly amortization requires payments of
$1.0 million on April 1, 2003 and July 1, 2003;
$1.5 million on October 1, 2003; and $1.2 million
for the remaining quarterly amortization payments in 2004, 2005,
and 2006, with a final payment of $1.5 million on
July 1, 2006. The revolving line of credit will expire on
July 1, 2004, and is thereafter renewable on an annual
basis.

27



---



##### Table of Contents



The Company made principal payments of
$1.2 million on January 1, 2003, $1.0 million on
April 1, 2003 and July 1, 2003, and $1.5 million
on October 1, 2003, on the term loan.

Both the term loan and revolving line of credit
provide for interest at a variable rate based, at the
Companys option, upon either the prime rate or
eurocurrency rate. The applicable margin, which ranges from 200
to 300 basis points above eurocurrency rates, is determined by
the level of the fixed charge coverage ratio. Of all the
covenants, the most restrictive covenant is the fixed charge
coverage ratio. The fixed charge coverage ratio, as defined by
the credit facility, is the ratio of the non-regulated earnings
before interest and taxes for the four preceding fiscal quarters
to the sum of fixed charges which include interest expense,
principal payments payable, stock repurchases, and dividends
declared during the period. Any unused portion of the revolving
credit as of the date of determination reduces the sum of these
fixed charges. At September 30, 2003, this ratio was 4.6 to
1.0, compared to the covenant minimum of 1.2 to 1.0.

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

In addition, a non-insurance premium finance
subsidiary of the Company maintains a line of credit with a
bank, which permits borrowings up to 80% of the accounts
receivable, which collateralize the line of credit. At
September 30, 2003, this line of credit had an outstanding
balance of $3.8 million.

At September 30, 2003, shareholders
equity was $154.0 million, or $5.31 per common share,
compared to $147.4 million, or $4.98 per common share, at
December 31, 2002.

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

A significant portion of the Companys
consolidated assets represent assets of the Insurance Company
Subsidiaries that at this time, without prior approval of the
Michigan Office of Financial and Insurance Services
(OFIS), cannot be transferred to the holding company
in the form of dividends, loans or advances. The restriction on
the transferability to the holding company from its Insurance
Company Subsidiaries is limited by Michigan insurance regulatory
guidelines which, in general, are as follows: the maximum
discretionary dividend that may be declared, based on data from
the preceding calendar year, is the greater of each insurance
companys net income (excluding realized capital gains) or
ten percent of the insurance companys surplus (excluding
unrealized gains). These dividends are further limited by a
clause in the Michigan law that prohibits an insurer from
declaring dividends, except from surplus earnings of the
company. Earned surplus balances are calculated on a quarterly
basis. Since Star is the parent insurance company, its maximum
dividend calculation represents the combined Insurance Company
Subsidiaries surplus. Based upon the 2002 statutory
financial statements, Star may only pay dividends to the Company
during 2003 with the prior approval of OFIS. Stars earned
surplus position at December 31, 2002 was negative
$24.3 million. At September 30, 2003, earned surplus
was negative $26.2 million. The increase in negative earned
surplus was anticipated with the statutory recognition of
acquisition costs when premiums are written vs. earned. No
statutory dividends were paid in 2002.

Regulatory and Rating Issues

The National Association of Insurance
Commissioners (NAIC) has adopted a risk-based
capital (RBC) formula to be applied to all property
and casualty insurance companies. The formula measures required
capital and surplus based on an insurance companys
products and investment portfolio and is used as a tool to
evaluate the capital of regulated companies. The RBC formula is
used by state insurance regulators to monitor trends in
statutory capital and surplus for the purpose of initiating
regulatory action. In general, an insurance company must submit
a calculation of its RBC formula to the insurance department of
its state of

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domicile as of the end of the previous calendar
year. These laws require increasing degrees of regulatory
oversight and intervention as an insurance companys RBC
declines. The level of regulatory oversight ranges from
requiring the insurance company to inform and obtain approval
from the domiciliary insurance commissioner of a comprehensive
financial plan for increasing its RBC to mandatory regulatory
intervention requiring an insurance company to be placed under
regulatory control in a rehabilitation or liquidation proceeding.


At December 31, 2002, all of the Insurance
Company Subsidiaries were in compliance with RBC requirements.
Star reported statutory surplus of $93.8 million at
December 31, 2002, compared to the threshold requiring the
minimum regulatory involvement of $49.7 million in 2002. At
September 30, 2003, Stars statutory surplus was
$98.2 million. Statutory accounting principles differ in
some respects from generally accepted accounting principles
(GAAP). These differences, among other differences,
include the costs of acquiring and renewing business. Under
statutory accounting principles these acquisition costs are
expensed as premium is written, while under GAAP these costs are
deferred and recognized as premium is earned over the terms of
the policies or reinsurance treaties to which the costs relate.
At September 30, 2003, deferred policy acquisition costs
increased $6.8 million, or 56.3%, to $19.0 million,
compared to $12.1 million at December 31, 2002. This
increase reflects the increase in gross unearned premiums of
$43.0 million, or 62.5%, to $111.6 million at
September 30, 2003, compared to $68.7 million at
December 31, 2002.

Insurance operations are subject to various
leverage tests (e.g. premium to statutory surplus ratios), which
are evaluated by regulators and rating agencies. The
Companys targets for gross and net written premium to
statutory surplus are 3.0 to 1 and 2.0 to 1, respectively. As of
September 30, 2003, on a statutory consolidated basis,
gross and net premium leverage ratios were 2.4 to 1.0 and 1.8 to
1.0, respectively.

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

New Accounting Pronouncements

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

As of January 1, 2003, the Company adopted
the requirements of SFAS No. 148 utilizing the prospective
method. Under SFAS 148, compensation expense of $155,000 and
$35,000, has been recorded for stock options granted in the nine
months and quarter ended September 30, 2003, respectively.
No compensation cost has been recorded for stock option grants
issued during 2002 as the market value equaled the exercise
price at the date of grant.

On May 15, 2003, the FASB issued SFAS
No. 150 Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. The
statement requires issuers to classify as liabilities (or assets
in some circumstances) three classes of freestanding financial
instruments that embody obligations for the issuer. Generally,
the statement is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this statement did not
have an impact on our financial statements.

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In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 clarifies the requirements of SFAS
No. 5, Accounting for Contingencies, relating
to a guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. For certain guarantees
issued after December 31, 2002, FIN No. 45 requires a
guarantor to recognize, upon issuance of a guarantee, a
liability for the fair value of the obligations it assumes under
the guarantee. Guarantees issued prior to January 1, 2003
are not subject to liability recognition, but are subject to
expanded disclosure requirements. The adoption of FIN
No. 45 did not have a material impact on our financial
statements.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities. The
primary objective of FIN No. 46 is to provide guidance on
the identification of, and financial reporting for, entities
over which control is achieved through means other than voting
rights; such entities are known as variable interest entities.
FIN No. 46 requires variable interest entities to be
consolidated by the primary beneficiary of the variable interest
entities and expands disclosure requirements for both variable
interest entities that are consolidated as well as those within
which an enterprise holds a significant variable interest. FIN
No. 46 is required to be adopted by December 31, 2003.
We are currently evaluating the impact FIN No. 46 will have
on our financial statements.

Item
3.     Quantitative and Qualitative
Disclosures about Market Risk

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

Item
4.     Controls and
Procedures

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

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PART II  OTHER
INFORMATION






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

The information required by this item is included
under Note 7 of the Companys
Form 10-Q for the nine months ended September 30,
2003, which is hereby incorporated by reference.






|        |                                              
|------- | ---------------------------------------------
|Item 2. | Changes in Securities and Use of
    Proceeds

In September 2003, a subsidiary trust of the
Company issued $10 million of mandatorily redeemable trust
preferred securities (TPS) to a trust formed by an
institutional investor, Dekania CDO I, Ltd. The
Companys trust received a total of $9.7 million in
net proceeds, after the deduction of a total of approximately
$300,000 of commissions paid to the placement agent in the
transaction. The proceeds of the issuance were invested in the
Debentures issued by the Company, as described in Note 4 of
the consolidated financial statements included elsewhere in this
report. The Companys trust sold the TPS in a non-public
offering pursuant to Section 4(2) of the Securities Act of
1933, as amended.






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

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

|        |    |             |  |                                                                                                                                                                                                                                    
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 4  | .1          |  | TPS Indenture                                                                                                                                                                                                                      
|        | 10 | .1          |  | Third Amendment to Restated Credit Agreement
    between Meadowbrook Insurance Group, Inc. and Comerica Bank,
    dated September 29, 2003.                                                                                        
|        | 10 | .2          |  | TPS Purchase Agreement                                                                                                                                                                                                             
|        | 10 | .3          |  | TPS Amended and Restated Declaration of Trust                                                                                                                                                                                      
|        | 10 | .4          |  | TPS Guaranty Agreement                                                                                                                                                                                                             
|        | 31 | .1          |  | Certification of Robert S. Cubbin, Chief
    Executive Officer of the Corporation, pursuant to Securities
    Exchange Act Rule 13a-14(a).                                                                                         
|        | 31 | .2          |  | Certification of Karen M. Spaun, Senior Vice
    President and Chief Financial Officer of the Corporation,
    pursuant to Securities Exchange Act Rule 13a-14(a).                                                                 
|        | 32 | .1          |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Robert S. Cubbin,
    Chief Executive Officer of the Corporation.                        
|        | 32 | .2          |  | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Karen M. Spaun, Senior
    Vice President and Chief Financial Officer of the Corporation.

(B) Reports on Form 8-K:

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

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SIGNATURES

Pursuant to the requirements of the Securities
and Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto
duly authorized.



| |                                  
| | ---------------------------------
| | MEADOWBROOK INSURANCE GROUP, INC.



| |     |                   
| | --- | ------------------
| | By: | /s/ KAREN M. SPAUN

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

Dated: November 12, 2003

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EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                                    
|------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 4  | .1          |  | TPS Indenture                                                                                                                                                                                                                      
|        | 10 | .1          |  | Third Amendment to Restated Credit Agreement
    between Meadowbrook Insurance Group, Inc. and Comerica Bank,
    dated September 29, 2003.                                                                                        
|        | 10 | .2          |  | TPS Purchase Agreement                                                                                                                                                                                                             
|        | 10 | .3          |  | TPS Amended and Restated Declaration of Trust                                                                                                                                                                                      
|        | 10 | .4          |  | TPS Guaranty Agreement                                                                                                                                                                                                             
|        | 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.