##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                           
|-- |  | ------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
	2001                                              
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-14094



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Meadowbrook Insurance Group, Inc.

(Exact name of registrant as specified in its
charter)


|                                          |  |                                  
|----------------------------------------- |  | ---------------------------------
|Michigan                                  |  | 38-2626206                       
|(State of Incorporation)                  |  | (IRS Employer Identification No.)
|                                         
|26600 Telegraph Road, Southfield, MI      |  | 48034                            
|(Address of principal executive
	offices) |  | (Zip Code)                       

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

Securities registered pursuant to
Section 12(b) of the Act:


|                                       |  |                                     
|-------------------------------------- |  | ------------------------------------
|Title of Each Class                    |  | Name of Exchange on Which Registered
|                                       |  |                                     
|Common Stock, $.01 par value per share |  | New York Stock Exchange             

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 if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     þ

The aggregate market value of the voting stock
(common stock, $.01 par value) held by nonaffiliates of the
registrant was $13,960,638 on March 22, 2002, based on the
closing sales price of the Common Stock on such date.

The aggregate number of shares of the
Registrants Common Stock, $.01 par value, outstanding on
March 22, 2002 was 8,512,194.

Documents Incorporated by Reference

Certain portions of the Registrants Proxy
Statement for the Annual Meeting scheduled for May 1, 2002
are incorporated by reference into Part III of this report.



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TABLE OF CONTENTS



|                                                                                                                                      |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                                                                                                               
|Analysis of Loss and Loss Adjustment Expense Development                                                                             
|PART II                                                                                                                              
|Selected Consolidated Financial Data                                                                                                 
|MANAGEMENTS DISCUSSION AND ANALYSIS                                                                                                 
|PART III                                                                                                                             
|PART IV                                                                                                                              
|REPORT OF MANAGEMENT                                                                                                                 
|REPORT OF INDEPENDENT ACCOUNTANTS                                                                                                    
|CONSOLIDATED BALANCE SHEET                                                                                                           
|CONSOLIDATED STATEMENT OF INCOME                                                                                                     
|CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME                                                                                       
|CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY                                                                                       
|CONSOLIDATED STATEMENT OF CASH FLOWS                                                                                                 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                           
|EXHIBIT INDEX                                                                                                                        
|CONDENSED FINANCIAL INFORMATION OF REGISTRANT MEADOWBROOK INSURANCE GROUP, INC. PARENT COMPANY ONLY BALANCE SHEET                    
|CONDENSED FINANCIAL INFORMATION OF REGISTRANT MEADOWBROOK INSURANCE GROUP, INC. PARENT COMPANY ONLY INCOME STATEMENT                 
|CONDENSED FINANCIAL INFORMATION OF REGISTRANT MEADOWBROOK INSURANCE GROUP, INC. PARENT COMPANY ONLY STATEMENT OF COMPREHENSIVE INCOME
|CONDENSED FINANCIAL INFORMATION OF REGISTRANT MEADOWBROOK INSURANCE GROUP, INC. PARENT COMPANY ONLY STATEMENT OF CASH FLOWS          
|SIGNATURES                                                                                                                           
|Employment Contact Bet. Co. & Jeffrey H. Koenig                                                                                      
|Permanent Reduction In Revolving Credit Aggregate                                                                                    
|Amendment No. 5 to Revolving Credit Agreement                                                                                        
|Statement Re: Computation of Per Share Earnings                                                                                      
|List of Subsidiaries                                                                                                                 
|Consent of Independent Accountants                                                                                                   
|Power of Attorney                                                                                                                    



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MEADOWBROOK INSURANCE GROUP, INC.






PART I

Item 1.     Business

The Company

Meadowbrook Insurance Group, Inc. (the
Company) is a Michigan corporation, which was
originally incorporated in 1985. The Company was formerly known
as Star Holding Company. In November 1995, the Company changed
its name and acquired Meadowbrook, Inc.
(Meadowbrook). Meadowbrook was founded in 1955 as
Meadowbrook Insurance Agency and was subsequently incorporated
in Michigan in 1965.

The Company serves as a holding company not only
for Meadowbrook but also for Star Insurance Company
(Star), Savers Property and Casualty Insurance
Company (Savers) and American Indemnity Insurance
Company, Ltd. (American Indemnity). Star was formed
in 1985 as a subsidiary of Star Holding Company. Star then
acquired Savers in 1990, and the Company acquired American
Indemnity in 1994.

Meadowbrook acquired Association Self Insurance
Services, Inc. (ASI) of Montgomery, Alabama in
November of 1996. ASI is a full service risk-management
operation focused on insurance pools and trust funds whose
services include claims, loss control, managed care, and policy
issuance. ASIs operations were consolidated with
Meadowbrooks existing operations in Montgomery, Alabama.

On July 1, 1997, the Company acquired Crest
Financial Corporation (Crest), a California-based
holding company, which formerly owned Williamsburg National
Insurance Company (Williamsburg), an insurance
carrier, and Crest Financial Services, a risk management service
company. Crest provides risk management services primarily to
the trucking industry within California. Effective
December 31, 1999, the Company reorganized its holding
structure, which resulted in Crest assigning Williamsburg to
Star.

On April 30, 1998, the Company acquired the
business of Villari & Associates, Inc. and operated the
agency as Meadowbrook-Villari Agency. The purchase price was
$5.6 million comprised of $4.5 million in cash and
33,433 shares of common stock of the Company, resulting in
goodwill of $5.6 million. The Meadowbrook-Villari Agency, a
Florida-based insurance agency, offered professional liability
products and programs, group health and disability, and property
and casualty products. Effective July 1, 2001, the Company
sold the business of Meadowbrook-Villari Agency. It is
anticipated this sale will result in a reduction of annualized
agency revenue of approximately $3.2 million, but should not
have a material impact on the Companys overall results of
operations. The Company recorded a loss of $1,097,000 in
conjunction with the sale.

On July 31, 1998, the Company acquired
Florida Preferred Administrators, Inc. (Florida
Preferred), a third party administrator, and Star acquired
Southeastern Holding Corporation, the holding company for an
insurance carrier Ameritrust Insurance Corporation
(Ameritrust), both of which are located in Sarasota,
Florida. Florida Preferred provides a broad range of risk
management services to purchasers of workers compensation
insurance from Ameritrust. This acquisition was subject to a
contingent earn-out provision, which was finalized in 2000.
During 2000, the Company paid approximately $4.7 million,
which satisfied all of the Companys obligations under the
transaction.

On August 6, 1999, the Company acquired the
assets of TPA Associates, Inc., all the outstanding stock of TPA
Insurance Agency, Inc., and Preferred Insurance Agency, Inc. and
approximately 94% of the outstanding stock of Preferred
Insurance Company, Ltd. (PICL) (collectively,
TPA). TPA is a program-oriented risk management
company that provides risk management services to self-insured
clients, creates and manages alternative risk management
programs, and performs underwriting, policy issuance and loss
control services. In January 2002, the Company purchased the
remaining 6% minority interest of PICL at a cost of $288,000.

Effective January 31, 2002, the Company sold
the business of Meadowbrook International, Ltd. It is
anticipated this sale will result in a reduction of annualized
reinsurance brokerage commission of

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MEADOWBROOK INSURANCE GROUP, INC.


approximately $450,000, but should not have a
material impact on the Companys overall results of
operations. The Company will record a gain of approximately
$200,000 in conjunction with the sale.

Industry Segments

Since 1976, the Company has been developing and
managing alternative market risk management programs for defined
client groups and their members. The alternative market, which
developed as a result of historical volatility in the cost and
availability of traditional commercial insurance coverages,
includes a wide range of approaches to financing and managing
risk exposures, such as captives and rent-a-captives, risk
retention and risk purchasing groups, governmental pools and
trusts, and self-insurance plans. According to industry reports,
the alternative market accounts for an estimated 45% of the
United States property and casualty premium written. The Company
believes that the alternative market is one of the preferred
means of managing property and casualty insurance and that the
Company is well positioned by focusing on alternative risk
solutions for agents, brokers, and insureds of all sizes.
Through the Company, clients now have access to the more
sophisticated risk management techniques previously available
only to larger corporations.

General

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

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

Services provided and insurance lines of business
include:

|                                                  |  |                                 
|------------------------------------------------- |  | --------------------------------
|Services                                          |  | Lines of Business               
|                                                  |  |                                 
| Risk Analysis and Identification                |  |  Workers Compensation         
| Feasibility Studies                             |  |  Commercial Multi-Peril        
| Program and Product Design                      |  |  General Liability             
| Sales, Marketing and Public Relations           |  |  Errors and Omissions          
| Consultation, Education and Training            |  |  Automobile                    
| Captive Formation                               |  |  Owners, Landlord and
	Tenant  
| Captive Management (Onshore and
	Offshore)      |  |  Employment Practices Liability
| Rent-a-Captive                                  |  |  Professional Liability        
| Underwriting/ Risk Selection                    |  |  Legal                         
| Policy Issuance                                 |  |  Medical                       
| Reinsurance Brokerage                           |  |  Real Estate Appraisers        
| Claims Handling and Administration              |  |  Pharmacists                   
| Litigation Management                           |  |  Inland Marine                 
| Accounting and Financial Statement
	Preparation |  |  Cargo                         
| Regulatory Compliance                           |  |  Watercraft                    
| Actuarial and Loss Reserve Analysis             |  |  Product Liability             
| Loss Prevention and Control                     |  |  Excess Reinsurance            
| Audit Support                                   |  |  Commercial Property           
| Information Technology and Processing           |  |                                 

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MEADOWBROOK INSURANCE GROUP, INC.


Description of Services and
Capabilities

Program Design.Prior to implementing a new program,
the Company generally reviews background data, including:
financial projections for the contemplated program; historical
loss experience; actuarial studies of the underlying risks; the
credit worthiness of the potential client; and the availability
of reinsurance. A senior management team and associates
representing each of the risk-management disciplines within the
Company work together to design, market, and implement new
programs. While the Company does not generate substantial fees
for program design services, these services are an integral part
of the Companys program management services.

Formation and Management of Risk-Bearing
Entities.The Company generates fees
by forming and managing risk-bearing entities for clients and
agents. The Company currently manages twenty-seven captives
and/or rent-a-captives and holds a minority interest in seven of
these captives. The offshore captives are managed by one of the
Companys subsidiaries in Bermuda and Barbados.

Risk Selection.The
Company performs underwriting services for its clients, its
clients captives and certain individual accounts.
Compensation for underwriting services generally is included in
the Companys management fees. The Companys
underwriting personnel help develop the proper criteria for
selecting risks, while actuarial and reinsurance personnel
evaluate and recommend the appropriate levels of risk retention.
The program is then tailored according to the requirements and
qualifications of each client.

Reinsurance Brokerage.Through its reinsurance brokerage
subsidiary, Meadowbrook Intermediaries, Inc., the Company earns
fees by placing excess-of-loss reinsurance and insurance
coverage with high deductibles for insurance companies, captives
and self-insured programs managed by the Company. Reinsurance is
also placed for clients that do not have other business
relationships with the Company.

Loss Control and Loss Prevention.The Company earns fees for loss
control services, which are designed to help clients prevent or
limit certain loss events. Through an evaluation of the
clients workplace environment, the Companys loss
control specialists assist the client in planning and
implementing a loss prevention program and, in certain cases,
provide educational and training programs for the client.

Claims Handling and Administration.The Company has experience in handling
and managing claims for workers compensation and most
other casualty lines, such as property and general liability. It
handles all claims functions for most of the programs managed by
the Company. The Companys involvement in claims handling
and administration provides feedback to program managers in
assessing the clients risk environment and the overall
structure of the program.

Customers, Marketing, and
Distribution

Fee Based
Operations:

Agencies.The agency
operation was formed in 1955 as the Companys original
business. The Companys insurance agencies produce
principally commercial insurance, as well as personal, property,
casualty, life and accident and health insurance, with more than
50 insurance carriers from which they earn commission
income and contingencies. The Companys combined agency
operations have grown to be one of the largest agencies in
Michigan and have expanded into California through acquisition.
In total, the Companys agency operations generated
commissions of $15.7 million, $17.2 million and
$16.4 million for the years ended December 31, 2001,
2000, and 1999, respectively.

Managed Programs.In
a managed program, the Company, through Meadowbrook, earns
commission and fee revenue by providing management and other
services to a clients risk-bearing entity, but generally
assumes no insurance risk and does not share in the operating
results of such programs. The Company believes its managed
programs provide a stable source of revenue, as well as
opportunities for revenue growth without a proportionate
increase in expenses. Revenue growth may occur through the sale
of existing managed program products to additional members of
the sponsoring client group, the expansion of coverages and
services

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MEADOWBROOK INSURANCE GROUP, INC.


provided to existing programs, and the creation
of programs for new client groups (such as additional municipal
associations) with needs that are similar to existing client
groups.

Managed program services for which Meadowbrook
receives fee-based revenues include: program design and
development; underwriting; reinsurance brokerage; policy
administration; loss control and prevention services (including
the provision of specialized law enforcement training); claims
and litigation management; information processing and accounting
functions; and general management oversight of the program on
behalf of the sponsoring client group. Fees received by the
Company under its managed programs are generally either a fixed
amount or based on a percentage of premium serviced.

Meadowbrook specializes in providing managed
programs to public entity associations and currently manages
public entity pools and other captive insurance entities which
provide insurance coverage for over 2,500 participants,
including city, county, township and village governments in five
states. Over the years, Meadowbrook has been able to expand the
services offered under existing programs, as well as to increase
the number of participants in these managed programs.

In addition to municipal associations,
Meadowbrook also manages offshore captives and other insurance
entities including the Companys insurance subsidiaries
Star, Savers, Williamsburg, Ameritrust, American Indemnity, and
PICL.

In total, Meadowbrook and its subsidiaries employ
approximately 570 associates to service the Companys
clients and provide management services to the Insurance
Operations as defined below.

Insurance
Operations:

The Companys major insurance company
subsidiaries, Star, Savers, Williamsburg, Ameritrust, and PICL
(collectively referred to as Insurance Operations),
issue insurance policies for risk-sharing and fully-insured
programs. These companies are complemented by American
Indemnity, which offers clients a rent-a-captive vehicle for
risk-sharing programs. The Insurance Operations are managed by
Meadowbrook and therefore have no employees.

The Insurance Operations are authorized to write
business, on either an admitted or surplus lines basis, in fifty
states. Through risk-sharing and fully insured programs, the
Insurance Operations primarily offer workers compensation,
commercial multiple peril, inland marine and other liability
coverages. For the year ended December 31, 2001, the
workers compensation line of business accounted for 49.4%
and 42.4% of gross written premiums and net earned premiums,
respectively.

Star, Savers, Williamsburg, and Ameritrust are
domiciled in Michigan, Missouri, California and Florida,
respectively. American Indemnity and PICL are Bermuda-based
insurance companies.

The Company provides alternative risk management
products and services to certain large client groups and
associations and then markets them to their individual members.
Within these groups, the Company targets small to medium sized
accounts. In 2001, 2000, and 1999, the Companys top four
programs, collectively, accounted for 29.4%, 21.6% and 25.9%,
respectively, of the Companys total net earned premium.
The loss or cancellation of any of the Companys
significant programs by the relevant client groups, or the
general availability of commercial market coverage to members of
such groups on more favorable terms than provided under the
Companys programs, could have a material adverse effect on
the Companys results of operations. Some of the
Companys clients may require its insurance companies to
retain an A- (Excellent) or better A.M.
Best rating. In August 2001, the Companys rating was
downgraded to B (Fair) by
A.M. Best. While the Company has not yet experienced a
material impact on its business to date, the impact of this
downgrade may have a material adverse impact on its ability to
market its insurance products. If the Company is unsuccessful in
increasing its capital in the immediate future, and its rating
remains at the current level, certain programs and insureds may
seek other insurance carriers with higher ratings. While the
Company has no reason to believe that any downward adjustment
will be made, there can

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MEADOWBROOK INSURANCE GROUP, INC.


be no assurance that A.M. Best will not further
reduce its rating of the Companys insurance company
subsidiaries in the future.

Client Risk-Sharing.In a client risk-sharing program, the
Company participates in the operating results of the program,
and the client group also shares in such results through a
captive, a rent-a-captive or a retrospectively-rated program. In
many instances, a captive owned by a client reinsures a portion
of the risk on a quota-share basis. In addition to premium
revenue and investment income from its participation in the
operating results of the program, the Company may also be
compensated through the receipt of ceding commissions and other
fees for policy issuance services and acquisition costs, captive
management services, reinsurance brokerage, loss prevention
services and claims handling and administrative services. For
financial reporting purposes, ceding commissions are treated as
a reduction in underwriting expenses.

The Companys experience has been that the
number of claims and the cost of losses tend to be lower in
risk-sharing programs than with traditional forms of insurance.
The Company believes that client risk-sharing motivates insureds
to focus on loss prevention and loss control measures and adhere
to stricter underwriting guidelines.

The Company assists the sponsoring group with the
formation of the captive, which is capitalized by contributions
from members of the sponsoring group in exchange for shares of
the captive. The captive is generally managed for a fee by an
offshore subsidiary of the Company. The Company works with the
client to determine the amount of risk exposure that will be
assumed by the captive, which varies depending on the
captives capitalization, the line of business, the amount
to be retained by the Company and the amount to be reinsured by
excess reinsurers. The Company then issues an insurance policy
and receives premium from the insured. Pursuant to the
quota-share reinsurance agreement with the captive, the Company
generally cedes (transfers) a portion of the retained risk to
the captive and pays to the captive its share of the net premium
(after deducting ceding commissions, policy issuance fees, the
cost of excess reinsurance, taxes and other fees and expenses).
The Company generally seeks to cede approximately 50% of its
loss exposures, but in some cases cedes as little as 20% or as
much as 80% of its loss exposures. The Company secures
obligations due from captives through the use of Funds Withheld
Trusts or Letters of Credit. At December 31, 2001, the
Company had risk exposure in excess of collateral in the amount
of $14.1 million on these programs, of which the Company
has an allowance of $6.5 million related to these
exposures. Through its reinsurance intermediary subsidiary, the
Company obtains excess-of-loss reinsurance subject to agreed
upon limits and retention levels. The Company generally
administers a significant portion of the claims handling
functions, and the captive provides funds to the Company for the
payment of the captives proportionate share of paid claims
and claims expenses. The captive realizes investment income from
its capital, unearned premium and loss reserves. Also, the
captive shares in the underwriting results.

The Company also offers its clients
rent-a-captive risk-sharing programs. These programs
allow a client to retain a significant portion of its own loss
exposure without the administrative costs and capital commitment
required to establish and operate its own captive.

In another variation on client risk-sharing, the
Company establishes retrospectively-rated programs for
individual accounts. In such a program, the Company works with
the client to develop the appropriate self-insured retention and
loss fund amount and then helps arrange for excess of loss
reinsurance. The client reimburses the Company for all claim
payments within the clients retention. The Company
generally earns a management fee (which includes claims and loss
control fees). In most of these programs, the Company also
participates in the operating results of the reinsurance
coverage and earns a ceding commission.

Agent Risk-Sharing.The Company also writes program
business on a risk-sharing basis with agents or brokers. The
Company believes agent risk-sharing has grown as a result of
market volatility and lack of coverage availability in the
traditional market. Risk-sharing is achieved either through an
agent-owned captive, rent-a-captive or through a contingent
commission structure based upon the program underwriting results.

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MEADOWBROOK INSURANCE GROUP, INC.


The agent may own a captive or purchase an
interest in a rent-a-captive, which acts as a reinsurer on
business produced. In some cases, the captives
shareholders may include key producers, subproducers or
insureds. In other circumstances, the agent accepts a lower
up-front commission in exchange for a multi-year contingent
commission based on operating results.

Fully-Insured Programs.In fully-insured programs, the Company
provides traditional insurance without a risk-sharing mechanism
and derives revenue exclusively from earned premiums and
investment income. Fully-insured programs are developed in
response to a specific market opportunity and generally when the
Company believes there is potential to evolve into a
risk-sharing program.

Surety Bonds.The
Company formed a surety bond business unit in late 1993 and
began issuing contract surety and licensee bonds in 1994. The
Company earned premium revenue on surety bonds issued through
general agents throughout the United States, including a wholly
owned subsidiary of the Company. General agents were paid
commissions and, in some cases, profit sharing bonuses based
upon loss ratios. The general agents had limited underwriting
authority. In marketing payment and performance surety bonds to
clients, the Company generally considered the net worth and
working capital ratios and the clients experience,
expertise, financial statements and historical track record. In
certain instances, the Company required collateral before
issuing a surety bond. The form of collateral varied depending
upon an assessment of the risk factors associated with the
surety bond. Generally, collateral consisted of escrowed cash,
letters of credit or investment securities, all of which were
held through the term of the bond.

In December 1996, Star entered into a five-year
joint underwriting agreement with Connecticut Surety Company
(CSC), whereby Star transferred the underwriting
risk on the majority of the Companys existing surety bond
business. Effective June 1, 2000, CSC no longer assumes
risk on new or renewal business from Star; however, one of
CSCs subsidiaries continues to act as a general agent for
the Company. This new and renewal business is now 100% reinsured
to unaffiliated reinsurers with an A.M. Best rating of
A or better. Effective January 2002, CSC sold the
renewal rights to the business of CSC and its subsidiaries to a
third party, which will now underwrite all new and renewal
business, excluding those bonds which Star must renew due to
statutory requirements.

In December 1998, CSC entered into an agreement
with Evergreen National Indemnity Company to transfer most of
its contract surety business it wrote on behalf of Star. The
agreement provides for the transfer of the underwriting risk on
this class of bonds from CSC to Evergreen National Indemnity
Company.

Effective May 26, 2000, CSC executed a
Subordinated Surplus Note in favor of Star in the principal sum
of $195,000. Fifty percent of the principal amount was due on
May 26, 2001; the outstanding balance, together with all
unpaid interest, is due on May 26, 2002. Interest earns at
9% per annum, with interest payments to be made quarterly,
subject to all terms and conditions of the Note. Effective
May 26, 2000 and July 14, 2000, Connecticut Surety
Corporation executed Promissory Notes in favor of the Company in
the amounts of $30,000 and $270,000, due on May 26, 2003
and July 14, 2003, respectively. Interest earns at 9% per
annum, payable semi-annually beginning on December 31,
2000, subject to the terms and conditions of the Notes.
Furthermore, Star purchased a portion of CSCs outstanding
loan with Fleet Bank for $124,800. Interest and repayment terms
are in accordance with the original terms between CSC and Fleet
Bank. Other investors executed similar notes with CSC in varying
amounts and also purchased a portion of the CSC loan with Fleet
Bank.

Effective December 31, 2000, CSC executed a
Subordinated Surplus Note with Star in the principal sum of
$3.8 million. Interest earns at 9% per annum, payable
quarterly beginning April 1, 2001. These loan proceeds were
deposited by CSC into a trust account established for the
benefit of Star in order to collateralize CSCs reinsurance
obligations under the reinsurance agreements described above.
This Subordinated Surplus Note, along with the other notes
described above, were intended to be converted into Voting
Convertible Preferred Stock of CSC, or its parent, as part of
recapitalization of CSC, pursuant to a Letter of Intent dated
December 31, 2000 between CSC, Star, and other investors.
However, Star and the other investors decided not to exercise
their conversion rights. As such, Star remains a surplus note
holder of CSC in the amounts and

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MEADOWBROOK INSURANCE GROUP, INC.


terms described above. The Company has recorded
an impairment of $870,000, which accounts for any
uncollateralized portion of these notes.

As of September 30, 2001, CSC had capital
and surplus of $5.0 million. On February 6, 2002, the
Connecticut Insurance Department placed CSC into Rehabilitation.

At December 31, 2001, the Company had
approximately $1.5 million of unsecured reinsurance
recoverables on unpaid losses due from CSC in excess of
collateral and allowances. Also during 2001, the Company
recorded a provision of $4.5 million related to balances due
from CSC, of which $3.5 million was related to reinsurance
recoverable balances.

Sales and Marketing.The Company markets its programs and
services to associations, groups, local, regional and national
insurance agents, and insurance consultants. Once a program has
been developed for a particular association or group, the
Company generally then markets the program to members of the
association or group. Sales and marketing efforts include
personal contact, direct mail, telemarketing, advertising,
internet based marketing including affiliations with an
insurance based web portal (captive.com) and the Companys
corporate web site (www.meadowbrook.com), and attendance at
seminars and trade and industry conventions. In June 2000, the
Company launched its Advantage System (Advantage),
an internet-based business processing system. The system is now
available in more than thirty states for the Companys
workers compensation programs.

Reserves

The information required by this item is
incorporated by reference to pages 44-45 and 49-50 of the
Notes to the Consolidated Financial Statements, and
pages 19, and 22-24 of item 7, Managements
Discussion and Analysis.

Reserves are computed by the Company based on
actuarial principles and procedures applicable to the lines of
business written by the Company. These reserve calculations are
reviewed regularly by management and independent actuarial
consultants. The Company engages independent actuarial
consultants on an annual basis to express an opinion as to the
adequacy of statutory reserves established by management. These
opinions are filed with the various jurisdictions in which the
Company is licensed. Provisions for inflation are implicitly
considered in the reserving process. For GAAP and statutory
purposes, the Companys reserves are carried at the total
estimate for ultimate expected loss without any discount to
reflect the time value of money.

Significant periods of time often elapse between
the occurrence of an insured loss, the reporting of the loss to
the Company, and the Companys payment of that loss. To
recognize liabilities for unpaid losses, the Company establishes
reserves as balance sheet liabilities representing estimates of
amounts needed to pay reported and unreported losses
(IBNR) and loss adjustment expenses
(LAE).

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MEADOWBROOK INSURANCE GROUP, INC.


The following table shows the development of
reserves for unpaid losses and LAE from 1992 through 2001 for
the Companys current insurance subsidiaries.

Due to the Companys adoption of SFAS 113,
the bottom portion of the table shows the impact of reinsurance
for the years 1993 through 2000, reconciling the net reserves
shown in the upper portion of the table to gross reserves.






Analysis of Loss and Loss Adjustment Expense
Development


|                                             |               |                          |        |        |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|-------------------------------------------- | ------------- | ------------------------ | ------ | ------ | - | ---- | ------ | ------ | - | ---- | ------ | ------ | - | ---- | ------- | ------ | -- | ---- | ------- | ------- | -- | - | ------- | ------- | -- | - | ------- | ------- | -- | - | ------- | ------- | -- | - | ------- | ------- | -- | - | ------- |  | 
|                                             |               |                         
|                                             |               | Years Ended December 31,
|                                             |               |                         
|                                             |               | 1992                     |        | 1993   |   | 1994 |        | 1995   |   | 1996 |        | 1997   |   | 1998 |         | 1999   |    | 2000 |         | 2001   
|                                             |               |                          |        |        |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |        
|                                             |               |                         
|                                             |               | (Dollars in thousands)  
|Reserves for losses and LAE at end of period |               | $                        | 23,545 |        |   | $    | 35,744 |        |   | $    | 47,149 |        |   | $    | 64,668  |        |    | $    | 65,775  |         |    | $ | 60,786  |         |    | $ | 84,254  |         |    | $ | 127,500 |         |    | $ | 172,862 |         |    | $ | 198,653 | 
|Cumulative paid as of                        |               |                          |        |        |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         | 
|                                             | 1 year later  |                          |        | 5,420  |   |      |        | 11,172 |   |      |        | 15,792 |   |      |         | 25,659 |    |      |         | 31,626  |    |   |         | 31,368  |    |   |         | 39,534  |    |   |         | 55,361  |    |   |         | 73,079  |    |   |         |  | 
|                                             | 2 years later |                          |        | 10,052 |   |      |        | 19,298 |   |      |        | 26,227 |   |      |         | 42,969 |    |      |         | 49,930  |    |   |         | 47,313  |    |   |         | 57,192  |    |   |         | 91,088  |    |   |         |         |    |   |         |  | 
|                                             | 3 years later |                          |        | 13,554 |   |      |        | 23,571 |   |      |        | 33,227 |   |      |         | 52,222 |    |      |         | 58,362  |    |   |         | 56,848  |    |   |         | 77,214  |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 4 years later |                          |        | 15,598 |   |      |        | 26,700 |   |      |        | 36,644 |   |      |         | 57,443 |    |      |         | 64,018  |    |   |         | 65,517  |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 5 years later |                          |        | 16,574 |   |      |        | 27,492 |   |      |        | 37,450 |   |      |         | 59,182 |    |      |         | 67,928  |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 6 years later |                          |        | 17,341 |   |      |        | 28,527 |   |      |        | 38,865 |   |      |         | 60,653 |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 7 years later |                          |        | 17,853 |   |      |        | 29,469 |   |      |        | 39,929 |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 8 years later |                          |        | 18,455 |   |      |        | 29,979 |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 9 years later |                          |        | 18,684 |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|Reserves re-estimated as of end of year:     |               |                          |        |        |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         | 
|                                             | 1 year later  |                          |        | 22,609 |   |      |        | 35,354 |   |      |        | 46,738 |   |      |         | 65,058 |    |      |         | 67,010  |    |   |         | 69,012  |    |   |         | 99,316  |    |   |         | 147,748 |    |   |         | 187,248 |    |   |         |  | 
|                                             | 2 years later |                          |        | 21,661 |   |      |        | 33,524 |   |      |        | 45,578 |   |      |         | 65,312 |    |      |         | 69,536  |    |   |         | 73,591  |    |   |         | 106,734 |    |   |         | 145,745 |    |   |         |         |    |   |         |  | 
|                                             | 3 years later |                          |        | 20,909 |   |      |        | 33,308 |   |      |        | 45,255 |   |      |         | 66,692 |    |      |         | 74,796  |    |   |         | 74,009  |    |   |         | 102,438 |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 4 years later |                          |        | 20,623 |   |      |        | 33,685 |   |      |        | 45,592 |   |      |         | 68,557 |    |      |         | 74,439  |    |   |         | 77,771  |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 5 years later |                          |        | 19,639 |   |      |        | 32,263 |   |      |        | 43,031 |   |      |         | 65,795 |    |      |         | 76,025  |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 6 years later |                          |        | 19,658 |   |      |        | 31,844 |   |      |        | 42,519 |   |      |         | 65,874 |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 7 years later |                          |        | 19,787 |   |      |        | 31,588 |   |      |        | 43,116 |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 8 years later |                          |        | 19,708 |   |      |        | 32,015 |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|                                             | 9 years later |                          |        | 19,872 |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |  | 
|Cumulative redundancy (deficiency):          |               |                          |        |        |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         | 
|                                             | Dollars       |                          | $      | 3,673  |   |      | $      | 3,729  |   |      | $      | 4,033  |   |      | $       | (1,206 | )  |      | $       | (10,250 | )  |   | $       | (16,985 | )  |   | $       | (18,184 | )  |   | $       | (18,245 | )  |   | $       | (14,386 | )  |   |         |  | 
|                                             | Percentage    |                          |        | 15.60  | % |      |        | 10.43  | % |      |        | 8.55   | % |      |         | (1.86  | )% |      |         | (15.58  | )% |   |         | (27.94  | )% |   |         | (21.58  | )% |   |         | (14.31  | )% |   |         | (8.32   | )% |   |         |  | 
|Net reserves                                 |               |                          |        |        |   |      | 35,744 |        |   |      | 47,149 |        |   |      | 64,668  |        |    |      | 65,775  |         |    |   | 60,786  |         |    |   | 84,254  |         |    |   | 127,500 |         |    |   | 172,862 |         |    |   | 198,653 | 
|Ceded reserves                               |               |                          |        |        |   |      | 14,707 |        |   |      | 17,844 |        |   |      | 22,318  |        |    |      | 26,615  |         |    |   | 38,193  |         |    |   | 64,590  |         |    |   | 101,744 |         |    |   | 168,962 |         |    |   | 195,943 | 
|Gross reserves                               |               |                          |        |        |   |      | 50,451 |        |   |      | 64,993 |        |   |      | 86,986  |        |    |      | 92,390  |         |    |   | 98,979  |         |    |   | 148,844 |         |    |   | 229,244 |         |    |   | 341,824 |         |    |   | 394,596 | 
|                                             |               |                          |        |        |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         | 
|Net re-estimated                             |               |                          |        |        |   |      | 32,015 |        |   |      | 43,116 |        |   |      | 65,874  |        |    |      | 76,025  |         |    |   | 77,771  |         |    |   | 102,438 |         |    |   | 145,745 |         |    |   | 187,248 |         |    |   |         | 
|Ceded re-estimated                           |               |                          |        |        |   |      | 19,779 |        |   |      | 26,208 |        |   |      | 38,559  |        |    |      | 41,143  |         |    |   | 58,698  |         |    |   | 95,362  |         |    |   | 145,921 |         |    |   | 185,399 |         |    |   |         | 
|Gross re-estimated                           |               |                          |        |        |   |      | 51,794 |        |   |      | 69,324 |        |   |      | 104,433 |        |    |      | 117,168 |         |    |   | 136,469 |         |    |   | 197,800 |         |    |   | 291,666 |         |    |   | 372,647 |         |    |   |         | 
|                                             |               |                          |        |        |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         | 
|Gross cumulative redundancy (deficiency)     |               |                          |        |        |   | $    | (1,343 | )      |   | $    | (4,331 | )      |   | $    | (17,447 | )      |    | $    | (24,778 | )       |    | $ | (37,490 | )       |    | $ | (48,956 | )       |    | $ | (62,422 | )       |    | $ | (30,823 | )       |    |   |         | 
|                                             |               |                          |        |        |   |      |        |        |   |      |        |        |   |      |         |        |    |      |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         |         |    |   |         | 

As a result of adverse development on prior
accident years reserves, the provision for losses and loss
adjustment expenses increased by $14,386,000, $20,248,000, and
$15,062,000 in calendar years 2001, 2000, and 1999, respectively.

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MEADOWBROOK INSURANCE GROUP, INC.


The $14.4 million of adverse development on
net reserves in 2001 reflects $5.2 million relating to
unprofitable discontinued programs, $4.5 million relating
to the provision for uncollectible reinsurance on CSC and HIH
America Compensation & Liability Company
(HIH), and the remaining development related to
claims activity on the auto liability line of business. Gross
adverse development was $30.8 million.

The $20.2 million and $15.0 million of
adverse development on net reserves and $46.3 million and
$35.0 million of adverse development on gross reserves in
2000 and 1999, respectively, reflects the impact of reserve
strengthening, primarily from discontinued programs in which the
actual claims activity, as well as severity of such claims was
greater than anticipated. Also affecting gross reserve
development was adverse experience on two discontinued
commercial automobile programs in which the Company retained
little or minimal risk.

Investments

Certain information required by this item is
incorporated by reference to pages 43-44, and 47-49 of the
Notes to the Consolidated Financial Statements, and
pages 20-21 of item 7, Managements Discussion
and Analysis.

Competition and Pricing

The Company competes with other providers of
alternative risk management programs and services and with
traditional providers of commercial insurance coverages. The
alternative risk management and the traditional property and
casualty insurance markets are highly competitive. The
Companys alternative risk management programs and services
compete with products and services offered by insurance
companies, other providers of alternative risk management
services (including certain domestic and foreign insurers and
reinsurers and insurance brokers), as well as with
self-insurance plans, captives managed by others, and a variety
of other risk-financing vehicles and mechanisms. These
competitive products are offered by other companies that may
have greater financial resources than the Company.

The market for alternative risk management
products and services is significantly influenced by market
conditions affecting the traditional property and casualty
insurance industry. Insurance market conditions historically
have been subject to significant variability due to premium rate
competition, natural disasters and other catastrophic events,
judicial trends, changes in the investment and interest rate
environment, regulation and general economic conditions. Pricing
is a primary means of competition in the commercial insurance
market. Competition is also based on the availability and
quality of products, quality and speed of service (including
claims service), financial strength, ratings, distribution
systems and technical expertise. The primary basis for
competition among alternative risk management providers varies
with the financial and insurance needs and resources of each
potential insured. Principal factors that are considered by
insureds include: an analysis of the net present-value (after
tax) of the cost of financing the insureds expected level
of losses, the amount of excess coverage provided in the event
losses exceed expected levels, cash flow and tax planning
considerations, and the expected quality and consistency of the
services to be provided. The Company believes that it is able to
compete based on its experience, the quality of its products and
services, and its program-oriented approach. However, its
ability to successfully compete is dependent upon a number of
factors, including market and competitive conditions, insurance
company ratings and the amount of statutory surplus.

Regulation

Regulation in General

The Companys insurance subsidiaries are
subject to regulation by government agencies within the states
they conduct business. The nature and extent of such regulation
vary from jurisdiction to jurisdiction but typically involve
prior approval of the acquisition of control of an insurance
company or of any company controlling an insurance company;
regulation of certain transactions entered into by an insurance
company

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MEADOWBROOK INSURANCE GROUP, INC.


with any of its affiliates; approval of premium
rates, forms and policies used for many lines of insurance;
standards of solvency and minimum amounts of capital and surplus
which must be maintained; establishment of reserves required to
be maintained for unearned premium, losses and loss expense; or
for other purposes, limitations on types and amounts of
investments, restrictions on the size of risks that may be
insured by a single company; licensing of insurers and agents;
deposits of securities for the benefit of policyholders, and the
filing of periodic reports with respect to financial condition
and other matters. In addition, state regulatory examiners
perform periodic examinations of insurance companies. Such
regulation is intended for the protection of policyholders,
rather then security holders.

In addition to the regulatory oversight of the
Companys insurance subsidiaries, the Company is subject to
regulation under the Michigan, Missouri, California, and Florida
Insurance Holding Company System Regulatory Acts (the
Holding Company Acts). The Holding Company Acts
contain certain reporting requirements including those requiring
the Company, as the ultimate parent company, to file information
relating to its capital structure, ownership, and financial
condition and general business operations of its insurance
subsidiaries. The Holding Company Acts contain prior approval
requirements with respect to certain transactions among
affiliates.

Insurance companies are also affected by a
variety of state and federal legislative and regulatory measures
and judicial decisions that define and extend the risks and
benefits for which insurance is sought and provided. These
include redefinition of risk exposure in areas such as product
liability, environmental damage and workers compensation.
In addition, individual state insurance departments may prevent
premium rates for some classes of insureds from reflecting the
level of risk assumed by the insurer for those classes. Such
developments may adversely affect the profitability of various
lines of insurance. In some cases, these adverse effects on
profitability can be minimized through repricing, if permitted
by applicable regulations, of coverages or limitations or
cessation of the affected business.

The Companys reinsurance intermediary is
also subject to regulation. Under applicable regulations, the
intermediary is responsible as a fiduciary for funds received on
account of the parties to the reinsurance transaction and is
required to hold such funds in appropriate bank accounts subject
to restrictions on withdrawals and prohibitions on commingling.

In March 1998, NAIC voted to adopt its
Codification of Statutory Accounting Principles project
(referred to hereafter as codification).
Codification is a modified form of statutory accounting
principles that will result in a change to the current NAIC
Accounting Practices and Procedures Manual applicable to
insurance enterprises. The Companys insurance subsidiaries
adopted codification effective January 1, 2001. The
adoption of codification increased consolidated statutory
surplus by $5.8 million as of January 1, 2001.

Insurance Regulation Concerning Change or
Acquisition of Control

Star, Savers, Williamsburg, and Ameritrust are
domestic property and casualty insurance companies organized,
respectively, under the insurance laws (the Insurance
Codes) of Michigan, Missouri, California, and Florida. The
Insurance Codes provide that the acquisition or change of
control of a domestic insurer or of any person that
controls a domestic insurer cannot be consummated without the
prior approval of the relevant insurance regulatory authority. A
person seeking to acquire control, directly or indirectly, of a
domestic insurance company or of any person controlling a
domestic insurance company must generally file with the relevant
insurance regulatory authority an application for change of
control containing certain information required by statute and
published regulations and provide a copy of such to the domestic
insurer. In all four states, control is generally presumed to
exist if any person, directly or indirectly, owns, controls,
holds with the power to vote or holds proxies representing 10%
or more of the voting securities of the Company.

In addition, many state insurance regulatory laws
contain provisions require prior notification to state agencies
of a change in control of a non-domestic admitted insurance
company in that state. While prior notification statutes do not
authorize the state agency to disapprove the change of control,
such statutes do

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MEADOWBROOK INSURANCE GROUP, INC.


authorize issuance of a cease and desist order
with respect to the non-domestic admitted insurer if certain
conditions exist, such as undue market concentration.

Any future transactions that would constitute a
change in control of the Company would also generally require
prior approval by the Insurance Departments of Michigan,
Missouri, California, and Florida and would require
pre-acquisition notification in those states that have adopted
pre-acquisition notification provisions and in which the
insurers are admitted. Such requirements may deter, delay or
prevent certain transactions that could be advantageous to the
stockholders of the Company.

Restrictions on Dividends and Risk-Based
Capital

The information required by this item is
incorporated by reference to pages 42-43 and 54-57 of the
Notes to the Consolidated Financial Statements, and
pages 18, and 28-30 of item 7, Managements
Discussion and Analysis.

Effect of Federal Legislation

On November 12, 1999, President Clinton
signed into law the Gramm-Leach-Bliley Financial Services Act
(S. 900) (the Act). This legislation repealed
provisions of the 1933 Glass-Stegall Act and amended provisions
of the Bank Holding Company Act to allow affiliations between
banks, securities firms and insurance companies through newly
authorized holding companies. The Act required several Federal
Agencies and Offices to work cooperatively with the individual
state departments of insurance that traditionally oversee
regulatory matters for insurance companies, for the purpose of
implementing the provisions of the Act. Star, Savers,
Williamsburg and Ameritrust have complied with the provisions of
the Act that are applicable, in particular, privacy provisions.
Some Federal measures that may affect the insurance business
include tort reform, pension regulation, taxation of insurers
and reinsurers, safety regulation and required minimal levels of
insurance.

NAIC-IRIS Ratios

The NAICs Insurance Regulatory Information
System (IRIS) was developed by a committee of state
insurance regulators and is primarily intended to assist state
insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating
in their respective states. IRIS identifies 11 industry ratios
and specifies usual values for each ratio.
Unexplained departure from the usual values on four or more
ratios generally leads to inquiries or possible further review
from individual state insurance commissioners.

In 2001, Star had seven ratios that varied from
the usual value range. The variations and reasons
for these variations are set forth below:

|                                                |  |               |            |            |     |     |      |    
|----------------------------------------------- |  | ------------- | ---------- | ---------- | --- | --- | ---- | ---
|Ratio                                           |  | Usual Range   |            | Star Value
|                                                |  |               |            |           
|Change in Net Writings                          |  | <33% or >33% |            |            | 44% | (1)
|Surplus Aid to Surplus                          |  |               | Under 15%  |            |     |     | 16%  | (2)
|Two-year Overall Operating Ratio                |  |               | Under 100% |            |     |     | 112% | (3)
|Liabilities to Liquid Assets                    |  |               | Under 105% |            |     |     | 151% | (3)
|One-year Reserve Development to Surplus         |  |               | Under 20%  |            |     |     | 20%  | (3)
|Two-year Reserve Development to Surplus         |  |               | Under 20%  |            |     |     | 22%  | (3)
|Estimated Current Reserve Deficiency to Surplus |  |               | Under 25%  |            |     |     | 42%  | (3)



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The growth in Stars net written premium
	reflects the conversion of the reinsurance purchased on two
	commercial auto programs from a quota-share to an excess-of-loss
	basis. As part of the plan to reduce both gross and net leverage
	ratios, the Company has cancelled these programs effective
	December 31, 2001. In addition, to reduce the
	Companys overall excess reinsurance costs, Star assumed
	premium that

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MEADOWBROOK INSURANCE GROUP, INC.




|    |                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | was previously assumed by Preferred Insurance
	Company, Ltd. (PICL). Excluding these items,
	Stars Change in Net Writings ratio would have been within
	the usual range at 4.3%.                                                                                                 
|   
|(2) | The Surplus Aid to Surplus ratio was impacted by
	the purchase of a significant quota share reinsurance treaty for
	several of the Companys workers compensation
	programs, as well as the overall reduction in statutory surplus
	as a result of the net losses in 2001 and 2000.
|   
|(3) | These operating ratios were negatively impacted
	by the underwriting losses recognized in 2000 and 2001. The
	underwriting losses were primarily related to the previously
	mentioned seven discontinued programs.                                                                  

In 2001, the Change in Net Writings for
Williamsburg National Insurance Company
(Williamsburg), another insurance subsidiary, was
116%. The growth in the net written premium on Williamsburg was
unusually high for the year primarily due to two new
workers compensation programs. These two new programs
generated an additional $383,000 of net written premium for
2001. Excluding the impact of this new business, the ratio would
have been within the usual range at 18%.

Item
2.     Properties

The Company currently leases its corporate
offices in Southfield, Michigan from 26600 Development
Associates Limited Partnership. In 2001, the Company paid
approximately $1.3 million in rent. The term of the lease
for the offices in Southfield expires on September 30,
2004. The Company, through its subsidiaries, is also a party to
various leases for locations in which such subsidiaries have
offices. The Company does not consider any of these leases to be
material.

In 1998, Star purchased land located at 26255
American Drive, Southfield, MI, which is in close proximity to
its existing offices. The cost of the land was $3.2 million.

In 2000, Savers purchased a building, located at
12641 East 166th Street, Cerritos, CA, for
$2.0 million. Crest has its operations in this building.

Item 3.     Legal
Proceedings

On June 26, 1995, two shareholders and an
officer of a former agent (the Primary Plaintiffs)
of Star and a former spouse of one shareholder and an employee
of the former agent (the Individual Plaintiffs)
initiated legal proceedings against, among others, Star and
Meadowbrook in the District Court for Washoe County, Reno,
Nevada. All of the plaintiffs requested injunctive relief,
compensatory damages, punitive and exemplary damages, and
attorneys fees in an unspecified amount. The Nevada
Insurance Department revoked the license of one of the Primary
Plaintiffs and one of the Individual Plaintiffs and denied
further licensing of the other Primary Plaintiffs.

Meadowbrook and Star vigorously defended
themselves and filed counterclaims against the Primary and
Individual Plaintiffs. On April 1, 1998, the Court issued
an Order dismissing all claims of the Primary Plaintiffs with
prejudice.

On January 12, 1999, the remaining claims of
the Individual Plaintiffs and the counterclaims of Meadowbrook
and Star against the Primary and Individual Plaintiffs were
tried. On February 2, 1999, the jury returned a verdict in
favor of Meadowbrook and Star against the Primary and Individual
Plaintiffs. In addition, the jury found against the Individual
Plaintiffs and in favor of Meadowbrook and Star on their
remaining claims. On April 21, 1999, the Court found in
favor of Meadowbrook and Star and against the Primary and
Individual Plaintiffs on all outstanding claims for equitable
relief.

A Final Judgment has been entered with the Court.
All Plaintiffs have filed an appeal with the Nevada Supreme
Court. One of the Plaintiffs has filed bankruptcy and another
has had a Receiver appointed for him. In view of the bankruptcy
filing, the case is now stayed before the Nevada Supreme Court.
It is not expected that the outcome of this litigation will have
a material impact on the financial condition of the Company.

13



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MEADOWBROOK INSURANCE GROUP, INC.


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

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

None.




PART II

Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters

Shareholder Information 
 Corporate Headquarters26600 Telegraph Road 
 Southfield, MI 48034 
 Phone: (248) 358-1100

AuditorsPricewaterhouseCoopers LLP 
 Grand Rapids, MI

Corporate CounselHoward & Howard 
 Bloomfield Hills, MI

Transfer Agent & Registrar Equiserve 
 P.O. Box 2536 
 Jersey City, NJ 07303-2536


Stock ListingNew York Stock Exchange 
 Symbol: MIG

Annual Meeting The Annual Meeting of 
 Meadowbrook Shareholders 
 will be held at: 2:00 p.m., 
 May 1, 2002 
 Temple Beth-El 
 7400 Telegraph Road 
 Bloomfield Hills, MI


Shareholder Relations and
Form 10-K

A copy of Meadowbrook Insurance Group,
Inc.s 2001 Annual Report and Form 10-K, as filed with
the Securities and Exchange Commission, may be obtained upon
written request to the Investor Relations Department at the
Companys Corporate Offices, or contact:



| |                                                                                                      
| | -----------------------------------------------------------------------------------------------------
| | Karen M. Spaun, Vice President 
	Finance and Accounting 

	(248) 204-8178     kspaun@meadowbrook.com
|
| | Jennifer Barber, Senior Financial Analyst 

	(248) 204-8159     jbarber@meadowbrook.com              

Direct Investment Plan

Meadowbrooks Shareholder Investment Plan
offers a simple and systematic way to purchase Meadowbrook
Common Stock without paying brokerage fees or commissions. With
the Shareholder Investment Plans many flexible features,
an account may be customized to reflect individual financial and
investment objectives.

If you would like additional information
including a prospectus and an application, please contact:
Equiserve, (800) 649-2579.

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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Share Price and Dividend Information

The following table sets forth for the periods
indicated, the high and low closing sale prices of the
Companys Common Shares as reported on the NYSE Composite
Tape, and quarterly dividends paid for the years ended
December 31:

|               |  |      |        |     |  |           |      |  |  |   |      | 
|-------------- |  | ---- | ------ | --- |  | --------- | ---- |  |  | - | ---- | 
|Dec. 31, 2001  |  | High |        | Low |  | Dividends
|               |  |      |        |     |  |          
|First Quarter  |  |      | 8.1875 |     |  |           | 3.40 |  |  | $ | 0.03 | 
|Second Quarter |  |      | 4.10   |     |  |           | 2.45 |  |  |   | 0.03 | 
|Third Quarter  |  |      | 3.70   |     |  |           | 1.80 |  |  |   | 0.03 | 
|Fourth Quarter |  |      | 3.18   |     |  |           | 1.66 |  |  |   |     | 
|               |  |      |        |     |  |           |      |  |  |   |      | 
|Total          |  | $    | 0.09   |    
|               |  |      |        |    

|               |  |      |       |     |  |           |        |  |  |   |      | 
|-------------- |  | ---- | ----- | --- |  | --------- | ------ |  |  | - | ---- | 
|Dec. 31, 2000  |  | High |       | Low |  | Dividends
|               |  |      |       |     |  |          
|First Quarter  |  |      | 7.75  |     |  |           | 4.75   |  |  | $ | 0.03 | 
|Second Quarter |  |      | 5.875 |     |  |           | 4.50   |  |  |   | 0.03 | 
|Third Quarter  |  |      | 5.25  |     |  |           | 3.9375 |  |  |   | 0.03 | 
|Fourth Quarter |  |      | 8.375 |     |  |           | 4.00   |  |  |   | 0.03 | 
|               |  |      |       |     |  |           |        |  |  |   |      | 
|Total          |  | $    | 0.12  |    
|               |  |      |       |    

As of March 22, 2002 there were
approximately 253 holders of record of the Companys common
stock excluding shares held by nominees.

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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Item
6.     Selected Financial
Data






Selected Consolidated Financial Data


|                                                       |                        |                                                 |         |       |   |      |         |       |   |      |         |       |   |   |         |      |   |   |         |      |  
|------------------------------------------------------ | ---------------------- | ----------------------------------------------- | ------- | ----- | - | ---- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ---- | - | - | ------- | ---- | -
|                                                       |                        |                                                
|                                                       |                        | For the Years Ended December 31,               
|                                                       |                        |                                                
|                                                       |                        | 2001                                            |         | 2000  |   | 1999 |         | 1998  |   | 1997
|                                                       |                        |                                                 |         |       |   |      |         |       |   |     
|                                                       |                        |                                                
|                                                       |                        | (In thousands, except per share and ratio data)
|Income Statement Data:                                 |                        |                                                 |         |       |   |      |         |       |   |      |         |       |   |   |         |      |   |   |         |     
|Gross written premium                                  |                        | $                                               | 299,104 |       |   | $    | 287,852 |       |   | $    | 230,474 |       |   | $ | 186,332 |      |   | $ | 146,739 |     
|Net written premium                                    |                        |                                                 | 186,083 |       |   |      | 136,324 |       |   |      | 122,819 |       |   |   | 93,481  |      |   |   | 74,965  |     
|Net earned premium                                     |                        |                                                 | 163,665 |       |   |      | 146,000 |       |   |      | 124,906 |       |   |   | 92,085  |      |   |   | 68,493  |     
|Net commissions and fees                               |                        |                                                 | 40,675  |       |   |      | 41,251  |       |   |      | 38,697  |       |   |   | 32,398  |      |   |   | 24,360  |     
|Net investment income                                  |                        |                                                 | 14,228  |       |   |      | 13,715  |       |   |      | 11,618  |       |   |   | 9,579   |      |   |   | 8,138   |     
|Net realized (loss) gain on investments                |                        |                                                 | 735     |       |   |      | 540     |       |   |      | (227    | )     |   |   | 52      |      |   |   | 134     |     
|Loss on sale of subsidiary                             |                        |                                                 | (1,097  | )     |   |      |        |       |   |      |        |       |   |   |        |      |   |   |        |     
|Total revenue                                          |                        |                                                 | 218,206 |       |   |      | 201,506 |       |   |      | 174,994 |       |   |   | 134,114 |      |   |   | 101,125 |     
|Net losses and LAE                                     |                        |                                                 | 125,183 |       |   |      | 127,619 |       |   |      | 95,358  |       |   |   | 56,703  |      |   |   | 36,143  |     
|Policy acquisition and other expenses                  |                        |                                                 | 54,440  |       |   |      | 53,316  |       |   |      | 47,583  |       |   |   | 31,931  |      |   |   | 19,531  |     
|Interest on notes payable                              |                        |                                                 | 4,516   |       |   |      | 5,135   |       |   |      | 3,636   |       |   |   | 1,979   |      |   |   | 649     |     
|(Loss) income before income taxes                      |                        |                                                 | (10,112 | )     |   |      | (27,602 | )     |   |      | (14,056 | )     |   |   | 6,645   |      |   |   | 17,386  |     
|Net (loss) income before cumulative effect             |                        |                                                 | (6,510  | )     |   |      | (17,473 | )     |   |      | (7,847  | )     |   |   | 5,870   |      |   |   | 13,043  |     
|Net (loss) income                                      |                        |                                                 | (6,510  | )     |   |      | (17,473 | )     |   |      | (9,553  | )     |   |   | 5,870   |      |   |   | 13,043  |     
|Earnings per share before cumulative
	effect  Diluted |                        | $                                               | (0.76   | )     |   | $    | (2.05   | )     |   | $    | (0.91   | )     |   | $ | 0.65    |      |   | $ | 1.42    |     
|Earnings per share  Diluted                           |                        | $                                               | (0.76   | )     |   | $    | (2.05   | )     |   | $    | (1.11   | )     |   | $ | 0.65    |      |   | $ | 1.42    |     
|Dividends declared per share                           |                        | $                                               | 0.09    |       |   | $    | 0.12    |       |   | $    | 0.12    |       |   | $ | 0.10    |      |   | $ | 0.08    |     
|Balance Sheet Data:                                    |                        |                                                 |         |       |   |      |         |       |   |      |         |       |   |   |         |      |   |   |         |     
|Total investments and cash and cash equivalents        |                        | $                                               | 233,723 |       |   | $    | 240,083 |       |   | $    | 225,523 |       |   | $ | 201,025 |      |   | $ | 167,292 |     
|Total assets                                           |                        |                                                 | 687,888 |       |   |      | 661,183 |       |   |      | 551,977 |       |   |   | 440,075 |      |   |   | 328,642 |     
|Loss and LAE reserves                                  |                        |                                                 | 394,596 |       |   |      | 341,824 |       |   |      | 229,244 |       |   |   | 148,844 |      |   |   | 98,979  |     
|Shareholders equity                                   |                        |                                                 | 80,316  |       |   |      | 85,975  |       |   |      | 100,408 |       |   |   | 119,567 |      |   |   | 115,446 |     
|Other Data:                                            |                        |                                                 |         |       |   |      |         |       |   |      |         |       |   |   |         |      |   |   |         |     
|GAAP ratios (insurance companies only):                |                        |                                                 |         |       |   |      |         |       |   |      |         |       |   |   |         |      |   |   |         |     
|                                                       | Net loss and LAE ratio |                                                 |         | 81.1  | % |      |         | 90.9  | % |      |         | 79.0  | % |   |         | 65.0 | % |   |         | 55.7 | %
|                                                       | Expense ratio          |                                                 |         | 36.0  | % |      |         | 35.9  | % |      |         | 34.5  | % |   |         | 30.6 | % |   |         | 34.0 | %
|                                                       | Combined ratio         |                                                 |         | 117.1 | % |      |         | 126.8 | % |      |         | 113.5 | % |   |         | 95.6 | % |   |         | 89.7 | %
|Statutory combined ratio                               |                        |                                                 | 113.0   | %     |   |      | 126.4   | %     |   |      | 114.2   | %     |   |   | 98.7    | %    |   |   | 90.2    | %   

16



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






MANAGEMENTS DISCUSSION AND
ANALYSIS




|        |                                                                                       
|------- | --------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
	of Financial Condition and Results of Operations

Description of Business

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

The agency segment was formed in 1955 as the
Companys original business. The insurance agency produces
principally commercial insurance, as well as personal, property,
casualty, life and accident and health insurance, with more than
50 insurance carriers from which they earn commission income and
contingencies. The agency segment has grown to be one of the
largest agencies in Michigan and, with acquisitions, has
expanded into California.

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

The Company categorizes its programs into three
categories: managed, risk-sharing, and fully insured. In
managed programs, the Company usually assumes no
insurance risk and generates fee revenue through program
management services. In risk-sharing programs, the
Company participates with the client or producing agent in the
operating results of the programs through a captive,
rent-a-captive or similar insured vehicles. In
risk-sharing programs, the Company derives revenues
from net earned premiums and investment income. In addition, the
Company benefits from the margin built into the ceding
commissions for services it renders on behalf of the
risk-sharing partner for the program. In fully insured
programs, the Company provides commercial insurance
coverage without a risk-sharing mechanism and derives revenue
exclusively from net earned premiums and investment income.
Fully-insured programs are developed in response to a specific
market opportunity and generally when the Company believes there
is potential to subsequently create a risk-sharing
program.

17



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

In recent years, the Company derived its revenue
from the following sources (in thousands):

|         |                                            |                                  |   |         |   |      |   |         |   |  |   |         |  
|-------- | ------------------------------------------ | -------------------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|         |                                            |                                 
|         |                                            | For the Years Ended December 31,
|         |                                            |                                 
|         |                                            | 2001                             |   | 2000    |   | 1999
|         |                                            |                                  |   |         |   |     
|Revenues |                                            |                                  |   |         |   |      |   |         |   |  |   |        
|         | Net earned premiums                        |                                  | $ | 163,665 |   |      | $ | 146,000 |   |  | $ | 124,906 |  
|         | Management fees                            |                                  |   | 25,471  |   |      |   | 24,519  |   |  |   | 22,878  |  
|         | Investment income                          |                                  |   | 14,177  |   |      |   | 13,664  |   |  |   | 11,546  |  
|         | Net realized gains (losses) on investments |                                  |   | 735     |   |      |   | 540     |   |  |   | (227    | )
|         |                                            |                                  |   |         |   |      |   |         |   |  |   |        
|         | Program business                           |                                  |   | 204,048 |   |      |   | 184,723 |   |  |   | 159,103 |  
|         | Agency operations                          |                                  |   | 15,706  |   |      |   | 17,234  |   |  |   | 16,391  |  
|         | Reconciling items                          |                                  |   | 52      |   |      |   | 52      |   |  |   | 72      |  
|         | Loss on sale of subsidiary                 |                                  |   | (1,097  | ) |      |   |        |   |  |   |        |  
|         | Intersegment revenue                       |                                  |   | (503    | ) |      |   | (503    | ) |  |   | (572    | )
|         |                                            |                                  |   |         |   |      |   |         |   |  |   |        
|         | Consolidated revenue                       |                                  | $ | 218,206 |   |      | $ | 201,506 |   |  | $ | 174,994 |  
|         |                                            |                                  |   |         |   |      |   |         |   |  |   |        

The revenue included in reconciling items relates
to interest income in the holding company.

Significant Accounting Policies and Risk
Factors

Regulatory
Matters

The Company has received inquiries from various
state regulators requesting information concerning Stars
financial condition. The losses, adverse trends and
uncertainties discussed in this report have been and continue to
be reviewed by the domiciliary state and other insurance
regulators of the Companys insurance subsidiaries. The
Company had previously submitted a Business Plan to reduce its
current leverage ratios and increase the risk-based capital
(RBC) ratio level and continues to work closely with
the Michigan Office of Financial and Insurance Services
(OFIS) to monitor its progress. While the
Companys gross and net written premiums have declined
steadily throughout 2001, it has not yet sufficiently reduced
its premium leverage ratios nor complied with the required RBC
level. In addition to continued reductions in premium writings,
capital from sources outside the Company may also be necessary
to make sufficient progress towards reducing its leverage ratios
and increasing the RBC ratio. While the Company has retained an
investment-banking firm to execute its selected capital raising
alternative, there can be no assurance the Company will be
successful in raising additional capital, or that proceeds
therefrom which would be contributed to the Companys
insurance subsidiaries would result in sufficient progress
towards reducing its leverage ratios and increasing the RBC
ratio. If the regulators determine the Company has made
insufficient progress towards reducing its leverage ratios and
increasing the RBC ratio, they may take action at any time.
While the regulators have taken no actions to date, regulators
could require the Company to take steps to correct the capital
deficiency, require a reduction in permitted premium writings,
or implement some form of regulatory action.

Liquidity

The Company has a $47.5 million line of
credit with its primary lender. As of December 31, 2001,
the Company had $47.5 million outstanding on this line of
credit. Under the current loan agreement, the Company is
required to reduce the amount outstanding by $11.3 million
by June 30, 2002 and an additional $12.3 million by
December 31, 2002. This line of credit bears interest at a
variable margin over the prime rate. As of December 31,
2001, the prime rate was 4.75% and the variable margin was 1.5%.

18



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Absent the sale of assets or other capital
raising events, the Company may not have the liquidity in its
non-regulated subsidiaries to make the required payments
pursuant to the revised pay-down schedule on or after the
scheduled payment of $10.8 million on June 30, 2002.
Furthermore, if repayment is required due to default, the
Company currently does not have sufficient cash to repay the
balance. As part of the loan agreement, certain of the
Companys non-regulated subsidiaries guaranteed repayment
of the line of credit and the Company pledged the stock of its
non-regulated subsidiaries as collateral. In the event of
default, the banks would have the right to sell the
Companys non-regulated subsidiaries and apply the proceeds
to the balance on the line of credit.

Losses and
Loss Adjustment Expenses and Reinsurance
Recoverables

The liability for losses and loss adjustment
expenses LAE represents (1) case basis estimates of
reported losses and LAE on direct business, (2) actuarial
estimates of incurred but not reported losses and LAE, and (3)
estimates received from ceding reinsurers on assumed business.
Such liabilities, by necessity, are based upon estimates and,
while management believes that the amount accrued is adequate,
the ultimate liability may be greater or less than the amount
provided. At December 31, 2001, loss and loss adjustment
expenses were $394.6 million.

Reinsurance recoverables represent
(1) amounts currently due from reinsurers on paid loss and
LAE, (2) amounts recoverable from reinsurers on case basis
estimates of reported losses and LAE, and (3) amounts
recoverable from reinsurers on actuarial estimates of incurred
but not reported losses and LAE. Such recoverables, by
necessity, are based upon estimates and, while management
believes that the amount accrued is collectible, the ultimate
recoverable may be greater or less than the amount accrued. At
December 31, 2001, reinsurance recoverables on paid and
unpaid losses were $222.5 million.

The methods for making such estimates and for
establishing the loss reserves and reinsurance recoverables are
continually reviewed and updated. Certain information is
incorporated by reference to Item 1 
Business  Reserves on pages 8-10.

Taxes

At December 31, 2001, the Company had a
deferred tax asset of $24.5 million, $11.8 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.
Although realization is not assured, management believes that it
is more likely than not that current tax strategies, which
include potential sale of assets and/or subsidiaries, and the
ongoing results from operations excluding the discontinuation of
seven specific unprofitable programs, will generate sufficient
taxable income to realize the deferred tax asset. If the Company
is unable to execute these tax strategies or generate sufficient
taxable income, the establishment of a valuation allowance may
be required. The NOL of $11.8 million was generated from
losses occurring in 1999, 2000, and 2001, which, if unused, will
begin to expire in 2019.

Goodwill and
Amortization Expense

On July 31, 1998, the Company acquired
Florida Preferred Administrators, Inc. (Florida
Preferred) and Ameritrust Insurance Corporation
(Ameritrust), at a purchase price of
$12.3 million, resulting in goodwill of $7.0 million.
Florida Preferred, a Florida-based third party administrator,
provides a broad range of risk management services to purchasers
of workers compensation insurance from Ameritrust, as well
as other insurance carriers. This acquisition was subject to a
contingent earn-out provision, which was finalized in 2000.
During 2000, the Company paid approximately $4.7 million to
the former shareholders under this provision.

On August 6, 1999, the Company acquired the
assets of TPA Associates, Inc., all of the outstanding stock of
TPA Insurance Agency, Inc. and Preferred Insurance Agency, Inc.
and approximately 94% of the

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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

outstanding stock of Preferred Insurance Company,
Ltd., (collectively, TPA) at a purchase price of
$16.2 million. This transaction resulted in goodwill of
$12.9 million.

The remaining goodwill relates to acquisitions of
other agency and fee-for-service operations.

At December 31, 2001 and 2000, the net
goodwill was $28,997,000 and $35,946,000, respectively.
Amortization expense for 2001, 2000 and 1999 was
$2.3 million, $2.0 million and $1.6 million,
respectively. These charges primarily reflect the amortization
of goodwill associated with acquisitions in 1997, 1998, and 1999.

Annually, the Company evaluates the net carrying
value of goodwill to determine if there has been any impairment
in value. The methodology used for this evaluation entails
review of current market values of subsidiaries, and annual
operating performance along with anticipated results for the
ensuing year based on operating budgets and forecasts. At
December 31, 2001 the Company concluded that there had been
no impairment in the net carrying value of goodwill.

The Financial Accounting Standards Board
(FASB) has issued Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and
Other Intangible Assets. SFAS No. 142, for periods
starting December 15, 2001 or thereafter, eliminates the
amortization of goodwill. In addition, goodwill would be
separately tested for impairment using a fair-value based
approach. Upon implementation in 2002, the Company will no
longer amortize goodwill. Goodwill amortization in 2001 was
$2.3 million. Management has not yet evaluated the impact
to goodwill as prescribed by SFAS No. 142. The overall
market value of the Company as of March 22, 2002 was
$26.7 million, or $3.14 per share, compared to book
value of $80.3 million, or $9.44 per share.

Dependence on
Key Programs

The Company provides alternative risk management
products and services to certain large client groups and
associations and then markets them to their individual members.
Within these groups, the Company targets small to medium sized
accounts. In 2001, 2000, and 1999, the Companys top four
programs, collectively, accounted for 29.4%, 21.6% and 25.9%,
respectively, of the Companys total net earned premium.
The loss or cancellation of any of the Companys
significant programs by the relevant client groups, or the
general availability of commercial market coverage to members of
such groups on more favorable terms than provided under the
Companys programs, could have a material adverse effect on
the Companys results of operations. Some of the
Companys clients may require its insurance companies to
retain an A- (Excellent) or better A.M.
Best rating. In August 2001, the Companys rating was
downgraded to B (Fair) by A.M. Best.
While the Company has not yet experienced a material impact on
its business to date, the impact of this downgrade may have a
material adverse impact on its ability to market its insurance
products. If the Company is unsuccessful in increasing its
capital in the immediate future, and its rating remains at the
current level, certain programs and insureds may seek other
insurance carriers with higher ratings. While the Company has no
reason to believe that any downward adjustment will be made,
there can be no assurance that A.M. Best will not further reduce
its rating of the Companys insurance company subsidiaries
in the future.

Investments

The Companys investment securities at
December 31, 2001 and 2000 are classified as available for
sale. Investments classified as available for sale securities
are available to be sold in the future in response to the
Companys liquidity needs, changes in market interest
rates, tax strategies and asset-liability management strategies,
among other reasons. Available for sale securities are reported
at fair value, with unrealized gains and losses reported in the
accumulated other comprehensive income component of
shareholders equity, net of deferred taxes.

20



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Realized gains or losses on sale or maturity of
investments are determined on the basis of specific costs of the
investments. Discount or premium on debt securities purchased at
other than par value is amortized using the constant yield
method. Investments with other than temporary declines in fair
value are written down to estimated fair value and the related
realized losses recognized in income. There were $1,293,637 in
impaired investments written down in 2001, and none in 2000 and
1999. The Company had gross unrealized losses of $711,000 on
investments having a fair value of $21.8 million. These
gross unrealized losses were deemed not to be other than
temporarily impaired.

Revenue
Recognition

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 and fee income are recorded on the
later of the effective date or the billing date of the policies
on which they were earned. The income effects of subsequent
premium and fee adjustments are recorded when the adjustments
become known.

The Company occasionally guarantees the financing
of policies it writes. No material premium financing guarantees
were in effect at December 31, 2001.

The majority of 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.

Description
of Surety Business

Surety
Business

In December 1996, Star entered into a five-year
joint underwriting agreement with Connecticut Surety Company
(CSC), whereby Star transferred the underwriting
risk on the majority of the Companys existing surety bond
business. Effective June 1, 2000, CSC no longer assumes
risk on new or renewal business from Star; however, one of
CSCs subsidiaries continues to act as a general agent for
the Company. This new and renewal business is now 100% reinsured
to unaffiliated reinsurers with an A.M. Best rating of
A or better. Effective January 2002, CSC sold the
renewal rights to the business of CSC and its subsidiaries to a
third party, which will now underwrite all new and renewal
business, excluding those bonds which Star must renew due to
statutory requirements.

In December 1998, CSC entered into an agreement
with Evergreen National Indemnity Company to transfer most of
its contract surety business it wrote on behalf of Star. The
agreement provides for the transfer of the underwriting risk on
this class of bonds from CSC to Evergreen National Indemnity
Company.

Effective May 26, 2000, CSC executed a
Subordinated Surplus Note in favor of Star in the principal sum
of $195,000. Fifty percent of the principal amount was due on
May 26, 2001; the outstanding balance, together with all
unpaid interest, is due on May 26, 2002. Interest earns at
9% per annum, with interest payments to be made quarterly,
subject to all terms and conditions of the Note. Effective
May 26, 2000 and July 14, 2000, Connecticut Surety
Corporation executed Promissory Notes in favor of the Company in
the amounts of $30,000 and $270,000, due on May 26, 2003
and July 14, 2003, respectively. Interest earns at 9% per
annum, payable semi-annually beginning on December 31,
2000, subject to the terms and conditions of the Notes.
Furthermore, Star purchased a portion of CSCs outstanding
loan with Fleet Bank for $124,800. Interest and

21



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MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

repayment terms are in accordance with the
original terms between CSC and Fleet Bank. Other investors
executed similar notes with CSC in varying amounts and also
purchased a portion of the CSC loan with Fleet Bank.

Effective December 31, 2000, CSC executed a
Subordinated Surplus Note with Star in the principal sum of
$3.8 million. Interest earns at 9% per annum, payable
quarterly beginning April 1, 2001. These loan proceeds were
deposited by CSC into a trust account established for the
benefit of Star in order to collateralize CSCs reinsurance
obligations under the reinsurance agreements described above.
This Subordinated Surplus Note, along with the other notes
described above, were intended to be converted into Voting
Convertible Preferred Stock of CSC, or its parent, as part of
recapitalization of CSC, pursuant to a Letter of Intent dated
December 31, 2000 between CSC, Star, and other investors.
However, Star and the other investors decided not to exercise
their conversion rights. As such, Star remains a surplus note
holder of CSC in the amounts and terms described above. The
Company has recorded an impairment of $870,000, which accounts
for any uncollateralized portion of these notes.

As of September 30, 2001, CSC had capital
and surplus of $5.0 million. On February 6, 2002, the
Connecticut Insurance Department placed CSC into Rehabilitation.

At December 31, 2001, the Company had
approximately $1.5 million of unsecured reinsurance
recoveries on unpaid losses due from CSC in excess of collateral
and allowances. Also during 2001, the Company recorded a
provision of $4.5 million related to balances due from CSC, of
which $3.5 million was related to reinsurance recoverable
balances.

Summary  Business
Plan

The Company has alternative plans to mitigate the
risk items described above. The Company has retained an
investment-banking firm to file a registration statement with
the Securities and Exchange Commission with respect to a public
offering of its common stock. The Company executed an engagement
letter with an investment-banking firm that will act as
financial advisor and lead underwriter for the Company in
selling its common stock to the public. The terms will be
determined immediately prior to the offering, which is expected
to commence in May or June 2002. The offering is subject to
certain conditions and no underwriting agreement has yet been
executed. If the capital raising is unsuccessful, management
believes the Company has the ability to sell certain of its
non-regulated subsidiaries to satisfy its debt obligations.
There are no restrictions that prohibit the sale of
non-regulated subsidiaries. Proceeds from the offering would be
used to satisfy all or a portion of the Companys debt
obligations and add to the surplus of its insurance
subsidiaries. However, there can be no assurance that these
capital-raising efforts will be successful.

Results of Operations

Over the past three years, the Company took
actions to eliminate seven specific unprofitable programs that
were not aligned with its historic and present alternative risk
management strategy. The Company also established strict
corporate program guidelines that identify the following
criteria as unacceptable:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | Risk-taking in the surety line of business;                                
|
| |  | Programs with aggregate stop loss provisions; and                          
|
| |  | Programs which lack adequate capital contributed
	by risk-sharing partners.

The underwriting losses associated with these
seven programs were $12.8 million, $29.0 million, and
$12.0 million for the years ended December 31, 2001,
2000, and 1999, respectively. At December 31, 2001, the
amount of unearned premium associated with these programs was
$3.2 million.

On April 30, 1998, the Company acquired the
business of Villari & Associates, Inc. and operated the
agency as Meadowbrook-Villari Agency. The purchase price was
$5.6 million comprised of $4.5 million in cash and
33,433 shares of common stock of the Company, resulting in
goodwill of $5.6 million. The

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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Meadowbrook-Villari Agency, a Florida-based
insurance agency, offered professional liability products and
programs, group health and disability, and property and casualty
products. Effective July 1, 2001, the Company sold the
business of Meadowbrook-Villari Agency. It is anticipated this
sale will result in a reduction of annualized agency revenue of
approximately $3.2 million, but should not have a material
impact on the Companys overall results of operations. The
Company recorded a loss of $1,097,000 in conjunction with the
sale.



| |                       
| | ----------------------
| | 2001 compared to 2000:

Results from operations improved
$11.0 million from a net loss of $17.5 million in 2000
to a net loss of $6.5 million in 2001. The net loss in 2001
reflects the impact of pre-tax adverse development of
$14.4 million on net reserves. The adverse development
reflects $5.2 million relating to unprofitable discontinued
programs, $4.5 million relating to the provision for
uncollectible reinsurance on CSC and HIH America
Compensation & Liability Company (HIH), a
California domiciled insurance company, which was seized by the
California Department of Insurance, and the remaining
development related to claims activity on the auto liability
line of business. In addition, the Company incurred provisions
for pre-tax impairments in the investment in CSC surplus notes
of $870,000 and recorded a loss of $1.1 million on the sale
of the Meadowbrook-Villari Agency. The 2000 results also
reflected significant adverse development related to the
discontinued programs mentioned above.



| |                       
| | ----------------------
| | 2000 compared to 1999:

Results from operations, excluding the cumulative
effect of accounting change, deteriorated $9.6 million from
a net loss of $7.8 million in 1999 to a net loss of
$17.5 million in 2000. The 2000 results reflect a
$28.0 million pre-tax, or $18.5 million after-tax
charge, for loss and loss adjustment expense related items. This
charge reflects $20.2 million of adverse development on
prior accident years, $2.0 million for accelerated
amortization of deferred acquisition costs, $3.0 million
for additional reinsurance costs on the Companys
adjustable rate casualty reinsurance treaty, and
$2.8 million associated with loss-based assessments and
other indirect claims expenses. The adverse development was
primarily from discontinued programs. The adverse development of
$15.9 million in 1999 was primarily related to programs no
longer being underwritten by the Company, which includes
discontinued programs.



| |                 
| | ----------------
| | Program Business

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

|             |                                            |                                  |   |         |   |      |   |         |   |  |   |         |  
|------------ | ------------------------------------------ | -------------------------------- | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|             |                                            |                                 
|             |                                            | For the Years Ended December 31,
|             |                                            |                                 
|             |                                            | 2001                             |   | 2000    |   | 1999
|             |                                            |                                  |   |         |   |     
|Revenue:     |                                            |                                  |   |         |   |      |   |         |   |  |   |        
|             | Net earned premiums                        |                                  | $ | 163,665 |   |      | $ | 146,000 |   |  | $ | 124,906 |  
|             | Management fees                            |                                  |   | 25,471  |   |      |   | 24,519  |   |  |   | 22,878  |  
|             | Investment income                          |                                  |   | 14,177  |   |      |   | 13,664  |   |  |   | 11,546  |  
|             | Net realized gains (losses) on investments |                                  |   | 735     |   |      |   | 540     |   |  |   | (227    | )
|             |                                            |                                  |   |         |   |      |   |         |   |  |   |        
|             | Total revenue                              |                                  | $ | 204,048 |   |      | $ | 184,723 |   |  | $ | 159,103 |  
|             |                                            |                                  |   |         |   |      |   |         |   |  |   |        
|Pre-tax loss |                                            |                                  |   |         |   |      |   |         |   |  |   |        
|             | Program business                           |                                  | $ | (7,624  | ) |      | $ | (24,289 | ) |  | $ | (11,891 | )



| |                       
| | ----------------------
| | 2001 compared to 2000:

Revenues from program business increased
$19.3 million, or 10.5%, to $204.0 million for the
year ended December 31, 2001 from $184.7 million for
the comparable period in 2000. This increase reflects 12.1%

23



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

growth in net earned premiums to
$163.7 million in the year ended December 31, 2001
from $146.0 million in the comparable period in 2000, and
is the result of growth in existing programs both from
increasing policy count and rate increases. These increases were
partially offset by the impact of the purchase of a large quota
share reinsurance treaty for several workers compensation
programs and the decline in written premium from programs
previously discontinued. Management fees grew $952,000, or 3.9%,
to $25.5 million from $24.5 million. Primarily, this
increase resulted from a profit sharing fee of $1.6 million
related to the good experience achieved on a loss portfolio
transfer and new business growth of $1.0 million, which
amounts were partially offset by fees related to discontinued or
inactive managed programs. The remaining increase reflects a
$513,000, or 3.8%, increase in investment income to
$14.2 million in 2001 from $13.7 million in 2000.

This increase reflects both a 1.2% increase in
average invested assets, from operating cash flows, and a
decrease in pre-tax yields to 5.64% in 2001 from 6.23% in 2000.

Program business generated a pre-tax loss of
($7.6) million for the year ended December 31, 2001
compared to a pre-tax loss of ($24.3) million for the
comparable period in 2000. This was the result of a decrease in
the Companys loss and loss adjustment expenses and
operating expenses on program business. The Companys loss
and loss adjustment expense ratio was 81.1% for the year ended
December 31, 2001 compared to 90.9% for the comparable
period in 2000. The net loss in 2001 reflects the impact of
adverse development of $14.4 million on net reserves. The
adverse development reflects $5.2 million related to
unprofitable discontinued programs, $4.5 million related to
the provision for uncollectible reinsurance on CSC and HIH, and
the remaining development related to claims activity on the auto
liability line of business. The 2000 results reflected
significant adverse development related to the discontinued
programs mentioned above.

The Companys expense ratio was 36.0% for
the year ended December 31, 2001 compared to 35.9% for the
comparable period in 2000.



| |                       
| | ----------------------
| | 2000 compared to 1999:

Revenues from program business increased
$25.6 million, or 16.1%, to $184.7 million in 2000
from $159.1 million in 1999. The increase reflects 16.9%
growth in net earned premiums to $146.0 million in 2000
from $124.9 million in 1999. This increase reflects growth
in new and existing programs, partially offset by a reduction in
premiums from programs discontinued in 1999 and 2000. In
addition, the purchase of a large quota share reinsurance treaty
for several workers compensation programs resulted in a
$9.5 million reduction in net earned premiums. Management
fees grew $1.6 million, or 7.2%, to $24.5 million from
$22.9 million. This increase reflects the addition of
two new managed programs and the full year impact of the
1999 acquisition of TPA. The remaining increase reflects a
$2.1 million, or 18.3%, increase in investment income to
$13.7 million in 2000 from $11.6 million in 1999. This
increase reflects both a 9.2% increase in average invested
assets, from operating cash flows, and an increase in pre-tax
yields to 6.23% in 2000 from 5.33% in 1999.

Program business in 2000 generated a pre-tax loss
of ($24.3) million compared to a pre-tax loss of
($11.9) million in 1999. The 2000 results reflect a
$28.0 million pre-tax, or $18.5 million after-tax,
charge for loss and loss adjustment expense reserve related
items. This charge reflects $20.2 million of adverse
development on prior accident years, $2.0 million for
accelerated amortization of deferred acquisition costs,
$3.0 million for additional reinsurance costs on the
Companys adjustable rate casualty reinsurance treaty, and
$2.8 million associated with loss-based assessments and
other indirect claims expenses. The adverse development in 2000
was primarily from discontinued programs. The adverse
development of $15.9 million in 1999 was primarily relating to
programs no longer being underwritten by the Company, which
includes discontinued programs.

24



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Agency Operations

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

|                |  |      |        |      |  |      |        |  |  |   |        | 
|--------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                |  | 2001 |        | 2000 |  | 1999
|                |  |      |        |      |  |     
|Net commission  |  | $    | 15,706 |      |  | $    | 17,234 |  |  | $ | 16,391 | 
|Pre-tax income* |  | $    | 5,348  |      |  | $    | 4,115  |  |  | $ | 3,639  | 



---



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



| |                       
| | ----------------------
| | 2001 compared to 2000:

Revenue from agency operations, which consists
primarily of agency commission revenue, decreased
$1.5 million, or 8.9%, to $15.7 million for the year
ended December 31, 2001 from $17.2 million for the
comparable period in 2000. This decrease reflects the sale of
the Meadowbrook-Villari Agency. Excluding the
Meadowbrook-Villari Agency revenues from both periods, agency
revenue would have decreased 2.2%. This decrease in agency
commissions primarily relates to the sale of business to a
former employee, for which there was a corresponding reduction
in salary and administrative costs. Agency operations generated
pre-tax income of $5.3 million for the year ended
December 31, 2001 compared to $4.1 million for the
comparable period in 2000. The improvement in agency operations
reflects improved margins as a result of expense management
initiatives. Effective July 1, 2001, the Company sold the
business of Meadowbrook-Villari Agency. It is anticipated that
this sale will result in a reduction of annualized agency
revenue of approximately $3.2 million, but should not have
a material impact on the Companys overall results of
operations.

2000 compared to
1999:

Agency commissions increased $843,000, or 5.1%,
to $17.2 million in 2000 from $16.4 million in 1999.
Agency operations pre-tax income increased $476,000, or 13.1%,
to $4.1 million in 2000 from $3.6 million in 1999.
This improvement in pre-tax income reflects the combination of
growth in commission revenues and the impact of expense
reductions taken in late 1999.

Other
Items

Taxes

The provision for income taxes resulted in a
benefit of $3.6 million, $10.1 million, and
$6.2 million in 2001, 2000, and 1999 with a negative
effective tax rate of 35.6%, 36.7% and 44.2%, respectively. The
tax rate in 1999 deviated significantly from the 34% corporate
rate due to the Companys investment portfolio being
weighted in tax-exempt securities. During 2000, because of the
Companys current tax position, the Company shifted more of
its investment portfolio to taxable securities, bringing the
effective tax rate closer to the corporate tax rate of 34%.

Interest
Expense

Interest expense for 2001, 2000 and 1999 was
$4.5 million, $5.1 million and $3.6 million,
respectively. This interest expense relates primarily to the
Companys line of credit. The average debt outstanding was
approximately $54 million, $51 million, and
$44 million in 2001, 2000 and 1999, respectively. The
average interest rate was approximately 8%, 9%, and 8% in 2001,
2000 and 1999, respectively.

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

25



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

cash flow from non-regulated subsidiaries in the
form of commission revenue, outside management fees, and
intercompany management fees. These sources of income are used
to meet debt service, shareholders dividends, and other
operating expenses of the holding company and non-regulated
subsidiaries. Earnings before interest, taxes, depreciation, and
amortization from non-regulated subsidiaries were approximately
$14.0 million in 2001. These earnings were available for
debt service.

Cash flow used in operations was
$2.8 million in 2001, compared to cash flow provided by
operations of $24.0 million, $23.6 million in 2000,
and 1999, respectively. As anticipated by management, the
decrease in cash flow in 2001 reflects the acceleration in the
payment of previously reserved claims, which more than offset
the growth in gross and net written premiums. The positive cash
flow in 2000 and 1999 reflects growth in gross and net written
premium and the strengthening of case and incurred but not
reported (IBNR) reserves that did not require
immediate cash payments in those years. Absent a capital
contribution or the sale of a portion of the Companys
assets, as discussed below, the Company plans to reduce gross
and net written premium in 2002 to reduce certain leverage
ratios (see Regulatory and Rating Issues). As these
losses are paid and growth in premium declines, cash and
invested assets in the Companys insurance subsidiaries may
decline.

At December 31, 2001, the Company had a bank
line of credit that permits borrowings up to $47.5 million.
The Company drew on this line of credit primarily to consummate
the acquisitions made during 1997 through 1999. The Company also
used the line of credit to fund operating expenses of the
non-regulated subsidiaries and to make investments with the
regulated subsidiaries.

As of December 31, 2001, $47.5 million
was outstanding on this line of credit. The line of credit bears
interest at a variable margin over the Prime Rate. As of
December 31, 2001, the Prime Rate was 4.75% and the
variable margin was 1.5%.

At December 31, 2000, the Company was
obligated to reduce the credit line to $33.0 million by
April 30, 2001. In May 2001, the Company received a
permanent waiver of this obligation to reduce the credit line.
Concurrent with the permanent waiver, the Company and its banks
agreed to waive all prior covenant violations of the existing
loan agreement and establish new covenants. In addition, the
Company agreed to a revised pay-down schedule, pursuant to which
the Company was required to reduce the credit line by
$5.0 million per quarter beginning September 30, 2001.

The scheduled payments of $5.0 million due
on September 30, 2001 and December 31, 2001 were not
made. In February 2002, the Company received a permanent waiver
of these obligations to reduce the credit line. Concurrent with
the permanent waiver, the Company and its banks agreed to waive
all prior covenant violations of the existing loan agreement and
establish new covenants effective retroactive to
December 31, 2001 related to statutory surplus, GAAP net
worth, fixed charge coverage, debt-to-capital ratios and net and
gross premium ratios. In addition, the Company agreed to a
revised pay-down schedule and a variable margin over the Prime
Rate that increases by one quarter point every two months
beginning February 1, 2002 until the line of credit is paid
down to $33.0 million. Pursuant to the revised pay-down
schedule, the Company is required to reduce the credit line by
$0.5 million on March 31, 2002, $10.8 million on
June 30, 2002, $1.0 million on September 30,
2002, and $11.3 million on December 31, 2002.

Unless a further extension is obtained, the line
of credit expires and the remaining balance of $24.0 million is
payable in full on January 3, 2003. Under the terms of the
credit agreement, in the event of default, the banks have the
right to terminate the revolving credit facility and demand full
and immediate repayment.

Absent the sale of assets or other capital
raising events, the Company may not have the liquidity in its
non-regulated subsidiaries to make the required payments
pursuant to the revised pay down schedule on or after the
scheduled payment of $10.8 million on June 30, 2002.
Furthermore, if repayment is required due to default, the
Company currently does not have sufficient cash to repay the
balance. As part of the loan agreement, certain of the
Companys non-regulated subsidiaries guaranteed repayment
of the line of credit

26



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

and the Company pledged the stock of its
non-regulated subsidiaries as collateral. In the event of
default, the banks would have the right to sell the
Companys non-regulated subsidiaries and apply the proceeds
to the balance on the line of credit.

The Company has retained an investment-banking
firm to file a registration statement with the Securities and
Exchange Commission with respect to a public offering of its
common stock. The Company executed an engagement letter with an
investment-banking firm that will act as financial advisor and
lead underwriter for the Company in selling its common stock to
the public. The terms will be determined immediately prior to
the offering, which is expected to commence in May or June 2002.
The offering is subject to certain conditions and no
underwriting agreement has yet been executed. If the capital
raising is unsuccessful, management believes the Company has the
ability to sell certain of its non-regulated subsidiaries to
satisfy its debt obligations. There are no restrictions that
prohibit the sale of non-regulated subsidiaries. Proceeds from
the offering would be used to satisfy all or a portion of the
Companys debt obligations and add to the surplus of its
insurance subsidiaries. However, there can be no assurance that
these capital-raising efforts will be successful.

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. The line will expire on May 14,
2002 and management intends to renew this line of credit. The
line bears interest at 1% under the Prime Rate, which was 4.75%
and 9.50% at December 31, 2001 and 2000, respectively. At
December 31, 2001 and 2000, $3.8 million and
$2.5 million, respectively, were outstanding under this
line.

In addition, the Company has an outstanding
subordinated promissory note payable in the amount of
$3.5 million, due June 30, 2003, which bears interest
at a rate of 6.673% plus a Eurocurrency margin. As of
December 31, 2001, the Eurocurrency margin was 1.7%.
Proceeds of this borrowing were used to reduce the outstanding
balance on the bank line of credit.

There were no letters of credit open as of
December 31, 2001. One letter of credit in the amount of
$14,200,000 which had previously been provided as collateral for
two insurance subsidiaries obligations under a reinsurance
agreement, was drawn on in full by the beneficiary. This amount
earns interest payable to the Company on the drawn balance at
4.5%. This agreement expires September 1, 2006.

As of December 31, 2001 and 2000, the
recorded values of the Companys investment portfolio,
including cash and cash equivalents, were $233.8 million
and $240.1 million, respectively. The debt securities in
the investment portfolio, at December 31, 2001, were 88.2%
investment grade A or above bonds as defined by
Standard & Poors.

Shareholders equity was $80.3 million,
or $9.44 per common share, at December 31, 2001, compared
to $86.0 million at December 31, 2000, or
$10.10 per common share. The decrease in shareholders
equity during 2001 primarily reflects the Companys second
quarter net loss. Changes in shareholders equity related
to the unrealized values of underlying portfolio investments has
been and will continue to be volatile as market prices of debt
securities fluctuate with changes in the interest rate
environment.

A significant portion of the Companys
consolidated assets represent assets of the Companys
insurance subsidiaries that at this time cannot be transferred
to the holding company in the form of dividends, loans or
advances. The restriction on the transferability to the holding
company from its insurance subsidiaries is dictated by Michigan
regulatory guidelines, which are as follows: The maximum
discretionary dividend that may be declared, based on data from
the preceding calendar year, is the greater of each insurance
companys net income (excluding realized capital gains) or
ten percent of the insurance companys policyholders
surplus (excluding unrealized gains). These dividends are
further limited by a clause in the Michigan law that prohibits
an insurer from declaring dividends except out of earned surplus
of the company. Earned surplus balances are calculated on a
quarterly basis. Since Star Insurance Company (Star)
is the parent of the domestic insurance company subsidiaries,
its maximum dividend calculation represents the combined
insurance companies surplus. Based upon the 2001 statutory
financial statements, Star may not pay any

27



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

dividends to the Company during 2002 without
prior approval of OFIS. Stars earned surplus position at
December 31, 2001 was negative $29.1 million. No
statutory dividends were paid in 2001 or 2000.

The insurance subsidiaries are required to
maintain certain deposits with regulatory authorities, which
totaled $71.9 million at December 31, 2001, and
$55.0 million at December 31, 2000.

Regulatory and Rating Issues

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 to 1 and 2 to 1,
respectively. Due primarily to net losses in 2000 and in the
first half of 2001, statutory surplus is at a level where the
premium leverage ratios as of December 31, 2001, on a
statutory consolidated basis, were 5.8 to 1 and 3.4 to
1 on a gross and net written premium basis, respectively.

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

The RBC Model Act provides for four different
levels of regulatory attention depending on the ratio of the
companys total adjusted capital, defined as the total of
its statutory capital, surplus and asset valuation reserve, to
its risk-based capital.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company Action Level is triggered
	if a companys total adjusted capital is less than 200% but
	greater than or equal to 150% of its risk-based capital. At the
	Company Action Level, a company must submit a
	comprehensive plan to the regulatory authority that discusses
	proposed corrective actions to improve its capital position. A
	company whose total adjusted capital is between 250% and 200% of
	its risk-based capital is subject to a trend test. A trend test
	calculates the greater of any decrease in the margin (i.e. the
	amount in dollars by which a companys adjusted capital
	exceeds it risk-based capital) between the current year and the
	prior year and between the current year and the average of the
	past three years, and assumes that the decrease could occur
	again in the coming year. If a similar decrease in margin in the
	coming year would result in a risk-based capital ratio of less
	than 190%, then Company Action Level regulatory
	action would be triggered.
|
| |  | The Regulatory Action Level is
	triggered if a companys total adjusted capital is less
	than 150% but greater than or equal to 100% of its risk-based
	capital. At the Regulatory Action Level, the
	regulatory authority will perform a special examination of the
	company and issue an order specifying corrective actions that
	must be followed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The Authorized Control Level is
	triggered if a companys total adjusted capital is less
	than 100% but greater than or equal to 70% of its risk-based
	capital, at which level the regulatory authority may take any
	action it deems necessary, including placing the company under
	regulatory control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The Mandatory Control Level, is
	triggered if a companys total adjusted capital is less
	than 70% of its risk-based capital, at which level the
	regulatory authority is mandated to place the company under its
	control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

28



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

At December 31, 2001, all of the
Companys insurance subsidiaries were in compliance with
RBC requirements, with the exception of Star. Star reported
statutory surplus of $51.6 million and $56.2 million
at December 31, 2001 and 2000, respectively. The calculated
RBC was $29.7 million in 2001 and $27.0 million in
2000 and the threshold requiring the minimum regulatory
involvement was $59.5 million in 2001 and
$53.9 million in 2000. The 2001 RBC ratio for Star was
within Company Action Level. The Company is required to submit
an RBC Plan outlining how it intends to achieve compliance. The
Company is preparing the RBC Plan which includes, but is not
limited to, the actions outlined below in the Business Plan. The
RBC Plan is due by April 15, 2002.

The NAICs Insurance Regulatory Information
System (IRIS) was developed by a committee of state
insurance regulators and is primarily intended to assist state
insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating
in their respective states. IRIS identifies 11 industry ratios
and specifies usual values for each ratio.
Unexplained departure from the usual values on four or more
ratios generally leads to inquiries or possible further review
from individual state insurance commissioners.

In 2001, Star had seven ratios that varied from
the usual value range. The variations and reasons
for these variations are set forth below:

|                                                |  |               |            |            |    |      |     |     
|----------------------------------------------- |  | ------------- | ---------- | ---------- | -- | ---- | --- | ----
|Ratio                                           |  | Usual Range   |            | Star Value
|                                                |  |               |            |           
|Change in Net Writings                          |  | <33% or >33% |            |            | 44 | %(1)
|Surplus Aid to Surplus                          |  |               | Under 15%  |            |    |      | 16  | %(2)
|Two-year Overall Operating Ratio                |  |               | Under 100% |            |    |      | 112 | %(3)
|Liabilities to Liquid Assets                    |  |               | Under 105% |            |    |      | 151 | %(3)
|One-year Reserve Development to Surplus         |  |               | Under 20%  |            |    |      | 20  | %(3)
|Two-year Reserve Development to Surplus         |  |               | Under 20%  |            |    |      | 22  | %(3)
|Estimated Current Reserve Deficiency to Surplus |  |               | Under 25%  |            |    |      | 42  | %(3)



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The growth in Stars net written premium
	reflects the conversion of two commercial auto programs to
	fully-insured programs from risk-sharing programs. As part of
	the plan to reduce both gross and net leverage ratios, the
	Company has cancelled these programs effective December 31,
	2001. In addition, to reduce the Companys overall excess
	reinsurance costs, Star assumed premium that was previously
	assumed by Preferred Insurance Company, Ltd. (PICL).
	Excluding these items, Stars Change in Net Writings ratio
	would have been within the usual range at 4.3%.
|   
|(2) | The Surplus Aid to Surplus ratio was impacted by
	the purchase of a significant quota share reinsurance treaty for
	several of the Companys workers compensation
	programs, as well as the overall reduction in statutory surplus
	as a result of the net losses in 2001 and 2000.                                                                                                                                                                                                                                                                                                     
|   
|(3) | These operating ratios were negatively impacted
	by the underwriting losses recognized in 2000 and 2001, which
	were primarily related to the previously mentioned seven
	discontinued programs.                                                                                                                                                                                                                                                                                                                                                                                         

In 2001, the Change in Net Writings for
Williamsburg National Insurance Company
(Williamsburg), another insurance subsidiary, was
116%. The growth in the net written premium on Williamsburg was
unusually high for the year primarily due to two new
workers compensation programs. These two new programs
generated an additional $383,000 of net written premium for
2001. Excluding the impact of this new business, the ratio would
have been within the usual range at 18%.

The Company has received inquiries from various
state regulators requesting information concerning Stars
financial condition. The losses, adverse trends and
uncertainties discussed in this report have been and continue to
be reviewed by the domiciliary state and other insurance
regulators of the Companys insurance subsidiaries. The
Company had previously submitted a Business Plan to reduce its
current leverage ratios and

29



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

increase the RBC ratio level and is working
closely with OFIS to monitor its progress. While the
Companys gross and net written premium have declined
steadily throughout 2001, it has not yet sufficiently reduced
its premium leverage ratios and complied with the required RBC
level. In addition to continued reductions in premium writings,
capital from sources outside the Company may also be necessary
to make sufficient progress towards reducing its leverage ratios
and increasing the RBC ratio. While the Company has retained an
investment-banking firm to execute its selected capital raising
alternative, there can be no assurance that the Company will be
successful in raising additional capital, or that proceeds
therefrom, which would be contributed to the Companys
insurance subsidiaries, would result in sufficient progress
towards reducing its leverage ratios and increasing the RBC
ratio. If the regulators determine that the Company has made
insufficient progress towards reducing its leverage ratios and
increasing the RBC ratio, they may take action at any time.
While the regulators have taken no actions to date, these
actions could include requiring the Company to propose steps to
correct the capital deficiency, requiring a further reduction in
permitted premium writings, or placing the Company under some
form of regulatory control.

Reinsurance Considerations

The Company seeks to manage the risk exposure of
its insurance subsidiaries and its clients through the purchase
of excess-of-loss and quota share reinsurance. The
Companys reinsurance requirements are analyzed on a
specific program basis to determine the appropriate retention
levels and reinsurance coverage limits. The Company secures this
reinsurance based on the availability, cost, and benefits of
various reinsurance alternatives.

Reinsurance does not legally discharge an insurer
from its primary liability for the full amount of risks assumed
under insurance policies it issues, but it does make the
assuming reinsurer liable to the insurer to the extent of the
reinsurance ceded. Therefore, the Company is subject to credit
risk with respect to the obligations of its reinsurers. In its
selection of reinsurers, the Company evaluates the financial
stability of its prospective reinsurers. To date, the Company
has not, in the aggregate, experienced any material difficulties
in collecting reinsurance recoverables other than those balances
related to CSC and HIH, as discussed previously, and for which
allowances have been established. No assurance can be given
regarding the future ability of any of the Companys
reinsurers to meet their obligations. The following table sets
forth information relating to the Companys
five largest reinsurers on the basis of reinsurance premium
ceded (other than client captive quota-share reinsurers) as of
December 31, 2001 (in thousands):

|                                     |  |                           |        |                         |  |           |        |  |  |  |     | 
|------------------------------------ |  | ------------------------- | ------ | ----------------------- |  | --------- | ------ |  |  |  | --- | 
|                                     |  | Reinsurance Premium Ceded |        | Reinsurance Recoverable |  | A.M. Best
|Reinsurer                            |  | December 31, 2001         |        | December 31, 2001       |  | Rating   
|                                     |  |                           |        |                         |  |          
|Employers Reinsurance Corporation    |  | $                         | 46,650 |                         |  | $         | 81,529 |  |  |  | A++ | 
|XL Insurance Company                 |  |                           | 8,012  |                         |  |           | 2,373  |  |  |  | A+  | 
|Lumbermens Mutual Insurance Company |  |                           | 4,791  |                         |  |           | 1,056  |  |  |  | A   | 
|Lloyds Syndicate #227                |  |                           | 3,715  |                         |  |           | 7,697  |  |  |  | Ag  | 
|Accident Fund Company of Michigan    |  |                           | 3,442  |                         |  |           | 1,622  |  |  |  | A   | 

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
December 31, 2001, the Company had risk exposure in excess
of collateral in the amount of $14.1 million on these
programs, of which the Company has an allowance of
$6.5 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

30



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

exposure to uncollectibility. 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.

New Accounting Pronouncements

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

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

FASB has issued SFAS No. 142 Goodwill
and Other Intangible Assets. SFAS No. 142, for
periods starting December 15, 2001 or thereafter,
eliminates the amortization of goodwill. In addition, goodwill
would be separately tested for impairment using a fair-value
based approach. Upon implementation in 2002, the Company will no
longer amortize goodwill. Goodwill amortization in 2001 was
$2.3 million. Management has not yet evaluated the impact
to goodwill as prescribed by SFAS No. 142. The overall
market value of the Company as of March 22, 2002 was $26.7
million, or $3.14 per share, compared to book value of
$80.3 million, or $9.44 per share.

FASB has issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144, for periods starting
January 1, 2002 or thereafter, clarifies and revises
existing guidance on accounting for impairment of plant,
property, and equipment, amortized intangibles, and other
long-lived assets not specifically addressed in other accounting
literature. Management does not expect the adoption of this
standard to have a significant impact on the Companys 2002
financial results. SFAS No. 144 also broadens the
presentation of discontinued operations to include a component
of an entity (rather than only a segment of a business).

In March 1998, NAIC voted to adopt its
Codification of Statutory Accounting Principles project
(referred to hereafter as codification).
Codification is a modified form of statutory accounting
principles that will result in a change to the current NAIC
Accounting Practices and Procedures Manual applicable to
insurance enterprises. The Companys insurance subsidiaries
adopted codification effective January 1, 2001. The
adoption of codification increased consolidated statutory
surplus by $5.8 million as of January 1, 2001.

Safe Harbor

This annual report may provide information
including certain statements which constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These include
statements regarding the intent, belief, or current expectations
of the Companys management. You are cautioned that any
such forward-looking statements are not guarantees of future
performance and involve a number of risks and uncertainties, and
results could differ materially from those indicated by such
forward-looking statements. Among the important factors that
could cause actual results to differ materially from those
indicated by such forward-looking statements are: the frequency
and severity of claims; uncertainties inherent in reserve
estimates; catastrophic events; a change in the demand for,
pricing of, availability or collectibility of reinsurance;
increased rate pressure on premiums; obtainment of certain rate
increases in current market conditions; investment rate of
return; changes in and adherence to insurance regulation;
actions taken by

31



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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.



|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7A. | Qualitative and Quantitative Disclosures
	About Market Risk

Market risk is the risk of loss arising from
adverse changes in market rates and prices, such as interest
rates as well as other relevant market rate or price changes.
The volatility and liquidity in the markets in which the
underlying assets are traded directly influence market risk. The
following is a discussion of the Companys primary risk
exposures and how those exposures are currently managed as of
December 31, 2001. The Companys market risk sensitive
instruments are primarily related to debt securities and equity
securities, which are available for sale and not held for
trading purposes.

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

At December 31, 2001, the fair value of the
Companys investment portfolio was $200.4 million,
98.6% of which is invested in debt securities. The remaining
1.4% is invested in preferred stocks. The Companys market
risk to the investment portfolio is interest rate risk
associated with debt securities. The Companys exposure to
equity price risk is not significant. The Companys
investment philosophy is one of maximizing after-tax earnings
and has historically included significant investments in
tax-exempt bonds. During the year, the Company continued to
increase its allocation to taxable securities to maximize
after-tax income and the utilization of the Companys NOL.
For the Companys investment portfolio, there were no
significant changes in the Companys primary market risk
exposures or in how those exposures are managed compared to the
year ended December 31, 2000. The Company does not
anticipate significant changes in the Companys primary
market risk exposures or in how those exposures are managed in
future reporting periods based upon what is known or expected to
be in effect.

A sensitivity analysis is defined as the
measurement of potential loss in future earnings, fair values or
cash flows of market sensitive instruments resulting from one or
more selected hypothetical changes in interest rates and other
market rates or prices over a selected period. In the
Companys sensitivity analysis model, a hypothetical change
in market rates is selected that is expected to reflect
reasonable possible near-term changes in those rates. The term
near term means a period of up to one year from the
date of the consolidated financial statements. In its
sensitivity model, the Company uses fair values to measure its
potential loss of debt securities assuming an upward parallel
shift in interest rates to measure the hypothetical change in
fair values. Based upon this sensitivity model, a 100 basis
point increase in interest rates produces a loss in fair value
of market sensitive instruments of approximately
$7.3 million. This loss in fair value only reflects the
impact of interest rate increases on the fair value of the
Companys debt securities. This loss after tax constitutes
6.0% of shareholders equity. The other financial
instruments, which include cash and cash equivalents, equity
securities, premium receivables, reinsurance recoverables, line
of credit and other assets and liabilities, when included in the
sensitivity model, do not produce a material loss in fair values.

Item
8.     Financial Statements and
Supplementary Data

See list of Financial Statement Schedules on
page 35. The financial statements listed on page 35
including footnote 17 on page 64 of the notes to the
consolidated financial statements.



|        |                                                                                      
|------- | -------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
	Accountants on Accounting and Financial Disclosure

None

32



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






PART III


Certain information required by Part III is
omitted from this Report in that the Registrant will file a
definitive Proxy Statement pursuant to Regulation 14A (the
Proxy Statement) not later than 120 days after
the end of the fiscal year covered by this report and certain
information included therein is incorporated herein by
reference. Only those sections of the Proxy Statement that
specifically address the items set forth herein are incorporated
by reference.

Item
10.     Directors and Executive
Officers of the Registrant

The information required by this item is included
under the captions Information about the Nominees, the
Incumbent Directors and Other Executive Officers and
Section 16(a) Beneficial Ownership Reporting
Compliance of the Companys Proxy Statement relating
to the Annual Meeting of Shareholders to be held on May 1,
2002, which is hereby incorporated by reference.

Item
11.     Executive
Compensation

The information required by this item is included
under the captions Executive Compensation,
Compensation of Directors, and Employment
Contracts of the Companys Proxy Statement relating
to the Annual Meeting of Shareholders to be held on May 1,
2002, which are hereby incorporated by reference; information
under the captions Report of Compensation Committee of the
Board on Executive Compensation and Performance
Graph are furnished pursuant to this Item 11 but
shall not be deemed filed.

Item
12.     Security Ownership of
Certain Beneficial Owners and Management

The information required by this item is included
under the caption Security Ownership of Certain Beneficial
Owners and Management of the Companys Proxy
Statement relating to the Annual Meeting of Shareholders to be
held on May 1, 2002, which is hereby incorporated by
reference.

Item
13.     Certain Relationships and
Related Transactions

The information required by this item is included
under the caption Certain Transactions with
Management of the Companys Proxy Statement relating
to the Annual Meeting of Shareholders to be held on May 1,
2002, which is hereby incorporated by reference.

33



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






PART IV




|         |                                                                  
|-------- | -----------------------------------------------------------------
|Item 14. | Exhibits, Financial Statement Schedules,
	and Reports on Form 8-K

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

|   |  |                                                                                                                                                                                                                                 |  |      |       | 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | 
|   |  |                                                                                                                                                                                                                                 |  | Page
|   |  |                                                                                                                                                                                                                                 |  |     
|1. |  | List of Financial Statements:                                                                                                                                                                                                   |  |      |       | 
|   |  | Report of PricewaterhouseCoopers LLP, Independent
	Accountants                                                                                                                                                                  |  |      | 36    | 
|   |  | Consolidated Balance Sheet 
	December 31, 2001 and 2000                                                                                                                                                                        |  |      | 37    | 
|   |  | Consolidated Statement of Income  For
	Years Ended December 31, 2001, 2000, and 1999                                                                                                                                           |  |      | 38    | 
|   |  | Consolidated Statement of Comprehensive
	Income  For Years Ended December 31, 2001, 2000,
	and 1999                                                                                                                            |  |      | 39    | 
|   |  | Consolidated Statement of Shareholders
	Equity  For Years Ended December 31, 2001, 2000,
	and 1999                                                                                                                            |  |      | 40    | 
|   |  | Consolidated Statement of Cash Flows 
	For Years Ended December 31, 2001, 2000, and 1999                                                                                                                                       |  |      | 41    | 
|   |  | Notes to Consolidated Financial Statements                                                                                                                                                                                      |  |      | 42-63 | 
|2. |  | Financial Statement Schedule                                                                                                                                                                                                    |  |      |       | 
|   |  | Schedule II Condensed Financial Information
	of Registrant                                                                                                                                                                      |  |      | 66-69 | 
|   |  | Schedules not listed above have been omitted
	because they are not applicable or are not required or the
	information required to be set forth therein is included in the
	Consolidated Financial Statements and Notes thereto.
|3. |  | Exhibits: The Exhibits listed on the
	accompanying Exhibit Index immediately following the
	financial statement schedule are filed as part of, or
	incorporated by reference into, this Form 10-K.                             

(B) Reports on Form 8-K

No reports on Form 8-K were filed by the
Registrant during the quarter ended December 31, 2001.

34



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






REPORT OF MANAGEMENT


Management is responsible for the accompanying
consolidated financial statements and all other financial
information contained in the Annual Report. The financial
statements have been prepared in conformity with generally
accepted accounting principles and include amounts which of
necessity are based on managements best estimates and
informed judgments under existing circumstances.

The Company maintains a system of internal
controls designed to provide reasonable assurance, at
appropriate costs, that assets are safeguarded, transactions are
properly authorized and recorded, and that the financial records
provide a reliable basis for the preparation of financial
statements that are free of material misstatement.

The financial statements have been audited by the
independent auditors PricewaterhouseCoopers LLP. Their role is
to render an independent professional opinion on
managements financial statements based upon performance of
procedures they deem appropriate under generally accepted
auditing standards. As part of their audit, they evaluate the
Companys internal control structure to the extent they
consider necessary to express their opinion on the consolidated
financial statements.

The Audit Committee of the Board of Directors,
composed of directors who are not officers or employees of the
Company, meets periodically with management, the Companys
chief internal auditor, and with its independent auditors to
discuss their evaluation of internal accounting controls and the
quality of financial reporting. Both the independent auditors
and the internal auditors have free access to the Audit
Committee to discuss the results of audits.

|                                                           |  |                                                                                   
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------
|(SIG)Merton J. Segal
	Chairman and Chief Executive Officer |  | (SIG)Joseph C. Henry
	Executive Vice President and
	Acting Chief Financial Officer

February 20, 2002

35



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##### Table of Contents








REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of

Meadowbrook Insurance Group, Inc.:


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 14(a)(1) present fairly, in all material respects, the
financial position of Meadowbrook Insurance Group, Inc. at
December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under
Item 14(a)(2), present fairly, in all material respects,
the information set forth therein when read in conjunction with
the related consolidated financial statements. These financial
statements and financial statement schedules are the
responsibility of the Companys management; our
responsibility is to express an opinion on these financial
statements and financial statement schedules based on our
audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.

As discussed in Notes 1 and 8 to the
financial statements, the Companys largest insurance
subsidiary is within the Company Action Level of Risk Based
Capital at December 31, 2001.



| |                             
| | ----------------------------
| | (PRICEWATERHOUSECOOPERS LLP)

Grand Rapids, Michigan

February 20, 2002


36



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED BALANCE SHEET


|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |         |         |         | 
|--------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                        |                                                                                                                         |                                                                                                                                          
|                                        |                                                                                                                         | December 31,                                                                                                                             
|                                        |                                                                                                                         |                                                                                                                                          
|                                        |                                                                                                                         | 2001                                                                                                                                      |                                            | 2000   
|                                        |                                                                                                                         |                                                                                                                                           |                                            |        
|                                        |                                                                                                                         |                                                                                                                                          
|                                        |                                                                                                                         | (In thousands, except                                                                                                                    
|                                        |                                                                                                                         | share data)                                                                                                                              
|ASSETS                                 
|Investments                             |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|                                        | Debt securities available for sale, at fair value
	(cost of $193,020 and $164,685 in 2001 and 2000, respectively)       |                                                                                                                                           | $                                          | 197,634 |         |         | $ | 166,790 |        
|                                        | Equity securities available for sale, at fair
	value (cost of $2,757 and $16,445 in 2001 and 2000, respectively)        |                                                                                                                                           |                                            | 2,787   |         |         |   | 16,455  |        
|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|                                        |                                                                                                                         |                                                                                                                                           | Total investments                          |         |         | 200,421 |   |         |         | 183,245 | 
|                                        | Cash and cash equivalents                                                                                               |                                                                                                                                           |                                            | 33,302  |         |         |   | 56,838  |        
|                                        | Accrued investment income                                                                                               |                                                                                                                                           |                                            | 2,577   |         |         |   | 2,480   |        
|                                        | Premiums and agent balances receivable (net of
	allowance of $4,932 and $5,242 in 2001 and 2000, respectively)          |                                                                                                                                           |                                            | 78,171  |         |         |   | 79,121  |        
|                                        | Reinsurance recoverable on:                                                                                             |                                                                                                                                           |                                            |         |         |         |   |         |        
|                                        |                                                                                                                         | Paid losses                                                                                                                               |                                            |         | 26,515  |         |   |         | 16,425  |        
|                                        |                                                                                                                         | Unpaid losses                                                                                                                             |                                            |         | 195,943 |         |   |         | 168,962 |        
|                                        | Prepaid reinsurance premiums                                                                                            |                                                                                                                                           |                                            | 37,852  |         |         |   | 55,854  |        
|                                        | Deferred policy acquisition costs                                                                                       |                                                                                                                                           |                                            | 13,953  |         |         |   | 6,624   |        
|                                        | Deferred federal income taxes                                                                                           |                                                                                                                                           |                                            | 24,506  |         |         |   | 21,753  |        
|                                        | Federal income taxes recoverable                                                                                        |                                                                                                                                           |                                            | 730     |         |         |   | 1,933   |        
|                                        | Intangible assets (less accumulated amortization
	of $6,005 and $5,403 in 2001 and 2000, respectively)                  |                                                                                                                                           |                                            | 28,997  |         |         |   | 35,946  |        
|                                        | Other assets                                                                                                            |                                                                                                                                           |                                            | 44,921  |         |         |   | 32,002  |        
|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|                                        |                                                                                                                         |                                                                                                                                           | Total assets                               |         | $       | 687,888 |   |         | $       | 661,183 | 
|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|LIABILITIES AND SHAREHOLDERS
	EQUITY  
|Liabilities                             |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|                                        | Losses and loss adjustment expenses                                                                                     |                                                                                                                                           | $                                          | 394,596 |         |         | $ | 341,824 |        
|                                        | Unearned premiums                                                                                                       |                                                                                                                                           |                                            | 94,002  |         |         |   | 94,142  |        
|                                        | Debt                                                                                                                    |                                                                                                                                           |                                            | 54,741  |         |         |   | 53,013  |        
|                                        | Accounts payable and accrued expenses                                                                                   |                                                                                                                                           |                                            | 22,185  |         |         |   | 20,106  |        
|                                        | Reinsurance funds held and balances payable                                                                             |                                                                                                                                           |                                            | 26,887  |         |         |   | 38,171  |        
|                                        | Payable to insurance companies                                                                                          |                                                                                                                                           |                                            | 5,840   |         |         |   | 19,126  |        
|                                        | Other liabilities                                                                                                       |                                                                                                                                           |                                            | 9,321   |         |         |   | 8,826   |        
|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|                                        |                                                                                                                         |                                                                                                                                           | Total liabilities                          |         |         | 607,572 |   |         |         | 575,208 | 
|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|Commitments and contingencies (note 12) |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|Shareholders Equity                    |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|                                        | Common stock, $0.01 stated value; authorized
	30,000,000 shares; 8,512,194 and 8,512,008 shares issued and
	outstanding |                                                                                                                                           |                                            | 85      |         |         |   | 85      |        
|                                        | Additional paid-in capital                                                                                              |                                                                                                                                           |                                            | 67,948  |         |         |   | 67,928  |        
|                                        | Retained earnings                                                                                                       |                                                                                                                                           |                                            | 10,034  |         |         |   | 17,309  |        
|                                        | Note receivable from officer                                                                                            |                                                                                                                                           |                                            | (824    | )       |         |   | (772    | )      
|                                        | Accumulated other comprehensive income:                                                                                 |                                                                                                                                           |                                            |         |         |         |   |         |        
|                                        |                                                                                                                         | Unrealized appreciation on available for sale
	securities, net of deferred tax expense of $1,571 and $690 in
	2001 and 2000, respectively |                                            |         | 3,073   |         |   |         | 1,425   |        
|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|                                        |                                                                                                                         |                                                                                                                                           | Total shareholders equity                 |         |         | 80,316  |   |         |         | 85,975  | 
|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        
|                                        |                                                                                                                         |                                                                                                                                           | Total liabilities and shareholders equity |         | $       | 687,888 |   |         | $       | 661,183 | 
|                                        |                                                                                                                         |                                                                                                                                           |                                            |         |         |         |   |        

The accompanying notes are an integral part of
the Consolidated Financial Statements.

37



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF INCOME


|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |         |          |           |  
|------------------ | ----------------------------------------------------------------------------------------- | --------------------------------------------- | ------------------------------------------------------- | -------- | -------- | --------- | - | -------- | -------- | --------- | - | ------- | -------- | --------- | -
|                   |                                                                                           |                                              
|                   |                                                                                           | For the Years Ended December 31,             
|                   |                                                                                           |                                              
|                   |                                                                                           | 2001                                          |                                                         | 2000     |          | 1999     
|                   |                                                                                           |                                               |                                                         |          |          |          
|                   |                                                                                           |                                              
|                   |                                                                                           | (In thousands, except per share data)        
|Revenues           |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   | Premiums earned                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |         |         
|                   |                                                                                           | Gross                                         |                                                         | $        | 293,650  |           |   | $        | 310,697  |           |   | $       | 236,620  |          
|                   |                                                                                           | Ceded                                         |                                                         |          | (129,985 | )         |   |          | (164,697 | )         |   |         | (111,714 | )        
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   | Net earned                                                                                |                                               |                                                         | 163,665  |          |           |   | 146,000  |          |           |   | 124,906 |         
|                   | Net commissions and fees                                                                  |                                               |                                                         | 40,675   |          |           |   | 41,251   |          |           |   | 38,697  |         
|                   | Net investment income                                                                     |                                               |                                                         | 14,228   |          |           |   | 13,715   |          |           |   | 11,618  |         
|                   | Net realized gains (losses) on disposition
	of investments                                |                                               |                                                         | 735      |          |           |   | 540      |          |           |   | (227    | )       
|                   | Loss on sale of subsidiary                                                                |                                               |                                                         | (1,097   | )        |           |   |         |          |           |   |        |         
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   |                                                                                           |                                               | Total revenues                                          |          |          | 218,206   |   |          |          | 201,506   |   |         |          | 174,994   |  
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|Expenses           |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   | Losses and loss adjustment expenses                                                       |                                               |                                                         | 247,122  |          |           |   | 289,588  |          |           |   | 189,084 |         
|                   | Reinsurance recoveries                                                                    |                                               |                                                         | (121,939 | )        |           |   | (161,969 | )        |           |   | (93,726 | )       
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   | Net losses and loss adjustment expenses                                                   |                                               |                                                         | 125,183  |          |           |   | 127,619  |          |           |   | 95,358  |         
|                   | Salaries and employee benefits                                                            |                                               |                                                         | 44,179   |          |           |   | 43,038   |          |           |   | 42,473  |         
|                   | Other operating expenses                                                                  |                                               |                                                         | 54,440   |          |           |   | 53,316   |          |           |   | 47,583  |         
|                   | Interest on notes payable                                                                 |                                               |                                                         | 4,516    |          |           |   | 5,135    |          |           |   | 3,636   |         
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   |                                                                                           |                                               | Total expenses                                          |          |          | 228,318   |   |          |          | 229,108   |   |         |          | 189,050   |  
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   |                                                                                           |                                               | Loss before taxes                                       |          |          | (10,112   | ) |          |          | (27,602   | ) |         |          | (14,056   | )
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   | Federal income benefit                                                                    |                                               |                                                         | (3,602   | )        |           |   | (10,129  | )        |           |   | (6,209  | )       
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   |                                                                                           |                                               | Net loss before cumulative effect of accounting
	change |          |          | (6,510    | ) |          |          | (17,473   | ) |         |          | (7,847    | )
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   | Cumulative effect of accounting for insurance
	related assessments, net of deferred taxes |                                               |                                                         |         |          |           |   |         |          |           |   | (1,706  | )       
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   |                                                                                           |                                               | Net loss                                                |          | $        | (6,510    | ) |          | $        | (17,473   | ) |         | $        | (9,553    | )
|                   |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|Earnings Per Share |                                                                                           |                                               |                                                         |          |          |           |   |          |          |           |   |        
|                   | Basic                                                                                     |                                               |                                                         |          |          |           |   |          |          |           |   |         |         
|                   |                                                                                           | Before cumulative effect of accounting change |                                                         | $        | (0.76    | )         |   | $        | (2.05    | )         |   | $       | (0.91    | )        
|                   |                                                                                           | Cumulative effect of accounting change        |                                                         | $        |         |           |   | $        |         |           |   | $       | (0.20    | )        
|                   |                                                                                           |                                               | Net loss                                                |          | $        | (0.76     | ) |          | $        | (2.05     | ) |         | $        | (1.11     | )
|                   | Diluted Before cumulative effect of accounting
	change                                    |                                               | $                                                       | (0.76    | )        |           | $ | (2.05    | )        |           | $ | (0.91   | )       
|                   |                                                                                           |                                               | Cumulative effect of accounting change                  |          | $        |          |   |          | $        |          |   |         | $        | (0.20     | )
|                   |                                                                                           |                                               | Net loss                                                |          | $        | (0.76     | ) |          | $        | (2.05     | ) |         | $        | (1.11     | )
|                   | Weighted average number of common shares                                                  |                                               |                                                         |          |          |           |   |          |          |           |   |         |         
|                   |                                                                                           |                                               | Basic                                                   |          |          | 8,512,186 |   |          |          | 8,511,834 |   |         |          | 8,588,216 |  
|                   |                                                                                           |                                               | Diluted                                                 |          |          | 8,512,186 |   |          |          | 8,511,834 |   |         |          | 8,588,216 |  

The accompanying notes are an integral part of
the Consolidated Financial Statements.

38



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME


|         |                                                 |                                                                              |        |        |        |      |         |         |       |   |        |         |        |  
|-------- | ----------------------------------------------- | ---------------------------------------------------------------------------- | ------ | ------ | ------ | ---- | ------- | ------- | ----- | - | ------ | ------- | ------ | -
|         |                                                 |                                                                             
|         |                                                 | For the Years Ended December 31,                                            
|         |                                                 |                                                                             
|         |                                                 | 2001                                                                         |        | 2000   |        | 1999
|         |                                                 |                                                                              |        |        |        |     
|         |                                                 |                                                                             
|         |                                                 | (In thousands)                                                              
|Net loss |                                                 | $                                                                            | (6,510 | )      |        | $    | (17,473 | )       |       | $ | (9,553 | )      
|         | Other comprehensive (loss) income, net of
	tax: |                                                                              |        |        |        |      |         |         |       |   |        |         |       
|         |                                                 | Unrealized gains (losses) on securities                                      |        |        | 2,979  |      |         |         | 4,454 |   |        |         | (6,669 | )
|         |                                                 | Less: reclassification adjustment for gains
	(losses) included in net income |        |        | (1,331 | )    |         |         | (356  | ) |        |         | 150    |  
|         |                                                 |                                                                              |        |        |        |      |         |         |       |   |        |        
|         | Other comprehensive income (loss)               |                                                                              |        | 1,648  |        |      |         | 4,098   |       |   |        | (6,519  | )     
|         |                                                 |                                                                              |        |        |        |      |         |         |       |   |        |        
|         | Comprehensive loss                              |                                                                              | $      | (4,862 | )      |      | $       | (13,375 | )     |   | $      | (16,072 | )     
|         |                                                 |                                                                              |        |        |        |      |         |         |       |   |        |        

The accompanying notes are an integral part of
the Consolidated Financial Statements.

39



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY


|                                                          |  |                                                       |    |             |  |          |        |                 |  |               |         |               |  |   |      |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------- |  | ----------------------------------------------------- | -- | ----------- |  | -------- | ------ | --------------- |  | ------------- | ------- | ------------- |  | - | ---- | - |  | - | ------ | - |  | - | ------- | -
|                                                          |  |                                                      
|                                                          |  | For the Years ended December 31, 2001, 2000, and 1999
|                                                          |  |                                                      
|                                                          |  |                                                       |    | Accumulated |  |         
|                                                          |  |                                                       |    | Additional  |  |          |        | Other           |  | Total        
|                                                          |  | Common                                                |    | Paid-In     |  | Retained |        | Note Receivable |  | Comprehensive |         | Shareholders
|                                                          |  | Stock                                                 |    | Capital     |  | Earnings |        | from Officer    |  | Income        |         | Equity       
|                                                          |  |                                                       |    |             |  |          |        |                 |  |               |         |              
|                                                          |  |                                                      
|                                                          |  | (In thousands)                                       
|Balances January 1, 1999                                  |  | $                                                     | 87 |             |  | $        | 71,190 |                 |  | $             | 45,105  |               |  | $ | (661 | ) |  | $ | 3,846  |   |  | $ | 119,567 |  
|Unrealized depreciation on available for sale
	securities |  |                                                       |   |             |  |          |       |                 |  |               |        |               |  |   |     |   |  |   | (6,519 | ) |  |   | (6,519  | )
|Dividends declared at $0.12 per share                     |  |                                                       |   |             |  |          |       |                 |  |               | (1,031  | )             |  |   |     |   |  |   |       |   |  |   | (1,031  | )
|Issuance of 13,945 shares of common stock                 |  |                                                       |   |             |  |          | 93     |                 |  |               |        |               |  |   |     |   |  |   |       |   |  |   | 93      |  
|Retirement of 165,724 shares of common stock              |  |                                                       | (2 | )           |  |          | (3,414 | )               |  |               | 1,288   |               |  |   |     |   |  |   |       |   |  |   | (2,128  | )
|Tax benefit of stock option exercises                     |  |                                                       |   |             |  |          | 38     |                 |  |               |        |               |  |   |     |   |  |   |       |   |  |   | 38      |  
|Note receivable from an officer                           |  |                                                       |   |             |  |          |       |                 |  |               |        |               |  |   | (59  | ) |  |   |       |   |  |   | (59     | )
|Net loss                                                  |  |                                                       |   |             |  |          |       |                 |  |               | (9,553  | )             |  |   |     |   |  |   |       |   |  |   | (9,553  | )
|                                                          |  |                                                       |    |             |  |          |        |                 |  |               |         |               |  |   |      |   |  |   |        |   |  |   |         |  
|Balances December 31, 1999                                |  |                                                       | 85 |             |  |          | 67,907 |                 |  |               | 35,809  |               |  |   | (720 | ) |  |   | (2,673 | ) |  |   | 100,408 |  
|Unrealized appreciation on available for sale
	securities |  |                                                       |   |             |  |          |       |                 |  |               |        |               |  |   |     |   |  |   | 4,098  |   |  |   | 4,098   |  
|Dividends declared at $0.12 per share                     |  |                                                       |   |             |  |          |       |                 |  |               | (1,021  | )             |  |   |     |   |  |   |       |   |  |   | (1,021  | )
|Issuance of 34,718 shares of common stock                 |  |                                                       |   |             |  |          | 177    |                 |  |               |        |               |  |   |     |   |  |   |       |   |  |   | 177     |  
|Retirement of 34,365 shares of common stock               |  |                                                       |   |             |  |          | (157   | )               |  |               | (6      | )             |  |   |     |   |  |   |       |   |  |   | (163    | )
|Tax benefit of stock option exercises                     |  |                                                       |   |             |  |          | 1      |                 |  |               |        |               |  |   |     |   |  |   |       |   |  |   | 1       |  
|Note receivable from an officer                           |  |                                                       |   |             |  |          |       |                 |  |               |        |               |  |   | (52  | ) |  |   |       |   |  |   | (52     | )
|Net loss                                                  |  |                                                       |   |             |  |          |       |                 |  |               | (17,473 | )             |  |   |     |   |  |   |       |   |  |   | (17,473 | )
|                                                          |  |                                                       |    |             |  |          |        |                 |  |               |         |               |  |   |      |   |  |   |        |   |  |   |         |  
|Balances December 31, 2000                                |  |                                                       | 85 |             |  |          | 67,928 |                 |  |               | 17,309  |               |  |   | (772 | ) |  |   | 1,425  |   |  |   | 85,975  |  
|Unrealized appreciation on available for sale
	securities |  |                                                       |   |             |  |          |       |                 |  |               |        |               |  |   |     |   |  |   | 1,648  |   |  |   | 1,648   |  
|Dividends declared at $0.09 per share                     |  |                                                       |   |             |  |          |       |                 |  |               | (766    | )             |  |   |     |   |  |   |       |   |  |   | (766    | )
|Issuance of 1,400 shares of common stock                  |  |                                                       |   |             |  |          | 27     |                 |  |               |        |               |  |   |     |   |  |   |       |   |  |   | 27      |  
|Retirement of 1,214 shares of common stock                |  |                                                       |   |             |  |          | (8     | )               |  |               | 1       |               |  |   |     |   |  |   |       |   |  |   | (7      | )
|Tax benefit of stock option exercises                     |  |                                                       |   |             |  |          | 1      |                 |  |               |        |               |  |   |     |   |  |   |       |   |  |   | 1       |  
|Note receivable from an officer                           |  |                                                       |   |             |  |          |       |                 |  |               |        |               |  |   | (52  | ) |  |   |       |   |  |   | (52     | )
|Net loss                                                  |  |                                                       |   |             |  |          |       |                 |  |               | (6,510  | )             |  |   |     |   |  |   |       |   |  |   | (6,510  | )
|                                                          |  |                                                       |    |             |  |          |        |                 |  |               |         |               |  |   |      |   |  |   |        |   |  |   |         |  
|Balances December 31, 2001                                |  | $                                                     | 85 |             |  | $        | 67,948 |                 |  | $             | 10,034  |               |  | $ | (824 | ) |  | $ | 3,073  |   |  | $ | 80,316  |  
|                                                          |  |                                                       |    |             |  |          |        |                 |  |               |         |               |  |   |      |   |  |   |        |   |  |   |         |  

The accompanying notes are an integral part of
the Consolidated Financial Statements.

40



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |        |         |         |  
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------- | ---------------------------------------------------- | ------ | -------- | ------- | - | ------- | ------- | ------ | - | ------ | ------- | ------- | -
|                                                                         |                                                                                            |                                                                          
|                                                                         |                                                                                            | For the Years Ended December 31,                                         
|                                                                         |                                                                                            |                                                                          
|                                                                         |                                                                                            | 2001                                                                      |                                                      | 2000   |          | 1999   
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |        
|                                                                         |                                                                                            |                                                                          
|                                                                         |                                                                                            | (In thousands)                                                           
|Cash Flows From Operating Activities                                     |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         | Net Loss                                                                                   |                                                                           | $                                                    | (6,510 | )        |         | $ | (17,473 | )       |        | $ | (9,553 | )      
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                        
|                                                                         | Adjustments to reconcile net loss to net cash
	(used in) provided by operating activities: |                                                                           |                                                      |        |          |         |   |         |         |        |   |        |        
|                                                                         |                                                                                            | Amortization of intangible assets                                         |                                                      |        | 2,336    |         |   |         | 2,097   |        |   |        | 1,621   |        
|                                                                         |                                                                                            | Depreciation of furniture and equipment                                   |                                                      |        | 2,785    |         |   |         | 3,134   |        |   |        | 3,172   |        
|                                                                         |                                                                                            | Net accretion of discount on bonds                                        |                                                      |        | 26       |         |   |         | (59     | )      |   |        | 31      |        
|                                                                         |                                                                                            | (Gain) loss on sale of investments                                        |                                                      |        | (2,017   | )       |   |         | (540    | )      |   |        | 227     |        
|                                                                         |                                                                                            | Deferred income tax (benefit) expense                                     |                                                      |        | (3,633   | )       |   |         | (9,075  | )      |   |        | (6,724  | )      
|                                                                         | Changes in operating assets and liabilities:                                               |                                                                           |                                                      |        |          |         |   |         |         |        |   |        |        
|                                                                         | Decrease (increase) in:                                                                    |                                                                           |                                                      |        |          |         |   |         |         |        |   |        |        
|                                                                         |                                                                                            | Accrued investment income                                                 |                                                      |        | (98      | )       |   |         | 279     |        |   |        | (248    | )      
|                                                                         |                                                                                            | Premiums and agent balances receivable                                    |                                                      |        | 951      |         |   |         | 6,586   |        |   |        | (16,509 | )      
|                                                                         |                                                                                            | Reinsurance recoverable on paid and unpaid losses                         |                                                      |        | (37,071  | )       |   |         | (69,592 | )      |   |        | (40,293 | )      
|                                                                         |                                                                                            | Prepaid reinsurance premiums                                              |                                                      |        | 18,002   |         |   |         | (13,781 | )      |   |        | (5,737  | )      
|                                                                         |                                                                                            | Deferred policy acquisition costs                                         |                                                      |        | (7,329   | )       |   |         | 3,406   |        |   |        | (1,130  | )      
|                                                                         |                                                                                            | Federal income taxes recoverable                                          |                                                      |        | 1,204    |         |   |         | (752    | )      |   |        | 1,229   |        
|                                                                         |                                                                                            | Other assets                                                              |                                                      |        | (1,652   | )       |   |         | (8,765  | )      |   |        | 2,778   |        
|                                                                         | Increase (decrease) in:                                                                    |                                                                           |                                                      |        |          |         |   |         |         |        |   |        |        
|                                                                         |                                                                                            | Losses and loss adjustment expenses                                       |                                                      |        | 52,772   |         |   |         | 112,580 |        |   |        | 71,448  |        
|                                                                         |                                                                                            | Unearned premiums                                                         |                                                      |        | (140     | )       |   |         | 4,047   |        |   |        | 8,225   |        
|                                                                         |                                                                                            | Accounts payable and accrued expenses                                     |                                                      |        | 2,336    |         |   |         | 4,292   |        |   |        | 2,469   |        
|                                                                         |                                                                                            | Insurance company payable                                                 |                                                      |        | (13,286  | )       |   |         | (4,606  | )      |   |        | 7,086   |        
|                                                                         |                                                                                            | Reinsurance funds held and balances payable                               |                                                      |        | (11,284  | )       |   |         | 8,600   |        |   |        | 9,219   |        
|                                                                         |                                                                                            | Other liabilities                                                         |                                                      |        | (169     | )       |   |         | 3,603   |        |   |        | (3,678  | )      
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            |                                                                           | Total Adjustments                                    |        |          | 3,733   |   |         |         | 41,454 |   |        |         | 33,186  |  
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            | Net cash (used in) provided by operating
	activities                      |                                                      |        | (2,777   | )       |   |         | 23,981  |        |   |        | 23,633  |        
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|Cash Flows From Investing Activities                                     |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            | Purchase of equity securities available for sale                          |                                                      |        | (450     | )       |   |         | (236    | )      |   |        | (10,858 | )      
|                                                                         |                                                                                            | Purchase of debt securities available for sale                            |                                                      |        | (110,906 | )       |   |         | (68,486 | )      |   |        | (74,297 | )      
|                                                                         |                                                                                            | Proceeds from sale of equity securities available
	for sale               |                                                      |        | 15,189   |         |   |         | 1,049   |        |   |        | 1,362   |        
|                                                                         |                                                                                            | Proceeds from sales and maturities of debt
	securities available for sale |                                                      |        | 83,510   |         |   |         | 92,985  |        |   |        | 63,589  |        
|                                                                         |                                                                                            | Capital expenditures                                                      |                                                      |        | (1,381   | )       |   |         | (3,043  | )      |   |        | (3,656  | )      
|                                                                         |                                                                                            | Purchase of and additional investments in
	subsidiaries                   |                                                      |        |         |         |   |         | (5,158  | )      |   |        | (16,776 | )      
|                                                                         |                                                                                            | Sale of subsidiary                                                        |                                                      |        | 3,752    |         |   |         |        |        |   |        |        |        
|                                                                         |                                                                                            | Net cash of acquired subsidiaries                                         |                                                      |        |         |         |   |         |        |        |   |        | 3,795   |        
|                                                                         |                                                                                            | Net cash deposited in funds held                                          |                                                      |        | (12,790  | )       |   |         |        |        |   |        |        |        
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            |                                                                           | Net cash (used in) provided by investing
	activities |        |          | (23,076 | ) |         |         | 17,111 |   |        |         | (36,841 | )
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|Cash Flows From Financing Activities                                     |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            | Proceeds from lines of credit                                             |                                                      |        | 12,780   |         |   |         | 52,328  |        |   |        | 107,703 |        
|                                                                         |                                                                                            | Payment of lines of credit                                                |                                                      |        | (11,052  | )       |   |         | (57,778 | )      |   |        | (90,193 | )      
|                                                                         |                                                                                            | Book overdraft                                                            |                                                      |        | 1,642    |         |   |         | (1,459  | )      |   |        | 2,031   |        
|                                                                         |                                                                                            | Dividend paid on common stock                                             |                                                      |        | (1,021   | )       |   |         | (1,021  | )      |   |        | (1,037  | )      
|                                                                         |                                                                                            | Retirement of common stock                                                |                                                      |        | (32      | )       |   |         | (37     | )      |   |        | (2,093  | )      
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            |                                                                           | Net cash provided by (used in) financing
	activities |        |          | 2,317   |   |         |         | (7,967 | ) |        |         | 16,411  |  
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            | (Decrease) increase in cash and cash equivalents                          |                                                      |        | (23,536  | )       |   |         | 33,125  |        |   |        | 3,203   |        
|                                                                         |                                                                                            | Cash and cash equivalents, beginning of year                              |                                                      |        | 56,838   |         |   |         | 23,713  |        |   |        | 20,510  |        
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            | Cash and cash equivalents, end of year                                    |                                                      | $      | 33,302   |         |   | $       | 56,838  |        |   | $      | 23,713  |        
|                                                                         |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|Supplemental Disclosure of Cash Flow
	Information:                       |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            | Interest paid                                                             |                                                      | $      | 3,671    |         |   | $       | 5,135   |        |   | $      | 3,636   |        
|                                                                         |                                                                                            | Income taxes received, net of paid                                        |                                                      | $      | (1,176   | )       |   | $       | (228    | )      |   | $      | (1,639  | )      
|Supplemental Disclosure of Non Cash Investing
	and Financing Activities: |                                                                                            |                                                                           |                                                      |        |          |         |   |         |         |        |   |       
|                                                                         |                                                                                            | Tax benefit from stock options                                            |                                                      | $      | 1        |         |   | $       | 1       |        |   | $      | 38      |        

The accompanying notes are an integral part of
the Consolidated Financial Statements.

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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1.     Summary of
Significant Accounting Policies

Basis of Financial Presentation

The accompanying consolidated financial
statements have been prepared in conformity with generally
accepted accounting principles (GAAP), which differ
from statutory accounting practices prescribed or permitted for
insurance companies by regulatory authorities. Prescribed
statutory accounting practices include a variety of publications
of the National Association of Insurance Commissioners
(NAIC), as well as state laws, regulations and
general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.

Principles of Consolidation

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

Business

The Company, through its subsidiaries, is engaged
primarily in developing and managing alternative risk management
programs for defined client groups and their members. This
includes providing services, such as reinsurance brokering, risk
management consulting, claims handling, administrative services,
along with various types of property and casualty insurance
coverage, including workers compensation, general
liability and commercial multiple peril. The Company, through
its insurance subsidiaries, Star, Savers, Williamsburg, and
Ameritrust, issue insurance policies for risk-sharing and fully
insured programs. The Company retains underwriting risk in these
insurance programs, which may result in fluctuations in
earnings. The Company also operates retail insurance agencies,
which primarily place principally commercial insurance as well
as personal property, casualty, life and accident and health
insurance with multiple insurance carriers. The Company does not
have significant exposures to environmental/ asbestos and
catastrophic coverages. Insurance coverage is primarily provided
to associations or similar groups of members, commonly referred
to as programs. Four programs, collectively, accounted for
29.4%, 21.6%, and 25.9% of the Companys total net earned
premium in 2001, 2000, and 1999, respectively. The net earned
premium of the largest program in each respective year
represented 12.4%, 6.2%, and 7.6% of the Companys premium
revenues in 2001, 2000, and 1999, respectively.

The Company through its largest insurance
subsidiary, Star, has incurred significant losses in the past
three years, which has led to violations of certain covenants in
its line of credit agreement, reduced capital and surplus, and
violations of various regulatory ratios at the insurance company
subsidiaries. These losses also resulted in a downgrade by
A.M. Best of its rating of the insurance company
subsidiaries, state regulatory inquiries, and amendments to the
bank line of credit.

Accordingly, the absence of dividends from Star
has adversely impacted the Companys liquidity. Absent the
sale of assets or other capital raising events, the Company may
not have the liquidity in its non-regulated subsidiaries to make
the required debt payments pursuant to the revised pay down
schedule of $10.8 million on June 30, 2002, $1.0 million on
September 30, 2002, $11.3 million on December 31,
2002, and the remaining $24.0 million on January 3, 2003.
Furthermore, if repayment is required due to default, the
Company currently does not have sufficient cash to repay the
balance. As part of the loan agreement, certain of the
non-regulated subsidiaries guaranteed repayment of the line of
credit and the Company pledged the stock of its non-regulated
subsidiaries as collateral. In the event of default, the banks
would have the right to sell the

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Companys non-regulated subsidiaries and
apply the proceeds to the balance on the line of credit.
Managements plans to satisfy the debt are discussed below.

At December 31, 2001, Star is within the
Company Action Level of Risk Based Capital (RBC).
Accordingly, Star is required to submit a RBC Plan through the
OFIS for review. While Michigan and other insurance regulators
have taken no actions to date, the Company could be required to
take additional steps to correct Stars capital deficiency,
further reduce premium writings, or implement some form of
regulatory action. Management believes it has implemented its
plan to achieve compliance with the RBC and regulatory ratios
through the reduction in gross and net premiums and related
expense levels.

The Company has alternative plans to mitigate the
risk items described above. The Company has retained an
investment-banking firm to file a registration statement with
the Securities and Exchange Commission with respect to a public
offering of its common stock. The Company executed an engagement
letter with an investment-banking firm that will act as
financial advisor and lead underwriter for the Company in
selling its common stock to the public. The terms will be
determined immediately prior to the offering, which is expected
to commence in May or June 2002. The offering is subject to
certain conditions and no underwriting agreement has yet been
executed. If the capital raising is unsuccessful, management
believes the Company has the ability to sell certain of its
non-regulated subsidiaries to satisfy its debt obligations.
There are no restrictions that prohibit the sale of
non-regulated subsidiaries. Proceeds from the offering would be
used to satisfy all or a portion of the Companys debt
obligations and add to the surplus of its insurance
subsidiaries. However, there can be no assurance that these
capital-raising efforts will be successful.

At December 31, 2001, the Company had a
deferred tax asset of $24.5 million, $11.8 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.
Although realization is not assured, management believes that it
is more likely than not that current tax strategies, which
include potential sale of assets and/or subsidiaries, and the
ongoing results from operations excluding the discontinuation of
seven specific, unprofitable programs, will generate sufficient
taxable income to realize the deferred tax asset. If the Company
is unable to execute these tax strategies or generate sufficient
taxable income, the establishment of a valuation allowance may
be required. The NOL of $11.8 million was generated from
losses occuring in 1999, 2000, and 2001, which, if unused, will
begin to expire in 2019.

Use of Estimates

The preparation of financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results may
differ from those estimates.

Investments

The Companys investment securities at
December 31, 2001 and 2000 are classified as available for
sale. Investments classified as available for sale securities
are available to be sold in the future in response to the
Companys liquidity needs, changes in market interest
rates, tax strategies and asset-liability management strategies,
among other reasons. Available for sale securities are reported
at fair value, with unrealized gains and losses reported in the
accumulated other comprehensive income component of
shareholders equity, net of deferred taxes.

Realized gains or losses on sale or maturity of
investments are determined on the basis of specific costs of the
investments. Discount or premium on debt securities purchased at
other than par value is amortized using

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the constant yield method. Investments with other
than temporary declines in fair value are written down to
estimated fair value and the related realized losses recognized
in income. There were $1,282,528 in impaired investments written
down in 2001, and none in 2000 and 1999.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand
and highly liquid short-term investments. The Company considers
all short-term investments purchased with an original maturity
of three months or less to be cash equivalents.

Deferred Policy Acquisition Costs

Commissions and other costs of acquiring
insurance business that vary with and are primarily related to
the production of new and renewal business are deferred and
amortized over the terms of the policies or reinsurance treaties
to which they relate. Investment earnings are anticipated in
determining the recoverability of such deferred amounts.

Furniture and Equipment

Furniture and equipment are stated at cost and
are depreciated using the straight-line method over the
estimated useful lives of the assets, generally three to ten
years. Upon sale or retirement, the cost of the asset and
related accumulated depreciation are eliminated from their
respective accounts, and the resulting gain or loss is included
in income. Repairs and maintenance are charged to operations
when incurred.

Intangible Assets

Goodwill resulting from acquisitions is amortized
on a straight-line basis over 15 to 20 years.

Annually, the Company evaluates the net carrying
value of goodwill to determine if there has been any impairment
in value. The methodology used for this evaluation entails
review of current market values of subsidiaries, and annual
operating performance along with anticipated results for the
ensuing year based on operating budgets and forecasts. At
December 31, 2001 the Company concluded that there had been
no impairment in the net carrying value of goodwill.

The Financial Accounting Standards Board
(FASB) has issued Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and
Other Intangible Assets. SFAS No. 142, for periods
starting December 15, 2001 or thereafter, eliminates the
amortization of goodwill. In addition, goodwill would be
separately tested for impairment using a fair-value based
approach. Upon implementation in 2002, the Company will no
longer amortize goodwill. Goodwill amortization in 2001 was
$2.3 million. Management has not yet evaluated the impact
to goodwill as prescribed by SFAS No. 142. The overall
market value of the Company as of March 22, 2002 was
$26.7 million, or $3.14 per share, compared to book value
of $80.3 million, or $9.44 per share.

Losses and Loss Adjustment Expenses and
Reinsurance Recoverables

The liability for losses and loss adjustment
expenses LAE represents (1) case basis
estimates of reported losses and LAE on direct business,
(2) actuarial estimates of incurred but not reported losses
and LAE, and (3) estimates received from ceding reinsurers
on assumed business. Such liabilities, by necessity, are based
upon estimates and, while management believes that the amount
accrued is adequate, the ultimate liability may be greater or
less than the amount provided.

Reinsurance recoverables represent
(1) amounts currently due from reinsurers on paid loss and
LAE, (2) amounts recoverable from reinsurers on case basis
estimates of reported losses and LAE, and (3) amounts

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recoverable from reinsurers on actuarial
estimates of incurred but not reported losses and LAE. Such
recoverables, by necessity, are based upon estimates and, while
management believes that the amount accrued is collectible, the
ultimate recoverable may be greater or less than the amount
accrued.

The methods for making such estimates and for
establishing the loss reserves and reinsurance recoverables are
continually reviewed and updated.

Revenue Recognition

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 and fee income are recorded on the
later of the effective date or the billing date of the policies
on which they were earned. The income effects of subsequent
premium and fee adjustments are recorded when the adjustments
become known.

The Company occasionally guarantees the financing
of policies it writes. No material premium financing guarantees
were in effect at December 31, 2001.

The majority of 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.

Income Taxes

The Company accounts for its income taxes under
the asset and liability method. Deferred federal income taxes
are recognized for the tax consequences of temporary
differences by applying enacted statutory tax rates to
differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities.

Realization of the deferred tax asset is
dependent on generating sufficient taxable income to absorb both
the applicable reversing temporary differences and the NOL.
Although realization is not assured, management believes that it
is more likely than not that current tax strategies, which
include potential sale of assets and/or subsidiaries, and the
ongoing results from operations excluding the discontinuation of
seven specific, unprofitable programs, will generate sufficient
taxable income to realize the deferred tax asset. If the Company
is unable to execute these tax strategies or generate sufficient
taxable income, the establishment of a valuation allowance may
be required.

Stock Options

Compensation expense, if any, resulting from
stock options granted by the Company is determined based on the
difference between the exercise price and the fair market value
of the underlying common stock at the date of grant. The
Companys Stock Option Plan requires the grants be at fair
market value.

Earnings Per Share

Basic earnings per share are based on the
weighted average number of common shares outstanding during the
year 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. There are no

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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

shares issuable pursuant to stock options
included in diluted earnings per share for 2001, 2000 and 1999,
as they were anti-dilutive.

New Accounting Pronouncements

As described in our 1998 Annual Report, the
Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of
Position 97-3, Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments
(SOP 97-3). SOP 97-3 provides guidance for determining
when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that
liability, and when an asset may be recognized for the recovery
of such assessments through premium tax offsets or policy
surcharges. As required, the Company adopted SOP 97-3 in
the quarter ended March 31, 1999. The adoption of
SOP 97-3 resulted in a non-cash after-tax charge of
$1.7 million or $0.20 per share.

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

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

FASB has issued SFAS No. 142 Goodwill
and Other Intangible Assets. SFAS No. 142, for
periods starting December 15, 2001 or thereafter,
eliminates the amortization of goodwill. In addition, goodwill
would be separately tested for impairment using a fair-value
based approach. Upon implementation in 2002, the Company will no
longer amortize goodwill. Goodwill amortization in 2001 was
$2.3 million. Management has not yet evaluated the impact
to goodwill as prescribed by SFAS No. 142. The overall
market value of the Company as of March 22, 2002 was
$26.7 million or $3.14 per share, compared to book
value of $80.3 million, or $9.44 per share.

FASB has issued SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144, for periods starting
January 1, 2002 or thereafter, clarifies and revises
existing guidance on accounting for impairment of plant,
property, and equipment, amortized intangibles, and other
long-lived assets not specifically addressed in other accounting
literature. Management does not expect the adoption of this
standard to have a significant impact on the Companys 2002
financial results. SFAS No. 144 also broadens the
presentation of discontinued operation to include a component of
an entity (rather than only a segment of a business).

Reclassifications

Certain amounts in the 2000 and 1999 financial
statements and notes to consolidated financial statements have
been reclassified to conform with the 2001 presentation.

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2.     Investments

The estimated fair value of investments in
securities is determined based on published market quotations.
The cost or amortized cost and estimated fair value of
investments in securities at December 31, 2001 and 2000 are
as follows (in thousands):

|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |      |      |      |   |        |         |         | 
|----------------------------------------------------------- | ------------------------------------------ | ----------------------------------- | ------ | ---------- | ------- | ---------- | ----- | --------- | ----- | - | ---- | ---- | ---- | - | ------ | ------- | ------- | 
|                                                            |                                            |                                    
|                                                            |                                            | December 31, 2001                  
|                                                            |                                            |                                    
|                                                            |                                            | Cost or                             |        | Gross      |         | Gross      |       | Estimated
|                                                            |                                            | Amortized                           |        | Unrealized |         | Unrealized |       | Fair     
|                                                            |                                            | Cost                                |        | Gains      |         | Losses     |       | Value    
|                                                            |                                            |                                     |        |            |         |            |       |          
|Debt Securities:                                            |                                            |                                     |        |            |         |            |       |           |       |   |      |      |      |   |        |        
|Debt securities issued by the U.S. government and
	agencies |                                            | $                                   | 32,820 |            |         | $          | 776   |           |       | $ | (29  | )    |      | $ | 33,567 |        
|Obligations of states and political subdivisions            |                                            |                                     | 34,974 |            |         |            | 1,008 |           |       |   | (119 | )    |      |   | 35,863 |        
|Corporate securities                                        |                                            |                                     | 74,093 |            |         |            | 2,627 |           |       |   | (508 | )    |      |   | 76,212 |        
|Mortgage-backed securities                                  |                                            |                                     | 51,133 |            |         |            | 859   |           |       |   |     |      |      |   | 51,992 |        
|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |      |      |      |   |        |        
|                                                            | Total Debt Securities available for sale   |                                     |        | 193,020    |         |            |       | 5,270     |       |   |      | (656 | )    |   |        | 197,634 |        
|Equity Securities:                                          |                                            |                                     |        |            |         |            |       |           |       |   |      |      |      |   |        |        
|Preferred Stocks                                            |                                            |                                     | 2,757  |            |         |            | 85    |           |       |   | (55  | )    |      |   | 2,787  |        
|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |      |      |      |   |        |        
|                                                            | Total Equity Securities available for sale |                                     |        | 2,757      |         |            |       | 85        |       |   |      | (55  | )    |   |        | 2,787   |        
|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |      |      |      |   |        |        
|                                                            |                                            | Total Securities available for sale |        | $          | 195,777 |            |       | $         | 5,355 |   |      | $    | (711 | ) |        | $       | 200,421 | 
|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |      |      |      |   |        |        

|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |        |        |        |   |        |         |         | 
|----------------------------------------------------------- | ------------------------------------------ | ----------------------------------- | ------ | ---------- | ------- | ---------- | ----- | --------- | ----- | - | ------ | ------ | ------ | - | ------ | ------- | ------- | 
|                                                            |                                            |                                    
|                                                            |                                            | December 31, 2000                  
|                                                            |                                            |                                    
|                                                            |                                            | Cost or                             |        | Gross      |         | Gross      |       | Estimated
|                                                            |                                            | Amortized                           |        | Unrealized |         | Unrealized |       | Fair     
|                                                            |                                            | Cost                                |        | Gains      |         | Losses     |       | Value    
|                                                            |                                            |                                     |        |            |         |            |       |          
|Debt Securities:                                            |                                            |                                     |        |            |         |            |       |           |       |   |        |        |        |   |        |        
|Debt securities issued by the U.S. government and
	agencies |                                            | $                                   | 30,628 |            |         | $          | 464   |           |       | $ | (42    | )      |        | $ | 31,050 |        
|Obligations of states and political subdivisions            |                                            |                                     | 64,770 |            |         |            | 1,015 |           |       |   | (314   | )      |        |   | 65,471 |        
|Corporate securities                                        |                                            |                                     | 47,430 |            |         |            | 870   |           |       |   | (260   | )      |        |   | 48,040 |        
|Mortgage-backed securities                                  |                                            |                                     | 21,857 |            |         |            | 381   |           |       |   | (9     | )      |        |   | 22,229 |        
|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |        |        |        |   |        |        
|                                                            | Total Debt Securities available for sale   |                                     |        | 164,685    |         |            |       | 2,730     |       |   |        | (625   | )      |   |        | 166,790 |        
|Equity Securities:                                          |                                            |                                     |        |            |         |            |       |           |       |   |        |        |        |   |        |        
|Preferred Stocks                                            |                                            |                                     | 5,628  |            |         |            | 135   |           |       |   | (55    | )      |        |   | 5,708  |        
|Common Stocks                                               |                                            |                                     | 10,817 |            |         |            | 1,368 |           |       |   | (1,438 | )      |        |   | 10,747 |        
|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |        |        |        |   |        |        
|                                                            | Total Equity Securities available for sale |                                     |        | 16,445     |         |            |       | 1,503     |       |   |        | (1,493 | )      |   |        | 16,455  |        
|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |        |        |        |   |        |        
|                                                            |                                            | Total Securities available for sale |        | $          | 181,130 |            |       | $         | 4,233 |   |        | $      | (2,118 | ) |        | $       | 183,245 | 
|                                                            |                                            |                                     |        |            |         |            |       |           |       |   |        |        |        |   |        |        

47



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Gross unrealized appreciation and depreciation on
available for sale securities were as follows (in thousands):

|                                                                                                  |  |              |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | -
|                                                                                                  |  |             
|                                                                                                  |  | December 31,
|                                                                                                  |  |             
|                                                                                                  |  | 2001         |        | 2000
|                                                                                                  |  |              |        |     
|Unrealized appreciation                                                                           |  | $            | 5,355  |      |  | $ | 4,233  |  
|Unrealized depreciation                                                                           |  |              | (711   | )    |  |   | (2,118 | )
|                                                                                                  |  |              |        |      |  |   |        |  
|Net unrealized appreciation (depreciation)                                                        |  |              | 4,644  |      |  |   | 2,115  |  
|Deferred federal income (benefit) tax                                                             |  |              | (1,571 | )    |  |   | (690   | )
|                                                                                                  |  |              |        |      |  |   |        |  
|Net unrealized appreciation
	(depreciation) on investments, net of deferred federal
	income taxes |  | $            | 3,073  |      |  | $ | 1,425  |  
|                                                                                                  |  |              |        |      |  |   |        |  

The gross change, before tax expense, in
unrealized appreciation on available for sale debt securities
was $2,508,917 for 2001 and $5,619,880 for 2000. The gross
change, before tax expense, in unrealized appreciation on
available for sale equity securities was $19,852 and $527,837 in
2001 and 2000, respectively.

The realized gains on the sale of available for
sale debt securities and equity securities for the year ended
December 31, 2001 were $965,777 and $1,050,974,
respectively. The proceeds from these sales were
$49.7 million and $15.2 million, respectively.

The realized gains on the sale of available for
sale debt securities and equity securities for the year ended
December 31, 2000 were $369,847 and $170,218, respectively.
The proceeds from these sales were $87.6 million and
$1.0 million, respectively.

The realized (losses) gains on the sale of
available for sale debt securities and equity securities for the
year ended December 31, 1999 were ($232,860) and $5,659,
respectively. The proceeds from these sales were $53.7 million
and $1.4 million, respectively.

The amortized cost and estimated fair value of
available for sale debt securities at December 31, 2001, by
contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because certain borrowers may
have the right to call or prepay obligations with or without
call or prepayment penalties (in thousands):

|                                       |  |                    |         |            |  |   |         | 
|-------------------------------------- |  | ------------------ | ------- | ---------- |  | - | ------- | 
|                                       |  |                   
|                                       |  | Available for Sale
|                                       |  |                   
|                                       |  | Amortized          |         | Estimated 
|                                       |  | Cost               |         | Fair Value
|                                       |  |                    |         |           
|Due in one year or less                |  | $                  | 9,672   |            |  | $ | 9,820   | 
|Due after one year through five years  |  |                    | 52,836  |            |  |   | 54,829  | 
|Due after five years through ten years |  |                    | 64,397  |            |  |   | 66,277  | 
|Due after ten years                    |  |                    | 14,982  |            |  |   | 14,716  | 
|Mortgage-backed securities             |  |                    | 51,133  |            |  |   | 51,992  | 
|                                       |  |                    |         |            |  |   |         | 
|                                       |  | $                  | 193,020 |            |  | $ | 197,634 | 
|                                       |  |                    |         |            |  |   |         | 

48



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net investment income for the last three years
ended December 31 was as follows (in thousands):

|                              |  |      |        |      |  |      |        |  |  |   |        | 
|----------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                              |  | 2001 |        | 2000 |  | 1999
|                              |  |      |        |      |  |     
|Investment Income On:         |  |      |        |      |  |      |        |  |  |   |        | 
|Debt securities               |  | $    | 11,856 |      |  | $    | 11,058 |  |  | $ | 9,190  | 
|Equity securities             |  |      | 523    |      |  |      | 655    |  |  |   | 734    | 
|Cash and cash equivalents     |  |      | 2,333  |      |  |      | 2,317  |  |  |   | 1,942  | 
|                              |  |      |        |      |  |      |        |  |  |   |        | 
|Total gross investment income |  |      | 14,712 |      |  |      | 14,030 |  |  |   | 11,866 | 
|Less investment expenses      |  |      | 484    |      |  |      | 315    |  |  |   | 248    | 
|                              |  |      |        |      |  |      |        |  |  |   |        | 
|Net investment income         |  | $    | 14,228 |      |  | $    | 13,715 |  |  | $ | 11,618 | 
|                              |  |      |        |      |  |      |        |  |  |   |        | 

United States government obligations, municipal
bonds, and bank certificates of deposit aggregating $71,864,423
and $55,032,068 were on deposit at December 31, 2001 and
2000, respectively with state regulatory authorities or
otherwise pledged as required by law or contract.

3.     Liability for
Losses and Loss Adjustment Expenses

The Company regularly updates its reserve
estimates as new information becomes available and further
events occur that may impact the resolution of unsettled claims.
Changes in prior reserve estimates are reflected in results of
operations in the year such changes are determined to be needed
and recorded. Activity in the reserves for losses and loss
adjustment expenses is summarized as follows (in thousands):

|                               |                               |                                  |         |         |  |      |         |         |  |   |         |         | 
|------------------------------ | ----------------------------- | -------------------------------- | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                               |                               |                                 
|                               |                               | For the Years Ended December 31,
|                               |                               |                                 
|                               |                               | 2001                             |         | 2000    |  | 1999
|                               |                               |                                  |         |         |  |     
|Balance, beginning of year     |                               | $                                | 341,824 |         |  | $    | 229,244 |         |  | $ | 148,844 |        
|Less reinsurance recoverables  |                               |                                  | 168,962 |         |  |      | 101,744 |         |  |   | 64,590  |        
|                               |                               |                                  |         |         |  |      |         |         |  |   |         |        
|Net balance, beginning of year |                               |                                  | 172,862 |         |  |      | 127,500 |         |  |   | 84,254  |        
|                               |                               |                                  |         |         |  |      |         |         |  |   |         |        
|Total acquired reserves        |                               |                                  |        |         |  |      |        |         |  |   | 7,784   |        
|Incurred related to:           |                               |                                  |         |         |  |      |         |         |  |   |         |        
|                               | Current year                  |                                  |         | 110,797 |  |      |         | 107,371 |  |   |         | 80,296  | 
|                               | Prior years                   |                                  |         | 14,386  |  |      |         | 20,248  |  |   |         | 15,062  | 
|                               |                               |                                  |         |         |  |      |         |         |  |   |         |        
|Total incurred                 |                               |                                  | 125,183 |         |  |      | 127,619 |         |  |   | 95,358  |        
|                               |                               |                                  |         |         |  |      |         |         |  |   |         |        
|Paid related to:               |                               |                                  |         |         |  |      |         |         |  |   |         |        
|                               | Current year                  |                                  |         | 26,312  |  |      |         | 26,896  |  |   |         | 20,362  | 
|                               | Prior years                   |                                  |         | 73,080  |  |      |         | 55,361  |  |   |         | 39,534  | 
|                               |                               |                                  |         |         |  |      |         |         |  |   |         |        
|Total paid                     |                               |                                  | 99,392  |         |  |      | 82,257  |         |  |   | 59,896  |        
|                               |                               |                                  |         |         |  |      |         |         |  |   |         |        
|Net balance, end of year       |                               |                                  | 198,653 |         |  |      | 172,862 |         |  |   | 127,500 |        
|                               | Plus reinsurance recoverables |                                  |         | 195,943 |  |      |         | 168,962 |  |   |         | 101,744 | 
|                               |                               |                                  |         |         |  |      |         |         |  |   |         |        
|Balance, end of year           |                               | $                                | 394,596 |         |  | $    | 341,824 |         |  | $ | 229,244 |        
|                               |                               |                                  |         |         |  |      |         |         |  |   |         |        

As a result of adverse development on prior
accident years reserves, the provision for losses and loss
adjustment expenses increased by $14,386,000, $20,248,000, and
$15,062,000 in calendar years 2001, 2000, and 1999, respectively.

The $14.4 million of adverse development on
net reserves in 2001 reflects $5.2 million relating to
unprofitable discontinued programs, $4.5 million relating
to the provision for uncollectible reinsurance on

49



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Connecticut Surety Company (CSC) and
HIH America Compensation & Liability Company
(HIH), and the remaining development related to
claims activity on the auto liability line of business. Gross
adverse development in 2001 was $30.8 million, primarily
related to fronted programs that are ceded to well-capitalized
reinsurers.

The $20.2 million and $15.0 million of
adverse development on net reserves and $46.3 million and
$35.0 million of adverse development on gross reserves in
2000 and 1999, respectively, reflects the impact of reserve
strengthening, primarily from discontinued programs in which the
actual claims activity, as well as the severity of such claims
was greater than anticipated. Also affecting gross reserve
development was adverse experience on two commercial automobile
programs in which the Company retains little or minimal risk.

4.     Reinsurance

The insurance company subsidiaries cede insurance
to other insurers under pro rata and excess-of-loss contracts.
These reinsurance arrangements diversify the Companys
business and minimize its losses arising from large risks or
from hazards of an unusual nature. 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.

The Company receives ceding commissions in
conjunction with reinsurance activities. These ceding
commissions are offset against the related underwriting expenses
and were $32.3 million, $46.1 million and
$33.2 million in 2001, 2000, and 1999, respectively.

At December 31, 2001, the Company had
reinsurance recoverables for paid and unpaid losses of
$222.5 million. The Company customarily collateralizes
reinsurance balances due from non-admitted reinsurers through
Funds Withheld Trusts or Letters of Credit. The largest
unsecured reinsurance recoverable is due from an admitted
reinsurer with an A++ A.M. Best rating and
accounts for 36.5% of the total recoverable for paid and unpaid
losses.

During 2001, the Company recorded a provision of
$1.1 million related to balances due from HIH, a California
domiciled insurance company, which was seized by the California
Department of Insurance.

Also during 2001, the Company recorded a
provision of $4.5 million related to balances due from
Connecticut Surety Company, of which $3.5 million was
related to reinsurance recoverable balances.

The Companys insurance subsidiaries
maintain an excess reinsurance program designed to protect
against large or unusual losses and LAE activity. The Company
determines the appropriate amount of reinsurance based on the
Companys evaluation of the risks accepted and analysis
prepared by consultants and reinsurers and on market conditions
including the availability and pricing of reinsurance.

Under the workers compensation reinsurance
program, the Company reinsures each loss in excess of $100,000
up to a limit of $20 million, under separate treaties. The
first treaty covers losses in excess of $100,000 up to $250,000,
and the second treaty reinsures losses in excess of $250,000 up
to $20 million. In addition, the Company purchases coverage
in excess of $20 million up to $140 million to protect
itself in the event of a catastrophe.

Under the liability reinsurance treaty, the
reinsurers are responsible for 100% of the amount of each loss
in excess of $250,000 up to $5.0 million per occurrence.

50



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

In its risk-sharing programs, the Company is also
subject to credit risk with respect to the payment of claims by
its clients captive, rent-a-captive, large deductible
programs, indemnification agreements, and on the portion of risk
exposure either ceded to the captives, or retained by the
clients. The capitalization and credit worthiness of prospective
risk-sharing partners is one of the factors considered by the
Company in entering into and renewing risk-sharing programs. The
Company collateralizes balances due from its risk-sharing
partners through Funds Withheld Trusts or Letters of Credit. At
December 31, 2001, the Company had risk exposure in excess
of collateral in the amount of $14.1 million on these
programs, of which the Company has an allowance of
$6.5 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. 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.

Reconciliations of direct to net premiums, on
both written and earned bases, for 2001, 2000, and 1999 are as
follows (in thousands):

|        |  |         |          |        |  |         |          |        |  |         |          |        |  |   |          |   |  |   |          |   |  |   |          |  
|------- |  | ------- | -------- | ------ |  | ------- | -------- | ------ |  | ------- | -------- | ------ |  | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|        |  |         |          |        |  |        
|        |  | 2001    |          | 2000   |  | 1999   
|        |  |         |          |        |  |        
|        |  | Written |          | Earned |  | Written |          | Earned |  | Written |          | Earned
|        |  |         |          |        |  |         |          |        |  |         |          |       
|Direct  |  | $       | 282,588  |        |  | $       | 277,516  |        |  | $       | 271,123  |        |  | $ | 262,069  |   |  | $ | 215,333  |   |  | $ | 207,552  |  
|Assumed |  |         | 16,516   |        |  |         | 16,134   |        |  |         | 16,729   |        |  |   | 48,628   |   |  |   | 15,141   |   |  |   | 29,068   |  
|Ceded   |  |         | (113,021 | )      |  |         | (129,985 | )      |  |         | (151,528 | )      |  |   | (164,697 | ) |  |   | (107,655 | ) |  |   | (111,714 | )
|        |  |         |          |        |  |         |          |        |  |         |          |        |  |   |          |   |  |   |          |   |  |   |          |  
|Net     |  | $       | 186,083  |        |  | $       | 163,665  |        |  | $       | 136,324  |        |  | $ | 146,000  |   |  | $ | 122,819  |   |  | $ | 124,906  |  
|        |  |         |          |        |  |         |          |        |  |         |          |        |  |   |          |   |  |   |          |   |  |   |          |  

One reinsurer, rated A++ by A.M.
Best, accounts for 41.3% of ceded premiums in 2001.

5.     Deferred
Policy Acquisition Costs

The following reflects the amounts of policy
acquisition costs deferred and amortized (in thousands):

|                                       |  |                                  |         |      |  |      |         |   |  |   |         |  
|-------------------------------------- |  | -------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                       |  |                                 
|                                       |  | For the Years Ended December 31:
|                                       |  |                                 
|                                       |  | 2001                             |         | 2000 |  | 1999
|                                       |  |                                  |         |      |  |     
|Balance, beginning of period           |  | $                                | 6,624   |      |  | $    | 10,030  |   |  | $ | 8,900   |  
|Acquisition costs deferred             |  |                                  | 46,479  |      |  |      | 27,786  |   |  |   | 28,459  |  
|Amortized to expense during the period |  |                                  | (39,150 | )    |  |      | (31,192 | ) |  |   | (27,329 | )
|                                       |  |                                  |         |      |  |      |         |   |  |   |         |  
|Balance, end of period                 |  | $                                | 13,953  |      |  | $    | 6,624   |   |  | $ | 10,030  |  
|                                       |  |                                  |         |      |  |      |         |   |  |   |         |  

The Company reduced deferred policy acquisition
costs for premium deficiencies of $72,000, $1,180,000, and
$1,097,000 at December 31, 2001, 2000, and 1999,
respectively.

51



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Income
Taxes

The provision for income taxes consists of the
following (in thousands):

|                                       |  |                                  |        |      |  |      |         |   |  |   |        |  
|-------------------------------------- |  | -------------------------------- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                       |  |                                 
|                                       |  | For the Years Ended December 31:
|                                       |  |                                 
|                                       |  | 2001                             |        | 2000 |  | 1999
|                                       |  |                                  |        |      |  |     
|Current tax expense (benefit)          |  | $                                | 31     |      |  | $    | (1,054  | ) |  | $ | (364   | )
|Deferred tax benefit                   |  |                                  | (3,633 | )    |  |      | (9,075  | ) |  |   | (5,845 | )
|                                       |  |                                  |        |      |  |      |         |   |  |   |        |  
|Total provision for income tax benefit |  | $                                | (3,602 | )    |  | $    | (10,129 | ) |  | $ | (6,209 | )
|                                       |  |                                  |        |      |  |      |         |   |  |   |        |  

A reconciliation of the Companys tax
provision on income from operations to the U.S. federal income
tax rate of 34% in 2001, 2000, and 1999 is as follows (in
thousands):

|                                |                     |                                  |        |      |   |      |         |        |   |   |        |        |  
|------------------------------- | ------------------- | -------------------------------- | ------ | ---- | - | ---- | ------- | ------ | - | - | ------ | ------ | -
|                                |                     |                                 
|                                |                     | For the Years Ended December 31:
|                                |                     |                                 
|                                |                     | 2001                             |        | 2000 |   | 1999
|                                |                     |                                  |        |      |   |     
|Tax provision at statutory rate |                     | $                                | (3,438 | )    |   | $    | (9,384  | )      |   | $ | (4,779 | )     
|Tax effect of:                  |                     |                                  |        |      |   |      |         |        |   |   |        |       
|                                | Tax exempt interest |                                  |        | (710 | ) |      |         | (1,491 | ) |   |        | (2,104 | )
|                                | Other, net          |                                  |        | 546  |   |      |         | 746    |   |   |        | 674    |  
|                                |                     |                                  |        |      |   |      |         |        |   |   |        |       
|Federal income tax benefit      |                     | $                                | (3,602 | )    |   | $    | (10,129 | )      |   | $ | (6,209 | )     
|                                |                     |                                  |        |      |   |      |         |        |   |   |        |       
|Effective (benefit) tax rate    |                     |                                  | (35.6  | )%   |   |      | (36.7   | )%     |   |   | (44.2  | )%    
|                                |                     |                                  |        |      |   |      |         |        |   |   |        |       

Deferred federal income taxes, under SFAS
No. 109, reflect the estimated future tax effect of
temporary differences between the bases of assets and
liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations.

The components of deferred tax assets and
liabilities as of December 31, 2001 and 2000 are as follows
(in thousands):

|                                           |                      |                         |        |             |        |          |       |             |  |   |       |        |        |   |       |       |  | 
|------------------------------------------ | -------------------- | ----------------------- | ------ | ----------- | ------ | -------- | ----- | ----------- |  | - | ----- | ------ | ------ | - | ----- | ----- |  | 
|                                           |                      |                         |        |            
|                                           |                      | 2001                    |        | 2000       
|                                           |                      |                         |        |            
|                                           |                      | Deferred                |        | Deferred    |        | Deferred |       | Deferred   
|                                           |                      | Tax                     |        | Tax         |        | Tax      |       | Tax        
|                                           |                      | Assets                  |        | Liabilities |        | Assets   |       | Liabilities
|                                           |                      |                         |        |             |        |          |       |            
|Unpaid losses and loss adjustment expenses |                      | $                       | 10,704 |             |        | $        |      |             |  | $ | 9,636 |        |        | $ |      |      
|Unearned premium reserves                  |                      |                         | 4,483  |             |        |          |      |             |  |   | 2,499 |        |        |   |      |      
|Unrealized gains on investments            |                      |                         |       |             |        |          | 1,571 |             |  |   |      |        |        |   | 690   |      
|Deferred policy acquisition expense        |                      |                         |       |             |        |          | 4,606 |             |  |   |      |        |        |   | 2,126 |      
|Allowance for doubtful accounts            |                      |                         | 2,184  |             |        |          |      |             |  |   | 1,782 |        |        |   |      |      
|Accrued boards, bureaus, and assessments   |                      |                         |       |             |        |          |      |             |  |   | 1,197 |        |        |   |      |      
|Alternate minimum tax credit               |                      |                         | 1,333  |             |        |          |      |             |  |   | 1,333 |        |        |   |      |      
|Net operating loss carryforward            |                      |                         | 11,763 |             |        |          |      |             |  |   | 7,894 |        |        |   |      |      
|Other                                      |                      |                         | 216    |             |        |          |      |             |  |   | 534   |        |        |   | 306   |      
|                                           |                      |                         |        |             |        |          |       |             |  |   |       |        |        |   |       |      
|                                           | Total deferred taxes |                         |        | 30,683      |        |          |       | 6,177       |  |   |       | 24,875 |        |   |       | 3,122 | 
|                                           |                      |                         |        |             |        |          |       |             |  |   |       |        |        |   |       |      
|                                           |                      | Net deferred tax assets |        | $           | 24,506 |          |       |             |  |   |       | $      | 21,753 |   |       |       |  | 
|                                           |                      |                         |        |             |        |          |       |             |  |   |       |        |        |   |       |      

Realization of the deferred tax asset is
dependent on generating sufficient taxable income to absorb both
the applicable reversing temporary differences and the NOL.
Although realization is not assured, management believes that it
is more likely than not that current tax strategies, which
include potential sale of assets and/or

52



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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

subsidiaries, and the ongoing results from
operations excluding the discontinuation of seven specific
unprofitable programs, will generate sufficient taxable income
to realize the deferred tax asset. If the Company is unable to
execute these tax strategies or generate sufficient taxable
income, the establishment of a valuation allowance may be
required. The NOL of $11.8 million was generated from losses
occurring in 1999, 2000, and 2001, which, if unused, will begin
to expire in 2019.

7.     Debt

Line of Credit

At December 31, 2001 and 2000, the Company
had a bank line of credit that permits borrowings up to
$47.5 million and $48.0 million, respectively. The
Company drew on this line of credit primarily to consummate the
acquisitions made during 1997 through 1999. The Company also
used the line of credit to fund operating expenses of the
non-regulated subsidiaries and to make investments with the
regulated subsidiaries.

As of December 31, 2001, $47.5 million
was outstanding on this line of credit. The line of credit bears
interest at a variable margin over the Prime Rate. As of
December 31, 2001, the Prime Rate was 4.75% and the
variable margin was 1.5%.

At December 31, 2000, the Company was
obligated to reduce the credit line to $33.0 million by
April 30, 2001. In May 2001, the Company received a
permanent waiver of this obligation to reduce the credit line.
Concurrent with the permanent waiver, the Company and its banks
agreed to waive all prior covenant violations of the existing
loan agreement and establish new covenants. In addition, the
Company agreed to a revised pay-down schedule, pursuant to which
the Company was required to reduce the credit line by
$5.0 million per quarter beginning September 30, 2001.

The scheduled payments of $5.0 million due
on September 30, 2001 and December 31, 2001 were not
made. In February 2002, the Company received a permanent waiver
of these obligations to reduce the credit line. Concurrent with
the permanent waiver, the Company and its banks agreed to waive
all prior covenant violations of the existing loan agreement and
establish new covenants effective retroactive to
December 31, 2001 related to statutory surplus, GAAP net
worth, fixed charge coverage, debt-to-capital ratios and net and
gross premium ratios. In addition, the Company agreed to a
revised pay-down schedule and a variable margin over the Prime
Rate that increases by one-quarter point every two months
beginning February 1, 2002 until the line of credit is paid
down to $33.0 million. Pursuant to the revised pay down
schedule, the Company is required to reduce the credit line by
$0.5 million on March 31, 2002, $10.8 million on
June 30, 2002, $1.0 million on September 30,
2002, and $11.3 million on December 31, 2002.

The line of credit expires and is payable in full
on January 3, 2003. Under the terms of the credit
agreement, in the event of default, the banks have the right to
terminate the revolving credit facility and demand full and
immediate repayment.

Absent the sale of assets or other capital
raising event, the Company may not have the liquidity in its
non-regulated subsidiaries to make the required payments
pursuant to the revised pay-down schedule on or after the
scheduled payment of $10.8 million on June 30, 2002.
Furthermore, if repayment is required due to default, the
Company currently does not have sufficient cash to repay the
balance. As part of the loan agreement, certain of the
Companys non-regulated subsidiaries guaranteed repayment
of the line of credit and the Company pledged the stock of its
non-regulated subsidiaries as collateral. In the event of
default, the banks would have the right to sell the
Companys non-regulated subsidiaries and apply the proceeds
to the balance on the line of credit.

The Company has retained an investment-banking
firm to execute its selected capital-raising alternative.
Proceeds from the sale of any portion of the Companys
assets or capital contributions will likely be used to

53



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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

satisfy all or a portion of the Companys
obligations under the revised pay down schedule and to add to
the surplus of its insurance subsidiaries. However, there can be
no assurance that these capital-raising efforts will be
successful.

Other Debt

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. The line will expire on May 14,
2002. The line bears interest at 1% under the Prime Rate, which
was 4.75% and 9.50% at December 31, 2001 and 2000,
respectively. At December 31, 2001 and 2000,
$3.8 million and $2.5 million, respectively, were
outstanding under this line.

In addition, the Company has an outstanding
subordinated promissory note payable in the amount of
$3.5 million, due June 30, 2003, which bears interest
at a rate of 6.673% plus a Eurocurrency margin. As of
December 31, 2001, the Eurocurrency margin was 1.7%.
Proceeds of this borrowing were used to reduce the outstanding
balance on the bank line of credit.

8.     Shareholders
Equity and Regulatory Matters

A significant portion of the Companys
consolidated assets represent assets of the Companys
insurance subsidiaries that at this time cannot be transferred
to the holding company in the form of dividends, loans or
advances. The restriction on the transferability to the holding
company from its insurance subsidiaries is dictated by Michigan
regulatory guidelines, which are as follows: The maximum
discretionary dividend that may be declared, based on data from
the preceding calendar year, is the greater of each insurance
companys net income (excluding realized capital gains) or
ten percent of the insurance companys policyholders
surplus (excluding unrealized gains). These dividends are
further limited by a clause in the Michigan law that prohibits
an insurer from declaring dividends except out of earned surplus
of the company. Earned surplus balances are calculated on a
quarterly basis. Since Star is the parent of the domestic
insurance company subsidiaries, its maximum dividend calculation
represents the combined insurance companies surplus. Based
upon the 2001 statutory financial statements, Star may not pay
any dividends to the Company during 2002 without prior approval
of OFIS. Stars earned surplus position at
December 31, 2001 was negative $29.1 million. No
statutory dividends were paid in 2001 or 2000.

Summarized 2001 and 2000 statutory basis
information for the primary insurance subsidiaries, which
differs from generally accepted accounting principles, follows
(in thousands):

|                                      |  |      |        |        |  |              |        |            |  |      |        |        |  |              |        |            |  |   |         |   |  |   |        |  |  |   |        |  |  |   |        | 
|------------------------------------- |  | ---- | ------ | ------ |  | ------------ | ------ | ---------- |  | ---- | ------ | ------ |  | ------------ | ------ | ---------- |  | - | ------- | - |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                      |  |      |        |       
|                                      |  | 2001 |        | 2000  
|                                      |  |      |        |       
|                                      |  | Star |        | Savers |  | Williamsburg |        | Ameritrust |  | Star |        | Savers |  | Williamsburg |        | Ameritrust
|                                      |  |      |        |        |  |              |        |            |  |      |        |        |  |              |        |           
|Statutory capital and surplus         |  | $    | 51,579 |        |  | $            | 32,147 |            |  | $    | 11,142 |        |  | $            | 12,653 |            |  | $ | 56,198  |   |  | $ | 31,855 |  |  | $ | 11,022 |  |  | $ | 11,029 | 
|Minimum statutory capital and surplus |  |      | 5,000  |        |  |              | 20,000 |            |  |      | 2,600  |        |  |              | 5,000  |            |  |   | 5,000   |   |  |   | 20,000 |  |  |   | 2,600  |  |  |   | 5,000  | 
|Statutory net (loss) income           |  |      | (9,957 | )      |  |              | 2,136  |            |  |      | 318    |        |  |              | 1,793  |            |  |   | (24,405 | ) |  |   | 613    |  |  |   | 581    |  |  |   | 3,001  | 
|Net investment income                 |  |      | 12,557 |        |  |              | 5,118  |            |  |      | 594    |        |  |              | 1,932  |            |  |   | 10,429  |   |  |   | 3,469  |  |  |   | 614    |  |  |   | 2,015  | 

In March 1998, the National Association of
Insurance Commissioners (NAIC) voted to adopt its
Codification of Statutory Accounting Principles project
(referred to hereafter as codification).
Codification is a modified form of statutory accounting
principles that resulted in a change to the NAIC Accounting
Practices and Procedures Manual previously applicable to
insurance enterprises. The Companys insurance subsidiaries
adopted codification effective January 1, 2001. The
adoption of codification increased consolidated statutory
surplus by $5.8 million as of January 1, 2001.

54



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 to 1 and 2 to 1, respectively.
Due primarily to net losses in 2000 and in the first half of
2001, statutory surplus is at a level where the premium leverage
ratios as of December 31, 2001, on a statutory consolidated
basis, were 5.8 to 1 and 3.4 to 1 on a gross and net
written premium basis, respectively.

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

The RBC Model Act provides for four different
levels of regulatory attention depending on the ratio of the
companys total adjusted capital, defined as the total of
its statutory capital, surplus and asset valuation reserve, to
its risk-based capital.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company Action Level is triggered
	if a companys total adjusted capital is less than 200% but
	greater than or equal to 150% of its risk-based capital. At the
	Company Action Level, a company must submit a
	comprehensive plan to the regulatory authority that discusses
	proposed corrective actions to improve its capital position. A
	company whose total adjusted capital is between 250% and 200% of
	its risk-based capital is subject to a trend test. A trend test
	calculates the greater of any decrease in the margin (i.e. the
	amount in dollars by which a companys adjusted capital
	exceeds it risk-based capital) between the current year and the
	prior year and between the current year and the average of the
	past three years, and assumes that the decrease could occur
	again in the coming year. If a similar decrease in margin in the
	coming year would result in a risk-based capital ratio of less
	than 190%, then Company Action Level regulatory
	action would be triggered.
|
| |  | The Regulatory Action Level is
	triggered if a companys total adjusted capital is less
	than 150% but greater than or equal to 100% of its risk-based
	capital. At the Regulatory Action Level, the
	regulatory authority will perform a special examination of the
	company and issue an order specifying corrective actions that
	must be followed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The Authorized Control Level is
	triggered if a companys total adjusted capital is less
	than 100% but greater than or equal to 70% of its risk-based
	capital, at which level the regulatory authority may take any
	action it deems necessary, including placing the company under
	regulatory control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | The Mandatory Control Level, is
	triggered if a companys total adjusted capital is less
	than 70% of its risk-based capital, at which level the
	regulatory authority is mandated to place the company under its
	control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

At December 31, 2001, all of the
Companys insurance subsidiaries were in compliance with
RBC requirements, with the exception of Star. Star reported
statutory surplus of $51.6 million and $56.2 million
at December 31, 2001 and 2000, respectively. The calculated
RBC was $29.7 million in 2001 and $27.0 million in
2000 and the threshold requiring the minimum regulatory
involvement was $59.5 million in 2001 and
$53.9 million in 2000. The 2001 RBC ratio for Star was
within Company Action Level. The Company is required to submit
an RBC Plan outlining how it intends to achieve compliance. The
Company is preparing

55



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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the RBC Plan which includes, but is not limited,
to the actions outlined below in the Business Plan. The RBC Plan
is due by April 15, 2002.

The NAICs Insurance Regulatory Information
System (IRIS) was developed by a committee of state
insurance regulators and is primarily intended to assist state
insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating
in their respective states. IRIS identifies 11 industry ratios
and specifies usual values for each ratio.
Unexplained departure from the usual values on four or more
ratios generally leads to inquiries or possible further review
from individual state insurance commissioners.

In 2001, Star had seven ratios that varied from
the usual value range. The variations and reasons
for these variations are set forth below:

|                                                |  |               |            |            |       |   |        |  
|----------------------------------------------- |  | ------------- | ---------- | ---------- | ----- | - | ------ | -
|Ratio                                           |  | Usual Range   |            | Star Value
|                                                |  |               |            |           
|Change in Net Writings                          |  | <33% or >33% |            |            | 44%(1 | )
|Surplus Aid to Surplus                          |  |               | Under 15%  |            |       |   | 16%(2  | )
|Two-year Overall Operating Ratio                |  |               | Under 100% |            |       |   | 112%(3 | )
|Liabilities to Liquid Assets                    |  |               | Under 105% |            |       |   | 151%(3 | )
|One-year Reserve Development to Surplus         |  |               | Under 20%  |            |       |   | 20%(3  | )
|Two-year Reserve Development to Surplus         |  |               | Under 20%  |            |       |   | 22%(3  | )
|Estimated Current Reserve Deficiency to Surplus |  |               | Under 25%  |            |       |   | 42%(3  | )



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The growth in Stars net written premium
	reflects the conversion of the reinsurance purchased on two
	commercial auto programs from a quota-share to an excess-of-loss
	basis. As part of the plan to reduce both gross and net leverage
	ratios, the Company has cancelled these programs effective
	December 31, 2001. In addition, to reduce the
	Companys overall excess reinsurance costs, Star assumed
	premium that was previously assumed by Preferred Insurance
	Company, Ltd. (PICL). Excluding these items,
	Stars Change in Net Writings ratio would have been within
	the usual range at 4.3%.
|   
|(2) | The Surplus Aid to Surplus ratio was impacted by
	the purchase of a significant quota share reinsurance treaty for
	several of the Companys workers compensation
	programs, as well as the overall reduction in statutory surplus
	as a result of the net losses in 2001 and 2000.                                                                                                                                                                                                                                                                                                                            
|   
|(3) | These operating ratios were negatively impacted
	by the underwriting losses recognized in 2000 and 2001, which
	primarily related to the previously mentioned seven discontinued
	programs.                                                                                                                                                                                                                                                                                                                                                                                                                     

In 2001, the Change in Net Writings for
Williamsburg National Insurance Company
(Williamsburg), another insurance subsidiary, was
116%. The growth in the net written premium on Williamsburg was
unusually high for the year primarily due to two new
workers compensation programs. These two new programs
generated an additional $383,000 of net written premium for
2001. Excluding the impact of this new business, the ratio would
have been within the usual range at 18%.

The Company has received inquiries from various
state regulators requesting information concerning Stars
financial condition. The losses, adverse trends and
uncertainties discussed in this report have been and continue to
be reviewed by the domiciliary state and other insurance
regulators of the Companys insurance subsidiaries. The
Company had previously submitted a Business Plan to reduce its
current leverage ratios and increase the risk-based capital
(RBC) ratio level and continues to work closely with
the Michigan Office of Financial and Insurance Services
(OFIS) to monitor its progress. While the
Companys gross and net written premiums have declined
steadily throughout 2001, it has not yet sufficiently reduced
its premium leverage ratios nor complied with the required RBC
level. In addition to continued reductions in premium writings,
capital from sources outside the Company may also be necessary
to make sufficient progress towards reducing its leverage ratios
and increasing the RBC ratio. While the Company has retained an
investment-

56



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

banking firm to execute its selected capital
raising alternative, there can be no assurance the Company will
be successful in raising additional capital, or that proceeds
therefrom which would be contributed to the Companys
insurance subsidiaries would result in sufficient progress
towards reducing its leverage ratios and increasing the RBC
ratio. If the regulators determine the Company has made
insufficient progress towards reducing its leverage ratios and
increasing the RBC ratio, they may take action at any time.
While the regulators have taken no actions to date, regulators
could require the Company to take steps to correct the capital
deficiency, require a reduction in permitted premium writings,
or implement some form of regulatory action.

As discussed in Note 7, the Company was in
default on its line of credit during certain periods in 2001.
Under the provisions of the loan agreement, the Company, while
in default, is precluded from paying dividends to shareholders
without prior approval. The Board of Directors did not declare a
dividend for the quarter ended September 30, 2001. Although
the Company was not in default on its line of credit as of
December 31, 2001, the Board of Directors also did not
declare a dividend for the quarter ended December 31, 2001.

The Company, through AIIC, issues redeemable
nonvoting preferred shares to risk-sharing clients. Redemption
of the preferred shares may occur on January 1 of each year
upon the request by the preferred shareholder. The redemption
value amount varies based upon the value of the preferred shares
plus or minus the experience of the clients insurance
program. At December 31, 2001 and 2000, $1,167,000 and
$1,378,000, respectively, of preferred shares were included in
other liabilities. The preferred shares entitle the shareholders
to participate in the profits and losses of the subsidiary. As a
result, included in expenses for 2001, 2000 and 1999 were
$(768,500), $(428,795) and $474,485, respectively, of minority
earnings related to these preferred shares.

9.     Stock
Options

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

The Company measures compensation expense under
APB No. 25 and has adopted the disclosure requirements of
SFAS No. 123. If compensation cost for stock option grants
had been determined based on a fair value method, net loss and
earnings per share on a pro forma basis for 2001, 2000, and 1999
would be as follows (in thousands):

|                                       |                                |      |        |       |   |      |         |       |   |   |         |       |  
|-------------------------------------- | ------------------------------ | ---- | ------ | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                       |                                | 2001 |        | 2000  |   | 1999
|                                       |                                |      |        |       |   |     
|Reported net loss                      |                                | $    | (6,510 | )     |   | $    | (17,473 | )     |   | $ | (9,553  | )    
|Pro forma net loss, using SFAS No. 123 |                                | $    | (7,391 | )     |   | $    | (18,130 | )     |   | $ | (10,041 | )    
|Earnings per share, diluted:           |                                |      |        |       |   |      |         |       |   |   |         |      
|                                       | Reported                       |      | $      | (0.76 | ) |      | $       | (2.05 | ) |   | $       | (1.11 | )
|                                       | Pro forma, using SFAS No. 123. |      | $      | (0.87 | ) |      | $       | (2.13 | ) |   | $       | (1.17 | )

The Black-Scholes valuation model utilized the
following annualized assumptions for all applicable years:
Risk-free interest rate of 5.0%, 6.5%, and 4.75% for 2001, 2000,
and 1999, respectively. The dividend declared was $0.09 in 2001
and $0.12 per share in 2000 and 1999. The volatility factor for
the expected market price of the Companys common stock of
0.516, 0.366, and 0.337 in 2001, 2000, and 1999, respectively.
The weighted-average expected life of options is 5.0 for the
2001 and 2000 grants and 7.5 for the 1999 grant.

57



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a summary of the Companys
stock option activity and related information for the years
ended December 31:

|                                                                |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |  |           |   |  |   |       | 
|--------------------------------------------------------------- |  | ------- | --------- | --------- |  | ------- | ----- | --------- |  | ------- | --------- | --------- |  | - | ----- |  |  |  | --------- | - |  | - | ----- | 
|                                                                |  |         |           |           |  |        
|                                                                |  | 2001    |           | 2000      |  | 1999   
|                                                                |  |         |           |           |  |        
|                                                                |  |         |           | Weighted- |  |         |       | Weighted- |  |         |           | Weighted-
|                                                                |  |         |           | Average   |  |         |       | Average   |  |         |           | Average  
|                                                                |  |         |           | Exercise  |  |         |       | Exercise  |  |         |           | Exercise 
|                                                                |  | Options |           | Price     |  | Options |       | Price     |  | Options |           | Price    
|                                                                |  |         |           |           |  |         |       |           |  |         |           |          
|Outstanding  beginning of year                                 |  |         | 1,288,644 |           |  | $       | 12.43 |           |  |         | 1,287,414 |           |  | $ | 16.22 |  |  |  | 1,036,280 |   |  | $ | 16.38 | 
|Granted                                                         |  |         | 636,500   |           |  |         | 6.51  |           |  |         | 544,000   |           |  |   | 5.61  |  |  |  | 297,700   |   |  |   | 15.74 | 
|Exercised                                                       |  |         | (1,400    | )         |  |         | 5.67  |           |  |         | (34,718   | )         |  |   | 5.10  |  |  |  | (13,945   | ) |  |   | 5.15  | 
|Forfeited                                                       |  |         | (341,028  | )         |  |         | 13.28 |           |  |         | (508,052  | )         |  |   | 15.22 |  |  |  | (32,621   | ) |  |   | 21.74 | 
|                                                                |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |  |           |   |  |   |       | 
|Outstanding  end of year                                       |  |         | 1,582,716 |           |  | $       | 9.87  |           |  |         | 1,288,644 |           |  | $ | 12.43 |  |  |  | 1,287,414 |   |  | $ | 16.22 | 
|                                                                |  |         |           |           |  |         |       |           |  |         |           |           |  |   |       |  |  |  |           |   |  |   |       | 
|Exercisable at end of year                                      |  |         | 644,764   |           |  | $       | 10.87 |           |  |         | 470,105   |           |  | $ | 13.92 |  |  |  | 550,705   |   |  | $ | 15.62 | 
|Weighted-average fair value of options granted
	during the year |  |         | $3.00     |           |  |         |      |           |  |         | $2.53     |           |  |   |      |  |  |  | $6.06     |   |  |   |      | 

The following table summarizes information about
stock options outstanding at December 31, 2001:

|                 |  |                     |           |                     |  |           |     |         |  |           |       |  |  |  |         |  |  |   |       | 
|---------------- |  | ------------------- | --------- | ------------------- |  | --------- | --- | ------- |  | --------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                 |  |                     |           |                    
|                 |  | Options Outstanding |           | Options Exercisable
|                 |  |                     |           |                    
|                 |  |                     |           | Weighted-           |  | Weighted- |     |         |  | Weighted-
|                 |  |                     |           | Average             |  | Average   |     |         |  | Average  
|Range of         |  |                     |           | Remaining           |  | Exercise  |     |         |  | Exercise 
|Exercise Prices  |  | Options             |           | Life (Years)        |  | Price     |     | Options |  | Price    
|                 |  |                     |           |                     |  |           |     |         |  |          
|$4.57 to $6.49   |  |                     | 527,864   |                     |  |           | 3.1 |         |  | $         | 5.79  |  |  |  | 253,790 |  |  | $ | 5.88  | 
|$6.51 to $8.11   |  |                     | 599,706   |                     |  |           | 4.0 |         |  | $         | 6.63  |  |  |  | 158,348 |  |  | $ | 6.83  | 
|$10.25 to $16.26 |  |                     | 228,761   |                     |  |           | 6.8 |         |  |           | 14.58 |  |  |  | 98,480  |  |  |   | 14.00 | 
|$21.00 to $30.45 |  |                     | 226,385   |                     |  |           | 5.7 |         |  |           | 23.20 |  |  |  | 134,146 |  |  |   | 22.78 | 
|                 |  |                     |           |                     |  |           |     |         |  |           |       |  |  |  |         |  |  |   |       | 
|                 |  |                     | 1,582,716 |                     |  |           | 4.6 |         |  | $         | 9.87  |  |  |  | 644,764 |  |  | $ | 10.87 | 
|                 |  |                     |           |                     |  |           |     |         |  |           |       |  |  |  |         |  |  |   |       | 

No compensation cost has been recorded for stock
option grants issued during 2001, 2000, and 1999, as the market
value equaled the exercise price at the date of grant.

10.     Intangible
Assets

At December 31, 2001 and 2000, the net
goodwill was $28,997,000 and $35,946,000, respectively.
Amortization expense for 2001, 2000, and 1999 was
$2.3 million, $2.0 million and $1.6 million,
respectively. These charges primarily reflect the amortization
of goodwill associated with acquisitions in 1997, 1998, and 1999.

The Company has completed several acquisitions,
all of which have been accounted for as a purchase.

On August 6, 1999, the Company acquired the
assets of TPA Associates, Inc., all the outstanding stock of TPA
Insurance Agency, Inc. and Preferred Insurance Agency, Inc. and
approximately 94% of the outstanding stock of PICL,
(collectively, TPA) at a purchase price of
$16.2 million. This transaction resulted in goodwill of
$12.9 million.

On July 31, 1998, the Company acquired
Florida Preferred Administrators, Inc. (Florida
Preferred) and Ameritrust Insurance Corporation
(Ameritrust), at a purchase price of
$12.3 million, resulting in goodwill of $7.0 million.
Florida Preferred, a Florida-based third party administrator,
provides a broad range of risk management services to purchasers
of workers compensation insurance from Ameritrust as well
as other insurance carriers. This acquisition was subject to
contingent earn-out provisions based upon achieving certain

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

performance measures. During 2000, the Company
paid approximately $4,696,000 satisfying all obligations under
this agreement, which is accounted for as goodwill.

On April 30, 1998, the Company acquired the
business of Villari & Associates, Inc. and operated the
agency as Meadowbrook-Villari Agency. The purchase price was
$5.6 million comprised of $4.5 million in cash and
33,433 shares of common stock of the Company, resulting in
goodwill of $5.6 million. The Meadowbrook-Villari Agency, a
Florida-based insurance agency, offered professional liability
products and programs, group health and disability, and property
and casualty products. Effective July 1, 2001, the Company
sold the business of Meadowbrook-Villari Agency. It is
anticipated this sale will result in a reduction of annualized
agency revenue of approximately $3.2 million, but should not
have a material impact on the Companys overall results of
operations. The Company recorded a loss of $1,097,000 in
conjunction with the sale. This sale also resulted in a
reduction in net goodwill of $4.6 million.

The remaining goodwill relates to acquisitions of
other agency and fee-for-service operations.

11.     Employee
Benefit Plans

Company employees over the age of 20 1/2 who
have completed 6 months of service are eligible for
participation in Meadowbrooks 401(k) and Profit Sharing
Plan (the 401(k) Plan). The 401(k) Plan provides for
matching contributions and/or profit sharing contributions at
the discretion of the Board of Directors of Meadowbrook, Inc. In
2001, 2000, and 1999, the matching contributions were $492,029,
$510,461, and $421,278, respectively. There were no profit
sharing contributions in 2001, 2000, and 1999.

12.     Commitments
and Contingencies

The Company has certain operating lease
agreements for its offices and equipment. At December 31,
2001, future minimum rental payments required under
non-cancelable long-term operating leases are as follows (in
thousands):

|           |                                 |   |       |       | 
|---------- | ------------------------------- | - | ----- | ----- | 
|2002       |                                 | $ | 3,024 |      
|2003       |                                 |   | 2,705 |      
|2004       |                                 |   | 2,085 |      
|2005       |                                 |   | 923   |      
|2006       |                                 |   | 318   |      
|Thereafter |                                 |   | 13    |      
|           |                                 |   |       |      
|           | Total minimum lease commitments |   | $     | 9,068 | 
|           |                                 |   |       |      

Rent expense for the year ended December 31,
2001, 2000, and 1999, amounted to $2,820,695, $3,135,548, and
$2,851,954, respectively.

On June 26, 1995, two shareholders and an
officer of a former agent (the Primary Plaintiffs)
of Star, and a former spouse of one shareholder and an employee
of the former agent (the Individual Plaintiffs)
initiated legal proceedings against, among others, Star and
Meadowbrook in the District Court for Washoe County, Reno,
Nevada. All of the plaintiffs requested injunctive relief,
compensatory damages, punitive and exemplary damages, and
attorneys fees in an unspecified amount. The Nevada
Insurance Department revoked the license of one of the Primary
Plaintiffs and one of the Individual Plaintiffs and denied
further licensing of the other Primary Plaintiffs.

Meadowbrook and Star vigorously defended
themselves and filed counterclaims against the Primary and
Individual Plaintiffs. On April 1, 1998, the Court issued
an Order dismissing all claims of the Primary Plaintiffs with
prejudice.

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On January 12, 1999, the remaining claims of
the Individual Plaintiffs and the counterclaims of Meadowbrook
and Star against the Primary and Individual Plaintiffs were
tried. On February 2, 1999, the jury returned a verdict in
favor of Meadowbrook and Star against the Primary and Individual
Plaintiffs. In addition, the jury found against the Individual
Plaintiffs and in favor of Meadowbrook and Star on their
remaining claims. On April 21, 1999, the Court found in
favor of Meadowbrook and Star and against the Primary and
Individual Plaintiffs on all outstanding claims for equitable
relief.

A Final Judgment has been entered with the Court.
All plaintiffs have filed an appeal with the Nevada Supreme
Court. One of the Plaintiffs has filed bankruptcy and another
has had a Receiver appointed for him. In view of the bankruptcy
filing, the case is now stayed before the Nevada Supreme Court.
It is not expected that the outcome of this litigation will have
a material impact on the financial statements of the Company.

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

13.     Letters of
Credit

There were no letters of credit open as of
December 31, 2001. One letter of credit in the amount of
$14,200,000 which had previously been provided as collateral for
two insurance subsidiaries obligations under a reinsurance
agreement, was drawn on in full by the beneficiary. This amount
earns interest payable to the Company on the drawn balance at
4.5%. This agreement expires September 1, 2006.

14.     Related Party
Transactions

At December 31, 2001 and 2000, respectively,
the Company held a $824,238 and $772,316 note receivable,
including $163,449 of accrued interest at December 31,
2001, from an executive officer of the Company. Accrued interest
at December 31, 2000 was $111,527. This note arose from a
transaction in late 1998 in which the Company loaned the officer
funds to exercise 64,718 common stock options to cover the
exercise price and the taxes incurred as a result of the
exercise. The note has a 7.75% interest rate and is due on
demand any time after January 1, 2002. The loan is
collateralized by 64,718 shares of the Companys common
stock under a stock pledge agreement.

On June 1, 2001, the Company and the officer
entered into an employment agreement which provides the note is
a non-recourse loan and the Companys sole legal remedy in
the event of a default is the right to reclaim the shares
pledged under the stock pledge agreement. Also, if there is a
change in control of the Company and the officer is terminated
or if the officer is terminated without cause, the note is
cancelled and deemed paid in full. In these events, the officer
may also retain the pledged shares of Company, or, at the
officers discretion, sell these shares back to the Company
at the then current market price or their book value, whichever
is greater.

If the officer is terminated by the Company for
cause, the note is cancelled and considered paid in full. In
this case, however, the officer forfeits the pledged shares of
Company, or, at the Companys discretion, must sell these
shares back to the Company for a nominal amount.

If the officer terminates his employment during
the term of the agreement, the Company could demand full
repayment of the note. If the note was not paid by the officer
on the demand of the Company, the Company could reclaim the
shares of the Company that were pledged under stock pledge
agreement.

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

15.     Segment
Information

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

Agency Operations

The agency segment was formed in 1955 as
Meadowbrooks original business. The insurance agency
primarily places commercial insurance, as well as personal
property, casualty, life and accident and health insurance, with
more than 50 insurance carriers from which it earns commission
income. The agency has grown to be one of the largest agencies
in Michigan and, with recent acquisitions, expanded into
California.

Program Business

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

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

|                      |                                            |                                    |   |         |         |      |   |         |         |   |   |         |         |  
|--------------------- | ------------------------------------------ | ---------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                      |                                            |                                   
|                      |                                            | For the Years Ended December 31,  
|                      |                                            |                                   
|                      |                                            | 2001                               |   | 2000    |         | 1999
|                      |                                            |                                    |   |         |         |     
|Revenues              |                                            |                                    |   |         |         |      |   |         |         |   |   |        
|                      | Net earned premiums                        |                                    | $ | 163,665 |         |      | $ | 146,000 |         |   | $ | 124,906 |        
|                      | Management fees                            |                                    |   | 25,471  |         |      |   | 24,519  |         |   |   | 22,878  |        
|                      | Investment income                          |                                    |   | 14,177  |         |      |   | 13,664  |         |   |   | 11,546  |        
|                      | Net realized (losses) gains on investments |                                    |   | 735     |         |      |   | 540     |         |   |   | (227    | )      
|                      |                                            |                                    |   |         |         |      |   |         |         |   |   |        
|                      | Program business                           |                                    |   | 204,048 |         |      |   | 184,723 |         |   |   | 159,103 |        
|                      | Agency operations                          |                                    |   | 15,706  |         |      |   | 17,234  |         |   |   | 16,391  |        
|                      | Reconciling items                          |                                    |   | 52      |         |      |   | 52      |         |   |   | 72      |        
|                      | Loss on sale of subsidiary                 |                                    |   | (1,097  | )       |      |   |        |         |   |   |        |        
|                      | Intersegment revenue                       |                                    |   | (503    | )       |      |   | (503    | )       |   |   | (572    | )      
|                      |                                            |                                    |   |         |         |      |   |         |         |   |   |        
|                      |                                            | Consolidated revenue               |   | $       | 218,206 |      |   | $       | 201,506 |   |   | $       | 174,994 |  
|                      |                                            |                                    |   |         |         |      |   |         |         |   |   |        
|Pre-tax (loss) income |                                            |                                    |   |         |         |      |   |         |         |   |   |        
|                      | Program business                           |                                    | $ | (7,624  | )       |      | $ | (24,289 | )       |   | $ | (11,891 | )      
|                      | Agency operations*                         |                                    |   | 5,348   |         |      |   | 4,115   |         |   |   | 3,639   |        
|                      | Reconciling items                          |                                    |   | (6,739  | )       |      |   | (7,428  | )       |   |   | (5,804  | )      
|                      | Loss on sale of Meadowbrook-Villari Agency |                                    |   | (1,097  | )       |      |   |        |         |   |   |        |        
|                      |                                            |                                    |   |         |         |      |   |         |         |   |   |        
|                      |                                            | Consolidated pre-tax (loss) income |   | $       | (10,112 | )    |   | $       | (27,602 | ) |   | $       | (14,056 | )
|                      |                                            |                                    |   |         |         |      |   |         |         |   |   |        



---



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

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                         |  |                                  |        |      |  |      |        |   |  |   |        |  
|------------------------ |  | -------------------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                         |  |                                 
|                         |  | For the Years Ended December 31,
|                         |  |                                 
|                         |  | 2001                             |        | 2000 |  | 1999
|                         |  |                                  |        |      |  |     
|Holding Company Expenses |  | $                                | 140    |      |  | $    | (314   | ) |  | $ | (548   | )
|Amortization             |  |                                  | (2,336 | )    |  |      | (2,098 | ) |  |   | (1,620 | )
|Interest Expense         |  |                                  | (4,543 | )    |  |      | (5,016 | ) |  |   | (3,636 | )
|                         |  |                                  |        |      |  |      |        |   |  |   |        |  
|                         |  | $                                | (6,739 | )    |  | $    | (7,428 | ) |  | $ | (5,804 | )
|                         |  |                                  |        |      |  |      |        |   |  |   |        |  

16.     Fair Value of
Financial Instruments

SFAS No. 107, Disclosures About Fair
Value of Financial Instruments, requires companies to
disclose the fair value information about their financial
instruments. This standard excludes certain insurance related
financial assets and liabilities and all nonfinancial
instruments from its disclosure requirements.

Due to the short-term nature of cash and cash
equivalents, premiums and agent balances receivable and accrued
interest, their estimated fair value approximates their carrying
value. Since debt and equity securities are recorded in the
financial statements at their estimated fair market value as
securities available for sale under SFAS No. 115
Accounting for Certain Investments in Debt and Equity
Securities, their carrying value is their estimated fair
market value. In addition, the lines of credit bear variable
rate interest, so their estimated fair value approximates their
carrying value.

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MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     Quarterly
Financial Data (Unaudited)

The following is a summary of unaudited quarterly
results of operations for 2001 and 2000 (in thousands, except
per share and ratio data):

|                                                |  |         |        |         |  |         |        |         |  |   |        |   |  |   |         |      
|----------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ | - |  | - | ------- | -----
|                                                |  | 1st     |        | 2nd     |  | 3rd     |        | 4th    
|                                                |  | Quarter |        | Quarter |  | Quarter |        | Quarter
|                                                |  |         |        |         |  |         |        |        
|2001:                                           |  |         |        |         |  |         |        |         |  |   |        |   |  |   |         |      
|Gross written premium                           |  | $       | 90,096 |         |  | $       | 75,005 |         |  | $ | 72,747 |   |  | $ | 61,256  |      
|Net written premium                             |  |         | 57,091 |         |  |         | 46,126 |         |  |   | 42,977 |   |  |   | 39,889  |      
|Net earned premium                              |  |         | 41,173 |         |  |         | 39,644 |         |  |   | 40,673 |   |  |   | 42,175  |      
|Net commissions and fees                        |  |         | 12,409 |         |  |         | 10,366 |         |  |   | 8,560  |   |  |   | 9,370   |      
|Net investment income and realized gains/losses |  |         | 3,654  |         |  |         | 1,155  |         |  |   | 4,162  |   |  |   | 4,895   |      
|Net losses and LAE incurred                     |  |         | 30,036 |         |  |         | 34,577 |         |  |   | 30,357 |   |  |   | 30,213  |      
|Policy acquisition and other expenses           |  |         | 14,324 |         |  |         | 14,860 |         |  |   | 11,264 |   |  |   | 13,992  |      
|Interest on notes payable                       |  |         | 1,319  |         |  |         | 1,163  |         |  |   | 1,091  |   |  |   | 943     |      
|Net income (loss)                               |  |         | 153    |         |  |         | (7,482 | ) (1)   |  |   | 300    |   |  |   | 519     |      
|Earnings per share                              |  | $       | 0.02   |         |  | $       | (0.88  | )       |  | $ | 0.04   |   |  | $ | 0.06    |      
|Dividends declared per share                    |  | $       | 0.03   |         |  | $       | 0.03   |         |  | $ | 0.03   |   |  |   |        |      
|GAAP combined ratio                             |  |         | 113.8  | %       |  |         | 128.3  | %       |  |   | 113.7  | % |  |   | 113.1   | %    
|2000:                                           |  |         |        |         |  |         |        |         |  |   |        |   |  |   |         |      
|Gross written premium                           |  | $       | 70,684 |         |  | $       | 70,549 |         |  | $ | 90,673 |   |  | $ | 55,946  |      
|Net written premium                             |  |         | 39,125 |         |  |         | 37,968 |         |  |   | 59,148 |   |  |   | 83      | (2)  
|Net earned premium                              |  |         | 33,268 |         |  |         | 37,829 |         |  |   | 47,787 |   |  |   | 27,126  | (2)  
|Net commissions and fees                        |  |         | 10,182 |         |  |         | 10,520 |         |  |   | 9,887  |   |  |   | 10,662  |      
|Net investment income and realized gains/losses |  |         | 2,787  |         |  |         | 3,392  |         |  |   | 3,644  |   |  |   | 4,432   |      
|Net losses and LAE incurred                     |  |         | 23,302 |         |  |         | 27,810 |         |  |   | 33,679 |   |  |   | 42,828  |      
|Policy acquisition and other expenses           |  |         | 11,109 |         |  |         | 11,409 |         |  |   | 14,497 |   |  |   | 16,301  |      
|Interest on notes payable                       |  |         | 1,240  |         |  |         | 1,378  |         |  |   | 1,277  |   |  |   | 1,240   |      
|Net income (loss)                               |  |         | 105    |         |  |         | 914    |         |  |   | 708    |   |  |   | (19,200 | ) (3)
|Earnings per share                              |  | $       | 0.01   |         |  | $       | 0.11   |         |  | $ | 0.08   |   |  | $ | (2.26   | )    
|Dividends declared per share                    |  | $       | 0.03   |         |  | $       | 0.03   |         |  | $ | 0.03   |   |  | $ | 0.03    |      
|GAAP combined ratio                             |  |         | 107.8  | %       |  |         | 109.3  | %       |  |   | 105.6  | % |  |   | 211.2   | %    



---



|    |                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The second quarter of 2001 was impacted by a
	$5.5 million charge related to management concerns about
	the financial condition of CSC.                                                                                                                
|   
|(2) | The fourth quarter of 2000 was impacted by the
	purchase of a significant quota share reinsurance treaty.
	Excluding the impact of this treaty, net written premium and net
	earned premium would have been $25,481,000 and $36,579,000,
	respectively.
|   
|(3) | The fourth quarter of 2000 reflects the impact of
	an after-tax charge to strengthen reserves, primarily related to
	discontinued programs.                                                                                                            

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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.

Exhibit Index




|        |       |             |  |                                                                                                                                                                                                                                     |  |  |     |  
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | -
|Exhibit |       |             |  | Filing                                                                                                                                                                                                                             
|No.     |       | Description |  | Basis                                                                                                                                                                                                                              
|        |       |             |  |                                                                                                                                                                                                                                    
|        | 3.1   |             |  | Amended and Restated Articles of Incorporation of
	the Company                                                                                                                                                                      |  |  | (9  | )
|        | 3.2   |             |  | Amended and Restated Bylaws of the Company                                                                                                                                                                                          |  |  | (1  | )
|        | 10.1  |             |  | Management Services Agreement and Addendums among
	the Company, Star, Savers and Meadowbrook dated January 1,
	1998                                                                                                                 |  |  | (6  | )
|        | 10.2  |             |  | Meadowbrook Insurance Group, Inc. 1995 Stock
	Option Plan                                                                                                                                                                           |  |  | (1  | )
|        | 10.3  |             |  | Lease between Meadowbrook and 26600 Development
	Associates Limited Partnership, with Fourth Amendment to lease
	dated March 21, 1995                                                                                               |  |  | (1  | )
|        | 10.4  |             |  | Fifth and Sixth Amendments to Lease between
	Meadowbrook and 26600 Development Associates Limited Partnership
	dated August 7, 1995 and May 13, 1996                                                                                |  |  | (1  | )
|        | 10.5  |             |  | Meadowbrook, Inc. 401(k) and Profit Sharing Plan
	Trust, amended and restated December 31, 1994                                                                                                                                     |  |  | (1  | )
|        | 10.6  |             |  | Employment Agreement, Covenant Not to Compete and
	Restricted Stock Agreement dated as of August 1, 1995 between
	Meadowbrook and Robert A. Engle                                                                                   |  |  | (1  | )
|        | 10.7  |             |  | Employment Agreement, Covenant Not to Compete and
	Restricted Stock Agreement dated as of August 1, 1995
	between Meadowbrook and Robert A. Engle, Amendment                                                                        |  |  | (1  | )
|        | 10.8  |             |  | Stock Purchase Agreement dated August 1,
	1995 among the Company, Robert A. Engle, Trustee of the
	Robert A. Engle Revocable Trust dated November 24,
	1993, Merton J. Segal and certain other employees of the
	Company            |  |  | (1  | )
|        | 10.9  |             |  | Stock Purchase Agreement dated August 1,
	1995 among the Company, Robert A. Engle, Trustee of the
	Robert A. Engle Revocable Trust dated November 24,
	1993, Merton J. Segal and certain other employees of the
	Company, Amendment |  |  | (1  | )
|        | 10.10 |             |  | Revolving Credit Agreement between Meadowbrook
	Insurance Group, Inc. and Comerica Bank dated as of
	July 24, 1998                                                                                                                  |  |  | (3  | )
|        | 10.11 |             |  | Demand Note dated November 9, 1998 among the
	Company and Robert S. Cubbin and Kathleen D. Cubbin
	and Stock Pledge Agreement                                                                                                       |  |  | (5  | )
|        | 10.13 |             |  | Seventh and Eighth Amendments to Lease between
	Meadowbrook and 26600 Development Associates Limited Partnership
	dated February 6, 1998 and September 16, 1999                                                                     |  |  | (6  | )
|        | 10.14 |             |  | Amendment No. 1 to Revolving Credit
	Agreement between Meadowbrook Insurance Group, Inc. and Comerica
	Bank dated as of March 27, 2000                                                                                              |  |  | (6  | )
|        | 10.15 |             |  | Amendment No. 2 to Revolving Credit
	Agreement between Meadowbrook Insurance Group, Inc. and Comerica
	Bank dated as of July 28, 2000                                                                                               |  |  | (7  | )
|        | 10.16 |             |  | Amendment No. 3 to Revolving Credit
	Agreement between Meadowbrook Insurance Group, Inc. and Comerica
	Bank dated as of September 30, 2000                                                                                          |  |  | (8  | )
|        | 10.17 |             |  | Subordinated Promissory Note between Meadowbrook
	Insurance Group, Inc. and Atlantic Mutual Insurance Company
	dated as of July 27, 2000                                                                                            |  |  | (9  | )
|        | 10.18 |             |  | Subordinated Guaranty between Meadowbrook
	Insurance Group, Inc. and Atlantic Mutual Insurance Company
	dated as of July 27, 2000                                                                                                   |  |  | (9  | )
|        | 10.19 |             |  | Subordinated Agreement between Meadowbrook
	Insurance Group, Inc. and Atlantic Mutual Insurance Company
	dated as of July 27, 2000                                                                                                  |  |  | (9  | )
|        | 10.20 |             |  | Amendment No. 4 to Revolving Credit Agreement and
	Waiver between Meadowbrook Insurance Group, Inc. and Comerica
	Bank dated as of May 15, 2001.                                                                                    |  |  | (10 | )
|        | 10.21 |             |  | Employment Contract between the Company and
	Robert S. Cubbin dated June 1, 2001                                                                                                                                                    |  |  | (11 | )
|        | 10.22 |             |  | Asset Purchase Agreement dated July 5, 2001
	by and among Brown & Brown, Inc., Meadowbrook of
	Florida, Inc., and Meadowbrook, Inc.                                                                                                 |  |  | (11 | )

64



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MEADOWBROOK INSURANCE GROUP, INC.


|        |       |             |  |                                                                                                                                                                                                                                                                                                               |  |  |     |  
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | --- | -
|Exhibit |       |             |  | Filing                                                                                                                                                                                                                                                                                                       
|No.     |       | Description |  | Basis                                                                                                                                                                                                                                                                                                        
|        |       |             |  |                                                                                                                                                                                                                                                                                                              
|        | 10.23 |             |  | Employment Contract between the Company and
	Merton J. Segal dated June 1, 2001                                                                                                                                                                                                                               |  |  | (11 | )
|        | 10.24 |             |  | Employment Contract between the Company and
	Michael G. Costello dated June 1, 2001                                                                                                                                                                                                                           |  |  | (11 | )
|        | 10.25 |             |  | Employment Contract between the Company and
	Joseph C. Henry dated June 1, 2001                                                                                                                                                                                                                               |  |  | (12 | )
|        | 10.26 |             |  | Release and Severance Agreement between the
	Company and Jeffrey H. Koenig dated November 9, 2001.                                                                                                                                                                                                            |  |  |     |  
|        | 10.27 |             |  | Permanent Reduction in Revolving Credit Aggregate
	Commitment between Meadowbrook Insurance Group, Inc. and
	Comerica Bank dated as of December 5, 2001.                                                                                                                                                      |  |  |     |  
|        | 10.28 |             |  | Amendment No. 5 to Revolving Credit
	Agreement and Waiver between Meadowbrook Insurance Group, Inc.
	and Comerica Bank dated as of February 8, 2002.                                                                                                                                                          |  |  |     |  
|        | 11    |             |  | Statement re: computation of per share earnings                                                                                                                                                                                                                                                               |  |  |     |  
|        | 21    |             |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                         |  |  |     |  
|        | 23    |             |  | Consent of Independent Accountants                                                                                                                                                                                                                                                                            |  |  |     |  
|        | 24    |             |  | Power of attorney                                                                                                                                                                                                                                                                                             |  |  |     |  
|        | 28.1  |             |  | Star Insurance Companys 2001 Schedule P                                                                                                                                                                                                                                                                      |  |  | (2  | )
|        | 28.2  |             |  | Savers Property & Casualty Insurance
	Companys 2001 Schedule P                                                                                                                                                                                                                                               |  |  | (2  | )
|        | 28.3  |             |  | Williamsburg National Insurance Companys
	2001 Schedule P                                                                                                                                                                                                                                                    |  |  | (2  | )
|        | 28.4  |             |  | Ameritrust Insurance Corporations 2001
	Schedule P                                                                                                                                                                                                                                                           |  |  | (2  | )
|        | 99.1  |             |  | Rights Agreement, dated as of September 30,
	1999, by and between Meadowbrook Insurance Group, Inc. and First
	Chicago Trust Company of New York, including the
	Certificate of Designation, the form of Rights Certificate and
	the Summary of Rights attached thereto as Exhibits A, B and
	C, respectively |  |  | (4  | )



---



|    |                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to Form S-1
	Registration Statement (No. 33-2626206) of Meadowbrook
	Insurance Group, Inc. declared effective November 20, 1995.
|   
|(2) | Submitted in paper format under separate cover;
	see Form SE filing.                                                                                      
|   
|(3) | Filed as Exhibit to Form 10-Q for the period
	ending September 30, 1998.                                                                                  
|   
|(4) | Incorporated by reference to Exhibit 99.1 to
	the Companys Form 8-A filed with the Securities and
	Exchange Commission on October 12, 1999.              
|   
|(5) | Filed as Exhibit to Form 10-K for the year
	ending December 31, 1998.                                                                                     
|   
|(6) | Filed as Exhibit to Form 10-K for the year
	ending December 31, 1999.                                                                                     
|   
|(7) | Filed as Exhibit to Form 10-Q for the period
	ending June 30, 2000.                                                                                       
|   
|(8) | Filed as Exhibit to Form 10-Q for the period
	ending September 30, 2000.                                                                                  
|   
|(9) | Filed as Exhibit to Form 10-K for the year
	ending December 31, 2000.                                                                                     



|     |                                                                         
|---- | ------------------------------------------------------------------------
|(10) | Filed as Exhibit to Form 10-Q for the period
	ending March 31, 2001.    
|    
|(11) | Filed as Exhibit to Form 10-Q for the period
	ending June 30, 2001.     
|    
|(12) | Filed as Exhibit to Form 10-Q for the period
	ending September 30, 2001.

65



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


SCHEDULE II






CONDENSED FINANCIAL INFORMATION OF
REGISTRANT


MEADOWBROOK INSURANCE GROUP, INC.


PARENT COMPANY ONLY


BALANCE SHEET


|                                                          |                            |                                            |             |             |             |   |             |             |             | 
|--------------------------------------------------------- | -------------------------- | ------------------------------------------ | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                          |                            |                                           
|                                                          |                            | December 31,                              
|                                                          |                            |                                           
|                                                          |                            | 2001                                       |             | 2000       
|                                                          |                            |                                            |             |            
|ASSETS                                                   
|Cash and cash equivalents                                 |                            | $                                          | 253,221     |             |             | $ | 18,193      |            
|Investment in subsidiaries                                |                            |                                            | 112,011,693 |             |             |   | 114,318,538 |            
|Intangible assets                                         |                            |                                            | 3,023,828   |             |             |   | 3,218,783   |            
|Other assets                                              |                            |                                            | 651,543     |             |             |   | 2,624,827   |            
|                                                          |                            |                                            |             |             |             |   |             |            
|                                                          | Total assets               |                                            | $           | 115,940,285 |             |   | $           | 120,180,341 |            
|                                                          |                            |                                            |             |             |             |   |             |            
|LIABILITIES                                              
|Other liabilities                                         |                            | $                                          | 679,036     |             |             | $ | 651,236     |            
|Payable to subsidiaries                                   |                            |                                            | 3,805,505   |             |             |   | 2,414,853   |            
|Debt                                                      |                            |                                            | 31,139,606  |             |             |   | 31,139,606  |            
|                                                          |                            |                                            |             |             |             |   |             |            
|                                                          | Total liabilities          |                                            |             | 35,624,147  |             |   |             | 34,205,695  |            
|                                                          |                            |                                            |             |             |             |   |             |            
|SHAREHOLDERS EQUITY                                     
|Common stock                                              |                            |                                            | 85,122      |             |             |   | 85,120      |            
|Additional paid-in capital                                |                            |                                            | 67,948,208  |             |             |   | 67,927,665  |            
|Retained earnings                                         |                            |                                            | 10,033,577  |             |             |   | 17,309,391  |            
|Note receivable from officer                              |                            |                                            | (824,238    | )           |             |   | (772,316    | )          
|Unrealized appreciation on available for sale
	securities |                            |                                            | 3,073,469   |             |             |   | 1,424,786   |            
|                                                          |                            |                                            |             |             |             |   |             |            
|                                                          | Total shareholders equity |                                            |             | 80,316,138  |             |   |             | 85,974,646  |            
|                                                          |                            |                                            |             |             |             |   |             |            
|                                                          |                            | Total liabilities and shareholders equity |             | $           | 115,940,285 |   |             | $           | 120,180,341 | 
|                                                          |                            |                                            |             |             |             |   |             |            

66



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##### Table of Contents



SCHEDULE II






CONDENSED FINANCIAL INFORMATION OF
REGISTRANT


MEADOWBROOK INSURANCE GROUP, INC.


PARENT COMPANY ONLY


INCOME STATEMENT


|                                                        |                  |                                  |            |           |           |      |             |           |           |   |            |           |           | 
|------------------------------------------------------- | ---------------- | -------------------------------- | ---------- | --------- | --------- | ---- | ----------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                                                        |                  |                                 
|                                                        |                  | For the Years Ended December 31,
|                                                        |                  |                                 
|                                                        |                  | 2001                             |            | 2000      |           | 1999
|                                                        |                  |                                  |            |           |           |     
|Revenue                                                 |                  | $                                | 270,010    |           |           | $    | 170,035     |           |           | $ | 71,641     |          
|Operating expenses:                                     |                  |                                  |            |           |           |      |             |           |           |   |            |          
|                                                        | Interest expense |                                  |            | 3,275,040 |           |      |             | 3,042,923 |           |   |            | 1,633,060 |          
|                                                        | Other expenses   |                                  |            | 324,584   |           |      |             | 672,424   |           |   |            | 778,984   |          
|                                                        |                  |                                  |            |           |           |      |             |           |           |   |            |          
|                                                        |                  | Total operating expenses         |            |           | 3,599,624 |      |             |           | 3,715,347 |   |            |           | 2,412,044 | 
|                                                        |                  |                                  |            |           |           |      |             |           |           |   |            |          
|Loss before federal income taxes and subsidiary
	equity |                  |                                  | (3,329,614 | )         |           |      | (3,545,312  | )         |           |   | (2,340,403 | )        
|Federal income tax benefit                              |                  |                                  | (775,424   | )         |           |      | (1,166,629  | )         |           |   | (717,579   | )        
|                                                        |                  |                                  |            |           |           |      |             |           |           |   |            |          
|Net loss before subsidiary equity earnings              |                  |                                  | (2,554,190 | )         |           |      | (2,378,683  | )         |           |   | (1,622,824 | )        
|                                                        |                  |                                  |            |           |           |      |             |           |           |   |            |          
|Subsidiary equity earnings                              |                  |                                  | (3,955,530 | )         |           |      | (15,093,048 | )         |           |   | (7,930,403 | )        
|                                                        |                  |                                  |            |           |           |      |             |           |           |   |            |          
|Net loss                                                |                  | $                                | (6,509,720 | )         |           | $    | (17,471,731 | )         |           | $ | (9,553,227 | )        
|                                                        |                  |                                  |            |           |           |      |             |           |           |   |            |          

67



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##### Table of Contents



SCHEDULE II






CONDENSED FINANCIAL INFORMATION OF
REGISTRANT


MEADOWBROOK INSURANCE GROUP, INC.


PARENT COMPANY ONLY


STATEMENT OF COMPREHENSIVE INCOME


|         |                                                |                                                                              |            |            |            |      |             |             |           |   |            |             |            |  
|-------- | ---------------------------------------------- | ---------------------------------------------------------------------------- | ---------- | ---------- | ---------- | ---- | ----------- | ----------- | --------- | - | ---------- | ----------- | ---------- | -
|         |                                                |                                                                             
|         |                                                | For the Years Ended December 31,                                            
|         |                                                |                                                                             
|         |                                                | 2001                                                                         |            | 2000       |            | 1999
|         |                                                |                                                                              |            |            |            |     
|Net loss |                                                | $                                                                            | (6,509,720 | )          |            | $    | (17,471,731 | )           |           | $ | (9,553,227 | )          
|         | Other comprehensive income (loss), net of tax: |                                                                              |            |            |            |      |             |             |           |   |            |             |           
|         |                                                | Unrealized gains (losses) on securities:                                     |            |            | 2,979,739  |      |             |             | 4,454,297 |   |            |             | (6,668,767 | )
|         |                                                | Less: reclassification adjustment for (gains)
	losses included in net income |            |            | (1,331,056 | )    |             |             | (356,443  | ) |            |             | 149,953    |  
|         |                                                |                                                                              |            |            |            |      |             |             |           |   |            |            
|         | Other comprehensive income (loss)              |                                                                              |            | 1,648,683  |            |      |             | 4,097,854   |           |   |            | (6,518,814  | )         
|         |                                                |                                                                              |            |            |            |      |             |             |           |   |            |            
|         | Comprehensive loss                             |                                                                              | $          | (4,861,037 | )          |      | $           | (13,373,877 | )         |   | $          | (16,072,041 | )         
|         |                                                |                                                                              |            |            |            |      |             |             |           |   |            |            

68



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##### Table of Contents



SCHEDULE II






CONDENSED FINANCIAL INFORMATION OF
REGISTRANT


MEADOWBROOK INSURANCE GROUP, INC.


PARENT COMPANY ONLY


STATEMENT OF CASH FLOWS


|                                                      |                                  |                                                      |           |            |            |      |           |            |            |   |          |             |             |  
|----------------------------------------------------- | -------------------------------- | ---------------------------------------------------- | --------- | ---------- | ---------- | ---- | --------- | ---------- | ---------- | - | -------- | ----------- | ----------- | -
|                                                      |                                  |                                                     
|                                                      |                                  | For the Years Ended December 31,                    
|                                                      |                                  |                                                     
|                                                      |                                  | 2001                                                 |           | 2000       |            | 1999
|                                                      |                                  |                                                      |           |            |            |     
|Net cash provided by (used in) operating
	activities: |                                  | $                                                    | 1,288,628 |            |            | $    | 4,430,478 |            |            | $ | (434,781 | )          
|                                                      |                                  |                                                      |           |            |            |      |           |            |            |   |          |            
|Cash Flow from Investing Activities:                  |                                  |                                                      |           |            |            |      |           |            |            |   |          |            
|                                                      | Dividend from subsidiary         |                                                      |           | 5,633,465  |            |      |           |           |            |   |          |            |            
|                                                      | Investment in subsidiaries       |                                                      |           | (5,633,465 | )          |      |           | (3,662,203 | )          |   |          | (16,372,789 | )          
|                                                      |                                  |                                                      |           |            |            |      |           |            |            |   |          |            
|                                                      |                                  | Net cash used in investing activities                |           |            |           |      |           |            | (3,662,203 | ) |          |             | (16,372,789 | )
|                                                      |                                  |                                                      |           |            |            |      |           |            |            |   |          |            
|Cash Flow from Financing Activities:                  |                                  |                                                      |           |            |            |      |           |            |            |   |          |            
|                                                      | Proceeds from borrowings         |                                                      |           |           |            |      |           | 8,475,000  |            |   |          | 58,255,494  |            
|                                                      | Principal payments on borrowings |                                                      |           |           |            |      |           | (8,265,000 | )          |   |          | (38,350,395 | )          
|                                                      | Dividends paid on common stock   |                                                      |           | (1,021,458 | )          |      |           | (1,021,409 | )          |   |          | (1,036,861  | )          
|                                                      | Retirement of common stock       |                                                      |           | (32,142    | )          |      |           | (39,044    | )          |   |          | (2,092,842  | )          
|                                                      |                                  |                                                      |           |            |            |      |           |            |            |   |          |            
|                                                      |                                  | Net cash (used in) provided by financing
	activities |           |            | (1,053,600 | )    |           |            | (850,453   | ) |          |             | 16,775,396  |  
|                                                      |                                  |                                                      |           |            |            |      |           |            |            |   |          |            
|Increase (decrease) in cash and cash
	equivalents     |                                  |                                                      | 235,028   |            |            |      | (82,178   | )          |            |   | (32,174  | )          
|Cash and cash equivalents, beginning of year          |                                  |                                                      | 18,193    |            |            |      | 100,371   |            |            |   | 132,545  |            
|                                                      |                                  |                                                      |           |            |            |      |           |            |            |   |          |            
|Cash and cash equivalents, end of year                |                                  | $                                                    | 253,221   |            |            | $    | 18,193    |            |            | $ | 100,371  |            
|                                                      |                                  |                                                      |           |            |            |      |           |            |            |   |          |            

69



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##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






SIGNATURES


Pursuant to the requirements of Section 13
or 15(d) 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, in
Southfield, Michigan.



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

| |     |   
| | --- | --
| | BY: | **

| |                                     
| | ------------------------------------
| | Merton J. Segal                     
| | Chairman and Chief Executive Officer
| | (Principal Executive Officer)       



| |     |                    
| | --- | -------------------
| | By: | /s/ JOSEPH C. HENRY

| |                               
| | ------------------------------
| |                               
| | Executive Vice President      
| | Acting Chief Financial Officer
| | (Principal Financial Officer) 

Dated: March 28, 2002


Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                              |  |                                                                                                      |  |              
|------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                                     |  | Title                                                                                                |  | Date         
|                                                              |  |                                                                                                      |  |              
|**Merton J. Segal                                             |  | Chairman, Chief Executive Officer and Director
	(Principal Executive Officer)                        |  | March 28,2002
|                                                             
|**Robert S. Cubbin                                            |  | President, Chief Operating Officer and Director                                                      |  | March 28,2002
|                                                             
|**Joseph C. Henry                                             |  | Executive Vice President, Acting Chief Financial
	Officer (Principal Financial Officer) and Director |  | March 28,2002
|                                                             
|**Joseph S. Dresner                                           |  | Director                                                                                             |  | March 28,2002
|                                                             
|**Hugh W. Greenberg                                           |  | Director                                                                                             |  | March 28,2002
|                                                             
|**Florine Mark                                                |  | Director                                                                                             |  | March 28,2002
|                                                             
|**Robert H. Naftaly                                           |  | Director                                                                                             |  | March 28,2002
|                                                             
|**David K. Page                                               |  | Director                                                                                             |  | March 28,2002
|                                                             
|**Robert W. Sturgis                                           |  | Director                                                                                             |  | March 28,2002
|                                                             
|**Irvin F. Swider, Sr.                                        |  | Director                                                                                             |  | March 28,2002
|                                                             
|**Bruce E. Thal                                               |  | Director                                                                                             |  | March 28,2002
|                                                             
|**Herbert Tyner                                               |  | Director                                                                                             |  | March 28,2002
|**By: /s/ ROBERT S. CUBBINRobert S. Cubbin,
	Attorney-in-fact |  |                                                                                                      |  |              

70