##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

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

Commission File Number: 1-14094



---

Meadowbrook Insurance Group, Inc.

(Exact name of registrant as specified in its
charter)


|                                             |  |                                  
|-------------------------------------------- |  | ---------------------------------
|Michigan                                     |  | 38-2626206                       
|(State of Incorporation)                     |  | (IRS Employer Identification No.)
|                                            
|26600 Telegraph Road, Southfield, 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.     o

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

The aggregate market value of the voting stock
(common stock, $.01 par value) held by nonaffiliates of the
registrant was $84,300,226 on June 28, 2002, the last
business day of the Registrants most recently completed
second quarter, 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 20, 2003 was 29,404,194.

Documents Incorporated by Reference

Certain portions of the Registrants Proxy
Statement for the Annual Meeting scheduled for May 19, 2003
are incorporated by reference into Part III of this report
and certain portions of the 2002 Annual Report to Shareholders
are incorporated herein by reference into Part II of this
report.



---






---

TABLE OF CONTENTS



|                                                 |  |  |  |  |  |  |  | 
|------------------------------------------------ |  |  |  |  |  |  |  | 
|PART I                                          
|CAPTIVE RISK-SHARING STRUCTURE                  
|PART II                                         
|Selected Consolidated Financial Data            
|MANAGEMENTS DISCUSSION AND ANALYSIS            
|PART III                                        
|PART IV                                         
|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      
|EX-10.21 Management Services Agreement          
|EX-10.22 Management Services Agreement          
|EX-10.23 Agency Agreement                       
|EX-21 List of Subsidiaries                      
|EX-23 Consent of Independent Accountants        
|EX-24 Power of Attorney                         
|EX-99.2 Certification of Chief Executive Officer
|EX-99.3 Certification of Chief Financial Officer



---



##### Table of Contents



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 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
services 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 contributing 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 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. The
Company recorded a loss of $1.1 million 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. Southeastern Holding Corporation was dissolved in
December 2002 and Ameritrust became a wholly-owned subsidiary of
Star. Florida Preferred provides a broad range of risk
management services to purchasers of workers compensation
insurance from Ameritrust.

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 for a cost of $288,000.

Effective January 31, 2002, the Company sold
the business of Meadowbrook International, Ltd. This sale
resulted in a reduction of annualized reinsurance brokerage
commission of approximately $450,000, which did not have a
material impact on the Companys overall results of
operations. The Company recorded a gain of approximately
$199,000 in conjunction with the sale.

At December 31, 2002, Meadowbrook and its
subsidiaries employed approximately 588 associates to service
the Companys clients and provide management services to
the Insurance Operations as defined below.

2



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Overview

Since 1976, the Company has specialized in
providing alternative risk management solutions for its clients.
By forming risk-sharing partnerships, the Company aligns its
financial objectives with its clients. By having their capital
at risk, the Companys clients help to avoid adverse
selection and share in the underwriting profits and investment
income from their risk management plan. According to recent
sources, the alternative market will account for approximately
50% of the U.S. commercial property/casualty marketplace by
2003, up from 45% in 2002. The current state of the market
presents the Company with many opportunities. Higher rates and
less capacity are contributing to an environment in which
policyholders are seeking alternative ways to secure affordable
and stable insurance protection.

Using the Companys products and services,
small-to-medium sized client groups gain access to more
sophisticated risk management techniques previously available
only to larger corporations. This enables the client to control
insurance costs and turn risk management into a profit center.
As a pioneering leader in this under-served market, the Company
believes that it is well positioned to provide services to
additional client groups that seek more stable alternatives to
the purchase of traditional commercial insurance.

Based upon the particular risk management goals
of its clients and its assessment of the opportunity for
operating profit, the Company offers solutions on a managed
basis, a risk-sharing basis or, in certain circumstances, in
response to a specific market opportunity, a fully-insured
basis. In a managed program, the Company provides management
services for a fee but generally does not participate directly
in the operating results. In a risk-sharing program, the Company
receives management fees and commissions and participates with
its clients or agents in the operating results. In a
fully-insured program, the Company derives revenue exclusively
from the operating results. The Company writes business on a
fully-insured basis generally when it believes there is
potential to develop a long-term risk-sharing relationship.

The Company developed a broad range of
alternative risk management capabilities to design, manage, and
service its clients risk management needs. These
capabilities include:



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | program and product design services;                                                                                                                                                             
|
| |  | formation and management of risk-bearing
    entities, such as mutual insurance companies, captives,
    rent-a-captives, public entity pools, and risk retention and
    risk purchasing groups;
|
| |  | underwriting/risk selection and policy issuance;                                                                                                                                                 
|
| |  | reinsurance brokerage;                                                                                                                                                                           
|
| |  | loss prevention, control, claims handling and
    administration;                                                                                                                                
|
| |  | information technology and processing; and                                                                                                                                                       
|
| |  | sales, marketing and public relations to members
    of groups.                                                                                                                                  

Company Segments

Agency
Operations

The Company earns commissions through the
operation of a retail property and casualty insurance agency.
Formed in 1955 as its original business, the insurance agency
primarily places commercial insurance, as well as personal
property, casualty, life and accident and health insurance, with
more than fifty insurance carriers. The agency has grown to be
one of the largest agencies in Michigan and, with acquisitions,
has expanded into California.

In total, the Companys agency operations
generated commissions of $14.3 million, $15.7 million,
and $17.2 million for the years ended December 31,
2002, 2001, and 2000, respectively.

3



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Specialty
Risk Management Operations

The specialty risk management operations consist
primarily of developing and managing alternative risk management
solutions for defined client groups and their members. These
alternative risk solutions consist of a set of coverages and
services tailored to meet the specific requirements of a group
of clients. The Company provides 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 provided primarily to associations or similar groups of
members and to specified classes of business of our
agent-partners.

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                       |  |  Medical                        
| Policy Issuance                                    |  |  Real Estate Appraisers         
| Reinsurance Brokerage                              |  |  Pharmacists                    
| Claims Handling and Administration                 |  |  Inland Marine                  
| Litigation Management                              |  |  Product Liability              
| Accounting and Financial Statement
    Preparation |  |  Excess Reinsurance             
| Regulatory Compliance                              |  |  Commercial Property            
| Actuarial and Loss Reserve Analysis                |  |                                  
| Loss Prevention and Control                        |  |                                  
| Audit Support                                      |  |                                  
| Information Technology and Processing              |  |                                  

Managed Programs.In
a managed program, the Company earns service fee revenue by
providing management and other services to a clients
risk-bearing entity, but generally does not share in the
operating results. The Company believes its managed programs
provide a consistent 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 products
to additional members of the sponsoring client group, the
expansion of coverages and services 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 the Company
receives fee-based revenues include program design and
development; underwriting; reinsurance brokerage; policy
administration; loss prevention and control 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. The fees received by the
Company under its managed programs are generally either a fixed
amount or based on a percentage of premium serviced.

The Company specializes in providing managed
programs to public entity associations and currently manages
public entity pools and other insurance entities which provide
insurance coverage for approximately 1,700 participants,
including city, county, township and village governments in
three states. Over the years, the Company has been able to
expand the services offered under existing programs, as well as
to increase the number of participants in these managed programs.

4



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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

Risk- Sharing
Programs:

Client Risk-Sharing.In a client risk-sharing program, the
Company and the client both participate in the operating
results, through the utilization of a captive, rent-a-captive or
retrospectively-rated policy. In many instances, a captive owned
by a client reinsures a portion of the risk on a quota-share
basis. Both the captive and the rent-a-captive are reinsurance
companies and are accounted for under the provisions of
Statement of Financial Accounting Standards (SFAS)
No. 113 Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts.

In addition to premium revenue and investment
income from its participation in the operating results, 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.

Although the structure and nature of each of
risk-sharing relationship varies, the chart and description
below provides an illustration of the basic elements included in
many client risk-sharing programs.






CAPTIVE RISK-SHARING STRUCTURE


(CHART)






|    |                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company accounts for transactions with these
    risk-sharing clients as reinsurance under the provisions of SFAS
    No. 113 Accounting and Reporting for Reinsurance of
    Short-Duration and Long-Duration Contracts.

5



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


The Company assists the client with the formation
of the captive, which is capitalized by contributions from the
producers, or an association, or group policyholders 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, line of business, amount
retained by the Company and 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 between the Company and 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 exposure, but in some cases cedes as little as 20%
or as much as 80% of its loss exposure. The Company secures
obligations due from captives through the use of funds withheld
trusts or letters of credit. Through its reinsurance
intermediary subsidiary and independent intermediaries, the
Company obtains excess-of-loss reinsurance subject to agreed
upon limits and retention levels. The Company generally
administers all 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. The captive also
receives its proportionate share of 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 same level of administrative costs and
capital commitment required to establish and operate its own
captive.

In another variation of client risk-sharing, the
Company establishes retrospectively-rated programs for
individual accounts. In this type of 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 specialty risk
insurance 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 underwriting results.

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 specific market opportunities and generally when the
Company believes there is potential to evolve into a
risk-sharing mechanism.

Description of
Specialty Risk Management Services

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 and due
diligence process.

6



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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 over 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 or 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 who 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.

Sales and Marketing.The Company markets its programs and
services to associations, groups, local, regional and national
insurance agents, and insurance consultants. Sales and marketing
efforts include personal contact through independent agents,
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) and Agents Edge. Advantage
is an internet-based business processing system which reduces
the Companys internal administrative costs. In addition to
administrative processing efficiencies, Advantage enhances
underwriting practices, by automating risk selection criteria.

Agents Edge is a specific application of
Advantage utilizing an automated, predictable, profit-driven
underwriting model to make workers compensation products
available to select agencies through its regional branch
offices. The system is now available in more than forty states
for the Companys workers compensation programs.

Insurance Operations

The Companys major insurance company
subsidiaries, Star, Savers, Ameritrust, and Williamsburg
(collectively referred to as the Insurance Company
Subsidiaries) issue insurance policies. The Companys
offshore captives, American Indemnity and PICL, which offer
clients captive or rent-a-captive options complement the
Insurance Company Subsidiaries.

The Insurance Company Subsidiaries are authorized
to write business, on either an admitted or surplus lines basis,
in all fifty states. The Insurance Company Subsidiaries
primarily offer workers compensation, commercial multiple
peril, inland marine and other liability coverages. For the year
ended December 31, 2002, the workers compensation
line of business accounted for 57.1% and 55.6% of gross written
premiums and net earned premiums, respectively.

7



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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

Through the Insurance Company Subsidiaries, the
Company engages in specialty risk management programs where the
Company takes underwriting risks in exchange for premiums.
Despite the losses reported from 1999 to 2001, the Company is
dedicated to achieving consistent underwriting profitability.
The Companys strategy has been one of highly disciplined
niche underwriting and historically this focus has produced
profitable underwriting results.

The Company became a public company in 1995,
raising approximately $44.0 million in capital, which
enabled the Company to take advantage of new growth
opportunities. In deploying the capital raised, the Company
experienced growth by writing new insurance programs and making
several strategic acquisitions.

Beginning in late 1998, the Companys
underwriting results were impacted by adverse development on a
limited group of insurance programs that were started during
this period. Underwriting losses in those programs continued to
grow, resulting in a significant reduction in statutory surplus
within the Insurance Company Subsidiaries during 1999, 2000, and
the second quarter of 2001. The resulting impact on the
Companys financial position eventually caused the
Insurance Company Subsidiaries to be downgraded from
A- (Excellent) to stable B (Fair) by the
leading insurance rating agency, A.M. Best Company (A.M.
Best).

During the three years ended December 31,
2001, 2000, and 1999, the Company took actions to eliminate a
limited group of 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 program types as
unacceptable:



| |   |                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | Risk-taking in the surety line of business;                                                                                   
|
| |  | Programs with aggregate stop loss provisions,
    where the clients risk-sharing is capped at a specified
    loss ratio; and
|
| |  | Programs which lack adequate capital contributed
    by the risk-sharing partner or proven profitable experience.             

The underwriting losses associated with these
discontinued programs were $12.8 million,
$29.0 million, and $12.0 million, for the years ended
December 31, 2001, 2000, and 1999, respectively. As a
result of the concerted run-off strategy, all premiums related
to these programs were fully earned during the first half of
2002. In addition, at December 31, 2002, the uncertainty of
future reserve development on these discontinued programs
appears to have been reduced as a result of aggressive claims
handling and reserve strengthening. However, there can be no
certainty that there will not be additional losses in the future
associated with these programs.

In addition to these discontinued programs,
starting in late 2000 and in 2001, the Company terminated a
number of programs to reduce gross and net premium leverage
ratios. While these programs were within the Companys
underwriting guidelines, their performance was less profitable
than the Companys targeted return on equity goals. The
remaining programs, which are considered to be the continuing/
core programs, have historically met the underwriting
profitability goals.

In June 2002, the Company successfully completed
an offering of 21,275,000 shares of newly issued common stock at
$3.10 per share. The Company received $60.5 million in
total net proceeds from the offering, of which
$37.5 million was contributed to the surplus of Star as of
June 30, 2002 and $20.0 million was used to pay down
its line of credit. As a result of the capital contribution to
Star, on June 26, 2002, A.M. Best upgraded the
Insurance Company Subsidiaries financial strength rating to
B+ (Very Good) with a positive outlook. A positive
outlook is placed on a companys rating if its financial
and market trends are favorable, relative to its current rating
level. The upgrade reflects A.M. Bests positive
assessment of the Companys improved financial condition as
a result of the issuance of new common shares and its debt
reduction.

8



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


However, there can be no assurance that
A.M. Best will not change its rating of the Insurance
Company Subsidiaries in the future.

The following table summarizes the gross written
premium and net written premium for the years ended
December 31, 2002, 2001, 2000, 1999, and 1998.

|                                |       |                          |         |         |      |   |         |         |  |   |         |         |  |      |        |         |  |   |        |         | 
|------------------------------- | ----- | ------------------------ | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | ---- | ------ | ------- |  | - | ------ | ------- | 
|                                |       |                         
|                                |       | Years Ended December 31, |        
|                                |       |                          |        
|Gross Written Premium           |       | 2002                     |         |         | 2001 |   |         | 2000    |  |   | 1999    |         |  | 1998 |       
|                                |       |                          |         |         |      |   |         |         |  |   |         |         |  |      |       
|                                |       |                         
|                                |       | (in thousands)           |        
|Workers Compensation           |       | $                        | 104,822 |         |      | $ | 147,654 |         |  | $ | 132,108 |         |  | $    | 95,284 |         |  | $ | 81,165 |        
|Commercial Multi-Peril          |       |                          | 33,072  |         |      |   | 44,513  |         |  |   | 42,170  |         |  |      | 36,123 |         |  |   | 30,192 |        
|Inland Marine                   |       |                          | 8,886   |         |      |   | 12,048  |         |  |   | 11,752  |         |  |      | 11,044 |         |  |   | 8,672  |        
|Other Liability                 |       |                          | 10,442  |         |      |   | 28,856  |         |  |   | 32,173  |         |  |      | 29,312 |         |  |   | 25,381 |        
|Other Commercial Auto Liability |       |                          | 9,894   |         |      |   | 38,191  |         |  |   | 44,070  |         |  |      | 35,462 |         |  |   | 17,674 |        
|Surety Bonds                    |       |                          | 2,998   |         |      |   | 7,377   |         |  |   | 5,116   |         |  |      | 6,651  |         |  |   | 15,004 |        
|All Other Lines                 |       |                          | 13,523  |         |      |   | 20,465  |         |  |   | 20,463  |         |  |      | 16,598 |         |  |   | 8,244  |        
|                                |       |                          |         |         |      |   |         |         |  |   |         |         |  |      |       
|                                | Total |                          | $       | 183,637 |      |   | $       | 299,104 |  |   | $       | 287,852 |  |      | $      | 230,474 |  |   | $      | 186,332 | 
|                                |       |                          |         |         |      |   |         |         |  |   |         |         |  |      |       

|                                |       |                          |        |         |      |   |        |         |  |   |        |         |  |      |        |         |  |   |        |        | 
|------------------------------- | ----- | ------------------------ | ------ | ------- | ---- | - | ------ | ------- |  | - | ------ | ------- |  | ---- | ------ | ------- |  | - | ------ | ------ | 
|                                |       |                         
|                                |       | Years Ended December 31, |       
|                                |       |                          |       
|Net Earned Premium              |       | 2002                     |        |         | 2001 |   |        | 2000    |  |   | 1999   |         |  | 1998 |       
|                                |       |                          |        |         |      |   |        |         |  |   |        |         |  |      |       
|                                |       |                         
|                                |       | (in thousands)           |       
|Workers Compensation           |       | $                        | 80,795 |         |      | $ | 69,360 |         |  | $ | 83,301 |         |  | $    | 67,153 |         |  | $ | 47,331 |       
|Commercial Multi-Peril          |       |                          | 23,462 |         |      |   | 27,004 |         |  |   | 18,567 |         |  |      | 15,608 |         |  |   | 10,896 |       
|Inland Marine                   |       |                          | 1,716  |         |      |   | 3,782  |         |  |   | 2,915  |         |  |      | 2,914  |         |  |   | 2,352  |       
|Other Liability                 |       |                          | 9,325  |         |      |   | 22,539 |         |  |   | 22,261 |         |  |      | 22,982 |         |  |   | 21,297 |       
|Other Commercial Auto Liability |       |                          | 17,548 |         |      |   | 27,535 |         |  |   | 9,725  |         |  |      | 8,545  |         |  |   | 5,166  |       
|Surety Bonds                    |       |                          | 97     |         |      |   | 173    |         |  |   | 32     |         |  |      | 133    |         |  |   | 132    |       
|All Other Lines                 |       |                          | 12,440 |         |      |   | 13,272 |         |  |   | 9,199  |         |  |      | 7,571  |         |  |   | 4,911  |       
|                                |       |                          |        |         |      |   |        |         |  |   |        |         |  |      |       
|                                | Total |                          | $      | 145,383 |      |   | $      | 163,665 |  |   | $      | 146,000 |  |      | $      | 124,906 |  |   | $      | 92,085 | 
|                                |       |                          |        |         |      |   |        |         |  |   |        |         |  |      |       

Reserves

The information required by this item is
incorporated by reference to page 48 and 53-54 of the Notes
to the Consolidated Financial Statements, and pages 21-22
and 26-27 of Item 7, Managements Discussion and
Analysis.

9



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


The following table shows the development of
reserves for unpaid losses and loss adjustment expenses
(LAE) from 1993 through 2002 for the Companys
current Insurance Company Subsidiaries including American
Indemnity and PICL.

Due to the Companys adoption of
SFAS 113, the bottom portion of the table shows the impact
of reinsurance for the years 1994 through 2001, 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, |       
|                                             |               |                          |       
|                                             |               | 1993                     |        |        | 1994 |   |        | 1995   |   |   | 1996    |        |   | 1997 |         |         | 1998 |   |         | 1999    |   |   | 2000    |         |   | 2001 |         |         | 2002 |  
|                                             |               |                          |        |        |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |  
|                                             |               |                         
|                                             |               | (Dollars in thousands)   |       
|Reserves for losses and LAE at end of period |               | $                        | 35,744 |        |      | $ | 47,149 |        |   | $ | 64,668  |        |   | $    | 65,775  |         |      | $ | 60,786  |         |   | $ | 84,254  |         |   | $    | 127,500 |         |      | $ | 172,862 |         |   | $ | 198,653 |         |   | $ | 193,116 | 
|Cumulative paid as of                        |               |                          |        |        |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         | 
|                                             | 1 year later  |                          |        | 11,172 |      |   |        | 15,792 |   |   |         | 25,659 |   |      |         | 31,626  |      |   |         | 31,368  |   |   |         | 39,534  |   |      |         | 55,361  |      |   |         | 73,079  |   |   |         | 81,024  |   |   |         |  | 
|                                             | 2 years later |                          |        | 19,298 |      |   |        | 26,227 |   |   |         | 42,969 |   |      |         | 49,930  |      |   |         | 47,313  |   |   |         | 57,192  |   |      |         | 91,088  |      |   |         | 119,449 |   |   |         |         |   |   |         |  | 
|                                             | 3 years later |                          |        | 23,571 |      |   |        | 33,227 |   |   |         | 52,222 |   |      |         | 58,362  |      |   |         | 56,848  |   |   |         | 77,214  |   |      |         | 117,159 |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 4 years later |                          |        | 26,700 |      |   |        | 36,644 |   |   |         | 57,443 |   |      |         | 64,018  |      |   |         | 65,517  |   |   |         | 86,229  |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 5 years later |                          |        | 27,492 |      |   |        | 37,450 |   |   |         | 59,182 |   |      |         | 67,928  |      |   |         | 68,138  |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 6 years later |                          |        | 28,527 |      |   |        | 38,865 |   |   |         | 60,653 |   |      |         | 69,503  |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 7 years later |                          |        | 29,469 |      |   |        | 39,929 |   |   |         | 60,630 |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 8 years later |                          |        | 29,979 |      |   |        | 39,926 |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 9 years later |                          |        | 29,818 |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|Reserves re-estimated as of end of year:     |               |                          |        |        |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         | 
|                                             | 1 year later  |                          |        | 35,354 |      |   |        | 46,738 |   |   |         | 65,058 |   |      |         | 67,010  |      |   |         | 69,012  |   |   |         | 99,316  |   |      |         | 147,748 |      |   |         | 187,248 |   |   |         | 204,743 |   |   |         |  | 
|                                             | 2 years later |                          |        | 33,524 |      |   |        | 45,578 |   |   |         | 65,312 |   |      |         | 69,536  |      |   |         | 73,591  |   |   |         | 106,734 |   |      |         | 145,745 |      |   |         | 190,463 |   |   |         |         |   |   |         |  | 
|                                             | 3 years later |                          |        | 33,308 |      |   |        | 45,255 |   |   |         | 66,692 |   |      |         | 74,796  |      |   |         | 74,009  |   |   |         | 102,438 |   |      |         | 153,922 |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 4 years later |                          |        | 33,685 |      |   |        | 45,592 |   |   |         | 68,557 |   |      |         | 74,439  |      |   |         | 77,771  |   |   |         | 104,379 |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 5 years later |                          |        | 32,263 |      |   |        | 43,031 |   |   |         | 65,795 |   |      |         | 76,025  |      |   |         | 78,490  |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 6 years later |                          |        | 31,844 |      |   |        | 42,519 |   |   |         | 65,874 |   |      |         | 77,239  |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 7 years later |                          |        | 31,588 |      |   |        | 43,116 |   |   |         | 66,521 |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 8 years later |                          |        | 32,015 |      |   |        | 43,928 |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 9 years later |                          |        | 32,228 |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|Cumulative redundancy (deficiency):          |               |                          |        |        |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         | 
|                                             | Dollars       |                          | $      | 3,516  |      |   | $      | 3,221  |   |   | $       | (1,853 | ) |      | $       | (11,464 | )    |   | $       | (17,704 | ) |   | $       | (20,125 | ) |      | $       | (26,422 | )    |   | $       | (17,601 | ) |   | $       | (6,090  | ) |   |         |  | 
|                                             | Percentage    |                          |        | 9.84   | %    |   |        | 6.83   | % |   |         | -2.87  | % |      |         | -17.43  | %    |   |         | -29.13  | % |   |         | -23.89  | % |      |         | -20.72  | %    |   |         | -10.18  | % |   |         | -3.07   | % |   |         |  | 
|Net reserves                                 |               |                          |        |        |      |   | 47,149 |        |   |   | 64,668  |        |   |      | 65,775  |         |      |   | 60,786  |         |   |   | 84,254  |         |   |      | 127,500 |         |      |   | 172,862 |         |   |   | 198,653 |         |   |   | 193,116 | 
|Ceded reserves                               |               |                          |        |        |      |   | 17,844 |        |   |   | 22,318  |        |   |      | 26,615  |         |      |   | 38,193  |         |   |   | 64,590  |         |   |      | 101,744 |         |      |   | 168,962 |         |   |   | 195,943 |         |   |   | 181,817 | 
|Gross reserves                               |               |                          |        |        |      |   | 64,993 |        |   |   | 86,986  |        |   |      | 92,390  |         |      |   | 98,979  |         |   |   | 148,844 |         |   |      | 229,244 |         |      |   | 341,824 |         |   |   | 394,596 |         |   |   | 374,933 | 
|                                             |               |                          |        |        |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |  
|Net re-estimated                             |               |                          |        |        |      |   | 43,928 |        |   |   | 66,521  |        |   |      | 77,239  |         |      |   | 78,490  |         |   |   | 104,379 |         |   |      | 153,922 |         |      |   | 190,463 |         |   |   | 204,743 |         |   |   |         | 
|Ceded re-estimated                           |               |                          |        |        |      |   | 26,579 |        |   |   | 39,095  |        |   |      | 41,439  |         |      |   | 57,171  |         |   |   | 92,664  |         |   |      | 148,115 |         |      |   | 210,962 |         |   |   | 225,472 |         |   |   |         | 
|Gross re-estimated                           |               |                          |        |        |      |   | 70,507 |        |   |   | 105,616 |        |   |      | 118,678 |         |      |   | 135,661 |         |   |   | 197,044 |         |   |      | 302,037 |         |      |   | 401,425 |         |   |   | 430,215 |         |   |   |         | 
|                                             |               |                          |        |        |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |  
|Gross cumulative redundancy (deficiency)     |               |                          |        |        |      | $ | (5,514 | )      |   | $ | (18,630 | )      |   | $    | (26,288 | )       |      | $ | (36,682 | )       |   | $ | (48,200 | )       |   | $    | (72,793 | )       |      | $ | (59,601 | )       |   | $ | (35,619 | )       |   |   |         | 
|                                             |               |                          |        |        |      |   |        |        |   |   |         |        |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |  

10



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


The following table sets forth the difference
between GAAP reserves for loss and loss adjustment expenses and
statutory reserves for loss and loss adjustment expenses at
December 31, (in thousands):

|                                             |                      |      |          |        |      |   |          |        |  
|-------------------------------------------- | -------------------- | ---- | -------- | ------ | ---- | - | -------- | ------ | -
|                                             |                      | 2002 |          |        | 2001 |  
|                                             |                      |      |          |        |      |  
|GAAP reserves for loss and LAE               |                      | $    | 374,933  |        |      | $ | 394,596  |       
|Reinsurance recoverables for unpaid losses   |                      |      | (181,817 | )      |      |   | (195,943 | )     
|Allowances against reinsurance recoverables* |                      |      | (1,400   | )      |      |   | (2,422   | )     
|Non-regulated foreign insurance subsidiaries |                      |      |          |        |      |   |          |       
|                                             | American Indemnity** |      |          | (2,973 | )    |   |          | (5,572 | )
|                                             | PICL**               |      |          | (3,363 | )    |   |          | (5,479 | )
|                                             |                      |      |          |        |      |  
|Statutory reserves for loss and LAE          |                      | $    | 185,380  |        |      | $ | 185,180  |       
|                                             |                      |      |          |        |      |  



---



|  |                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------
|* | The GAAP allowance for reinsurance recoverables
    is reported as a Schedule F penalty or a non-admitted asset
    for statutory accounting.



|   |                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | American Indemnity and PICL are offshore
    captives, which offer clients captive or rent-a-captive options.
    They are not domestic insurance companies and, therefore, are
    not included in the combined statutory financial statements
    filed with the National Association of Insurance Commissioners
    and state regulators.

As a result of adverse development on prior
accident years reserves, the provision for losses and loss
adjustment expenses increased by $6,090,000, $14,386,000, and
$20,248,000 in calendar years 2002, 2001, and 2000, respectively.

Investments

Certain information required by this item is
incorporated by reference to page 47 and 51-53 of the
Notes to the Consolidated Financial Statements, and page 24
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. Both
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 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 Companys agency
operations compete with other local, regional, and national
insurance agencies for individual client insurance needs.

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. Principle 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

11



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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, many of which are outside of its control.

Regulation

Regulation in General

The Insurance Company Subsidiaries are subject to
regulation by government agencies in the states in which they do
business. The nature and extent of such regulation varies from
jurisdiction to jurisdiction but typically involves 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
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, loss 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
generally intended for the protection of policyholders rather
than security holders.

In addition to the regulatory oversight of the
Insurance Company 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
Company Subsidiaries. The Holding Company Acts contain special
reporting and prior approval requirements with respect to
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.

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 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 (commonly known as a Form A) containing
information required by statute and published regulations and
provide a copy of such

12



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Form A to the domestic insurer. In Michigan,
Missouri, California, and Florida, 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 that require pre-notification to state
agencies of a change in control of a non-domestic admitted
insurance company in that state. While such pre-notification
statutes do not authorize the state agency to disapprove the
change of control, such statutes do 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
shareholders of the Company.

Membership in Insolvency Funds and
Associations and Mandatory Pools

Most states require admitted property and
casualty insurers to become members of insolvency funds or
associations, which generally protect policyholders against the
insolvency of such insurers. Members of the fund or association
must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any
one year vary between 1% and 2% of annual premium written by a
member in that state. Assessments from insolvency funds were
$1,290,000, $959,000, and $125,000, respectively, for 2002,
2001, and 2000. Most of these payments are recoverable through
future policy surcharges and premium tax reductions.

The Insurance Company Subsidiaries are also
required to participate in various mandatory insurance
facilities or in funding mandatory pools, which are generally
designed to provide insurance coverage for consumers who are
unable to obtain insurance in the voluntary insurance market.
Among the pools participated in are those established in certain
states to provide windstorm and other similar types of property
coverage. These pools typically require all companies writing
applicable lines of insurance in the state for which the pool
has been established to fund deficiencies experienced by the
pool based upon each companys relative premium writings in
that state, with any excess funding typically distributed to the
participating companies on the same basis. To the extent that
these assessments are not covered by reinsurance treaties, they
may have an adverse effect on the Company. Total assessments
paid to all such facilities were $2,803,000, $2,521,000, and
$1,626,000, respectively, during 2002, 2001, and 2000.

Restrictions on Dividends and Risk-Based
Capital

The information required by this item is
incorporated by reference to pages 59-62 of the Notes to
the Consolidated Financial Statements, and pages 31-34 of
Item 7, Managements Discussion and Analysis.

Effect of Federal Legislation

The Terrorism Risk Insurance Act
(TRIA) was signed into law on November 26,
2002, and provides government support for businesses that suffer
damages as a result of acts of foreign based terrorism. TRIA
serves as an additional high layer of reinsurance against losses
that may arise from a domestic incident by foreign groups. The
impact to the Company resulting from TRIA is minimal as the
Company does not underwrite risks that are considered targets
for terrorism; avoids concentrations of exposures in both
property and workers compensation; and has terrorism
coverage included in its reinsurance treaties to cover the most
likely exposure.

13



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NAIC-IRIS Ratios

The National Association of Insurance
Commissioners (NAIC) 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 twelve industry ratios and specifies usual
values for each ratio. Departure from the usual values on
four or more ratios generally leads to inquiries or possible
further review from individual state insurance commissioners.

In 2002, the Insurance Company Subsidiaries
generated certain ratios that varied from the usual
value range. The variations and reasons for these
variations are set forth below:

|                                                |  |               |            |  |       |     |      |     
|----------------------------------------------- |  | ------------- | ---------- |  | ----- | --- | ---- | ----
|Ratio                                           |  | Usual Range   |            |  | Value |    
|                                                |  |               |            |  |       |    
|Company: Star                                   |  |               |            |  |       |     |      |     
|Change in Net Writings                          |  | <33% or >33% |            |  | 35%  | (1)
|Two-year Overall Operating Ratio                |  |               | Under 100% |  |       |     | 102% | (2) 
|Liabilities to Liquid Assets                    |  |               | Under 105% |  |       |     | 116% | (3) 
|Investment Yield                                |  | <10% or >4.5% |            |  | 4.4%  | (4)
|Change in Policyholders Surplus                |  | <50% or >10% |            |  | 66%   | (5)
|Two-year Reserve Development to Surplus         |  |               | Under 20%  |  |       |     | 24%  | (6) 
|Company: Williamsburg                           |  |               |            |  |       |     |      |     
|Change in Net Writings                          |  | <33% or >33% |            |  | 188%  | (7)
|Two-year Overall Operating Ratio                |  |               | Under 100% |  |       |     | 119% | (8) 
|Company: Ameritrust                             |  |               |            |  |       |     |      |     
|Change in Net Writings                          |  | <33% or >33% |            |  | 66%   | (9)
|Estimated Current Reserve Deficiency to Surplus |  |               | Under 25%  |  |       |     | 39%  | (10)



---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The reduction in Stars net written premium
    reflects the termination of unprofitable business, specifically
    in the commercial automobile line of business. As part of the
    plan to reduce both gross and net leverage ratios, the Company
    cancelled two large commercial automobile programs effective
    December 31, 2001. Excluding these items, Stars
    Change in Net Writings ratio would have been within the usual
    range at -7.7%.
|
| | (2) | The overall operating ratio in 2002 was 99%.
    While this was an improvement from the overall operating ratio
    for 2001 of 103%, the Two-year Overall Operating Ratio was
    slightly above the usual range. The improvement in the 2002
    ratio was a result of rate increases obtained and the run-off of
    unprofitable discontinued programs.                                                                                                     
|
| | (3) | While this ratio showed improvement from 151% at
    2001 to 116% at 2002, it continues to be negatively impacted by
    the exclusion of the value of affiliated common stocks, as the
    value of affiliated common stocks is not considered in the ratio.                                                                                                                                                                                                   
|
| | (4) | Statutory net investment income was lower in 2002
    due to an $8.2 million decrease in shareholder dividends
    from subsidiaries. Dividends from subsidiaries totaled
    $1.8 million in 2002, compared to $10.0 million in
    2001. Investment yield was also lower in 2002 due to lower yield
    rates on securities overall.                                                                                                                          
|
| | (5) | Change in Policyholders Surplus was
    favorably impacted by the Companys public offering of
    newly issues shares of common stock in June 2002. Of the
    $60.5 million in total net proceeds, $37.5 million was
    contributed to the surplus of Star as of June 2002.                                                                                                                                                                                 
|
| | (6) | The Two-year Reserve Development to Surplus Ratio
    reflects development in 2001 on unprofitable programs, which
    have been discontinued. Excluding the 2001 adverse development
    on discontinued programs, the ratio would have been within the
    usual range at 9%.                                                                                                                                                                                 

14



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.




| |     |                                                                                                                                                                                                                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (7) | The growth in the net written premium on
    Williamsburg was high for the year primarily due to three
    growing programs: one workers compensation and two general
    liability programs. These programs generated $1,469,000 of the
    total $1,643,000 increase in net written premium for 2002,
    creating the high ratio for the year.
|
| | (8) | The primary factor contributing to the high value
    of the Two-Year Overall Operating Ratio was incurred loss
    development and a net increase in expenses related to
    discontinued business. Excluding discontinued business,
    Williamsburgs Two-Year Overall Operating Ratio would have
    been within the usual range at 79%.      
|
| | (9) | This ratio was impacted by the cancellation of a
    surplus relief reinsurance treaty. Excluding the effect of the
    cancellation of this treaty, the Change in Net Writings would
    have been within the usual range at -27%.                                                                                                               



|     |                                                                                                                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | The Estimated Current Reserve Deficiency to
    Policyholders Surplus was also impacted by the
    cancellation of the surplus relief reinsurance treaty. Excluding
    the effect of the cancellation of this treaty, the Estimated
    Current Reserve Deficiency to Policyholders Surplus would
    have been within the acceptable range at -28%.

Item 2.     Properties

The Company currently leases its corporate
offices in Southfield, Michigan from an unaffiliated third
party. In 2002, the Company paid rent for its corporate offices
in the amount of approximately $1.3 million. 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 in close proximity
to its existing offices. The cost of the land was
$3.2 million.

In 2000, Savers purchased the building in
Cerritos, California for $2.0 million, in which one of the
Companys subsidiaries has its operations.

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 the Company, its subsidiary
Star, and others 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 company
vigorously defended itself and filed counterclaims against the
Primary and Individual Plaintiffs.

In 1998, the Court issued an Order dismissing all
claims of the Primary Plaintiffs with prejudice. In 1999, the
Company received a verdict in its favor on its counterclaims and
against the Primary and Individual Plaintiffs and in its favor
on its remaining claims and claims for equitable relief. The
plaintiffs have filed an appeal with the Nevada Supreme Court.
One of the plaintiffs has filed bankruptcy and another has
had a receiver appointed for him. As a result 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 Companys financial statements.

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

15



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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 Attorneys, P.C. 
 Bloomfield Hills, MI

Transfer Agent &
Registrar Equiserve Trust Company, N.A. 
 P.O. Box 43069 
 Providence, RI 02940-3069


Stock ListingNew York Stock Exchange 
 Symbol: MIG

Annual Meeting The Annual Meeting of 
 Meadowbrook Shareholders 
 will be held at:2:00 p.m. 
 May 19, 2003 
 Temple Beth-El 
 7400 Telegraph Road 
 Bloomfield Hills, MI


Shareholder Relations and
Form 10-K

A copy of Meadowbrook Insurance Group,
Inc.s 2002 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, Senior Vice President and Acting
    Chief Financial Officer 

    (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 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 Trust Company, N.A. (800) 649-2579.

16



---



##### 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:

|                  |  |      |      |  |     |  |      |           |  |  |   | 
|----------------- |  | ---- | ---- |  | --- |  | ---- | --------- |  |  | - | 
|December 31, 2002 |  | High |      |  | Low |  |      | Dividends | 
|                  |  |      |      |  |     |  |      |           | 
|First Quarter     |  |      | 4.00 |  |     |  | 1.70 |           |  |  |  | 
|Second Quarter    |  |      | 4.14 |  |     |  | 2.71 |           |  |  |  | 
|Third Quarter     |  |      | 3.28 |  |     |  | 2.20 |           |  |  |  | 
|Fourth Quarter    |  |      | 2.65 |  |     |  | 1.56 |           |  |  |  | 
|                  |  |      |      |  |     |  |      |           | 
|                  |  |      |      |  |     |  |      |           |  |  |  | 
|                  |  |      |      |  |     |  |      |           | 

|                  |  |      |        |  |     |  |      |           |  |   |      | 
|----------------- |  | ---- | ------ |  | --- |  | ---- | --------- |  | - | ---- | 
|December 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 |           |  |   |     | 
|                  |  |      |        |  |     |  |      |           | 
|                  |  |      |        |  |     |  |      |           |  | $ | 0.09 | 
|                  |  |      |        |  |     |  |      |           | 

As of March 20, 2003 there were
approximately 269 holders of record of the Companys common
stock. For purposes of this determination, Cede & Co., the
nominee for the Depositary Trust Company is treated as one
holder.

Equity Compensation Plan Information

|                                                               |       |                         |           |           |                      |                           |      |                         |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ----------------------- | --------- | --------- | -------------------- | ------------------------- | ---- | ----------------------- |  |  | --------- | --------- | 
|                                                               |       | Number of securities to |           |           | Weighted-average     |                           |      | Number of securities    | 
|                                                               |       | be issued upon exercise |           |           | exercise price of    |                           |      | remaining available for | 
|                                                               |       | of outstanding options, |           |           | outstanding options, |                           |      | future issuance under   | 
|                                                               |       | warrants and rights     |           |           | warrants and rights  |                           |      | equity compensation     | 
|                                                               |       |                         |           |           |                      | plans (excluding          |     
|                                                               |       |                         |           |           |                      | securities in column (a)) |     
|Plan category                                                  |       | (a)                     |           |           | (b)                  |                           |      | (c)                     | 
|                                                               |       |                         |           |           |                      |                           |      |                         | 
|Equity compensation plans approved by security
    holders     |       |                         | 2,693,223 |           |                      | $                         | 6.78 |                         |  |  | 1,006,948 |          
|Equity compensation plans not approved by
    security holders |       |                         | 300,000   |           |                      |                           | 3.10 |                         |  |  |          |          
|                                                               |       |                         |           |           |                      |                           |      |                         | 
|                                                               | Total |                         |           | 2,993,223 |                      |                           | $    | 6.41                    |  |  |           | 1,006,948 | 
|                                                               |       |                         |           |           |                      |                           |      |                         | 

The equity compensation plans not approved by
security holders consists of warrants issued in conjunction with
the public offering that occurred in June, 2002. The warrants
entitle the holders to purchase an aggregate of 300,000 shares
of common stock at $3.10 per share and may be exercised at any
time from June 6, 2003 through June 6, 2005, at which
time any warrants not exercised will become void.

17



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Item
6.     Selected Financial
Data






Selected Consolidated Financial Data


|                                                             |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |      |  
|------------------------------------------------------------ | ------------------------ | ----------------------------------------------- | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ---- | -
|                                                             |                          |                                                
|                                                             |                          | For the Years Ended December 31,                |        
|                                                             |                          |                                                 |        
|                                                             |                          | 2002                                            |         |       | 2001 |   |         | 2000  |   |   | 1999    |       |   | 1998 |        
|                                                             |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |        
|                                                             |                          |                                                
|                                                             |                          | (In thousands, except per share and ratio data) |        
|Income Statement Data:                                       |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |     
|Gross written premium                                        |                          | $                                               | 183,637 |       |      | $ | 299,104 |       |   | $ | 287,852 |       |   | $    | 230,474 |       |   | $ | 186,332 |     
|Net written premium                                          |                          |                                                 | 139,795 |       |      |   | 186,083 |       |   |   | 136,324 |       |   |      | 122,819 |       |   |   | 93,481  |     
|Net earned premium                                           |                          |                                                 | 145,383 |       |      |   | 163,665 |       |   |   | 146,000 |       |   |      | 124,906 |       |   |   | 92,085  |     
|Net commissions and fees                                     |                          |                                                 | 37,581  |       |      |   | 40,675  |       |   |   | 41,251  |       |   |      | 38,697  |       |   |   | 32,398  |     
|Net investment income                                        |                          |                                                 | 13,958  |       |      |   | 14,228  |       |   |   | 13,715  |       |   |      | 11,618  |       |   |   | 9,579   |     
|Net realized gain (loss) on investments                      |                          |                                                 | 666     |       |      |   | 735     |       |   |   | 540     |       |   |      | (227    | )     |   |   | 52      |     
|Gain (loss) of sale of subsidiary                            |                          |                                                 | 199     |       |      |   | (1,097  | )     |   |   |        |       |   |      |        |       |   |   |        |     
|Total revenue                                                |                          |                                                 | 197,787 |       |      |   | 218,206 |       |   |   | 201,506 |       |   |      | 174,994 |       |   |   | 134,114 |     
|Net losses and LAE(1)                                        |                          |                                                 | 98,734  |       |      |   | 125,183 |       |   |   | 127,619 |       |   |      | 95,358  |       |   |   | 56,703  |     
|Policy acquisition and other underwriting
    expenses(1)    |                          |                                                 | 33,635  |       |      |   | 31,662  |       |   |   | 25,422  |       |   |      | 22,067  |       |   |   | 11,627  |     
|Other administrative expenses                                |                          |                                                 | 23,016  |       |      |   | 22,778  |       |   |   | 27,894  |       |   |      | 25,516  |       |   |   | 20,304  |     
|Salaries and employee benefits                               |                          |                                                 | 37,659  |       |      |   | 44,179  |       |   |   | 43,038  |       |   |      | 42,473  |       |   |   | 36,856  |     
|Interest on notes payable                                    |                          |                                                 | 3,021   |       |      |   | 4,516   |       |   |   | 5,135   |       |   |      | 3,636   |       |   |   | 1,979   |     
|Gain on debt reduction                                       |                          |                                                 | (359    | )     |      |   |        |       |   |   |        |       |   |      |        |       |   |   |        |     
|Income (loss) before income taxes                            |                          |                                                 | 2,081   |       |      |   | (10,112 | )     |   |   | (27,602 | )     |   |      | (14,056 | )     |   |   | 6,645   |     
|Net income (loss) before cumulative effect(2)                |                          |                                                 | 1,650   |       |      |   | (6,510  | )     |   |   | (17,473 | )     |   |      | (7,847  | )     |   |   | 5,870   |     
|Net income (loss)                                            |                          |                                                 | 1,650   |       |      |   | (6,510  | )     |   |   | (17,473 | )     |   |      | (9,553  | )     |   |   | 5,870   |     
|Earnings per share before cumulative
    effect  Diluted(2) |                          | $                                               | 0.08    |       |      | $ | (0.76   | )     |   | $ | (2.05   | )     |   | $    | (0.91   | )     |   | $ | 0.65    |     
|Earnings per share  Diluted                                 |                          | $                                               | 0.08    |       |      | $ | (0.76   | )     |   | $ | (2.05   | )     |   | $    | (1.11   | )     |   | $ | 0.65    |     
|Dividends declared per share                                 |                          | $                                               |        |       |      | $ | 0.09    |       |   | $ | 0.12    |       |   | $    | 0.12    |       |   | $ | 0.10    |     
|Balance Sheet Data:                                          |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |     
|Total investments and cash and cash equivalents              |                          | $                                               | 286,050 |       |      | $ | 233,723 |       |   | $ | 240,083 |       |   | $    | 225,523 |       |   | $ | 201,025 |     
|Total assets                                                 |                          |                                                 | 674,839 |       |      |   | 687,888 |       |   |   | 661,183 |       |   |      | 551,977 |       |   |   | 440,075 |     
|Loss and LAE reserves                                        |                          |                                                 | 374,933 |       |      |   | 394,596 |       |   |   | 341,824 |       |   |      | 229,244 |       |   |   | 148,844 |     
|Debt                                                         |                          |                                                 | 32,497  |       |      |   | 54,741  |       |   |   | 53,013  |       |   |      | 58,463  |       |   |   | 40,953  |     
|Shareholders equity                                         |                          |                                                 | 147,395 |       |      |   | 80,316  |       |   |   | 85,975  |       |   |      | 100,408 |       |   |   | 119,567 |     
|Book value per share                                         |                          | $                                               | 4.98    |       |      | $ | 9.44    |       |   | $ | 10.10   |       |   | $    | 11.80   |       |   | $ | 13.80   |     
|Other Data:                                                  |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |     
|GAAP ratios (insurance companies only):                      |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |     
|                                                             | Net loss and LAE ratio   |                                                 |         | 72.1  | %    |   |         | 81.1  | % |   |         | 90.9  | % |      |         | 79.0  | % |   |         | 65.0 | %
|                                                             | Expense ratio            |                                                 |         | 36.5  | %    |   |         | 36.0  | % |   |         | 35.9  | % |      |         | 34.5  | % |   |         | 30.6 | %
|                                                             | Combined ratio           |                                                 |         | 108.6 | %    |   |         | 117.1 | % |   |         | 126.8 | % |      |         | 113.5 | % |   |         | 95.6 | %
|                                                             | Statutory combined ratio |                                                 |         | 109.7 | %    |   |         | 113.0 | % |   |         | 126.4 | % |      |         | 114.2 | % |   |         | 98.7 | %

18



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.




---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Both the loss and loss adjustment expense ratios
    are calculated based upon our unconsolidated insurance company
    operations. The following table sets forth the intercompany
    fees, which are eliminated in consolidation.

Unconsolidated GAAP data  Ratio
Calculation Table:

|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |         |      |   |   |        |      |  
|--------------------------------------------------------------------- | --------------------------- | -------------------------------- | ------- | ---- | ---- | - | ------- | ---- | - | - | ------- | ---- | - | ---- | ------- | ---- | - | - | ------ | ---- | -
|                                                                      |                             |                                 
|                                                                      |                             | For the Years Ended December 31, |        
|                                                                      |                             |                                  |        
|                                                                      |                             | 2002                             |         |      | 2001 |   |         | 2000 |   |   | 1999    |      |   | 1998 |        
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|Net earned premium                                                    |                             | $                                | 145,383 |      |      | $ | 163,665 |      |   | $ | 146,000 |      |   | $    | 124,906 |      |   | $ | 92,085 |     
|Consolidated net loss and LAE                                         |                             | $                                | 98,734  |      |      | $ | 125,183 |      |   | $ | 127,619 |      |   | $    | 95,358  |      |   | $ | 56,703 |     
|Intercompany claim fees                                               |                             |                                  | 6,154   |      |      |   | 7,520   |      |   |   | 5,026   |      |   |      | 3,271   |      |   |   | 3,166  |     
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|Unconsolidated net loss and LAE                                       |                             | $                                | 104,888 |      |      | $ | 132,703 |      |   | $ | 132,645 |      |   | $    | 98,629  |      |   | $ | 59,869 |     
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|                                                                      | GAAP net loss and LAE ratio |                                  |         | 72.1 | %    |   |         | 81.1 | % |   |         | 90.9 | % |      |         | 79.0 | % |   |        | 65.0 | %
|Consolidated policy acquisition and other
    underwriting expenses   |                             | $                                | 33,635  |      |      | $ | 31,662  |      |   | $ | 25,422  |      |   | $    | 22,067  |      |   | $ | 11,627 |     
|Intercompany administrative and other
    underwriting fees           |                             |                                  | 19,445  |      |      |   | 27,309  |      |   |   | 27,002  |      |   |      | 21,025  |      |   |   | 16,529 |     
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|Unconsolidated policy acquisition and other
    underwriting expenses |                             | $                                | 53,080  |      |      | $ | 58,971  |      |   | $ | 52,424  |      |   | $    | 43,092  |      |   | $ | 28,156 |     
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|                                                                      | GAAP expense ratio          |                                  |         | 36.5 | %    |   |         | 36.0 | % |   |         | 35.9 | % |      |         | 34.5 | % |   |        | 30.6 | %
|GAAP combined ratio                                                   |                             |                                  | 108.6   | %    |      |   | 117.1   | %    |   |   | 126.8   | %    |   |      | 113.5   | %    |   |   | 95.6   | %   



|    |                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The cumulative effect of the change in accounting
    principle in 1999 reflects the adoption of SOP 97-3,
    Accounting by Insurance and Other Enterprises for
    Insurance-Related Assessments.

Management uses the GAAP combined ratio and its
components to assess and benchmark underwriting performance.

The GAAP combined ratio is the sum of the GAAP
loss and loss adjustment expense ratio and the GAAP expense
ratio. The GAAP loss and loss adjustment expense ratio is the
unconsolidated net loss and loss adjustment expenses in relation
to net earned premium. The GAAP expense ratio is the
unconsolidated policy acquisition and other underwriting
expenses in relation to net earned premium.

The statutory combined ratio is the sum of the
statutory loss and loss adjustment expense ratio and the
statutory expense ratio. The statutory loss and loss adjustment
expense ratio is the net loss and loss adjustment expenses in
relation to net earned premium. The statutory expense ratio is
the statutory policy acquisition and other underwriting expenses
in relation to net written premium.

19



---



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

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

Specialty
Risk Management Operations

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

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,
which are reinsurance companies and are accounted for under the
provisions of Statement of Financial Accounting Standards
(SFAS) No. 113, Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration
Contracts. In risk-sharing programs, the Company derives
revenues from net earned premiums and investment income. In
addition, the Company may benefit from any 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 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.

Agency
Operations

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

20



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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

|         |                                   |                                  |   |         |      |  |   |         |   |  |   |         |  
|-------- | --------------------------------- | -------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|         |                                   |                                 
|         |                                   | For the Years Ended December 31, |  
|         |                                   |                                  |  
|         |                                   | 2002                             |   |         | 2001 |  |   | 2000    |  
|         |                                   |                                  |   |         |      |  |   |         |  
|Revenues |                                   |                                  |   |         |      |  |   |         |   |  |   |        
|         | Net earned premiums               |                                  | $ | 145,383 |      |  | $ | 163,665 |   |  | $ | 146,000 |  
|         | Management fees                   |                                  |   | 23,736  |      |  |   | 25,471  |   |  |   | 24,519  |  
|         | Investment income                 |                                  |   | 13,906  |      |  |   | 14,177  |   |  |   | 13,664  |  
|         | Net realized gain on investments  |                                  |   | 666     |      |  |   | 735     |   |  |   | 540     |  
|         |                                   |                                  |   |         |      |  |   |         |  
|         | Specialty risk management segment |                                  |   | 183,691 |      |  |   | 204,048 |   |  |   | 184,723 |  
|         | Agency operations                 |                                  |   | 14,330  |      |  |   | 15,706  |   |  |   | 17,234  |  
|         | Reconciling items                 |                                  |   | 52      |      |  |   | 52      |   |  |   | 52      |  
|         | Gain (loss) on sale of subsidiary |                                  |   | 199     |      |  |   | (1,097  | ) |  |   |        |  
|         | Intersegment revenue              |                                  |   | (485    | )    |  |   | (503    | ) |  |   | (503    | )
|         |                                   |                                  |   |         |      |  |   |         |  
|         | Consolidated revenue              |                                  | $ | 197,787 |      |  | $ | 218,206 |   |  | $ | 201,506 |  
|         |                                   |                                  |   |         |      |  |   |         |  

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

Significant Accounting Policies and Risk
Factors



| |                                                                     
| | --------------------------------------------------------------------
| | Losses and Loss Adjustment Expenses and
    Reinsurance Recoverables

Significant periods of time can elapse between
the occurrence of an insured loss, the reporting of the loss to
the insurer and the insurers payment of that loss. To
recognize liabilities for unpaid loss and loss expenses,
insurers establish reserves as balance sheet liabilities
representing estimates of amounts needed to pay reported and
unreported net losses and loss expenses. As of December 31,
2002, the Company had accrued $374.9 million of gross loss
and loss adjustment expense reserves compared with
$394.6 million at December 31, 2001.

Reinsurance recoverables represent
(1) amounts currently due from reinsurers on paid loss and
loss adjustment expenses (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
(IBNR) losses and LAE. Such recoverables, by
necessity, are based upon estimates. While management believes
that the amount accrued is collectible, the ultimate recoverable
may be greater or less than the amount accrued. At
December 31, 2002 and 2001, reinsurance recoverables on
paid and unpaid losses were $202.2 million and
$222.5 million, respectively.

When a claim is reported to one of the Insurance
Company Subsidiaries, its claims personnel establish a
case reserve for the estimated amount of the
ultimate payment. The amount of the reserve is primarily based
upon a case-by-case evaluation of the type of claim involved,
the circumstances surrounding each claim and the policy
provisions relating to the type of losses. The estimate reflects
the informed judgment of such personnel based on general
insurance reserving practices, as well as the experience and
knowledge of the claims person. Until the claim is resolved,
these estimates are revised as deemed necessary by the
responsible claims personnel based on subsequent developments
and periodic reviews of the claims.

In accordance with industry practice, the Company
maintains, in addition to case reserves, estimates of reserves
for losses and loss expenses incurred but not yet reported. The
Company projects an estimate of ultimate losses and loss
expenses at each reporting date. The difference between:
(i) projected ultimate loss and loss expense reserves and
(ii) case loss reserves and loss expense reserves thereon
is carried as the IBNR reserve. By using both estimates of
reported claims and IBNR determined using generally accepted
actuarial reserving techniques, the Company estimates the
ultimate liability for losses and LAE, net of reinsurance
recoverables.

21



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Reserves are reviewed by both internal and
independent actuaries for adequacy on a periodic basis. When
reviewing reserves, the Company analyzes historical data and
estimates the impact of various factors such as (i) per
claim information; (ii) Company and industry historical
loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the imposition of damages, and
changes in political attitudes; and (iv) trends in general
economic conditions, including the effects of inflation. This
process assumes that past experience, adjusted for the effects
of current developments and anticipated trends, is an
appropriate basis for predicting future events. There is not a
precise method, however, for subsequently evaluating the impact
of any specific factor on the adequacy of reserves because the
eventual deficiency or redundancy is affected by multiple
factors.

The key assumptions used in managements
selection of ultimate reserves included the underlying actuarial
methodologies, a review of current pricing and underwriting
initiatives, an evaluation of reinsurance costs and retention
levels, and a detailed claims analysis with an emphasis on how
aggressive claims handling may be impacting the paid and
incurred loss data trends embedded in the traditional actuarial
methods. With respect to the ultimate estimates for losses and
LAE, the key assumptions remained consistent for the years ended
December 31, 2002, 2001, and 2000.

Discontinued
Programs

During the three years ended December 31,
2001, 2000, and 1999, the Company took actions to eliminate a
limited group of unprofitable programs that were not aligned
with its 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,
    where the clients risk-sharing is capped at a specified
    loss ratio; and
|
| |  | Programs which lack adequate capital contributed
    by the risk-sharing partner or proven profitable experience.             

The underwriting losses associated with these
programs were $12.8 million, $29.0 million, and
$12.0 million, for the years ended December 31, 2001,
2000, and 1999, respectively. All premiums related to these
programs were fully earned during the first half of 2002. In
addition, at December 31, 2002, the uncertainty of future
reserve development on these discontinued programs appears to
have been reduced as a result of aggressive claims handling and
reserve strengthening. However, there can be no certainty that
there will not be additional losses in the future associated
with these programs.

Credit
Risk

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, 2002, the Company had risk exposure in excess
of collateral in the amount of $11.6 million, compared to
$14.1 million at December 31, 2001, on these programs,
for which the Company has an allowance of $6.8 million,
compared to $6.5 million at December 31, 2001, 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

22



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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.

Taxes

At December 31, 2002, the Company had a
deferred tax asset of $19.1 million, $7.8 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. At
December 31, 2002, management concluded that the positive
evidence supporting the generation of future taxable income
sufficient to realize the deferred tax asset outweighed the
negative evidence of the cumulative losses reported for the
periods ended December 31, 1999, 2000, and 2001. This
conclusion was based upon:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The current market conditions that supported the
    cumulative premium rate increases of 47% since the beginning of
    2000 is expected to continue;                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | The accident year 2002 loss and LAE ratio was
    67.5% on the Companys continuing business, and there was
    little adverse development on 2001 and prior reserves related to
    continuing business as of December 31, 2002;                                                                                                                                                                                                                                                                                                           
|
| |  | The completion of the Companys exit of
    certain discontinued unprofitable programs. Exposures related to
    these programs were fully earned during the first half of 2002.
    Furthermore, the uncertainty of future reserve development
    appears to have been reduced by aggressive claims handling which
    reduced the number of pending claims, reserve strengthening
    incurred in 2002, and a claim by claim review conducted by the
    Companys corporate claims department during the fourth
    quarter of 2002; and
|
| |  | Alternative tax strategies, which could generate
    capital gains from the potential sale of assets and/or
    subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                               

Goodwill

Effective January 1, 2002, the Company
adopted SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142, for periods starting
December 15, 2001 or thereafter, eliminates the
amortization of goodwill. In addition, the Company is required
to test, at least annually, all existing goodwill for impairment
using a fair value approach, on a reporting unit basis. Also
pursuant to SFAS No. 142, the Company is required to test
for impairment more frequently if events or changes in
circumstances indicate that the asset might be impaired. Upon
implementation of SFAS No. 142 in 2002, the Company is no
longer amortizing goodwill.

The Company evaluates existing goodwill for
impairment on an annual basis. The Company carries goodwill on
two reporting units within the agency operations segment in the
amount of $4.0 million and three reporting units within the
specialty risk management operations segment in the amount of
$25.0 million. The operating results for the reporting
units that carry goodwill have historically generated profits
and were not impacted by the unprofitable programs that were
previously discontinued. Management evaluated the net carrying
value of goodwill to determine if there has been any impairment
of value. The methodology used for this evaluation included the
review of current market values of the reporting units and
annual operating performance. Based on this evaluation,
management determined there is no impairment to goodwill.

At December 31, 2002 and 2001, the net
goodwill was $29.0 million. Amortization expense in
relation to goodwill in 2001 and 2000 was $2.3 million and
$2.1 million, respectively. In accordance with SFAS
No. 142, there was no amortization expense recorded in
relation to goodwill in 2002.

23



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Investments

The Companys investment securities at
December 31, 2002 and 2001 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.

Other Than
Temporary Impairments of Securities and Unrealized Losses on
Investments

The Companys policy on other than
temporarily impaired securities is to determine impairment based
on analysis of the following factors: market value consistently
equal to or less than 80% of amortized cost for a six month
period; rating downgrade or other credit event, e.g., failure to
pay interest when due; financial condition and near-term
prospects of the issuer, including any specific events which may
influence the operations of the issuer such as changes in
technology or discontinuance of a business segment; prospects
for the issuers industry segment; intent and ability of
the Company to retain the investment for a period of time
sufficient to allow for anticipated recovery in market value. At
December 31, 2002, the Company did not hold any securities
in its investment portfolio that met the tests for impairment.

At December 31, 2002, gross unrealized
depreciation on available for sale securities, which was not
impaired, was $648,000. The Company did not hold any securities
with market values consistently equal to or less than 80% of
amortized cost for a period of six months or more.

Results of Operations

Overview

2002 compared to
2001:

Results from operations improved
$8.2 million from a net loss of ($6.5) million in 2001
to net income of $1.7 million in 2002. This improvement
reflects the impact of the run-off of the previously mentioned
unprofitable discontinued programs, an overall shift in the mix
of business towards the workers compensation line of
business and the impact of rate increases achieved in 2002 and
2001 of 15.7% and 18.2%, respectively. The workers
compensation line of business had an accident year loss ratio of
67.4% in 2002 and represented 55.6% of net earned premium in
2002, compared to 42.4% of net earned premium in 2001. This
improvement is the result of the continuing rate increases and
expense management initiatives, which included reductions in
salary and benefit levels of $6.5 million, or 14.8%, from
$44.2 million in 2001, to $37.7 million in 2002. This
improvement is also the result of the elimination of
amortization of goodwill, which was $2.3 million in 2001.
Other administrative expenses increased $238,000, or 1%, to
$23.0 million in 2002, compared to $22.8 million in
2001. Salary and benefits and administrative expenses include
both corporate overhead and the holding company expenses
included in the reconciling items of the Companys segment
information.

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 Connecticut Insurance Company
(CSC) and HIH America Compensation & Liability
Company (HIH), and the remaining development related
to claims activity on the Companys automobile liability
line of business. CSC is a Connecticut domiciled insurance
company, which was seized by the Connecticut Insurance
Department, and HIH is a California domiciled insurance company,
which was seized by the California Department of

24



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Insurance. 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 a Florida-based agency. The
2000 results also reflected significant adverse development
related to the discontinued programs mentioned above.

Specialty
Risk Management Operations

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

|             |                                      |                                  |   |         |      |  |   |         |   |  |   |         |  
|------------ | ------------------------------------ | -------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|             |                                      |                                 
|             |                                      | For the Years Ended December 31, |  
|             |                                      |                                  |  
|             |                                      | 2002                             |   |         | 2001 |  |   | 2000    |  
|             |                                      |                                  |   |         |      |  |   |         |  
|Revenue:     |                                      |                                  |   |         |      |  |   |         |   |  |   |        
|             | Net earned premiums                  |                                  | $ | 145,383 |      |  | $ | 163,665 |   |  | $ | 146,000 |  
|             | Management fees                      |                                  |   | 23,736  |      |  |   | 25,471  |   |  |   | 24,519  |  
|             | Investment income                    |                                  |   | 13,906  |      |  |   | 14,177  |   |  |   | 13,664  |  
|             | Net realized gain on investments     |                                  |   | 666     |      |  |   | 735     |   |  |   | 540     |  
|             |                                      |                                  |   |         |      |  |   |         |  
|             | Total revenue                        |                                  | $ | 183,691 |      |  | $ | 204,048 |   |  | $ | 184,723 |  
|             |                                      |                                  |   |         |      |  |   |         |  
|Pre-tax loss |                                      |                                  |   |         |      |  |   |         |   |  |   |        
|             | Specialty risk management operations |                                  | $ | (1,081  | )    |  | $ | (7,624  | ) |  | $ | (24,289 | )

2002 compared to
2001:

Revenues from specialty risk management
operations decreased $20.3 million, or 10.0%, to
$183.7 million for the year ended December 31, 2002
from $204.0 million for the comparable period in 2001. This
decrease reflects an $18.3 million, or 11.2%, decrease in
net earned premiums to $145.4 million in the year ended
December 31, 2002 from $163.7 million in the
comparable period in 2001. This decrease is the result of a
reduction in earned premium of $16.8 million related to
programs discontinued in 1999 and a decrease of
$40.4 million related to programs terminated for leverage
ratio purposes. Offsetting this decrease is a $32.8 million
reduction in ceded earned premium associated with the
cancellation in 2002 of the surplus relief treaty relating to
several workers compensation programs and growth in
existing programs of $6.1 million, primarily due to rate
increases achieved in 2002 and 2001 and growth in policy counts.

Management fees decreased $1.7 million, or
6.8%, to $23.7 million from $25.5 million. This
decrease is the result of a one-time $1.6 million profit
sharing fee recognized in 2001 and a $1.6 decrease in fees for a
specific account for which the client moved the services
in-house. Offsetting this decrease was net growth in existing
programs of $1.4 million.

Net investment income decreased $271,000, or
1.9%, to $13.9 million for the year ended December 31,
2002 from $14.2 million for the comparable period in 2001.
This decrease reflects a decrease in the average yield to 5.37%
in 2002 from 5.98% in 2001. This decrease is offset by a
$23.0 million, or 9.7% increase in average invested assets,
from $236.9 million in 2001 to $259.9 million in 2002. The
increase in average invested assets reflects net assets invested
of $37.5 million from the proceeds received from the public
offering in June 2002.

Specialty risk management operations generated a
pre-tax loss of ($1.1) million for the year ended
December 31, 2002 compared to a pre-tax loss of
($7.6) million for the comparable period in 2001. The
Companys loss and loss adjustment expense ratio improved
by 9.0 points to 72.1% for the year ended December 31,
2002, from 81.1% for the comparable period in 2001. This
improvement reflects the impact of the discontinued programs, an
overall shift in the mix of business towards the workers
compensation line of business, which had an accident year loss
ratio of 67.4% in 2002 and represented 55.6% of net earned
premium

25



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

in 2002, compared to 42.4% of net earned premium
in 2001. Also contributing to the improvement was the impact of
rate increases achieved in 2002 and 2001 of 15.7% and 18.2%,
respectively.

For the year ended December 31, 2002, the
Company reported net adverse development on loss and LAE of
$6.1 million, or 3.1% of net loss and LAE reserves. The
adverse development reflected revisions in the estimated
reserves as a result of actual claims activity in calendar year
2002 that differed from the projected activity. There were no
significant changes in the key assumptions utilized in the
analysis and calculations of the Companys reserves during
2002. The major components of this development are as follows:

Continuing Programs:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The continuing programs contributed net favorable
    development of $515,000 on reserves of $79.9 million
    related to accident years 2001 and prior. This favorable
    development reflects better than expected claims activity on
    both workers compensation programs and liability
    occurrence programs that contributed $2.8 million, and
    $780,000, respectively to the net favorable development. As a
    result of reducing the number of outside third party
    administrators and by bringing the claims handling in-house, the
    Company was able to reduce reserves for claims handling by
    $1.5 million. These favorable results were partially offset
    by $2.3 million of adverse development in automobile
    liability, $908,000 in general liability, $1.1 million in
    claims made coverage for medical malpractice, and $344,000 in
    property exposures. The adverse development in these lines of
    business was the result of a higher level of actual claims
    activity than had been previously anticipated.

Discontinued and Terminated Programs:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The programs that were discontinued that had
    aggregate stop loss provisions, lack of risk sharing or proven
    actuarial experience, and the surety line of business accounted
    for $3.3 million of the adverse development on reserves of
    $33.3 million related to accident years 2001 and prior.
    This adverse development reflected higher than expected claims
    reported and paid in automobile liability of $1.5 million,
    $1.6 million in liability occurrence programs, and $291,000
    in workers compensation.                                              
|
| |  | The programs that were terminated in late 2000
    and in 2001 to reduce leverage ratios accounted for
    $3.3 million of the adverse development on reserves of
    $61.5 million related to accident years 2001 and prior.
    This adverse development primarily reflects higher than expected
    claims reported and paid in automobile liability of
    $1.4 million, $1.3 million in general liability, and
    $1.2 million in claims made liability. This adverse
    development was partially offset by favorable development on
    workers compensation programs of $861,000.

This increase in incurred losses on both
discontinued and terminated programs reflects a higher level of
reported and paid claims, as well as an increase in underlying
case reserves on discontinued business. Management believes the
increase in incurred losses, which includes both case and paid
losses, is the result of recent changes in claims management on
these programs that includes claim audits, centralization of
claims handling, and the aggressive closing of claim files.
These actions caused changes in payment and development patterns
which no longer follow the Companys historical or industry
development patterns. Traditional actuarial methods may be
causing these actions to be viewed as an indication of a need
for higher expected ultimate loss selections, rather than
stronger underlying case reserves or acceleration in the payment
and reported incurred patterns.

At December 31, 2002, the Company recorded
managements best estimate for the ultimate liability for
loss and LAE reserves, net of reinsurance recoverables, which
was $193.1 million. Reserves are reviewed by both internal
and independent actuaries for adequacy on a periodic basis. When
reviewing reserves, the Company analyzes historical data and
estimates the impact of various factors such as (i) per
claim information; (ii) Company and industry historical
loss experience; (iii) legislative enactments, judicial
decisions, legal developments in the imposition of damages, and
changes in political attitudes; and (iv) trends

26



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

in general economic conditions, including the
effects of inflation. This process assumes that past experience,
adjusted for the effects of current developments and anticipated
trends, is an appropriate basis for predicting future events.
There is not a precise method, however, for subsequently
evaluating the impact of any specific factor on the adequacy of
reserves because the eventual deficiency or redundancy is
affected by multiple factors.

Since 1995, the Companys calendar year
development on prior reserves ranged from favorable development
of 0.7% in 1995 to adverse development of 17.9% in 1999. Adverse
development during years ended December 31, 1998 through
December 31, 2002 averaged 11.7%. This unusually high level
of adverse development reflects the impact of isolated
deviations in the Companys business model. The deviations
included programs that lacked historical loss experience and/or
risk sharing and resulted in significant changes in the expected
loss ratios as the actual claims emerged. Furthermore, the use
of aggregate stop loss provisions, which also deviated from the
Companys business model, had an impact on reserve
development. In a program with an aggregate stop loss provision
the initial expected loss ratio used in program development and
the establishment of premium rates assumed that the projected
experience of the program would be below the aggregate
attachment point. Since the independent producer of the business
was compensated as a percentage of premium and had limited
financial risk for underwriting results, these programs
experienced rapid growth without meeting the Companys
historical underwriting guidelines. The initial reserves were
established based upon these initial expected loss ratios. As
claims started to be reported, it became apparent that the
expected loss ratios were too low and reserves were adjusted
accordingly. As frequency of losses continued to outpace
expectations and the aggregate attachment points were exceeded,
additional reserve strengthening became necessary. As previously
discussed, the Company took actions to discontinue these
programs starting in late 1999, and the premiums relating to
these programs were fully earned during the first half of 2002.
Furthermore, at December 31, 2002, the uncertainty of
future reserve development has been reduced as a result of
aggressive claims handling and reserve strengthening. As
previously discussed, during 2002, the Companys continuing
programs contributed favorable development of $515,000, or 0.6%
of reserves related to those programs. However, there can be no
certainty that there will not be additional losses in the future
associated with these programs.

The key assumptions used in managements
selection of ultimate reserves included the underlying actuarial
methodologies, a review of current pricing and underwriting
initiatives, an evaluation of reinsurance costs and retention
levels, and a detailed claims analysis with an emphasis on how
aggressive claims handling may be impacting the paid and
incurred loss data trends embedded in the traditional actuarial
methods. With respect to the ultimate estimates for losses and
LAE, the key assumptions remained consistent for the years ended
December 31, 2002, 2001, and 2000.

The Companys expense ratio was 36.5% for
the year ended December 31, 2002 compared to 36.0% for the
comparable period in 2001. Due to the run-off of discontinued
and terminated programs, gross premium is declining and, as a
result, fixed costs as a percentage of revenue have temporarily
increased the expense ratio.

2001
compared to 2000:

Revenues from specialty risk management
operations 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% 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 discontinued
programs. 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
were partially

27



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

offset by the reduction in 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 1.8% 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.

Specialty risk management operations 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 specialty risk management
operations. 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 automobile
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.

Agency Operations

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

|                |  |                                  |        |  |      |   |        |      |  |   |        | 
|--------------- |  | -------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                |  |                                 
|                |  | For the Years Ended December 31, |       
|                |  |                                  |       
|                |  | 2002                             |        |  | 2001 |   |        | 2000 | 
|                |  |                                  |        |  |      |   |        |      | 
|Net commission  |  | $                                | 14,330 |  |      | $ | 15,706 |      |  | $ | 17,234 | 
|Pre-tax income* |  | $                                | 6,131  |  |      | $ | 5,348  |      |  | $ | 4,115  | 



---



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



| |                       
| | ----------------------
| | 2002 compared to 2001:

Revenue from agency operations, which consists
primarily of agency commission revenue, decreased
$1.4 million, or 8.8%, to $14.3 million for the year
ended December 31, 2002 from $15.7 million for the
comparable period in 2001. This decrease reflects the sale of a
Florida-based agency, effective July 1, 2001. Excluding
revenue related to this agency for the twelve months ended
December 31, 2001, revenues for the agency operations would
have increased 4.6%.

Agency operations generated pre-tax income of
$6.1 million for the year ended December 31, 2002
compared to $5.3 million for the comparable period in 2001.
The improvement in the pre-tax margin is the result of rate
increases and overall expense reductions.



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

Revenue from agency operations 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 a
Florida-based agency effective, July 1, 2001. Excluding
revenue related to this agency for 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.

28



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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.

Other
Items

Taxes

Federal income tax expense for 2002 was $431,000,
or 20.7% of income before taxes. For 2001 and 2000, the Company
reflected a federal income tax benefit of $3.6 million and
$10.1 million, or 35.6%, and 36.7% of loss before taxes,
respectively. The Companys effective tax rate differs from
the 34% statutory rate primarily due to tax-exempt investment
income. Changes in the effective rate over prior periods are
related to changes in the proportion of tax-exempt investment
income to total underwriting results and elimination of goodwill
amortization.



Interest Expense

Interest expense for 2002, 2001, and 2000 was
$3.0 million, $4.5 million, and $5.1 million,
respectively. This interest expense relates primarily to the
Companys line of credit. The average debt outstanding was
approximately $44 million, $54 million, and
$51 million in 2002, 2001, and 2000, respectively. The
average interest rate was approximately 7%, 8%, and 9%, in 2002,
2001, and 2000, 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
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 $10.0 million
in 2002. These earnings were available for debt service,
including interest.

Cash flow provided by operations was
$1.8 million in 2002, compared to cash flow used in
operations of $2.8 million in 2001. Cash flow provided by
operations in 2000 was $24.0 million. The increase in cash
flow from operations, primarily reflects an increase in
earnings, acceleration of collections on reinsurance
recoverables, the cash receipt of $8.2 million associated
with the cancellation of the surplus relief treaty in 2002, and
increased collections on premium and agent receivable balances.
The decrease in cash flow in 2001 reflected 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 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.

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

29



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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

Also in 2002, the Company issued 825,000 stock
options at an exercise price of $3.507 to certain members of the
executive management team.

On September 25, 2002, the Company
successfully executed a revised credit agreement with its
existing bank. The revised agreement includes a $20.0 million
term loan and a revolving line of credit for up to
$8.0 million. The term loan calls for quarterly
amortization of the principal beginning on October 1, 2002
until July 1, 2006, at which time the term loan will be
paid in full. The quarterly amortization requires payments of
$1.2 million on October 1, 2002 and January 1,
2003; $1.0 million on April 1, 2003 and July 1,
2003; $1.5 million on October 1, 2003; and
$1.2 million for the remaining quarterly amortization
payments in 2004, 2005, and 2006, with a final payment of $1.5
million on July 1, 2006. The revolving line of credit will
expire on July 1, 2004, and is thereafter renewable on an
annual basis. At December 31, 2002, the Company had an
outstanding balance of $18.8 million and $5.3 million
on the term loan and revolving line of credit, respectively.

Pursuant to the terms of the loan agreement, the
Company made a principal payment of $1.2 million on
October 1, 2002. Subsequent to December 31, 2002, the
Company paid in full the amount outstanding on the revolving
line of credit. In addition, the Company paid the
$1.2 million principal payment due on January 1, 2003,
pursuant to the terms of the loan agreement.

Both the term loan and revolving line of credit
provide for interest at a variable rate based, at the
Companys option, upon either the prime rate or
eurocurrency rate. The applicable margin, which ranges from 200
to 300 basis points above eurocurrency rates, is determined
by the level of the fixed charge coverage ratio. The most
restrictive covenant is the fixed charge coverage ratio. The
fixed coverage ratio, as defined by the credit facility, is the
ratio of the non-regulated earnings before interest and taxes
for the four preceding fiscal quarters to the sum of fixed
charges which include interest expense, principal payments
payable, stock repurchases, and dividends declared during the
period. Any unused portion of the revolving credit as of the
date of determination reduces the sum of these fixed charges.
This ratio at December 31, 2002, was 2.9 to 1.0, compared
to the covenant minimum of 1.2 to 1.0.

As of December 31, 2002, the Company was in
compliance with all debt covenants.

A non-insurance premium finance subsidiary of the
Company maintains a line of credit with a bank, which permits
borrowings of up to 80% of the accounts receivable, which
collateralize the line of credit. The line will expire on
May 14, 2003. Management expects to renegotiate the line of
credit prior to its expiration. The line bears interest at the
Prime Rate, which was 4.25% and 4.75% at December 31, 2002
and 2001, respectively. At December 31, 2002 and 2001,
$4.9 million and $3.8 million, respectively, were
outstanding under this line of credit.

In addition, the Company had an outstanding
subordinated promissory note payable in the amount of
$3.5 million, due June 30, 2003, which bore interest
at a rate of 6.673% plus a Eurocurrency margin. As of
December 31, 2002, the Eurocurrency margin was 1.25%. On
January 14, 2003, the Company paid in full the
$3.5 million subordinated promissory note.

At December 31, 2002, one letter of credit
was open in the amount of $100,000 which was provided as
collateral for an insurance subsidiarys obligations under
a reinsurance agreement. There were no letters of credit open as
of December 31, 2001.

As of December 31, 2002 and 2001, the
recorded values of the Companys investment portfolio,
including cash and cash equivalents, were $286.1 million
and $233.7 million, respectively. The debt securities in the

30



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

investment portfolio, at December 31, 2002,
were 91.7% investment grade A or above bonds as defined by
Standard and Poors.

As a result of the Companys public
offering, shareholders equity increased to
$147.4 million, or a book value of $4.98 per common share,
at December 31, 2002 compared to $80.3 million, or a
book value of $9.44 per common share, at December 31,
2001.

On September 17, 2002, the Companys
Board of Directors authorized management to repurchase up to
1,000,000 shares of the Companys common stock in market
transactions for a period not to exceed twenty-four months. As
of December 31, 2002, the Company repurchased and retired
195,700 shares of common stock for a total cost of approximately
$455,000. As of March 20, 2003, the Company repurchased and
retired an additional 187,300 shares of common stock for a total
cost of approximately $448,000.

The Board of Directors of the Company did not
declare a dividend in 2002. The Board of Directors considers
whether a dividend will be declared based on a variety of
factors, including but not limited to, the Companys cash
flow, liquidity needs, results of operations and financial
condition. As a holding company, the ability to pay cash
dividends is partially dependent on dividends and other
permitted payments from its subsidiaries. The Company did not
receive any dividends from its regulated insurance subsidiaries
in 2002.

A significant portion of the Companys
consolidated assets represent assets of the Insurance Company
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 Company Subsidiaries is dictated by Michigan
insurance regulatory guidelines, which are as follows: The
maximum discretionary dividend that may be declared, based on
data from the preceding calendar year, is the greater of each
insurance companys net income (excluding realized capital
gains) or ten percent of the insurance companys surplus
(excluding unrealized gains). These dividends are further
limited by a clause in the Michigan law that prohibits an
insurer from declaring dividends except out of surplus earnings
of the company. Earned surplus balances are calculated on a
quarterly basis. Since Star is the parent insurance company, its
maximum dividend calculation represents the combined insurance
companies surplus. Based upon the 2002 statutory financial
statements, Star may only pay dividends to the Company during
2003 with the prior approval of Michigan Office of Financial and
Insurance Services (OFIS). Stars earned
surplus position at December 31, 2002 was negative
$24.3 million. No dividends were paid in 2002 or 2001.

The Insurance Company Subsidiaries are required
to maintain certain deposits with regulatory authorities, which
totaled $89.8 million at December 31, 2002, and
$71.9 million at December 31, 2001.

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 3.0 to 1 and 2.0 to 1, respectively. As
previously indicated, the Company contributed $37.5 million
to the surplus of Star during the second quarter of 2002. The
premium leverage ratios as of December 31, 2002, on a
statutory consolidated basis, were 2.0 to 1 and 1.5 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

31



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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, 2002, all of the Insurance
Company Subsidiaries were in compliance with RBC requirements.
Star reported statutory surplus of $93.8 million and
$51.6 million at December 31, 2002 and 2001,
respectively. The calculated RBC was $24.8 million in 2002
and $29.7 million in 2001. The threshold requiring the
minimum regulatory involvement was $49.7 in 2002 and
$59.5 million in 2001.

The 2001 RBC ratio for Star was within Company
Action Level and the Company was required to submit a Business
Plan to OFIS outlining how it intended to achieve compliance.
The Business Plan was approved by OFIS. The Company complied
with the Business Plan when it sold 21,275,000 shares of newly
issued common stock at $3.10 per share in a public offering in
June 2002. Of the $60.5 million in total net proceeds,
$37.5 million was contributed to the surplus of Star as of
June 30, 2002. As a result, at December 31, 2002, each
of the Insurance Company Subsidiaries RBC is above the
minimum threshold requirement.

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 twelve industry
ratios and specifies usual values for each ratio.
Departure from the usual values on four or more ratios generally
leads to inquiries or possible further review from individual
state insurance commissioners.

32



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

In 2002, the Insurance Company Subsidiaries
generated certain ratios that varied from the usual
value range. The variations and reasons for these
variations are set forth below:

|                                                |  |               |            |  |       |      |     |      
|----------------------------------------------- |  | ------------- | ---------- |  | ----- | ---- | --- | -----
|Ratio                                           |  | Usual Range   |            |  | Value |     
|                                                |  |               |            |  |       |     
|Company: Star                                   |  |               |            |  |       |      |     |      
|Change in Net Writings                          |  | <33% or >33% |            |  | 35   | %(1)
|Two-year Overall Operating Ratio                |  |               | Under 100% |  |       |      | 102 | %(2) 
|Liabilities to Liquid Assets                    |  |               | Under 105% |  |       |      | 116 | %(3) 
|Investment Yield                                |  | <10% or >4.5% |            |  | 4.4   | %(4)
|Change in Policyholders Surplus                |  | <50% or >10% |            |  | 66    | %(5)
|Two-year Reserve Development to Surplus         |  |               | Under 20%  |  |       |      | 24  | %(6) 
|Company: Williamsburg                           |  |               |            |  |       |      |     |      
|Change in Net Writings                          |  | <33% or >33% |            |  | 188   | %(7)
|Two-year Overall Operating Ratio                |  |               | Under 100% |  |       |      | 119 | %(8) 
|Company: Ameritrust                             |  |               |            |  |       |      |     |      
|Change in Net Writings                          |  | <33% or >33% |            |  | 66    | %(9)
|Estimated Current Reserve Deficiency to Surplus |  |               | Under 25%  |  |       |      | 39  | %(10)



---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The reduction in Stars net written premium
    reflects the termination of unprofitable business, specifically
    in the commercial automobile line of business. As part of the
    plan to reduce both gross and net leverage ratios, the Company
    cancelled two large commercial automobile programs effective
    December 31, 2001. Excluding these items, Stars
    Change in Net Writings ratio would have been within the usual
    range at -7.7%.
|
| | (2) | The overall operating ratio in 2002 was 99%.
    While this was an improvement from the overall operating ratio
    for 2001 of 103%, the Two-year Overall Operating Ratio was
    slightly above the usual range. The improvement in the 2002
    ratio was a result of rate increases obtained and the run-off of
    unprofitable discontinued programs.                                                                                                     
|
| | (3) | While this ratio showed improvement from 151% at
    2001 to 116% at 2002, it continues to be negatively impacted by
    the exclusion of the value of affiliated common stocks, as the
    value of affiliated common stocks is not considered in the ratio.                                                                                                                                                                                                   
|
| | (4) | Statutory net investment income was lower in 2002
    due to an $8.2 million decrease in shareholder dividends
    from subsidiaries. Dividends from subsidiaries totaled
    $1.8 million in 2002, compared to $10.0 million in
    2001. Investment yield was also lower in 2002 due to lower yield
    rates on securities overall.                                                                                                                          
|
| | (5) | Change in Policyholders Surplus was
    favorably impacted by the Companys public offering of
    newly issued shares of common stock in June 2002. Of the
    $60.5 million in total net proceeds, $37.5 million was
    contributed to the surplus of Star as of June 2002.                                                                                                                                                                                 
|
| | (6) | The Two-year Reserve Development to Surplus Ratio
    reflects development in 2001 on unprofitable programs, which
    have been discontinued. Excluding the 2001 adverse development
    on discontinued programs, the ratio would have been within the
    usual range at 9%.                                                                                                                                                                                 
|
| | (7) | The growth in the net written premium on
    Williamsburg was high for the year primarily due to three
    growing programs: one workers compensation and two general
    liability programs. These programs generated $1,469,000 of the
    total $1,643,000 increase in net written premium for 2002,
    creating the high ratio for the year.                                                                                                              
|
| | (8) | The primary factor contributing to the high value
    of the Two-Year Overall Operating Ratio was incurred loss
    development and a net increase in expenses related to
    discontinued business. Excluding discontinued                                                                                                                                                                                                                                     

33



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued



| |     |                                                                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | business, Williamsburgs Two-Year Overall
    Operating Ratio would have been within the usual range
    at 79%.                                                                                                                   
|
| | (9) | This ratio was impacted by the cancellation of a
    surplus relief reinsurance treaty. Excluding the effect of the
    cancellation of this treaty, the Change in Net Writings would
    have been within the usual range at -27%.



|     |                                                                                                                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | The Estimated Current Reserve Deficiency to
    Policyholders Surplus was also impacted by the
    cancellation of the surplus relief reinsurance treaty. Excluding
    the effect of the cancellation of this treaty, the Estimated
    Current Reserve Deficiency to Policyholders Surplus would
    have been within the acceptable range at -28%.

On June 26, 2002, A.M. Best upgraded the
Insurance Company Subsidiaries financial strength rating to a
B+ (Very Good) with a positive outlook. A positive
outlook is placed on a companys rating if its financial
and market trends are favorable, relative to its current rating
level. The upgrade reflects A.M. Bests positive assessment
of the Companys improved financial condition as a result
of the issuance of new common shares and its debt reduction.
However, there can be no assurance that A.M. Best will not
change its rating of the Insurance Company Subsidiaries in the
future.

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 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 (other than client captive quota-share reinsurers) as
of December 31, 2002:

|                                    |  |                           |       |  |                         |   |       |           |  |  |     | 
|----------------------------------- |  | ------------------------- | ----- |  | ----------------------- | - | ----- | --------- |  |  | --- | 
|                                    |  | Reinsurance Premium Ceded |       |  | Reinsurance Recoverable |   |       | A.M. Best | 
|Reinsurer                           |  | December 31, 2002         |       |  | December 31, 2002       |   |       | Rating    | 
|                                    |  |                           |       |  |                         |   |       |           | 
|                                    |  | (In thousands)            |       |  | (In thousands)          |   |       |          
|Accident Fund Company of Michigan   |  | $                         | 5,515 |  |                         | $ | 4,118 |           |  |  | A   | 
|General Reinsurance Company         |  |                           | 3,037 |  |                         |   | 937   |           |  |  | A++ | 
|American National Insurance Company |  |                           | 2,601 |  |                         |   |      |           |  |  | A+  | 
|Lloyds Syndicate #227               |  |                           | 1,579 |  |                         |   | 9,812 |           |  |  | Ag  | 
|XL Reinsurance America              |  |                           | 1,417 |  |                         |   | 3,729 |           |  |  | 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, 2002, the Company had

34



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

risk exposure in excess of collateral in the
amount of $11.6 million on these programs, of which the
Company has an allowance of $6.8 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 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, 2002, the Company
adopted SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142, for periods starting
December 15, 2001 or thereafter, eliminates the
amortization of goodwill. In addition, the Company is required
to test, at least annually, all existing goodwill for impairment
using a fair value approach, on a reporting unit basis. Also
pursuant to SFAS No. 142, the Company is required to test
for impairment more frequently if events or changes in
circumstances indicate that the asset might be impaired. Upon
implementation of SFAS No. 142 in 2002, the Company is no
longer amortizing goodwill. Net income would have increased by
$1,561,000 and $1,942,000 in 2001 and 2000, respectively, if the
amortization of goodwill had ceased as of January 1, 2000.

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

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

Recent Developments

On March 14, 2003, the Company reported that
Joseph C. Henry, Executive Vice President, Chief Operating
Officer, and Acting Chief Financial Officer, is leaving the
Company. Karen M. Spaun, the Companys Chief
Accounting Officer, has been named Acting Chief Financial
Officer. Gregory L. Wilde, Senior Vice President of the
Companys branch operations, has assumed additional
corporate and operational responsibilities and will be appointed
President of Insurance Company Subsidiaries.

35



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Safe Harbor

This Form 10-K may provide information
including certain statements which constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These include
statements regarding the intent, belief, or current expectations
of the Companys management, including, but not limited to,
those statements that use the words believes,
expects, anticipates,
estimates, or similar expressions. You are cautioned
that any such forward-looking statements are not guarantees of
future performance and involve a number of risks and
uncertainties, and results could differ materially from those
indicated by such forward-looking statements. Among the
important factors that could cause actual results to differ
materially from those indicated by such forward-looking
statements are: the frequency and severity of claims;
uncertainties inherent in reserve estimates; catastrophic
events; a change in the demand for, pricing of, availability or
collectibility of reinsurance; increased rate pressure on
premiums; obtainment of certain rate increases in current market
conditions; investment rate of return; changes in and adherence
to insurance regulation; actions taken by regulators, rating
agencies or lenders; obtainment of certain processing
efficiencies; changing rates of inflation; general economic
conditions and other risks identified in the Companys
reports and registration statements filed with the Securities
and Exchange Commission. The Company is not under any obligation
to (and expressly disclaims any such obligation to) update or
alter its forward-looking statements whether as a result of new
information, future events or otherwise.

36



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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, 2002. The Companys market risk sensitive
instruments are primarily related to fixed income 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, 2002, the fair value of the
Companys investment portfolio was $246.7 million,
99.3% of which is invested in debt securities. The remaining
0.7% is invested in preferred stocks. The Companys market
risk to the investment portfolio is interest rate risk
associated with debt securities. The Companys exposure to
equity price risk is not significant. The Companys
investment philosophy is one of maximizing after-tax earnings
and has historically included significant investments in
tax-exempt bonds. During the year, the Company continued to
increase its allocation to taxable securities to maximize
after-tax income and 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, 2001. The Company does not
anticipate significant changes in the Companys primary
market risk exposures or in how those exposures are managed in
future reporting periods based upon what is known or expected to
be in effect.

A sensitivity analysis is defined as the
measurement of potential loss in future earnings, fair values or
cash flows of market sensitive instruments resulting from one or
more selected hypothetical changes in interest rates and other
market rates or prices over a selected period. In the
Companys sensitivity analysis model, a hypothetical change
in market rates is selected that is expected to reflect
reasonable possible near-term changes in those rates. The term
near term means a period of up to one year from the
date of the consolidated financial statements. In its
sensitivity model, the Company uses fair values to measure its
potential loss of debt securities assuming an upward parallel
shift in interest rates to measure the hypothetical change in
fair values. Based upon this sensitivity model, a 100 basis
point increase in interest rates produces a loss in fair value
of market sensitive instruments of approximately
$7.5 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
3.3% 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 18 on page 62 of the notes to the
consolidated financial statements.

Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

None

37



---



##### 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 19,
2003, 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 19,
2003, 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 19, 2003, 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 19,
2003, which is hereby incorporated by reference.

Item 14.     Controls
and Procedures

Within 90 days prior to the date of this
report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including the Chief Executive Officer and Acting
Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon that
evaluation, the Companys Chief Executive Officer and
Acting Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective to ensure that
all material information relating to the Company (including its
consolidated subsidiaries) required to be included in this
annual report has been made known in a timely manner. There have
been no significant changes in the Companys internal
controls or in other factors that could significantly affect
these internal controls subsequent to the date of the most
recent evaluation by the Companys Chief Executive Officer
and Acting Chief Financial Officer.

38



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






PART IV




|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | 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                                                                                                                                                                       |  |      | 40    | 
|   |  | Consolidated Balance Sheet 
    December 31, 2002 and 2001                                                                                                                                                                             |  |      | 41    | 
|   |  | Consolidated Statement of Income  For
    Years Ended December 31, 2002, 2001, and 2000                                                                                                                                                |  |      | 42    | 
|   |  | Consolidated Statement of Comprehensive
    Income  For Years Ended December 31, 2002, 2001,
    and 2000                                                                                                                              |  |      | 43    | 
|   |  | Consolidated Statement of Shareholders
    Equity  For Years Ended December 31, 2002, 2001,
    and 2000                                                                                                                              |  |      | 44    | 
|   |  | Consolidated Statement of Cash Flows 
    For Years Ended December 31, 2002, 2001, and 2000                                                                                                                                            |  |      | 45    | 
|   |  | Notes to Consolidated Financial Statements                                                                                                                                                                                              |  |      | 46-69 | 
|2. |  | Financial Statement Schedule                                                                                                                                                                                                            |  |      |       | 
|   |  | Schedule I Summary of Investments Other Than
    Investments in Related Parties                                                                                                                                                         |  |      | 72    | 
|   |  | Schedule II Condensed Financial Information
    of Registrant                                                                                                                                                                           |  |      | 73-76 | 
|   |  | Schedule III Supplementary Insurance
    Information                                                                                                                                                                                    |  |      | 77-79 | 
|   |  | Schedule IV Reinsurance                                                                                                                                                                                                                 |  |      | 80    | 
|   |  | Schedule V Valuation and qualifying accounts                                                                                                                                                                                            |  |      | 81    | 
|   |  | Schedule VI Supplemental Information
    Concerning Property and Casualty Insurance Operations                                                                                                                                          |  |      | 82    | 
|   |  | 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

The Registrant filed a Current Report on
Form 8-K on October 1, 2002, announcing the execution
of a revised credit facility with its existing bank. A copy of
the credit agreement was included by exhibit.

39



---



##### 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 15(a)(1) present fairly, in all material respects, the
financial position of Meadowbrook Insurance Group, Inc. (the
Company) at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 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 15(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 Note 11 to the consolidated
financial statements, the Company changed its method of
accounting for goodwill in conformity with Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets which was adopted as of
January 1, 2002.

LOGO

Grand Rapids, Michigan

February 23, 2003


40



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED BALANCE SHEET


|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |         |   |         |         |         | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                         |                                                                                                                                |                                                                                                                                                  
|                                         |                                                                                                                                | December 31,                                                                                                                                      |                                           
|                                         |                                                                                                                                |                                                                                                                                                   |                                           
|                                         |                                                                                                                                | 2002                                                                                                                                              |                                            |         | 2001    |        
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                |                                                                                                                                                  
|                                         |                                                                                                                                | (In thousands, except                                                                                                                             |                                           
|                                         |                                                                                                                                | share data)                                                                                                                                       |                                           
|ASSETS                                  
|Investments                              |                                                                                                                                |                                                                                                                                                   |                                            |         |         |         |   |        
|                                         | Debt securities available for sale, at fair value
    (cost of $231,876 and $193,020 in 2002 and 2001, respectively)           |                                                                                                                                                   | $                                          | 244,861 |         |         | $ | 197,634 |        
|                                         | Equity securities available for sale, at fair
    value (cost of $1,980 and $2,757 in 2002 and 2001, respectively)             |                                                                                                                                                   |                                            | 1,804   |         |         |   | 2,787   |        
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                |                                                                                                                                                   | Total investments                          |         |         | 246,665 |   |         |         | 200,421 | 
|                                         | Cash and cash equivalents                                                                                                      |                                                                                                                                                   |                                            | 39,385  |         |         |   | 33,302  |        
|                                         | Accrued investment income                                                                                                      |                                                                                                                                                   |                                            | 2,800   |         |         |   | 2,577   |        
|                                         | Premiums and agent balances receivable (net of
    allowance of $4,747 and $4,932 in 2002 and 2001, respectively)              |                                                                                                                                                   |                                            | 71,420  |         |         |   | 78,171  |        
|                                         | Reinsurance recoverable on:                                                                                                    |                                                                                                                                                   |                                            |         |         |         |   |         |        
|                                         |                                                                                                                                | Paid losses                                                                                                                                       |                                            |         | 20,396  |         |   |         | 26,515  |        
|                                         |                                                                                                                                | Unpaid losses                                                                                                                                     |                                            |         | 181,817 |         |   |         | 195,943 |        
|                                         | Prepaid reinsurance premiums                                                                                                   |                                                                                                                                                   |                                            | 18,115  |         |         |   | 37,852  |        
|                                         | Deferred policy acquisition costs                                                                                              |                                                                                                                                                   |                                            | 12,140  |         |         |   | 13,953  |        
|                                         | Deferred federal income taxes                                                                                                  |                                                                                                                                                   |                                            | 19,099  |         |         |   | 24,506  |        
|                                         | Goodwill                                                                                                                       |                                                                                                                                                   |                                            | 28,997  |         |         |   | 28,997  |        
|                                         | Other assets                                                                                                                   |                                                                                                                                                   |                                            | 34,005  |         |         |   | 45,651  |        
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                |                                                                                                                                                   | Total assets                               |         | $       | 674,839 |   |         | $       | 687,888 | 
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Liabilities                              |                                                                                                                                |                                                                                                                                                   |                                            |         |         |         |   |        
|                                         | Losses and loss adjustment expenses                                                                                            |                                                                                                                                                   | $                                          | 374,933 |         |         | $ | 394,596 |        
|                                         | Unearned premiums                                                                                                              |                                                                                                                                                   |                                            | 68,678  |         |         |   | 94,002  |        
|                                         | Debt                                                                                                                           |                                                                                                                                                   |                                            | 32,497  |         |         |   | 54,741  |        
|                                         | Accounts payable and accrued expenses                                                                                          |                                                                                                                                                   |                                            | 18,665  |         |         |   | 22,185  |        
|                                         | Reinsurance funds held and balances payable                                                                                    |                                                                                                                                                   |                                            | 16,199  |         |         |   | 26,887  |        
|                                         | Payable to insurance companies                                                                                                 |                                                                                                                                                   |                                            | 8,358   |         |         |   | 5,840   |        
|                                         | Other liabilities                                                                                                              |                                                                                                                                                   |                                            | 8,114   |         |         |   | 9,321   |        
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                |                                                                                                                                                   | Total liabilities                          |         |         | 527,444 |   |         |         | 607,572 | 
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        
|Commitments and contingencies (note 13)  |                                                                                                                                |                                                                                                                                                   |                                            |         |         |         |   |        
|Shareholders Equity                     |                                                                                                                                |                                                                                                                                                   |                                            |         |         |         |   |        
|                                         | Common stock, $0.01 stated value; authorized
    50,000,000 shares; 29,591,494 and 8,512,194 shares issued and
    outstanding |                                                                                                                                                   |                                            | 296     |         |         |   | 85      |        
|                                         | Additional paid-in capital                                                                                                     |                                                                                                                                                   |                                            | 127,429 |         |         |   | 67,948  |        
|                                         | Retained earnings                                                                                                              |                                                                                                                                                   |                                            | 12,073  |         |         |   | 10,034  |        
|                                         | Note receivable from officer                                                                                                   |                                                                                                                                                   |                                            | (876    | )       |         |   | (824    | )      
|                                         | Accumulated other comprehensive income:                                                                                        |                                                                                                                                                   |                                            |         |         |         |   |         |        
|                                         |                                                                                                                                | Unrealized appreciation on available for sale
    securities, net of deferred tax expense of $4,336 and $1,571 in
    2002 and 2001, respectively |                                            |         | 8,473   |         |   |         | 3,073   |        
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                |                                                                                                                                                   | Total shareholders equity                 |         |         | 147,395 |   |         |         | 80,316  | 
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                |                                                                                                                                                   | Total liabilities and shareholders equity |         | $       | 674,839 |   |         | $       | 687,888 | 
|                                         |                                                                                                                                |                                                                                                                                                   |                                            |         |         |        

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

41



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF INCOME


|                                         |                                                    |                                       |                            |         |         |            |  |          |          |           |   |          |          |           |  
|---------------------------------------- | -------------------------------------------------- | ------------------------------------- | -------------------------- | ------- | ------- | ---------- |  | -------- | -------- | --------- | - | -------- | -------- | --------- | -
|                                         |                                                    |                                      
|                                         |                                                    | For the Years Ended December 31,      |                           
|                                         |                                                    |                                       |                           
|                                         |                                                    | 2002                                  |                            |         | 2001    |            |  | 2000     |         
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|                                         |                                                    |                                      
|                                         |                                                    | (In thousands, except per share data) |                           
|Revenues                                 |                                                    |                                       |                            |         |         |            |  |          |          |           |   |         
|                                         | Premiums earned                                    |                                       |                            |         |         |            |  |          |          |           |   |          |         
|                                         |                                                    | Gross                                 |                            | $       | 208,961 |            |  | $        | 293,650  |           |   | $        | 310,697  |          
|                                         |                                                    | Ceded                                 |                            |         | (63,578 | )          |  |          | (129,985 | )         |   |          | (164,697 | )        
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|                                         | Net earned                                         |                                       |                            | 145,383 |         |            |  | 163,665  |          |           |   | 146,000  |         
|                                         | Net commissions and fees                           |                                       |                            | 37,581  |         |            |  | 40,675   |          |           |   | 41,251   |         
|                                         | Net investment income                              |                                       |                            | 13,958  |         |            |  | 14,228   |          |           |   | 13,715   |         
|                                         | Net realized gains on disposition of investments   |                                       |                            | 666     |         |            |  | 735      |          |           |   | 540      |         
|                                         | Gain (loss) on sale of subsidiary                  |                                       |                            | 199     |         |            |  | (1,097   | )        |           |   |         |         
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|                                         |                                                    |                                       | Total revenues             |         |         | 197,787    |  |          |          | 218,206   |   |          |          | 201,506   |  
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|Expenses                                 |                                                    |                                       |                            |         |         |            |  |          |          |           |   |         
|                                         | Losses and loss adjustment expenses                |                                       |                            | 171,226 |         |            |  | 247,122  |          |           |   | 289,588  |         
|                                         | Reinsurance recoveries                             |                                       |                            | (72,492 | )       |            |  | (121,939 | )        |           |   | (161,969 | )       
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|                                         | Net losses and loss adjustment expenses            |                                       |                            | 98,734  |         |            |  | 125,183  |          |           |   | 127,619  |         
|                                         | Salaries and employee benefits                     |                                       |                            | 37,659  |         |            |  | 44,179   |          |           |   | 43,038   |         
|                                         | Policy acquisition and other underwriting expenses |                                       |                            | 33,635  |         |            |  | 31,662   |          |           |   | 25,422   |         
|                                         | Other operating expenses                           |                                       |                            | 23,016  |         |            |  | 22,778   |          |           |   | 27,894   |         
|                                         | Interest on notes payable                          |                                       |                            | 3,021   |         |            |  | 4,516    |          |           |   | 5,135    |         
|                                         | Gain on debt reduction                             |                                       |                            | (359    | )       |            |  |         |          |           |   |         |         
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|                                         |                                                    |                                       | Total expenses             |         |         | 195,706    |  |          |          | 228,318   |   |          |          | 229,108   |  
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|                                         |                                                    |                                       | Income (loss) before taxes |         |         | 2,081      |  |          |          | (10,112   | ) |          |          | (27,602   | )
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|                                         | Federal income tax expense (benefit)               |                                       |                            | 431     |         |            |  | (3,602   | )        |           |   | (10,129  | )       
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|                                         |                                                    |                                       | Net income (loss)          |         | $       | 1,650      |  |          | $        | (6,510    | ) |          | $        | (17,473   | )
|                                         |                                                    |                                       |                            |         |         |            |  |          |         
|Earnings Per Share                       |                                                    |                                       |                            |         |         |            |  |          |          |           |   |         
|                                         | Basic                                              |                                       |                            |         |         |            |  |          |          |           |   |          |         
|                                         |                                                    |                                       | Net income (loss)          |         | $       | 0.08       |  |          | $        | (0.76     | ) |          | $        | (2.05     | )
|                                         | Diluted                                            |                                       |                            |         |         |            |  |          |          |           |   |          |         
|                                         |                                                    |                                       | Net income (loss)          |         | $       | 0.08       |  |          | $        | (0.76     | ) |          | $        | (2.05     | )
|Weighted average number of common shares |                                                    |                                       |                            |         |         |            |  |          |          |           |   |         
|                                         |                                                    |                                       | Basic                      |         |         | 20,543,878 |  |          |          | 8,512,186 |   |          |          | 8,511,834 |  
|                                         |                                                    |                                       | Diluted                    |         |         | 20,543,878 |  |          |          | 8,512,186 |   |          |          | 8,511,834 |  

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

42



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME


|                  |                                         |                                                                         |       |       |       |   |        |        |        |   |         |         |       |  
|----------------- | --------------------------------------- | ----------------------------------------------------------------------- | ----- | ----- | ----- | - | ------ | ------ | ------ | - | ------- | ------- | ----- | -
|                  |                                         |                                                                        
|                  |                                         | For the Years Ended December 31,                                        |      
|                  |                                         |                                                                         |      
|                  |                                         | 2002                                                                    |       |       | 2001  |   |        | 2000   |       
|                  |                                         |                                                                         |       |       |       |   |        |        |       
|                  |                                         |                                                                        
|                  |                                         | (In thousands)                                                          |      
|Net income (loss) |                                         | $                                                                       | 1,650 |       |       | $ | (6,510 | )      |        | $ | (17,473 | )      
|                  | Other comprehensive income, net of tax: |                                                                         |       |       |       |   |        |        |        |   |         |         |      
|                  |                                         | Unrealized gains on securities                                          |       |       | 5,889 |   |        |        | 2,979  |   |         |         | 4,454 |  
|                  |                                         | Less: reclassification adjustment for losses
    included in net income |       |       | (489  | ) |        |        | (1,331 | ) |         |         | (356  | )
|                  |                                         |                                                                         |       |       |       |   |        |        |       
|                  | Other comprehensive income              |                                                                         |       | 5,400 |       |   |        | 1,648  |        |   |         | 4,098   |      
|                  |                                         |                                                                         |       |       |       |   |        |        |       
|                  | Comprehensive income (loss)             |                                                                         | $     | 7,050 |       |   | $      | (4,862 | )      |   | $       | (13,375 | )    
|                  |                                         |                                                                         |       |       |       |   |        |        |       

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

43



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY


|                                                             |  |                                                       |     |             |         |   |         |          |      |   |              |       |  |               |       |   |               |   |        |   |  |   |         |  
|------------------------------------------------------------ |  | ----------------------------------------------------- | --- | ----------- | ------- | - | ------- | -------- | ---- | - | ------------ | ----- |  | ------------- | ----- | - | ------------- | - | ------ | - |  | - | ------- | -
|                                                             |  |                                                      
|                                                             |  | For the Years ended December 31, 2002, 2001, and 2000 |    
|                                                             |  |                                                       |    
|                                                             |  |                                                       |     | Accumulated |         |   |        
|                                                             |  |                                                       |     | Additional  |         |   |         |          | Note |   |              | Other |  |               | Total |  
|                                                             |  | Common                                                |     |             | Paid-In |   |         | Retained |      |   | Receivable   |       |  | Comprehensive |       |   | Shareholders |  
|                                                             |  | Stock                                                 |     |             | Capital |   |         | Earnings |      |   | from Officer |       |  | Income        |       |   | Equity        |  
|                                                             |  |                                                       |     |             |         |   |         |          |      |   |              |       |  |               |       |   |               |  
|                                                             |  |                                                      
|                                                             |  | (In thousands)                                        |    
|Balances January 1, 2000                                     |  | $                                                     | 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 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  |  
|Unrealized appreciation on available for sale
    securities |  |                                                       |    |             |         |   |        |          |      |   |             |       |  |               |      |   |               |   | 5,400  |   |  |   | 5,400   |  
|Issuance of 21,275,000 shares of common stock
    (net)      |  |                                                       | 213 |             |         |   | 60,303  |          |      |   |             |       |  |               |      |   |               |   |       |   |  |   | 60,516  |  
|Retirement of 195,700 shares of common stock                 |  |                                                       | (2  | )           |         |   | (822    | )        |      |   | 389          |       |  |               |      |   |               |   |       |   |  |   | (435    | )
|Note receivable from an officer                              |  |                                                       |    |             |         |   |        |          |      |   |             |       |  |               | (52   | ) |               |   |       |   |  |   | (52     | )
|Net income                                                   |  |                                                       |    |             |         |   |        |          |      |   | 1,650        |       |  |               |      |   |               |   |       |   |  |   | 1,650   |  
|                                                             |  |                                                       |     |             |         |   |         |          |      |   |              |       |  |               |       |   |               |  
|Balances December 31, 2002                                   |  | $                                                     | 296 |             |         | $ | 127,429 |          |      | $ | 12,073       |       |  | $             | (876  | ) |               | $ | 8,473  |   |  | $ | 147,395 |  
|                                                             |  |                                                       |     |             |         |   |         |          |      |   |              |       |  |               |       |   |               |  

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

44



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF CASH FLOWS


|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |          |         |   |         |         |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------- | ------------------------------------------------------- | ----- | -------- | ------- | - | ------ | -------- | ------- | - | ------- | ------- | ------ | -
|                                                                            |                                                                                                        |                                                                             
|                                                                            |                                                                                                        | For the Years Ended December 31,                                             |                                                        
|                                                                            |                                                                                                        |                                                                              |                                                        
|                                                                            |                                                                                                        | 2002                                                                         |                                                         |       | 2001     |         |   | 2000   |         
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|                                                                            |                                                                                                        |                                                                             
|                                                                            |                                                                                                        | (In thousands)                                                               |                                                        
|Cash Flows From Operating Activities                                        |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |          |         |   |        
|                                                                            | Net income (loss)                                                                                      |                                                                              | $                                                       | 1,650 |          |         | $ | (6,510 | )        |         | $ | (17,473 | )      
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|                                                                            | Adjustments to reconcile net income (loss) to net
    cash (used in) provided by operating activities: |                                                                              |                                                         |       |          |         |   |        |          |         |   |         |        
|                                                                            |                                                                                                        | Amortization of goodwill and other intangible
    assets                     |                                                         |       | 15       |         |   |        | 2,336    |         |   |         | 2,097   |       
|                                                                            |                                                                                                        | Depreciation of furniture and equipment                                      |                                                         |       | 2,408    |         |   |        | 2,785    |         |   |         | 3,134   |       
|                                                                            |                                                                                                        | Net accretion of discount on bonds                                           |                                                         |       | 700      |         |   |        | 26       |         |   |         | (59     | )     
|                                                                            |                                                                                                        | Gain on sale of investments                                                  |                                                         |       | (741     | )       |   |        | (2,017   | )       |   |         | (540    | )     
|                                                                            |                                                                                                        | Gain on debt reduction                                                       |                                                         |       | (359     | )       |   |        |         |         |   |         |        |       
|                                                                            |                                                                                                        | Deferred income tax expense (benefit)                                        |                                                         |       | 2,642    |         |   |        | (3,633   | )       |   |         | (9,075  | )     
|                                                                            | Changes in operating assets and liabilities:                                                           |                                                                              |                                                         |       |          |         |   |        |          |         |   |         |        
|                                                                            | Decrease (increase) in:                                                                                |                                                                              |                                                         |       |          |         |   |        |          |         |   |         |        
|                                                                            |                                                                                                        | Premiums and agent balances receivable                                       |                                                         |       | 6,750    |         |   |        | 951      |         |   |         | 6,586   |       
|                                                                            |                                                                                                        | Reinsurance recoverable on paid and unpaid losses                            |                                                         |       | 20,245   |         |   |        | (37,071  | )       |   |         | (69,592 | )     
|                                                                            |                                                                                                        | Prepaid reinsurance premiums                                                 |                                                         |       | 19,736   |         |   |        | 18,002   |         |   |         | (13,781 | )     
|                                                                            |                                                                                                        | Deferred policy acquisition costs                                            |                                                         |       | 1,813    |         |   |        | (7,329   | )       |   |         | 3,406   |       
|                                                                            |                                                                                                        | Other assets                                                                 |                                                         |       | 5,640    |         |   |        | (546     | )       |   |         | (9,238  | )     
|                                                                            | Increase (decrease) in:                                                                                |                                                                              |                                                         |       |          |         |   |        |          |         |   |         |        
|                                                                            |                                                                                                        | Losses and loss adjustment expenses                                          |                                                         |       | (19,663  | )       |   |        | 52,772   |         |   |         | 112,580 |       
|                                                                            |                                                                                                        | Unearned premiums                                                            |                                                         |       | (25,324  | )       |   |        | (140     | )       |   |         | 4,047   |       
|                                                                            |                                                                                                        | Payable to insurance companies                                               |                                                         |       | 2,518    |         |   |        | (13,286  | )       |   |         | (4,606  | )     
|                                                                            |                                                                                                        | Reinsurance funds held and balances payable                                  |                                                         |       | (10,688  | )       |   |        | (11,284  | )       |   |         | 8,600   |       
|                                                                            |                                                                                                        | Other liabilities                                                            |                                                         |       | (5,559   | )       |   |        | 2,167    |         |   |         | 7,895   |       
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|                                                                            |                                                                                                        |                                                                              | Total Adjustments                                       |       |          | 133     |   |        |          | 3,733   |   |         |         | 41,454 |  
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|                                                                            |                                                                                                        | Net cash provided by (used in) operating
    activities                      |                                                         |       | 1,783    |         |   |        | (2,777   | )       |   |         | 23,981  |       
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|Cash Flows From Investing Activities                                        |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |          |         |   |        
|                                                                            |                                                                                                        | Purchase of equity securities available for sale                             |                                                         |       |         |         |   |        | (450     | )       |   |         | (236    | )     
|                                                                            |                                                                                                        | Purchase of debt securities available for sale                               |                                                         |       | (162,327 | )       |   |        | (110,906 | )       |   |         | (68,486 | )     
|                                                                            |                                                                                                        | Proceeds from sale of equity securities available
    for sale               |                                                         |       | 900      |         |   |        | 15,189   |         |   |         | 1,049   |       
|                                                                            |                                                                                                        | Proceeds from sales and maturities of debt
    securities available for sale |                                                         |       | 123,416  |         |   |        | 83,510   |         |   |         | 92,985  |       
|                                                                            |                                                                                                        | Capital expenditures                                                         |                                                         |       | (658     | )       |   |        | (1,381   | )       |   |         | (3,043  | )     
|                                                                            |                                                                                                        | Purchase of agency business and investments in
    subsidiaries              |                                                         |       | (221     | )       |   |        |         |         |   |         | (5,158  | )     
|                                                                            |                                                                                                        | Sale of subsidiaries                                                         |                                                         |       |         |         |   |        | 3,752    |         |   |         |        |       
|                                                                            |                                                                                                        | Cash advance to agent                                                        |                                                         |       | (1,002   | )       |   |        |         |         |   |         |        |       
|                                                                            |                                                                                                        | Net cash deposited in funds held                                             |                                                         |       | 5,215    |         |   |        | (12,790  | )       |   |         |        |       
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|                                                                            |                                                                                                        |                                                                              | Net cash (used in) provided by investing
    activities |       |          | (34,677 | ) |        |          | (23,076 | ) |         |         | 17,111 |  
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|Cash Flows From Financing Activities                                        |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |          |         |   |        
|                                                                            |                                                                                                        | Proceeds from lines of credit                                                |                                                         |       | 19,710   |         |   |        | 12,780   |         |   |         | 52,328  |       
|                                                                            |                                                                                                        | Payment of lines of credit                                                   |                                                         |       | (41,595  | )       |   |        | (11,052  | )       |   |         | (57,778 | )     
|                                                                            |                                                                                                        | Book overdraft                                                               |                                                         |       | 832      |         |   |        | 1,642    |         |   |         | (1,459  | )     
|                                                                            |                                                                                                        | Dividend paid on common stock                                                |                                                         |       |         |         |   |        | (1,021   | )       |   |         | (1,021  | )     
|                                                                            |                                                                                                        | Net proceeds from issuance of common stock                                   |                                                         |       | 60,516   |         |   |        |         |         |   |         |        |       
|                                                                            |                                                                                                        | Retirement of common stock                                                   |                                                         |       | (486     | )       |   |        | (32      | )       |   |         | (37     | )     
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|                                                                            |                                                                                                        |                                                                              | Net cash provided by (used in) financing
    activities |       |          | 38,977  |   |        |          | 2,317   |   |         |         | (7,967 | )
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|                                                                            |                                                                                                        | Increase (decrease) in cash and cash
    equivalents                         |                                                         |       | 6,083    |         |   |        | (23,536  | )       |   |         | 33,125  |       
|                                                                            |                                                                                                        | Cash and cash equivalents, beginning of year                                 |                                                         |       | 33,302   |         |   |        | 56,838   |         |   |         | 23,713  |       
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|                                                                            |                                                                                                        | Cash and cash equivalents, end of year                                       |                                                         | $     | 39,385   |         |   | $      | 33,302   |         |   | $       | 56,838  |       
|                                                                            |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |         
|Supplemental Disclosure of Cash Flow
    Information:                       |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |          |         |   |        
|                                                                            |                                                                                                        | Interest paid                                                                |                                                         | $     | 3,681    |         |   | $      | 3,671    |         |   | $       | 5,135   |       
|                                                                            |                                                                                                        | Income taxes received, net of paid                                           |                                                         | $     | (1,842   | )       |   | $      | (1,176   | )       |   | $       | (228    | )     
|Supplemental Disclosure of Non Cash Investing
    and Financing Activities: |                                                                                                        |                                                                              |                                                         |       |          |         |   |        |          |         |   |        
|                                                                            |                                                                                                        | Tax benefit from stock options                                               |                                                         | $     |         |         |   | $      | 1        |         |   | $       | 1       |       

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

45



---



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

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

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.

46



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Investments

The Companys investment securities at
December 31, 2002 and 2001 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. Dividend and interest income are recognized when
earned. Discount or premium on debt securities purchased at
other than par value is amortized using the constant yield
method. Investments with other than temporary declines in fair
value are written down to estimated fair value and the related
realized losses recognized in income. There were $75,000 and
$1.3 million in impaired investments written down in 2002
and 2001, respectively and none in 2000.

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.

Goodwill and Other Intangible Assets

Effective January 1, 2002, the Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 142 Goodwill and Other
Intangible Assets. SFAS No. 142, for periods starting
December 15, 2001 or thereafter, eliminates the
amortization of goodwill. In addition, the Company is required
to test, at least annually, all existing goodwill for impairment
using a fair value approach, on a reporting unit basis. Also
pursuant to SFAS No. 142, the Company is required to test
for impairment more frequently if events or changes in
circumstances indicate that the asset might be impaired. Upon
implementation of SFAS No. 142 in 2002, the Company is no
longer amortizing goodwill. See Note 11 for additional
information regarding the effect of the adoption of SFAS
No. 142.

Prior to 2002, goodwill resulting from
acquisitions was amortized on a straight-line basis over 15 to
20 years.

During the fourth quarter of 2002, the Company
purchased two unrelated agency books of business. The Company
will amortize these intangible assets over their estimated lives
based on the expected retention of the purchased books of
business. These intangible assets have weighted average
amortization period of an

47



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimated two and a half years. At
December 31, 2002, the gross carrying amount and
accumulated amortization was $221,000 and $15,000, respectively.
The Company did not have any other intangibles assets at
December 31, 2001.

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
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. There were no changes in key
assumptions during 2002.

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. Commission income is reported net of
sub-broker commission expense. Commission and other adjustments
are recorded when they occur and the Company maintains an
allowance for estimated policy cancellations and commission
returns.

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

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 basis of existing assets and liabilities.

48



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Realization of the deferred tax asset is
dependent upon generating sufficient taxable income to absorb
both the applicable reversing temporary differences and the net
operating loss (NOL). At December 31, 2002,
management concluded that the positive evidence supporting the
generation of future taxable income sufficient to realize the
deferred tax asset outweighed the negative evidence of the
cumulative losses reported for the periods ended
December 31, 1999, 2000, and 2001. This conclusion was
based upon:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The current market conditions that supported the
    cumulative premium rate increases of 47% since the beginning of
    2000 is expected to continue;                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The accident year 2002 loss and LAE ratio was
    67.5% relating to the Companys continuing business, and
    there was little adverse development on 2001 and prior reserves
    related to continuing business as of December 31, 2002;                                                                                                                                                                                                                                                                                                    
|
| |  | The completion of the Companys exit from
    certain discontinued unprofitable programs. Exposures related to
    these programs were fully earned during the first half of 2002.
    Furthermore, the uncertainty of future reserve development
    appears to have been reduced by aggressive claims handling which
    reduced the number of pending claims, reserve strengthening
    incurred in 2002, and a claim by claim review conducted by the
    Companys corporate claims department during the fourth
    quarter of 2002; and
|
| |  | Alternative tax strategies, which could generate
    capital gains from the potential sale of assets and/or
    subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                 

Comprehensive Income

Comprehensive income (loss) encompasses all
changes in shareholders equity (except those arising from
transactions with shareholders) and includes net income and net
unrealized capital gains or losses on available-for-sale
securities.

Stock Options

The Company applies the intrinsic value-based
provisions set forth in APB Opinion No. 25. Under the
intrinsic value method, compensation expense is determined on
the measurement date, that is the first date on which both the
number of shares the employee is entitled to receive, and the
exercise price are known. 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
exercise price of the grants to be at the current fair market
value of the underlying common stock.

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. Outstanding options of 2,693,223, 1,582,716, and
1,288,644 for the periods ended December 31, 2002, 2001,
and 2000, respectively, have been excluded from the diluted
earnings per share as they were anti-dilutive. In addition,
outstanding warrants of 300,000 for the period ended
December 31, 2002, have been excluded from the diluted
earnings per share as they were anti-dilutive.

49



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

New Accounting Pronouncements

Effective January 1, 2002, the Company
adopted SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142, for periods starting
December 15, 2001 or thereafter, eliminates the
amortization of goodwill. In addition, the Company is required
to test, at least annually, all existing goodwill for impairment
using a fair value approach, on a reporting unit basis. Also
pursuant to SFAS No. 142, the Company is required to test
for impairment more frequently if events or changes in
circumstances indicate that the asset might be impaired. Upon
implementation of SFAS No. 142 in 2002, the Company is no
longer amortizing goodwill. Net income would have increased by
$1,561,000 and $1,942,000 in 2001 and 2000, respectively, if the
amortization of goodwill had ceased as of January 1, 2000.
See Note 11 for additional information regarding the effect
of the adoption of SFAS No. 142.

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

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

Reclassifications

Certain amounts in the 2001 and 2000 financial
statements and notes to consolidated financial statements have
been reclassified to conform to the 2002 presentation.

50



---



##### Table of Contents



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, 2002 and 2001 are
as follows (in thousands):

|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |      |      |   |        |         |         | 
|-------------------------------------------------------------- | ------------------------------------------ | ----------------------------------- | ------ | ------- | ---------- | - | ----- | ---------- | ------ | - | --------- | ---- | ---- | - | ------ | ------- | ------- | 
|                                                               |                                            |                                    
|                                                               |                                            | December 31, 2002                   |       
|                                                               |                                            |                                     |       
|                                                               |                                            | 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 |                                            | $                                   | 52,434 |         |            | $ | 3,033 |            |        | $ |          |      |      | $ | 55,467 |        
|Obligations of states and political subdivisions               |                                            |                                     | 26,845 |         |            |   | 2,136 |            |        |   |          |      |      |   | 28,981 |        
|Corporate securities                                           |                                            |                                     | 83,143 |         |            |   | 6,845 |            |        |   | (470      | )    |      |   | 89,518 |        
|Mortgage-backed securities                                     |                                            |                                     | 69,454 |         |            |   | 1,443 |            |        |   | (2        | )    |      |   | 70,895 |        
|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |     
|                                                               | Total Debt Securities available for sale   |                                     |        | 231,876 |            |   |       | 13,457     |        |   |           | (472 | )    |   |        | 244,861 |        
|Equity Securities:                                             |                                            |                                     |        |         |            |   |       |            |        |   |           |      |      |   |        |        
|Preferred Stocks                                               |                                            |                                     | 1,980  |         |            |   |      |            |        |   | (176      | )    |      |   | 1,804  |        
|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |     
|                                                               | Total Equity Securities available for sale |                                     |        | 1,980   |            |   |       |           |        |   |           | (176 | )    |   |        | 1,804   |        
|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |     
|                                                               |                                            | Total Securities available for sale |        | $       | 233,856    |   |       | $          | 13,457 |   |           | $    | (648 | ) |        | $       | 246,665 | 
|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |     

|                                                               |                                            |                                     |        |         |            |   |       |            |       |   |           |      |      |   |        |         |         | 
|-------------------------------------------------------------- | ------------------------------------------ | ----------------------------------- | ------ | ------- | ---------- | - | ----- | ---------- | ----- | - | --------- | ---- | ---- | - | ------ | ------- | ------- | 
|                                                               |                                            |                                    
|                                                               |                                            | 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 | 
|                                                               |                                            |                                     |        |         |            |   |       |            |       |   |           |     

51



---



##### 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, |       
|                                                                                     |  |              |       
|                                                                                     |  | 2002         |        |   | 2001 |  
|                                                                                     |  |              |        |   |      |  
|Unrealized appreciation                                                              |  | $            | 13,457 |   |      | $ | 5,355  |  
|Unrealized depreciation                                                              |  |              | (648   | ) |      |   | (711   | )
|                                                                                     |  |              |        |   |      |  
|Net unrealized appreciation                                                          |  |              | 12,809 |   |      |   | 4,644  |  
|Deferred federal income tax benefit                                                  |  |              | (4,336 | ) |      |   | (1,571 | )
|                                                                                     |  |              |        |   |      |  
|Net unrealized appreciation on investments, net
    of deferred federal income taxes |  | $            | 8,473  |   |      | $ | 3,073  |  
|                                                                                     |  |              |        |   |      |  

The gross change, before tax expense, in
unrealized appreciation on available for sale debt securities
was $8,371,000 for 2002 and $2,508,917 for 2001. The gross
change, before tax expense, in the unrealized (depreciation)
appreciation on available for sale equity securities was
$(206,000) and $19,852 in 2002 and 2001, respectively.

The realized gains on the sale of available for
sale debt securities and equity securities for the year ended
December 31, 2002 were $618,597 and $122,652, respectively.
The proceeds from these sales were $93.8 million and
$0.9 million, 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 amortized cost and estimated fair value of
available for sale debt securities at December 31, 2002, 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                |  | $                  | 7,660   |  |            | $ | 8,013   | 
|Due after one year through five years  |  |                    | 76,263  |  |            |   | 80,726  | 
|Due after five years through ten years |  |                    | 66,966  |  |            |   | 73,211  | 
|Due after ten years                    |  |                    | 11,533  |  |            |   | 12,016  | 
|Mortgage-backed securities             |  |                    | 69,454  |  |            |   | 70,895  | 
|                                       |  |                    |         |  |            |  
|                                       |  | $                  | 231,876 |  |            | $ | 244,861 | 
|                                       |  |                    |         |  |            |  

52



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net investment income for the three years ended
December 31, 2002, 2001, and 2000 was as follows
(in thousands):

|                              |  |      |        |  |      |   |        |      |  |   |        | 
|----------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                              |  | 2002 |        |  | 2001 |   |        | 2000 | 
|                              |  |      |        |  |      |   |        |      | 
|Investment Income On:         |  |      |        |  |      |   |        |      |  |   |        | 
|Debt securities               |  | $    | 12,572 |  |      | $ | 11,856 |      |  | $ | 11,058 | 
|Equity securities             |  |      | 230    |  |      |   | 523    |      |  |   | 655    | 
|Cash and cash equivalents     |  |      | 1,736  |  |      |   | 2,333  |      |  |   | 2,317  | 
|                              |  |      |        |  |      |   |        |      | 
|Total gross investment income |  |      | 14,538 |  |      |   | 14,712 |      |  |   | 14,030 | 
|Less investment expenses      |  |      | 580    |  |      |   | 484    |      |  |   | 315    | 
|                              |  |      |        |  |      |   |        |      | 
|Net investment income         |  | $    | 13,958 |  |      | $ | 14,228 |      |  | $ | 13,715 | 
|                              |  |      |        |  |      |   |        |      | 

United States government obligations, municipal
bonds, and bank certificates of deposit aggregating $89,767,585
and $71,864,423 were on deposit at December 31, 2002 and
2001, 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, |        
|                               |                               |                                  |        
|                               |                               | 2002                             |         |         | 2001 |   |         | 2000    | 
|                               |                               |                                  |         |         |      |   |         |         | 
|Balance, beginning of year     |                               | $                                | 394,596 |         |      | $ | 341,824 |         |  | $ | 229,244 |        
|Less reinsurance recoverables  |                               |                                  | 195,943 |         |      |   | 168,962 |         |  |   | 101,744 |        
|                               |                               |                                  |         |         |      |   |         |         | 
|Net balance, beginning of year |                               |                                  | 198,653 |         |      |   | 172,862 |         |  |   | 127,500 |        
|                               |                               |                                  |         |         |      |   |         |         | 
|Incurred related to:           |                               |                                  |         |         |      |   |         |         |  |   |         |        
|                               | Current year                  |                                  |         | 92,644  |      |   |         | 110,797 |  |   |         | 107,371 | 
|                               | Prior years                   |                                  |         | 6,090   |      |   |         | 14,386  |  |   |         | 20,248  | 
|                               |                               |                                  |         |         |      |   |         |         | 
|Total incurred                 |                               |                                  | 98,734  |         |      |   | 125,183 |         |  |   | 127,619 |        
|                               |                               |                                  |         |         |      |   |         |         | 
|Paid related to:               |                               |                                  |         |         |      |   |         |         |  |   |         |        
|                               | Current year                  |                                  |         | 23,247  |      |   |         | 26,312  |  |   |         | 26,896  | 
|                               | Prior years                   |                                  |         | 81,024  |      |   |         | 73,080  |  |   |         | 55,361  | 
|                               |                               |                                  |         |         |      |   |         |         | 
|Total paid                     |                               |                                  | 104,271 |         |      |   | 99,392  |         |  |   | 82,257  |        
|                               |                               |                                  |         |         |      |   |         |         | 
|Net balance, end of year       |                               |                                  | 193,116 |         |      |   | 198,653 |         |  |   | 172,862 |        
|                               | Plus reinsurance recoverables |                                  |         | 181,817 |      |   |         | 195,943 |  |   |         | 168,962 | 
|                               |                               |                                  |         |         |      |   |         |         | 
|Balance, end of year           |                               | $                                | 374,933 |         |      | $ | 394,596 |         |  | $ | 341,824 |        
|                               |                               |                                  |         |         |      |   |         |         | 

As a result of adverse development on prior
accident years reserves, the provision for loss and loss
adjustment expenses increased by $6,090,000, $14,386,000, and
$20,248,000 in calendar years 2002, 2001, and 2000, respectively.

For the year ended December 31, 2002, the
Company reported net adverse development on loss and LAE of
$6.1 million, or 3.1% of net loss and LAE reserves. The
adverse development reflected revisions in the

53



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

estimated reserves as a result of actual claims
activity in calendar year 2002 that differed from that which had
been projected. There were no significant changes in the key
assumptions utilized in the analysis and calculations of the
Companys reserves during 2002. The $6.1 million of
adverse development reflects $6.6 million related to
discontinued and terminated programs. Partially offsetting this
adverse development is favorable development on continuing
programs of $515,000.

This increase in incurred losses on both
discontinued and terminated programs reflects a higher level of
reported and paid claims, as well as an increase in underlying
case reserves on discontinued business. Management believes the
increase in incurred losses, which includes both case and paid
losses, is the result of recent changes in claims management on
these programs that includes claim audits, centralization of
claims handling, and the aggressive closing of claim files.
These actions caused changes in payment and development patterns
which no longer follow the Companys historical or industry
development patterns. Traditional actuarial methods may be
causing these actions to be viewed as an indication of a need
for higher expected ultimate loss selections, rather than
stronger underlying case reserves or acceleration in the payment
and reported incurred patterns.

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 Connecticut
Insurance Company (CSC) and HIH America
Compensation & Liability Company (HIH), and
the remaining development related to claims activity on the
automobile 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 of adverse development on
net reserves and $46.3 million of adverse development on
gross reserves in 2000 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 $8.7 million, $32.3 million, and
$46.1 million in 2002, 2001, and 2000, respectively.

At December 31, 2002, the Company had
reinsurance recoverables for paid and unpaid losses of
$202.2 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 42.6% of the total recoverable for paid and unpaid
losses.

54



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2002, the Company has an
allowance of $980,000 and $1.1 million at December 31,
2001, related to balances due from HIH, a California domiciled
insurance company, which was seized by the California Department
of Insurance.

At December 31, 2002, the Company also has
an allowance of $3.7 million recorded related to
reinsurance balances due from CSC, a Connecticut domiciled
insurance company seized by the Connecticut Insurance
Department. At December 31, 2001, the allowance relating to
CSC was $3.5 million.

The Companys insurance subsidiaries
maintain an excess reinsurance program designed to protect
against large or unusual loss 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 $300,000
up to a limit of $20 million, under separate treaties. The
first treaty covers losses in excess of $300,000 up to $500,000,
and the second treaty reinsures losses in excess of $500,000 up
to $20 million. In addition, the Company purchases coverage
in excess of $20 million up to $50 million to protect
itself in the event of a catastrophe.

Under the liability reinsurance treaty, the
reinsurers are responsible for 100% of the amount of each loss
in excess of $250,000 up to $2.0 million per occurrence.

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, 2002, the Company had risk exposure in excess
of collateral in the amount of $11.6 million and
$14.1 million at December 31, 2001, on these programs,
of which the Company has an allowance of $6.8 million and
$6.5 million at December 31, 2001, 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 a
written and earned basis, for 2002, 2001, and 2000 are as
follows (in thousands):

|        |  |         |         |   |        |   |         |         |  |   |          |   |  |         |          |   |        |   |          |   |  |   |          |  
|------- |  | ------- | ------- | - | ------ | - | ------- | ------- |  | - | -------- | - |  | ------- | -------- | - | ------ | - | -------- | - |  | - | -------- | -
|        |  |         |         |   |        |  
|        |  | 2002    |         |   | 2001   |   |         | 2000    | 
|        |  |         |         |   |        |   |         |         | 
|        |  | Written |         |   | Earned |   |         | Written |  |   | Earned   |   |  | Written |          |   | Earned |  
|        |  |         |         |   |        |   |         |         |  |   |          |   |  |         |          |   |        |  
|Direct  |  | $       | 167,629 |   |        | $ | 195,186 |         |  | $ | 282,588  |   |  | $       | 277,516  |   |        | $ | 271,123  |   |  | $ | 262,069  |  
|Assumed |  |         | 16,008  |   |        |   | 13,775  |         |  |   | 16,516   |   |  |         | 16,134   |   |        |   | 16,729   |   |  |   | 48,628   |  
|Ceded   |  |         | (43,842 | ) |        |   | (63,578 | )       |  |   | (113,021 | ) |  |         | (129,985 | ) |        |   | (151,528 | ) |  |   | (164,697 | )
|        |  |         |         |   |        |   |         |         |  |   |          |   |  |         |          |   |        |  
|Net     |  | $       | 139,795 |   |        | $ | 145,383 |         |  | $ | 186,083  |   |  | $       | 163,665  |   |        | $ | 136,324  |   |  | $ | 146,000  |  
|        |  |         |         |   |        |   |         |         |  |   |          |   |  |         |          |   |        |  

One reinsurer, rated A by A.M. Best,
accounts for 12.6% of ceded premiums in 2002.

55



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, |        
|                                       |  |                                  |        
|                                       |  | 2002                             |         |   | 2001 |   |         | 2000 | 
|                                       |  |                                  |         |   |      |   |         |      | 
|Balance, beginning of period           |  | $                                | 13,953  |   |      | $ | 6,624   |      |  | $ | 10,030  |  
|Acquisition costs deferred             |  |                                  | 33,565  |   |      |   | 46,479  |      |  |   | 27,786  |  
|Amortized to expense during the period |  |                                  | (35,378 | ) |      |   | (39,150 | )    |  |   | (31,192 | )
|                                       |  |                                  |         |   |      |   |         |      | 
|Balance, end of period                 |  | $                                | 12,140  |   |      | $ | 13,953  |      |  | $ | 6,624   |  
|                                       |  |                                  |         |   |      |   |         |      | 

The Company reduced deferred policy acquisition
costs for premium deficiencies of $72,000 and $1,180,000, at
December 31, 2001 and 2000, respectively. There were no
premium deficiencies at December 31, 2002.

6.     Income
Taxes

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

|                                                 |  |                                  |        |   |      |   |        |      |  |   |         |  
|------------------------------------------------ |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------- | -
|                                                 |  |                                 
|                                                 |  | For the Years Ended December 31, |       
|                                                 |  |                                  |       
|                                                 |  | 2002                             |        |   | 2001 |   |        | 2000 | 
|                                                 |  |                                  |        |   |      |   |        |      | 
|Current tax (benefit) expense                    |  | $                                | (2,211 | ) |      | $ | 31     |      |  | $ | (1,054  | )
|Deferred tax expense (benefit)                   |  |                                  | 2,642  |   |      |   | (3,633 | )    |  |   | (9,075  | )
|                                                 |  |                                  |        |   |      |   |        |      | 
|Total provision for income tax expense (benefit) |  | $                                | 431    |   |      | $ | (3,602 | )    |  | $ | (10,129 | )
|                                                 |  |                                  |        |   |      |   |        |      | 

A reconciliation of the Companys tax
provision on income from operations to the U.S. federal income
tax rate of 34% in 2002, 2001, and 2000 is as follows (in
thousands):

|                                     |                     |                                  |      |      |      |   |        |      |   |   |         |        |  
|------------------------------------ | ------------------- | -------------------------------- | ---- | ---- | ---- | - | ------ | ---- | - | - | ------- | ------ | -
|                                     |                     |                                 
|                                     |                     | For the Years Ended December 31, |     
|                                     |                     |                                  |     
|                                     |                     | 2002                             |      |      | 2001 |   |        | 2000 |  
|                                     |                     |                                  |      |      |      |   |        |      |  
|Tax provision at statutory rate      |                     | $                                | 708  |      |      | $ | (3,438 | )    |   | $ | (9,384  | )     
|Tax effect of:                       |                     |                                  |      |      |      |   |        |      |   |   |         |       
|                                     | Tax exempt interest |                                  |      | (367 | )    |   |        | (710 | ) |   |         | (1,491 | )
|                                     | Other, net          |                                  |      | 90   |      |   |        | 546  |   |   |         | 746    |  
|                                     |                     |                                  |      |      |      |   |        |      |  
|Federal income tax expense (benefit) |                     | $                                | 431  |      |      | $ | (3,602 | )    |   | $ | (10,129 | )     
|                                     |                     |                                  |      |      |      |   |        |      |  
|Effective tax expense (benefit) rate |                     |                                  | 20.7 | %    |      |   | (35.6  | )%   |   |   | (36.7   | )%    
|                                     |                     |                                  |      |      |      |   |        |      |  

Deferred federal income taxes, under SFAS
No. 109 Accounting for Income Taxes, 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.

56



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The components of deferred tax assets and
liabilities as of December 31, 2002 and 2001 are as follows
(in thousands):

|                                           |                      |                         |        |        |             |   |       |          |  |   |             |        |        |   |       |       |  | 
|------------------------------------------ | -------------------- | ----------------------- | ------ | ------ | ----------- | - | ----- | -------- |  | - | ----------- | ------ | ------ | - | ----- | ----- |  | 
|                                           |                      |                         |        |       
|                                           |                      | 2002                    |        |        | 2001        |  
|                                           |                      |                         |        |        |             |  
|                                           |                      | Deferred                |        |        | Deferred    |   |       | Deferred |  |   | Deferred    |       
|                                           |                      | Tax                     |        |        | Tax         |   |       | Tax      |  |   | Tax         |       
|                                           |                      | Assets                  |        |        | Liabilities |   |       | Assets   |  |   | Liabilities |       
|                                           |                      |                         |        |        |             |   |       |          |  |   |             |       
|Unpaid losses and loss adjustment expenses |                      | $                       | 11,263 |        |             | $ |      |          |  | $ | 10,704      |        |        | $ |      |      
|Unearned premium reserves                  |                      |                         | 3,598  |        |             |   |      |          |  |   | 4,483       |        |        |   |      |      
|Unrealized gains on investments            |                      |                         |       |        |             |   | 4,336 |          |  |   |            |        |        |   | 1,571 |      
|Deferred policy acquisition expense        |                      |                         |       |        |             |   | 4,055 |          |  |   |            |        |        |   | 4,606 |      
|Allowance for doubtful accounts            |                      |                         | 1,580  |        |             |   |      |          |  |   | 2,184       |        |        |   |      |      
|Policyholder dividends                     |                      |                         | 770    |        |             |   |      |          |  |   | 306         |        |        |   |      |      
|Alternate minimum tax credit               |                      |                         | 2,015  |        |             |   |      |          |  |   | 1,333       |        |        |   |      |      
|Net operating loss carryforward            |                      |                         | 7,751  |        |             |   |      |          |  |   | 11,763      |        |        |   |      |      
|Other                                      |                      |                         | 513    |        |             |   |      |          |  |   |            |        |        |   | 90    |      
|                                           |                      |                         |        |        |             |   |       |          |  |   |             |       
|                                           | Total deferred taxes |                         |        | 27,490 |             |   |       | 8,391    |  |   |             | 30,773 |        |   |       | 6,267 | 
|                                           |                      |                         |        |        |             |   |       |          |  |   |             |       
|                                           |                      | Net deferred tax assets |        | $      | 19,099      |   |       |          |  |   |             | $      | 24,506 |   |       |       |  | 
|                                           |                      |                         |        |        |             |   |       |          |  |   |             |       

Realization of the deferred tax asset is
dependent on generating sufficient taxable income to absorb both
the applicable reversing temporary differences and the NOL (see
Note 1  Summary of Significant Accounting
Policies). The NOL of $7.8 million will begin to expire in
2019.

7.     Debt

Term Loan and Revolving Line of
Credit

On September 25, 2002, the Company
successfully executed a revised credit agreement with its
existing bank. The revised agreement includes a $20.0 million
term loan and a revolving line of credit for up to
$8.0 million. The term loan calls for quarterly
amortization of the principal beginning on October 1, 2002
until July 1, 2006, at which time the term loan will be
paid in full. The quarterly amortization requires payments of
$1.2 million on October 1, 2002 and January 1,
2003; $1.0 million on April 1, 2003 and July 1,
2003; $1.5 million on October 1, 2003; and
$1.2 million for the remaining quarterly amortization
payments in 2004, 2005 and 2006, with a final payment of $1.5
million on July 1, 2006. The revolving line of credit will
expire on July 1, 2004, and is thereafter renewable on an
annual basis. At December 31, 2002, the Company had an
outstanding balance of $18.8 million and $5.3 million
on the term loan and revolving line of credit, respectively. As
part of the loan agreement, certain of the Companys
non-regulated subsidiaries guaranteed repayment of the credit
facility and the Company pledged the stock of its non-regulated
subsidiaries as collateral.

In June 2002, prior to the revised credit
agreement, the Company reached a settlement with its lead bank
and paid $20.0 million from the proceeds of the public
offering on its existing line of credit. This settlement
resulted in a gain on debt reduction of $359,000, which was to
the benefit of the Company.

At December 31, 2001, the Company had a bank
line of credit that permitted borrowings up to
$47.5 million, of which $47.5 million was outstanding.
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.

57



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Both the term loan and revolving line of credit
provide for interest at a variable rate based, at the
Companys option, upon either the prime rate or
eurocurrency rate. The applicable margin, which ranges from 200
to 300 basis points above eurocurrency rates, is determined by
the level of the fixed charge coverage ratio. The most
restrictive covenant is the fixed charge coverage ratio. The
fixed charge coverage ratio, as defined by the credit facility,
is the ratio of the non-regulated earnings before interest and
taxes for the four preceding fiscal quarters to the sum of fixed
charges which include interest expense, principal payments
payable, stock repurchases, and dividends declared during the
period. Any unused portion of the revolving credit as of the
date of determination reduces the sum of these fixed charges.
The fixed coverage ratio, at December 31, 2002, was 2.9 to
1.0, compared to the covenant minimum of 1.2 to 1.0.

As of December 31, 2002, the Company was in
compliance with all debt covenants.

As of December 31, 2002, the prime based
rate for the term loan and revolving line of credit was 5.0% and
4.5%, respectively. The euro-based rate as of December 31,
2002, for the term loan and revolving line of credit was 3.48%
and 2.78%, respectively.

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 of credit. The line will expire on
May 14, 2003. Management expects to renegotiate the line of
credit prior to its expiration. The line bears interest at the
Prime Rate, which was 4.25% and 4.75% at December 31, 2002
and 2001, respectively. At December 31, 2002 and 2001,
$4.9 million and $3.8 million, respectively, were
outstanding under this line of credit.

In addition, the Company had an outstanding
subordinated promissory note payable in the amount of
$3.5 million, due June 30, 2003, which bore interest
at a rate of 6.673% plus a Eurocurrency margin. As of
December 31, 2002, the Eurocurrency margin was 1.25%. On
January 14, 2003, the Company paid in full the
$3.5 million subordinated promissory note.

The Company, through American Indemnity, issues
redeemable nonvoting preferred shares to risk-sharing clients.
The preferred shares entitle the shareholders to participate in
the profits and losses of the subsidiary. 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, 2002 and 2001, preferred shares totaling
$1,167,000 were included in other liabilities. The redemption
value for these preferred shares was $1,198,000 at
December 31, 2002.

8.     Shareholders
Equity

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

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

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

58



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

twenty-four months. As of December 31, 2002,
the Company repurchased and retired 195,700 shares of common
stock for a total cost of approximately $455,000.

The Companys Board of Directors did not
declare a dividend in 2002. The Board of Directors considers
whether a dividend will be declared based on a variety of
factors, including but not limited to, the Companys cash
flow, liquidity needs, results of operations and financial
condition. As a holding company, the ability to pay cash
dividends is partially dependent on dividends and other
permitted payments from its subsidiaries. The Company did not
receive any dividends from its regulated insurance subsidiaries
in 2002.

9.     Regulatory
Matters and Rating Issues

A significant portion of the Companys
consolidated assets represent assets of the Insurance Company
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 Company 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 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 2002
statutory financial statements, Star may only pay dividends to
the Company during 2003 with the prior approval of OFIS.
Stars earned surplus position at December 31, 2002
was negative $24.3 million. No dividends were paid in 2002
or 2001.

Summarized 2002 and 2001 statutory basis
information for the primary insurance subsidiaries, which
differs from generally accepted accounting principles, follows
(in thousands):

|                                      |  |      |        |  |        |   |        |              |  |   |            |   |  |      |        |   |        |   |        |              |  |   |            |  |  |   |        |  |  |   |        | 
|------------------------------------- |  | ---- | ------ |  | ------ | - | ------ | ------------ |  | - | ---------- | - |  | ---- | ------ | - | ------ | - | ------ | ------------ |  | - | ---------- |  |  | - | ------ |  |  | - | ------ | 
|                                      |  |      |        | 
|                                      |  | 2002 |        |  | 2001   |  
|                                      |  |      |        |  |        |  
|                                      |  | Star |        |  | Savers |   |        | Williamsburg |  |   | Ameritrust |   |  | Star |        |   | Savers |   |        | Williamsburg |  |   | Ameritrust | 
|                                      |  |      |        |  |        |   |        |              |  |   |            |   |  |      |        |   |        |   |        |              |  |   |            | 
|Statutory capital and surplus         |  | $    | 93,832 |  |        | $ | 31,342 |              |  | $ | 11,228     |   |  | $    | 10,648 |   |        | $ | 51,579 |              |  | $ | 32,147     |  |  | $ | 11,142 |  |  | $ | 12,653 | 
|Minimum statutory capital and surplus |  |      | 5,000  |  |        |   | 20,000 |              |  |   | 2,600      |   |  |      | 5,000  |   |        |   | 5,000  |              |  |   | 20,000     |  |  |   | 2,600  |  |  |   | 5,000  | 
|Statutory net income (loss)           |  |      | 5,045  |  |        |   | (650   | )            |  |   | (1,030     | ) |  |      | (401   | ) |        |   | (9,957 | )            |  |   | 2,136      |  |  |   | 318    |  |  |   | 1,793  | 

In March 1998, the 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 Insurance Company 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 operations are subject to various
leverage tests (e.g. premium to statutory surplus ratios), which
are evaluated by regulators and rating agencies. The
Companys targets for gross and net written premium to
statutory surplus are 3.0 to 1 and 2.0 to 1,
respectively. As previously indicated, the Company contributed
$37.5 million to the surplus of Star during the second
quarter of 2002. The premium leverage ratios as of
December 31, 2002, on a statutory consolidated basis, were
2.0 to 1 and 1.5 to 1 on a gross and net written
premium basis, respectively.

The 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

59



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

RBC formula is used by state insurance regulators
to monitor trends in statutory capital and surplus for the
purpose of initiating regulatory action. In general under these
laws, an insurance company must submit a report of its RBC level
to the insurance department of its state of domicile as of the
end of the previous calendar year. These laws require increasing
degrees of regulatory oversight and intervention as an insurance
companys RBC declines. The level of regulatory oversight
ranges from requiring the insurance company to inform and obtain
approval from the domiciliary insurance commissioner of a
comprehensive financial plan for increasing its RBC to mandatory
regulatory intervention requiring an insurance company to be
placed under regulatory control in a rehabilitation or
liquidation proceeding.

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, 2002, all of the Insurance
Company Subsidiaries were in compliance with RBC requirements.
Star reported statutory surplus of $93.8 million and
$51.6 million at December 31, 2002 and 2001,
respectively. The calculated RBC was $24.8 million in 2002
and $29.7 million in 2001. The threshold requiring the
minimum regulatory involvement was $49.7 in 2002 and
$59.5 million in 2001.

The 2001 RBC ratio for Star was within Company
Action Level and the Company was required to submit a Business
Plan to OFIS outlining how it intended to achieve compliance.
The Business Plan was approved by OFIS and the Company complied
with the Business Plan when it sold 21,275,000 shares of newly
issued common stock at $3.10 per share in a public offering
in June of 2002. Of the $60.5 million in total net
proceeds, $37.5 million was contributed to the surplus of
Star as of June 30, 2002. As a result, at December 31,
2002, all of the Insurance Company Subsidiaries RBC is
above the minimum threshold requirement.

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

60



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

identifies twelve industry ratios and specifies
usual values for each ratio. Departure from the
usual values on four or more ratios generally leads to inquiries
or possible further review from individual state insurance
commissioners.

In 2002, the Insurance Company Subsidiaries
generated certain ratios that varied from the usual
value range. The variations and reasons for these
variations are set forth below:

|                                                |  |               |  |       |      |     
|----------------------------------------------- |  | ------------- |  | ----- | ---- | ----
|Ratio                                           |  | Usual Range   |  | Value |     
|                                                |  |               |  |       |     
|Company: Star                                   |  |               |  |       |      |     
|Change in Net Writings                          |  | <33% or> -33% |  |       | -35% | (1) 
|Two-year Overall Operating Ratio                |  | Under 100%    |  |       | 102% | (2) 
|Liabilities to Liquid Assets                    |  | Under 105%    |  |       | 116% | (3) 
|Investment Yield                                |  | <10% or> 4.5% |  |       | 4.4% | (4) 
|Change in Policyholders Surplus                |  | <50% or> -10% |  |       | 66%  | (5) 
|Two-year Reserve Development to Surplus         |  | Under 20%     |  |       | 24%  | (6) 
|Company: Williamsburg                           |  |               |  |       |      |     
|Change in Net Writings                          |  | <33% or> -33% |  |       | 188% | (7) 
|Two-year Overall Operating Ratio                |  | Under 100%    |  |       | 119% | (8) 
|Company: Ameritrust                             |  |               |  |       |      |     
|Change in Net Writings                          |  | <33% or> -33% |  |       | 66%  | (9) 
|Estimated Current Reserve Deficiency to Surplus |  | Under 25%     |  |       | 39%  | (10)



---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The reduction in Stars net written premium
    reflects the termination of unprofitable business, specifically
    in the commercial automobile line of business. As part of the
    plan to reduce both gross and net leverage ratios, the Company
    cancelled two large commercial automobile programs effective
    December 31, 2001. Excluding these items, Stars
    Change in Net Writings ratio would have been within the usual
    range at -7.7%.
|
| | (2) | The overall operating ratio in 2002 was 99%.
    While this was an improvement from the overall operating ratio
    for 2001 of 103%, the Two-year Overall Operating Ratio was
    slightly above the usual range. The improvement in the 2002
    ratio was a result of rate increases obtained and the run-off of
    unprofitable discontinued programs.                                                                                                     



|    |                                                                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | While this ratio showed improvement from 151% at
    2001 to 116% at 2002, it continues to be negatively impacted by
    the exclusion of the value of affiliated common stocks, as the
    value of affiliated common stocks is not considered in the ratio.



| |     |                                                                                                                                                                                                                                                                                                                                       
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4) | Statutory net investment income was lower in 2002
    due to an $8.2 million decrease in shareholder dividends
    from subsidiaries. Dividends from subsidiaries totaled
    $1.8 million in 2002, compared to $10.0 million in
    2001. Investment yield was also lower in 2002 due to lower yield
    rates on securities overall.
|
| | (5) | Change in Policyholders Surplus was
    favorably impacted by the Companys public offering of
    newly issued shares of common stock in June 2002. Of the
    $60.5 million in total net proceeds, $37.5 million was
    contributed to the surplus of Star as of June 2002.                                                       
|
| | (6) | The Two-year Reserve Development to Surplus Ratio
    reflects development in 2001 on unprofitable programs which have
    been discontinued. Excluding the 2001 adverse development on
    discontinued programs, the ratio would have been within the
    usual range at 9%.                                                        
|
| | (7) | The growth in the net written premium on
    Williamsburg was high for the year primarily due to three
    growing programs: one workers compensation and two general
    liability programs. These programs                                                                                                                         

61



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |  |                                                                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------
| |  | generated $1,469,000 of the total $1,643,000
    increase in net written premium for 2002, creating the high
    ratio for the year.



| |     |                                                                                                                                                                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (8) | The primary factor contributing to the high value
    of the Two-Year Overall Operating Ratio was incurred loss
    development and a net increase in expenses related to
    discontinued business. Excluding discontinued business,
    Williamsburgs Two-Year Overall Operating Ratio would have
    been within the usual range at 79%.
|
| | (9) | This ratio was impacted by the cancellation of a
    surplus relief reinsurance treaty. Excluding the effect of the
    cancellation of this treaty, the Change in Net Writings would
    have been within the usual range at -27%.                                                                                                         



|     |                                                                                                                                                                                                                                                                                                                                                        
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | The Estimated Current Reserve Deficiency to
    Policyholders Surplus was also impacted by the
    cancellation of the surplus relief reinsurance treaty. Excluding
    the effect of the cancellation of this treaty, the Estimated
    Current Reserve Deficiency to Policyholders Surplus would
    have been within the acceptable range at -28%.

On June 26, 2002, A.M. Best upgraded the
Insurance Company Subsidiaries financial strength rating to a
B+ (Very Good) with a positive outlook. A positive
outlook is placed on a companys rating if its financial
and market trends are favorable, relative to its current rating
level. The upgrade reflects A.M. Bests positive
assessment of the Companys improved financial condition as
a result of the issuance of new common shares and its debt
reduction. However, there can be no assurance that
A.M. Best will not change its rating of the Insurance
Company Subsidiaries in the future.

10.     Stock
Options

The Company, through its 1995 and 2002 Stock
Option Plans (the Plans), 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 in each plan. The plans are
administered by the Compensation Committee (the
Committee) appointed by the Board of Directors.
Option shares may be exercised subject to the terms of the Plans
and the terms prescribed by the Committee at the time of grant.
Currently, the Plans options have either five or ten-year
terms and are exercisable/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 income
(loss) and earnings per share on a pro forma basis for
2002, 2001, and 2000 would be as follows (in thousands):

|                                                    |                                |      |       |      |      |   |        |       |   |   |         |       |  
|--------------------------------------------------- | ------------------------------ | ---- | ----- | ---- | ---- | - | ------ | ----- | - | - | ------- | ----- | -
|                                                    |                                | 2002 |       |      | 2001 |   |        | 2000  |  
|                                                    |                                |      |       |      |      |   |        |       |  
|Reported net income (loss)                          |                                | $    | 1,650 |      |      | $ | (6,510 | )     |   | $ | (17,473 | )    
|Pro forma net income (loss), using SFAS
    No. 123 |                                | $    | 544   |      |      | $ | (7,391 | )     |   | $ | (18,130 | )    
|Earnings per share, diluted:                        |                                |      |       |      |      |   |        |       |   |   |         |      
|                                                    | Reported                       |      | $     | 0.08 |      |   | $      | (0.76 | ) |   | $       | (2.05 | )
|                                                    | Pro forma, using SFAS No. 123. |      | $     | 0.03 |      |   | $      | (0.87 | ) |   | $       | (2.13 | )

The Black-Scholes valuation model utilized the
following annualized assumptions for all applicable years:
Risk-free interest rate of 4.46%, 5.0%, and 6.5% for 2002, 2001,
and 2000, respectively. No dividends were declared in 2002. The
dividend declared was $0.09 in 2001 and $0.12 per share in 2000.
The volatility factor for the expected market price of the
Companys common stock of 0.562, 0.516, and 0.366, in 2002,
2001, and 2000, respectively. The weighted-average expected life
of options is 5.0 for the 2002, 2001, and 2000 grants.

62



---



##### 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:

|                                                                   |  |         |           |           |       |   |       |         |           |  |           |   |  |           |       |  |       |  |           |   |  |   |       | 
|------------------------------------------------------------------ |  | ------- | --------- | --------- | ----- | - | ----- | ------- | --------- |  | --------- | - |  | --------- | ----- |  | ----- |  | --------- | - |  | - | ----- | 
|                                                                   |  |         |           |           |       |  
|                                                                   |  | 2002    |           |           | 2001  |   |       | 2000    |          
|                                                                   |  |         |           |           |       |   |       |         |          
|                                                                   |  |         |           | Weighted- |       |   |       |         | Weighted- |  |           |   |  | Weighted- |      
|                                                                   |  |         |           | Average   |       |   |       |         | Average   |  |           |   |  | Average   |      
|                                                                   |  |         |           | Exercise  |       |   |       |         | Exercise  |  |           |   |  | Exercise  |      
|                                                                   |  | Options |           |           | Price |   |       | Options |           |  | Price     |   |  | Options   |       |  | Price | 
|                                                                   |  |         |           |           |       |   |       |         |           |  |           |   |  |           |       |  |       | 
|Outstanding  beginning of year                                    |  |         | 1,582,716 |           |       | $ | 9.87  |         |           |  | 1,288,644 |   |  | $         | 12.43 |  |       |  | 1,287,414 |   |  | $ | 16.22 | 
|Granted                                                            |  |         | 1,276,220 |           |       |   | 3.26  |         |           |  | 636,500   |   |  |           | 6.51  |  |       |  | 544,000   |   |  |   | 5.61  | 
|Exercised                                                          |  |         |          |           |       |   |      |         |           |  | (1,400    | ) |  |           | 5.67  |  |       |  | (34,718   | ) |  |   | 5.10  | 
|Forfeited                                                          |  |         | (165,713  | )         |       |   | 10.18 |         |           |  | (341,028  | ) |  |           | 13.28 |  |       |  | (508,052  | ) |  |   | 15.22 | 
|                                                                   |  |         |           |           |       |   |       |         |           |  |           |   |  |           |       |  |       | 
|Outstanding  end of year                                          |  |         | 2,693,223 |           |       | $ | 6.78  |         |           |  | 1,582,716 |   |  | $         | 9.87  |  |       |  | 1,288,644 |   |  | $ | 12.43 | 
|                                                                   |  |         |           |           |       |   |       |         |           |  |           |   |  |           |       |  |       | 
|Exercisable at end of year                                         |  |         | 1,063,387 |           |       | $ | 8.40  |         |           |  | 644,764   |   |  | $         | 10.87 |  |       |  | 470,105   |   |  | $ | 13.92 | 
|Weighted-average fair value of options
    granted during the year |  |         | $1.77     |           |       |   |      |         |           |  | $3.00     |   |  |           |      |  |       |  | $2.53     |   |  |   |      | 

The following table summarizes information about
stock options outstanding at December 31, 2002:

|                 |  |                     |           |           |                     |  |           |       |  |   |         |           |  |       |           |  |  |   |       | 
|---------------- |  | ------------------- | --------- | --------- | ------------------- |  | --------- | ----- |  | - | ------- | --------- |  | ----- | --------- |  |  | - | ----- | 
|                 |  |                     |           |          
|                 |  | Options Outstanding |           |           | Options Exercisable | 
|                 |  |                     |           |           |                     | 
|                 |  |                     |           | Weighted- |                     |  | Weighted- |       |  |   |         | Weighted- | 
|                 |  |                     |           | Average   |                     |  | Average   |       |  |   |         | Average   | 
|Range of         |  |                     |           | Remaining |                     |  | Exercise  |       |  |   |         | Exercise  | 
|Exercise Prices  |  | Options             |           |           | Life (Years)        |  |           | Price |  |   | Options |           |  | Price |          
|                 |  |                     |           |           |                     |  |           |       |  |   |         |           |  |       |          
|$3.07 to $3.51   |  |                     | 1,243,000 |           |                     |  | 4.5       |       |  | $ | 3.36    |           |  |       | 248,600   |  |  | $ | 3.36  | 
|$4.57 to $7.31   |  |                     | 1,021,424 |           |                     |  | 2.7       |       |  |   | 6.18    |           |  |       | 549,816   |  |  |   | 6.16  | 
|$8.11 to $16.26  |  |                     | 242,584   |           |                     |  | 5.6       |       |  |   | 13.95   |           |  |       | 145,465   |  |  |   | 13.25 | 
|$21.00 to $30.45 |  |                     | 186,215   |           |                     |  | 4.7       |       |  |   | 23.50   |           |  |       | 119,506   |  |  |   | 23.27 | 
|                 |  |                     |           |           |                     |  |           |       |  |   |         |           |  |       |          
|                 |  |                     | 2,693,223 |           |                     |  | 3.9       |       |  | $ | 6.78    |           |  |       | 1,063,387 |  |  | $ | 8.40  | 
|                 |  |                     |           |           |                     |  |           |       |  |   |         |           |  |       |          

No compensation cost has been recorded for stock
option grants issued during 2002, 2001, and 2000, as the market
value equaled the exercise price at the date of grant.

During 2002, the Company issued 825,000 stock
options at an exercise price of $3.507 to certain members of the
executive management team. These stock options are included in
the 2002 options granted above.

11.     Goodwill and
Other Intangible Assets

Goodwill

Effective January 1, 2002, the Company
adopted SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142, for periods starting
December 15, 2001 or thereafter, eliminates the
amortization of goodwill. In addition, the Company is required
to test, at least annually, all existing goodwill for impairment
using a fair value approach, on a reporting unit basis. Also
pursuant to SFAS No. 142, the Company is required to test
for impairment more frequently if events or changes in
circumstances indicate that the asset might be impaired. Upon
implementation of SFAS No. 142 in 2002, the Company is no
longer amortizing goodwill.

The Company evaluates existing goodwill for
impairment on an annual basis. The Company carries goodwill on
two reporting units within the agency operations segment in the
amount of $4.0 million and three

63



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

reporting units within the specialty risk
management operations segment in the amount of $25.0 million.
The operating results for the reporting units that carry
goodwill have historically generated profits. The reporting
units, within the specialty risk management operations segments,
that were impacted by the unprofitable programs that were
previously discontinued, do not carry any goodwill. Management
evaluated the net carrying value of goodwill to determine if
there has been any impairment of value. The methodology used for
this evaluation included the review of current market values of
the reporting units and annual operating performance. Based on
this evaluation, management determined there is no impairment to
goodwill.

The following table sets forth the
December 31, 2002 carrying amount of goodwill by business
segment (in thousands):

|                                                         |  |            |       |  |                       |   |        |       |  |   |        | 
|-------------------------------------------------------- |  | ---------- | ----- |  | --------------------- | - | ------ | ----- |  | - | ------ | 
|                                                         |  | Agency     |       |  | Specialty Risk        |   |        |      
|                                                         |  | Operations |       |  | Management Operations |   |        | Total | 
|                                                         |  |            |       |  |                       |   |        |       | 
|Balance at January 1, 2002                               |  | $          | 3,964 |  |                       | $ | 25,033 |       |  | $ | 28,997 | 
|Goodwill acquired during the period                      |  |            |      |  |                       |   |       |       |  |   |       | 
|Impaired losses                                          |  |            |      |  |                       |   |       |       |  |   |       | 
|Goodwill written off related to the sale of
    business |  |            |      |  |                       |   |       |       |  |   |       | 
|                                                         |  |            |       |  |                       |   |        |       | 
|Balance at December 31, 2002                             |  | $          | 3,964 |  |                       | $ | 25,033 |       |  | $ | 28,997 | 
|                                                         |  |            |       |  |                       |   |        |       | 

Amortization expense in relation to goodwill in
2001 and 2000 was $2.3 million and $2.1 million,
respectively. In accordance with SFAS No. 142, there was no
amortization expense recorded in relation to goodwill in 2002.

The following table provides net income (loss)
and related per share amounts as of December 31, 2002,
2001, and 2000, as reported and adjusted as if the Company had
eliminated the amortization of goodwill effective
January 1, 2000 (in thousands, except per share data):

|                                                    |                               |      |       |      |      |   |        |       |   |   |         |       |  
|--------------------------------------------------- | ----------------------------- | ---- | ----- | ---- | ---- | - | ------ | ----- | - | - | ------- | ----- | -
|                                                    |                               | 2002 |       |      | 2001 |   |        | 2000  |  
|                                                    |                               |      |       |      |      |   |        |       |  
|Reported net income (loss)                          |                               | $    | 1,650 |      |      | $ | (6,510 | )     |   | $ | (17,473 | )    
|Amortization Expense                                |                               |      |      |      |      |   | 2,336  |       |   |   | 2,097   |      
|Tax effect of amortization expense                  |                               |      |      |      |      |   | (775   | )     |   |   | (155    | )    
|Pro forma net income (loss), using SFAS
    No. 142 |                               | $    | 1,650 |      |      | $ | (4,949 | )     |   | $ | (15,531 | )    
|Earnings per share, basic                           |                               |      |       |      |      |   |        |       |   |   |         |      
|                                                    | Reported                      |      | $     | 0.08 |      |   | $      | (0.76 | ) |   | $       | (2.05 | )
|                                                    | Pro forma, using SFAS No. 142 |      | $     | 0.08 |      |   | $      | (0.58 | ) |   | $       | (1.82 | )
|Earnings per share, diluted:                        |                               |      |       |      |      |   |        |       |   |   |         |      
|                                                    | Reported                      |      | $     | 0.08 |      |   | $      | (0.76 | ) |   | $       | (2.05 | )
|                                                    | Pro forma, using SFAS No. 142 |      | $     | 0.08 |      |   | $      | (0.58 | ) |   | $       | (1.82 | )

Other
Intangible Assets

At December 31, 2002, the Company had other
intangible assets, net of related accumulated amortization, of
$206,000 recorded as part of other assets. During the fourth
quarter of 2002, the Company purchased two unrelated agency
books of business. The Company will amortize these intangible
assets over their estimated lives based on the expected
retention of the purchased books of business. These intangible
assets have weighted average amortization period of an estimated
two and a half years. At December 31, 2002, the gross
carrying amount and accumulated amortization was $221,000 and
$15,000, respectively. The Company did not have any other
intangibles assets at December 31, 2001. Amortization
expense was $15,000 for 2002.

64



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The amortization of the intangible assets will be
$90,000 in 2003, $85,000 in 2004, and $31,000 in 2005, at which
time the intangible assets will be fully amortized.

12.     Employee
Benefit Plans

Company employees over the age of 20 1/2 who
have completed six 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
2002, 2001, and 2000, the matching contributions were $416,115,
$492,029, and $510,461, respectively. There were no profit
sharing contributions in 2002, 2001, and 2000.

13.     Commitments
and Contingencies

The Company has certain operating lease
agreements for its offices and equipment. At December 31,
2002, future minimum rental payments required under
non-cancelable long-term operating leases are as follows (in
thousands):

|     |                                 |   |       |       | 
|---- | ------------------------------- | - | ----- | ----- | 
|2003 |                                 | $ | 3,098 |      
|2004 |                                 |   | 2,445 |      
|2005 |                                 |   | 1,138 |      
|2006 |                                 |   | 490   |      
|2007 |                                 |   | 111   |      
|     |                                 |   |      
|     | Total minimum lease commitments |   | $     | 7,282 | 
|     |                                 |   |      

Rent expense for the year ended December 31,
2002, 2001, and 2000, amounted to $3,074,630, $2,820,695, and
$3,135,548, 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.

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.

65



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

14.     Letters of
Credit

At December 31, 2002, one letter of credit
was outstanding in the amount of $100,000, which was provided as
collateral for an insurance subsidiarys obligations under
a reinsurance agreement. There were no outstanding letters of
credit as of December 31, 2001.

15.     Related Party
Transactions

At December 31, 2002 and 2001, respectively,
the Company held a $876,161 and $824,238 note receivable,
including $215,372 of accrued interest at December 31,
2002, from an executive officer of the Company. Accrued interest
at December 31, 2001 was $163,449. 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
partially 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 the 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
the 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s only recourse
is to reclaim the shares of the Company that were pledged under
stock pledge agreement.

16.     Segment
Information

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

Specialty Risk Management Operations

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

66



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Agency Operations

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

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

|                       |                                   |                                    |   |         |         |  |   |         |         |   |   |         |         |  
|---------------------- | --------------------------------- | ---------------------------------- | - | ------- | ------- |  | - | ------- | ------- | - | - | ------- | ------- | -
|                       |                                   |                                   
|                       |                                   | For the Years Ended December 31,   |  
|                       |                                   |                                    |  
|                       |                                   | 2002                               |   |         | 2001    |  |   | 2000    |        
|                       |                                   |                                    |   |         |         |  |   |         |        
|Revenues               |                                   |                                    |   |         |         |  |   |         |         |   |   |        
|                       | Net earned premiums               |                                    | $ | 145,383 |         |  | $ | 163,665 |         |   | $ | 146,000 |        
|                       | Management fees                   |                                    |   | 23,736  |         |  |   | 25,471  |         |   |   | 24,519  |        
|                       | Investment income                 |                                    |   | 13,906  |         |  |   | 14,177  |         |   |   | 13,664  |        
|                       | Net realized gain on investments  |                                    |   | 666     |         |  |   | 735     |         |   |   | 540     |        
|                       |                                   |                                    |   |         |         |  |   |         |        
|                       | Specialty risk management         |                                    |   | 183,691 |         |  |   | 204,048 |         |   |   | 184,723 |        
|                       | Agency operations                 |                                    |   | 14,330  |         |  |   | 15,706  |         |   |   | 17,234  |        
|                       | Reconciling items                 |                                    |   | 52      |         |  |   | 52      |         |   |   | 52      |        
|                       | Gain (loss) on sale of subsidiary |                                    |   | 199     |         |  |   | (1,097  | )       |   |   |        |        
|                       | Intersegment revenue              |                                    |   | (485    | )       |  |   | (503    | )       |   |   | (503    | )      
|                       |                                   |                                    |   |         |         |  |   |         |        
|                       |                                   | Consolidated revenue               |   | $       | 197,787 |  |   | $       | 218,206 |   |   | $       | 201,506 |  
|                       |                                   |                                    |   |         |         |  |   |         |        
|Pre-tax income (loss): |                                   |                                    |   |         |         |  |   |         |         |   |   |        
|                       | Specialty risk management         |                                    | $ | (1,081  | )       |  | $ | (7,624  | )       |   | $ | (24,289 | )      
|                       | Agency operations*                |                                    |   | 6,131   |         |  |   | 5,348   |         |   |   | 4,115   |        
|                       | Reconciling items                 |                                    |   | (3,168  | )       |  |   | (6,739  | )       |   |   | (7,428  | )      
|                       | Gain (loss) on sale of subsidiary |                                    |   | 199     |         |  |   | (1,097  | )       |   |   |        |        
|                       |                                   |                                    |   |         |         |  |   |         |        
|                       |                                   | Consolidated pre-tax income (loss) |   | $       | 2,081   |  |   | $       | (10,112 | ) |   | $       | (27,602 | )
|                       |                                   |                                    |   |         |         |  |   |         |        



---



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

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

|                         |  |                                  |        |   |      |   |        |      |  |   |        |  
|------------------------ |  | -------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                         |  |                                 
|                         |  | For the Years Ended December 31, |       
|                         |  |                                  |       
|                         |  | 2002                             |        |   | 2001 |   |        | 2000 | 
|                         |  |                                  |        |   |      |   |        |      | 
|Holding company expenses |  | $                                | (491   | ) |      | $ | 140    |      |  | $ | (314   | )
|Gain on debt reduction   |  |                                  | 359    |   |      |   |       |      |  |   |       |  
|Amortization             |  |                                  | (15    | ) |      |   | (2,336 | )    |  |   | (2,098 | )
|Interest expense         |  |                                  | (3,021 | ) |      |   | (4,543 | )    |  |   | (5,016 | )
|                         |  |                                  |        |   |      |   |        |      | 
|                         |  | $                                | (3,168 | ) |      | $ | (6,739 | )    |  | $ | (7,428 | )
|                         |  |                                  |        |   |      |   |        |      | 

67



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

17.     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.

68



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

18.     Quarterly
Financial Data (Unaudited)

The following is a summary of unaudited quarterly
results of operations for 2002 and 2001 (in thousands, except
per share and ratio data):

|                                                   |  |         |        |   |         |   |        |         |  |   |         |      |  |   |        |  
|-------------------------------------------------- |  | ------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- | ---- |  | - | ------ | -
|                                                   |  | 1st     |        |   | 2nd     |   |        | 3rd     |  |   | 4th     |     
|                                                   |  | Quarter |        |   | Quarter |   |        | Quarter |  |   | Quarter |     
|                                                   |  |         |        |   |         |   |        |         |  |   |         |     
|2002:                                              |  |         |        |   |         |   |        |         |  |   |         |      |  |   |        |  
|Gross premiums written                             |  | $       | 57,506 |   |         | $ | 42,816 |         |  | $ | 40,591  |      |  | $ | 42,724 |  
|Net premiums written                               |  |         | 37,904 |   |         |   | 40,722 |         |  |   | 29,838  |      |  |   | 31,331 |  
|Net premiums earned                                |  |         | 38,657 |   |         |   | 44,313 |         |  |   | 31,340  |      |  |   | 31,073 |  
|Net commissions and fees                           |  |         | 8,964  |   |         |   | 9,968  |         |  |   | 8,654   |      |  |   | 9,995  |  
|Net investment income and realized gains/losses    |  |         | 3,332  |   |         |   | 3,195  |         |  |   | 4,377   |      |  |   | 3,919  |  
|Gain on debt reduction                             |  |         |       |   |         |   | 359    |         |  |   |        |      |  |   |       |  
|Net losses and LAE incurred                        |  |         | 24,458 |   |         |   | 30,638 |         |  |   | 24,639  |      |  |   | 18,999 |  
|Policy acquisition and other underwriting expenses |  |         | 8,986  |   |         |   | 10,948 |         |  |   | 6,945   |      |  |   | 6,756  |  
|Other administrative expenses                      |  |         | 5,418  |   |         |   | 6,073  |         |  |   | 5,977   |      |  |   | 5,548  |  
|Salaries and employee benefits                     |  |         | 9,613  |   |         |   | 9,235  |         |  |   | 9,130   |      |  |   | 9,681  |  
|Interest on notes payable                          |  |         | 1,250  |   |         |   | 874    |         |  |   | 582     |      |  |   | 315    |  
|Net income (loss)                                  |  |         | 910    |   |         |   | 122    |         |  |   | (1,891  | )(1) |  |   | 2,509  |  
|Earnings per share                                 |  | $       | 0.11   |   |         | $ | 0.01   |         |  | $ | (0.06   | )    |  | $ | 0.08   |  
|Dividends declared per share                       |  |         |       |   |         |   |       |         |  |   |        |      |  |   |       |  
|GAAP combined ratio(3)                             |  |         | 105.2  | % |         |   | 108.4  | %       |  |   | 119.5   | %    |  |   | 102.2  | %
|2001:                                              |  |         |        |   |         |   |        |         |  |   |         |      |  |   |        |  
|Gross premiums written                             |  | $       | 90,096 |   |         | $ | 75,005 |         |  | $ | 72,747  |      |  | $ | 61,256 |  
|Net premiums written                               |  |         | 57,091 |   |         |   | 46,126 |         |  |   | 42,977  |      |  |   | 39,889 |  
|Net premiums earned                                |  |         | 41,173 |   |         |   | 39,644 |         |  |   | 40,673  |      |  |   | 42,175 |  
|Net commissions and fees                           |  |         | 12,409 |   |         |   | 10,336 |         |  |   | 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 underwriting expenses |  |         | 7,473  |   |         |   | 7,361  |         |  |   | 7,713   |      |  |   | 9,115  |  
|Other administrative expenses                      |  |         | 6,851  |   |         |   | 7,499  |         |  |   | 3,551   |      |  |   | 4,877  |  
|Salaries and employee benefits                     |  |         | 11,376 |   |         |   | 11,910 |         |  |   | 10,170  |      |  |   | 10,723 |  
|Interest on notes payable                          |  |         | 1,319  |   |         |   | 1,163  |         |  |   | 1,091   |      |  |   | 943    |  
|Net income (loss)                                  |  |         | 153    |   |         |   | (7,482 | )(2)    |  |   | 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(3)                             |  |         | 113.8  | % |         |   | 128.3  | %       |  |   | 113.7   | %    |  |   | 113.1  | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The third quarter of 2002 was impacted by a
    $6.5 million pre-tax charge to strengthen reserves and
    related expenses, primarily related to discontinued programs.                                                                                                                                                                                                                                                                                                                                                                                
|   
|(2) | The second quarter of 2001 was impacted by a
    $5.5 million charge related to management concerns about
    the financial condition of CSC.                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|(3) | Management uses the GAAP combined ratio and its
    components to assess and benchmark underwriting performance. The
    GAAP combined ratio is the sum of the GAAP loss and loss
    adjustment expense ratio and the GAAP expense ratio. The GAAP
    loss and loss adjustment expense ratio is the unconsolidated net
    incurred loss and loss adjustment expense in relation to net
    earned premium. The GAAP expense ratio is the unconsolidated
    policy acquisition and other underwriting expenses in relation
    to net earned premium.

69



---



##### 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                                                                                                                                                                           |        |  | (6  | )
|       
|        | 3.2   |  |             | Amended and Restated Bylaws of the Company                                                                                                                                                                                                  |        |  | (1  | )
|       
|        | 3.3   |  |             | Articles of Incorporation as Amended                                                                                                                                                                                                        |        |  | (9  | )
|       
|        | 4.1   |  |             | Warrant Agreement By and Between Meadowbrook
    Insurance Group, Inc. and Freidman, Billings, Ramsey &
    Co., Inc. dated June 11, 2002                                                                                                   |        |  | (10 | )
|       
|        | 10.1  |  |             | Meadowbrook Insurance Group, Inc. 1995 Stock
    Option Plan                                                                                                                                                                                |        |  | (1  | )
|       
|        | 10.2  |  |             | Lease between Meadowbrook and 26600 Development
    Associates Limited Partnership, with Fourth Amendment to lease
    dated March 21, 1995                                                                                                 |        |  | (1  | )
|       
|        | 10.3  |  |             | Fifth and Sixth Amendments to Lease between
    Meadowbrook and 26600 Development Associates Limited Partnership
    dated August 7, 1995 and May 13, 1996                                                                                  |        |  | (1  | )
|       
|        | 10.4  |  |             | Meadowbrook, Inc. 401(k) and Profit Sharing Plan
    Trust, amended and restated December 31, 1994                                                                                                                                          |        |  | (1  | )
|       
|        | 10.5  |  |             | Employment Agreement, Covenant Not to Compete and
    Restricted Stock Agreement dated as of August 1, 1995
    between Meadowbrook and Robert A. Engle                                                                                     |        |  | (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, Amendment                                                                          |        |  | (1  | )
|       
|        | 10.7  |  |             | 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  | )
|       
|        | 10.8  |  |             | 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, Amendment |        |  | (1  | )
|       
|        | 10.9  |  |             | Demand Note dated November 9, 1998 among the
    Company and Robert S. Cubbin and Kathleen D. Cubbin and Stock
    Pledge Agreement                                                                                                         |        |  | (4  | )
|       
|        | 10.10 |  |             | Seventh and Eighth Amendments to Lease between
    Meadowbrook and 26600 Development Associates Limited
    Partnership dated February 6, 1998 and September 16,
    1999                                                                   |        |  | (5  | )
|       
|        | 10.11 |  |             | Subordinated Promissory Note, Guaranty, and
    Agreement between Meadowbrook Insurance Group, Inc. and Atlantic
    Mutual Insurance Company dated as of July 27, 2000                                                                     |        |  | (6  | )
|       
|        | 10.12 |  |             | Employment Contract between the Company and
    Robert S. Cubbin dated June 1, 2002.                                                                                                                                                        |        |  | (7  | )
|       
|        | 10.13 |  |             | Employment Contract between the Company and
    Merton J. Segal dated June 1, 2002.                                                                                                                                                         |        |  | (7  | )
|       
|        | 10.14 |  |             | Employment Contract between the Company and
    Michael G. Costello dated June 1, 2002.                                                                                                                                                     |        |  | (7  | )
|       
|        | 10.15 |  |             | Meadowbrook Insurance Group, Inc. 2002 Stock
    Option Plan                                                                                                                                                                                |        |  | (8  | )
|       
|        | 10.16 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Merton J. Segal dated
    June 15, 2002.                                                                                                                |        |  | (11 | )
|       
|        | 10.17 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Robert S. Cubbin dated
    June 15, 2002.                                                                                                               |        |  | (11 | )
|       
|        | 10.18 |  |             | Amendment to Employment Agreement between
    Meadowbrook Insurance Group, Inc. and Michael G. Costello dated
    June 15, 2002.                                                                                                            |        |  | (11 | )
|       
|        | 10.19 |  |             | Assignment Agreement                                                                                                                                                                                                                        |        |  | (11 | )
|       
|        | 10.20 |  |             | Restated Credit Agreement between Meadowbrook
    Insurance Group, Inc. and Comerica Bank dated as of
    September 25, 2002.                                                                                                               |        |  | (12 | )

70



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |        |  |    |  
|------- | ----- |  | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ |  | -- | -
|Exhibit |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Filing | 
|No.     |       |  | Description |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Basis  | 
|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |        | 
|       
|        | 10.21 |  |             | Form of Management Services Agreement entered
    into by and between Meadowbrook Insurance Group, Inc.,
    Meadowbrook, Inc., and Star Insurance Company, Williamsburg
    National Insurance Co., Ameritrust Insurance Corporation,
    American Indemnity Insurance Company, Ltd., and Preferred
    Insurance Company, Ltd., respectively, each dated
    January 1, 2003.                                                                                                                                                                                                                                                           |        |  |    |  
|       
|        | 10.22 |  |             | Management Services Agreement entered into by and
    between Savers Property and Casualty Insurance Company and
    Meadowbrook, Inc. dated January 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |        |  |    |  
|       
|        | 10.23 |  |             | Agency Agreement entered into by and between
    Meadowbrook, Inc., Preferred Insurance Agency, Inc., TPA
    Insurance Agency, Inc., Preferred Comp Insurance Agency of New
    Hampshire, TPA Insurance Agency of New Hampshire, Inc.,
    Meadowbrook of Nevada, Inc. d/b/a Meadowbrook Insurance
    Services, Meadowbrook of Florida, Inc., Association Self-
    Insurance Services, Inc., Commercial Carriers Insurance Agency,
    Inc., and Star Insurance Company, Savers Property and Casualty
    Insurance Company, Williamsburg National Insurance Company, and
    Ameritrust Insurance Corporation dated January 1, 2003. |        |  |    |  
|       
|        | 21    |  |             | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |        |  |    |  
|       
|        | 23    |  |             | Consent of Independent Accountants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        |  |    |  
|       
|        | 24    |  |             | Power of Attorney                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |        |  |    |  
|       
|        | 28.1  |  |             | Star Insurance Companys 2002 Schedule P                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |        |  | (2 | )
|       
|        | 28.2  |  |             | Savers Property & Casualty Insurance
    Companys 2002 Schedule P                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        |  | (2 | )
|       
|        | 28.3  |  |             | Williamsburg National Insurance Companys
    2002 Schedule P                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |        |  | (2 | )
|       
|        | 28.4  |  |             | Ameritrust Insurance Corporations 2002
    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                                                                                                                                                                                                                                                                                                                  |        |  | (3 | )
|        | 99.2  |  |             | Certification of Chief Executive Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        |  |    |  
|        | 99.3  |  |             | Certification of Chief Financial Officer pursuant
    to 18 U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        |  |    |  



---



|    |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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) | 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.              
|   
|(4) | Filed as Exhibit to Form 10-K for the year
    ending December 31, 1998.                                                                                        
|   
|(5) | Filed as Exhibit to Form 10-K for the year
    ending December 31, 1999.                                                                                        
|   
|(6) | Filed as Exhibit to Form 10-K for the year
    ending December 31, 2000.                                                                                        
|   
|(7) | Filed as Exhibit to Form 10-Q for the period
    ending June 30, 2001.                                                                                          
|   
|(8) | Filed as Appendix to Meadowbrook Insurance Group,
    Inc. 2002 Proxy Statement.                                                                                
|   
|(9) | Filed as Exhibit to Form 10-Q for the period
    ending March 31, 2002.                                                                                         



|     |                                                                                                                                      
|---- | -------------------------------------------------------------------------------------------------------------------------------------
|(10) | Filed as Exhibit to Amendment No. 1 to
    Registration Statement on Form S-2 (Registration
    No. 333-86548) filed on May 10, 2002.
|    
|(11) | Filed as Exhibit to Form 10-Q for the period
    ending June 30, 2002.                                                               
|    
|(12) | Filed as Exhibit to Current Report on
    Form 8-K filed on October 1, 2002.                                                         

71



---



##### Table of Contents



SCHEDULE I

MEADOWBROOK INSURANCE GROUP, INC.

SUMMARY OF INVESTMENTS  OTHER
THAN INVESTMENTS IN RELATED PARTIES


As of December 31, 2002

(in thousands)


|                                                                     |                         |                   |        |         |         |              |        |         |         |   |        |         |         | 
|-------------------------------------------------------------------- | ----------------------- | ----------------- | ------ | ------- | ------- | ------------ | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                                                                     |                         |                   |        |         |         | Amount at    |       
|                                                                     |                         |                   |        |         |         | which        |       
|                                                                     |                         |                   |        |         |         | shown in the |       
|                                                                     |                         |                   |        |         |         | balance      |       
|Type of Investment                                                   |                         | Cost              |        |         | Value   |              |        | sheet   |        
|                                                                     |                         |                   |        |         |         |              |        |         |        
|Fixed Maturities:                                                    |                         |                   |        |         |         |              |        |         |         |   |        |        
|United States Government and government agencies
    and authorities |                         | $                 | 52,434 |         |         | $            | 55,467 |         |         | $ | 55,467 |        
|States and political subdivisions                                    |                         |                   | 26,845 |         |         |              | 28,981 |         |         |   | 28,981 |        
|Corporate securities                                                 |                         |                   | 83,143 |         |         |              | 89,518 |         |         |   | 89,518 |        
|Mortgage-backed securities                                           |                         |                   | 69,454 |         |         |              | 70,895 |         |         |   | 70,895 |        
|                                                                     |                         |                   |        |         |         |              |        |         |        
|                                                                     | Total Fixed Maturities  |                   |        | 231,876 |         |              |        | 244,861 |         |   |        | 244,861 |        
|Equity Securities:                                                   |                         |                   |        |         |         |              |        |         |         |   |        |        
|Preferred stocks                                                     |                         |                   | 1,980  |         |         |              | 1,804  |         |         |   | 1,804  |        
|                                                                     |                         |                   |        |         |         |              |        |         |        
|                                                                     | Total Equity Securities |                   |        | 1,980   |         |              |        | 1,804   |         |   |        | 1,804   |        
|                                                                     |                         |                   |        |         |         |              |        |         |        
|                                                                     |                         | Total Investments |        | $       | 233,856 |              |        | $       | 246,665 |   |        | $       | 246,665 | 
|                                                                     |                         |                   |        |         |         |              |        |         |        

72



---



##### Table of Contents



SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

MEADOWBROOK INSURANCE GROUP, INC.


PARENT COMPANY ONLY


BALANCE SHEET


|                                                             |                            |                                            |             |             |             |   |             |             |             | 
|------------------------------------------------------------ | -------------------------- | ------------------------------------------ | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                             |                            |                                           
|                                                             |                            | December 31,                               |            
|                                                             |                            |                                            |            
|                                                             |                            | 2002                                       |             |             | 2001        |  
|                                                             |                            |                                            |             |             |             |  
|ASSETS                                                      
|Cash and cash equivalents                                    |                            | $                                          | 149,878     |             |             | $ | 253,221     |            
|Investment in subsidiaries                                   |                            |                                            | 158,741,107 |             |             |   | 112,011,693 |            
|Receivables from subsidiaries                                |                            |                                            | 11,459,548  |             |             |   |            |            
|Goodwill                                                     |                            |                                            | 3,023,828   |             |             |   | 3,023,828   |            
|Other assets                                                 |                            |                                            | 1,828,389   |             |             |   | 651,543     |            
|                                                             |                            |                                            |             |             |             |  
|                                                             | Total assets               |                                            | $           | 175,202,750 |             |   | $           | 115,940,285 |            
|                                                             |                            |                                            |             |             |             |  
|LIABILITIES                                                 
|Other liabilities                                            |                            | $                                          | 257,313     |             |             | $ | 679,036     |            
|Payable to subsidiaries                                      |                            |                                            |            |             |             |   | 3,805,505   |            
|Debt                                                         |                            |                                            | 27,550,000  |             |             |   | 31,139,606  |            
|                                                             |                            |                                            |             |             |             |  
|                                                             | Total liabilities          |                                            |             | 27,807,313  |             |   |             | 35,624,147  |            
|                                                             |                            |                                            |             |             |             |  
|SHAREHOLDERS EQUITY                                        
|Common stock                                                 |                            |                                            | 295,915     |             |             |   | 85,122      |            
|Additional paid-in capital                                   |                            |                                            | 127,428,850 |             |             |   | 67,948,208  |            
|Retained earnings                                            |                            |                                            | 12,074,216  |             |             |   | 10,033,577  |            
|Note receivable from officer                                 |                            |                                            | (876,161    | )           |             |   | (824,238    | )          
|Unrealized appreciation on available for sale
    securities |                            |                                            | 8,472,617   |             |             |   | 3,073,469   |            
|                                                             |                            |                                            |             |             |             |  
|                                                             | Total shareholders equity |                                            |             | 147,395,437 |             |   |             | 80,316,138  |            
|                                                             |                            |                                            |             |             |             |  
|                                                             |                            | Total liabilities and shareholders equity |             | $           | 175,202,750 |   |             | $           | 115,940,285 | 
|                                                             |                            |                                            |             |             |             |  

73



---



##### 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, |           
|                                                           |                        |                                  |           
|                                                           |                        | 2002                             |            |           | 2001      |   |            | 2000      |          
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Revenue                                                    |                        | $                                | 277,599    |           |           | $ | 270,010    |           |           | $ | 170,035     |          
|Operating expenses:                                        |                        |                                  |            |           |           |   |            |           |           |   |             |          
|                                                           | Interest expense       |                                  |            | 3,102,988 |           |   |            | 3,275,040 |           |   |             | 3,042,923 |          
|                                                           | Gain on debt reduction |                                  |            | (359,029  | )         |   |            |          |           |   |             |          |          
|                                                           | Other expenses         |                                  |            | 768,153   |           |   |            | 324,584   |           |   |             | 672,424   |          
|                                                           |                        |                                  |            |           |           |   |            |           |          
|                                                           |                        | Total operating expenses         |            |           | 3,512,112 |   |            |           | 3,599,624 |   |             |           | 3,715,347 | 
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Loss before federal income taxes and subsidiary
    equity |                        |                                  | (3,234,513 | )         |           |   | (3,329,614 | )         |           |   | (3,545,312  | )        
|Federal income tax benefit                                 |                        |                                  | (1,054,339 | )         |           |   | (775,424   | )         |           |   | (1,166,629  | )        
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Loss before subsidiary equity earnings                     |                        |                                  | (2,180,174 | )         |           |   | (2,554,190 | )         |           |   | (2,378,683  | )        
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Subsidiary equity earnings                                 |                        |                                  | 3,830,268  |           |           |   | (3,955,530 | )         |           |   | (15,093,048 | )        
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Net income (loss)                                          |                        | $                                | 1,650,094  |           |           | $ | (6,509,720 | )         |           | $ | (17,471,731 | )        
|                                                           |                        |                                  |            |           |           |   |            |           |          

74



---



##### 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,                                       |          
|                  |                                         |                                                                        |          
|                  |                                         | 2002                                                                   |           |           | 2001      |   |            | 2000       |           
|                  |                                         |                                                                        |           |           |           |   |            |            |           
|Net income (loss) |                                         | $                                                                      | 1,650,094 |           |           | $ | (6,509,720 | )          |            | $ | (17,471,731 | )          
|                  | Other comprehensive income, net of tax: |                                                                        |           |           |           |   |            |            |            |   |             |             |          
|                  |                                         | Unrealized gains on securities:                                        |           |           | 5,888,375 |   |            |            | 2,979,739  |   |             |             | 4,454,297 |  
|                  |                                         | Less: reclassification adjustment for gains
    included in net income |           |           | (489,227  | ) |            |            | (1,331,056 | ) |             |             | (356,443  | )
|                  |                                         |                                                                        |           |           |           |   |            |            |           
|                  | Other comprehensive income              |                                                                        |           | 5,399,148 |           |   |            | 1,648,683  |            |   |             | 4,097,854   |          
|                  |                                         |                                                                        |           |           |           |   |            |            |           
|                  | Comprehensive income (loss)             |                                                                        | $         | 7,049,242 |           |   | $          | (4,861,037 | )          |   | $           | (13,373,877 | )        
|                  |                                         |                                                                        |           |           |           |   |            |            |           

75



---



##### 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,                        |         
|                                                         |                                   |                                                         |         
|                                                         |                                   | 2002                                                    |          |             | 2001        |   |           | 2000       |           
|                                                         |                                   |                                                         |          |             |             |   |           |            |           
|Net cash (used in) provided by operating
    activities: |                                   | $                                                       | (63,694  | )           |             | $ | 1,288,628 |            |            | $ | 4,430,478 |           
|                                                         |                                   |                                                         |          |             |             |   |           |            |           
|Cash Flow from Investing Activities:                     |                                   |                                                         |          |             |             |   |           |            |            |   |           |           
|                                                         | Dividend from subsidiary          |                                                         |          |            |             |   |           | 5,633,465  |            |   |           |           |           
|                                                         | Investment in subsidiaries        |                                                         |          | (37,500,000 | )           |   |           | (5,633,465 | )          |   |           | (3,662,203 | )         
|                                                         |                                   |                                                         |          |             |             |   |           |            |           
|                                                         |                                   | Net cash used in investing activities                   |          |             | (37,500,000 | ) |           |            |           |   |           |            | (3,662,203 | )
|                                                         |                                   |                                                         |          |             |             |   |           |            |           
|Cash Flow from Financing Activities:                     |                                   |                                                         |          |             |             |   |           |            |            |   |           |           
|                                                         | Proceeds from borrowings          |                                                         |          | 8,300,000   |             |   |           |           |            |   |           | 8,475,000  |           
|                                                         | Principal payments on borrowings  |                                                         |          | (30,869,709 | )           |   |           |           |            |   |           | (8,265,000 | )         
|                                                         | Dividends paid on common stock    |                                                         |          |            |             |   |           | (1,021,458 | )          |   |           | (1,021,409 | )         
|                                                         | Net proceeds from public offering |                                                         |          | 60,516,184  |             |   |           |           |            |   |           |           |           
|                                                         | Retirement of common stock        |                                                         |          | (486,124    | )           |   |           | (32,142    | )          |   |           | (39,044    | )         
|                                                         |                                   |                                                         |          |             |             |   |           |            |           
|                                                         |                                   | Net cash provided by (used in) financing
    activities |          |             | 37,460,351  |   |           |            | (1,053,600 | ) |           |            | (850,453   | )
|                                                         |                                   |                                                         |          |             |             |   |           |            |           
|(Decrease) increase in cash and cash equivalents         |                                   |                                                         | (103,343 | )           |             |   | 235,028   |            |            |   | (82,178   | )         
|Cash and cash equivalents, beginning of year             |                                   |                                                         | 253,221  |             |             |   | 18,193    |            |            |   | 100,371   |           
|                                                         |                                   |                                                         |          |             |             |   |           |            |           
|Cash and cash equivalents, end of year                   |                                   | $                                                       | 149,878  |             |             | $ | 253,221   |            |            | $ | 18,193    |           
|                                                         |                                   |                                                         |          |             |             |   |           |            |           

76



---



##### Table of Contents



SCHEDULE III

MEADOWBROOK INSURANCE GROUP, INC.

SUPPLEMENTARY INSURANCE INFORMATION


December 31, 2002

(in thousands)


|                                      |  |                   |        |                   |               |   |         |          |              |   |                  |  |         |   |   |  |  |   |         | 
|------------------------------------- |  | ----------------- | ------ | ----------------- | ------------- | - | ------- | -------- | ------------ | - | ---------------- |  | ------- | - | - |  |  | - | ------- | 
|                                      |  |                   |        | Future Policy     |               |   |         |          |              |   |                 
|                                      |  |                   |        | Benefits, Losses, |               |   |         |          | Other Policy |   |                 
|                                      |  | Deferred Policy   |        |                   | Claims &      |   |         | Unearned |              |   | Claims &         |  | Premium |  
|                                      |  | Acquisition Costs |        |                   | Loss Expenses |   |         | Premium  |              |   | Benefits Payable |  | Revenue |  
|                                      |  |                   |        |                   |               |   |         |          |              |   |                  |  |         |  
|Speciality Risk Management Operations |  | $                 | 12,140 |                   |               | $ | 374,933 |          |              | $ | 68,678           |  |         | $ |  |  |  | $ | 145,383 | 
|Agency Operations                     |  |                   |       |                   |               |   |        |          |              |   |                 |  |         |   |  |  |  |   |        | 
|Reconciling Items                     |  |                   |       |                   |               |   |        |          |              |   |                 |  |         |   |  |  |  |   |        | 
|                                      |  |                   |        |                   |               |   |         |          |              |   |                  |  |         |   |  
|                                      |  | $                 | 12,140 |                   |               | $ | 374,933 |          |              | $ | 68,678           |  |         | $ |  |  |  | $ | 145,383 | 

|                                      |  |            |        |                   |            |   |        |                   |  |   |           |  |  |         |        |  |  |   |         | 
|------------------------------------- |  | ---------- | ------ | ----------------- | ---------- | - | ------ | ----------------- |  | - | --------- |  |  | ------- | ------ |  |  | - | ------- | 
|                                      |  |            |        | Benefits, Claims, |            |   |        |                   |  |   |          
|                                      |  | Net        |        |                   | Losses &   |   |        | Amortization of   |  |   | Other     |  |  |        
|                                      |  | Investment |        |                   | Settlement |   |        | Deferred Policy   |  |   | Operating |  |  | Premium |       
|                                      |  | Income     |        |                   | Expenses   |   |        | Acquisition Costs |  |   | Expenses  |  |  | Written |       
|                                      |  |            |        |                   |            |   |        |                   |  |   |           |  |  |         |       
|Speciality Risk Management Operations |  | $          | 13,906 |                   |            | $ | 98,734 |                   |  | $ | 35,378    |  |  | $       | 50,660 |  |  | $ | 139,795 | 
|Agency Operations                     |  |            |       |                   |            |   |       |                   |  |   |          |  |  |         | 8,199  |  |  |   |        | 
|Reconciling Items                     |  |            | 52     |                   |            |   |       |                   |  |   |          |  |  |         | 2,735  |  |  |   |        | 
|                                      |  |            |        |                   |            |   |        |                   |  |   |           |  |  |         |       
|                                      |  | $          | 13,958 |                   |            | $ | 98,734 |                   |  | $ | 35,378    |  |  | $       | 61,594 |  |  | $ | 139,795 | 

77



---



##### Table of Contents



SCHEDULE III

MEADOWBROOK INSURANCE GROUP, INC.

SUPPLEMENTARY INSURANCE INFORMATION


December 31, 2001

(in thousands)


|                                      |  |             |        |               |          |   |         |          |  |              |          |  |         |   |   |  |  |   |         | 
|------------------------------------- |  | ----------- | ------ | ------------- | -------- | - | ------- | -------- |  | ------------ | -------- |  | ------- | - | - |  |  | - | ------- | 
|                                      |  |             |        | Future Policy |          |   |         |          |  |              |         
|                                      |  |             |        | Benefits,     |          |   |         |          |  |              |         
|                                      |  | Deferred    |        |               | Losses,  |   |         |          |  | Other Policy |          | 
|                                      |  | Policy      |        |               | Claims & |   |         |          |  | Claims &     |          | 
|                                      |  | Acquisition |        |               | Loss     |   |         | Unearned |  |              | Benefits |  | Premium |  
|                                      |  | Costs       |        |               | Expenses |   |         | Premium  |  |              | Payable  |  | Revenue |  
|                                      |  |             |        |               |          |   |         |          |  |              |          |  |         |  
|Speciality Risk Management Operations |  | $           | 13,953 |               |          | $ | 394,596 |          |  | $            | 94,002   |  |         | $ |  |  |  | $ | 163,665 | 
|Agency Operations                     |  |             |       |               |          |   |        |          |  |              |         |  |         |   |  |  |  |   |        | 
|Reconciling Items                     |  |             |       |               |          |   |        |          |  |              |         |  |         |   |  |  |  |   |        | 
|                                      |  |             |        |               |          |   |         |          |  |              |          |  |         |   |  
|                                      |  | $           | 13,953 |               |          | $ | 394,596 |          |  | $            | 94,002   |  |         | $ |  |  |  | $ | 163,665 | 

|                                      |  |            |        |           |            |   |              |             |  |   |           |  |  |         |        |  |  |   |         | 
|------------------------------------- |  | ---------- | ------ | --------- | ---------- | - | ------------ | ----------- |  | - | --------- |  |  | ------- | ------ |  |  | - | ------- | 
|                                      |  |            |        | Benefits, |            |   | Amortization |             |  |   |           | 
|                                      |  |            |        | Claims,   |            |   | of Deferred  |             |  |   |           | 
|                                      |  | Net        |        |           | Losses &   |   |              | Policy      |  |   | Other     |  |  |        
|                                      |  | Investment |        |           | Settlement |   |              | Acquisition |  |   | Operating |  |  | Premium |       
|                                      |  | Income     |        |           | Expenses   |   |              | Costs       |  |   | Expenses  |  |  | Written |       
|                                      |  |            |        |           |            |   |              |             |  |   |           |  |  |         |       
|Speciality Risk Management Operations |  | $          | 14,176 |           |            | $ | 125,183      |             |  | $ | 39,150    |  |  | $       | 47,339 |  |  | $ | 186,083 | 
|Agency Operations                     |  |            |       |           |            |   |             |             |  |   |          |  |  |         | 10,358 |  |  |   |        | 
|Reconciling Items                     |  |            | 52     |           |            |   |             |             |  |   |          |  |  |         | 6,288  |  |  |   |        | 
|                                      |  |            |        |           |            |   |              |             |  |   |           |  |  |         |       
|                                      |  | $          | 14,228 |           |            | $ | 125,183      |             |  | $ | 39,150    |  |  | $       | 63,985 |  |  | $ | 186,083 | 

78



---



##### Table of Contents



SCHEDULE III

MEADOWBROOK INSURANCE GROUP, INC.

SUPPLEMENTARY INSURANCE INFORMATION


December 31, 2000

(in thousands)


|                                      |  |             |       |               |          |   |         |          |  |              |          |  |         |   |   |  |  |   |         | 
|------------------------------------- |  | ----------- | ----- | ------------- | -------- | - | ------- | -------- |  | ------------ | -------- |  | ------- | - | - |  |  | - | ------- | 
|                                      |  |             |       | Future Policy |          |   |         |          |  |              |         
|                                      |  |             |       | Benefits,     |          |   |         |          |  |              |         
|                                      |  | Deferred    |       |               | Losses,  |   |         |          |  | Other Policy |          | 
|                                      |  | Policy      |       |               | Claims & |   |         |          |  | Claims &     |          | 
|                                      |  | Acquisition |       |               | Loss     |   |         | Unearned |  |              | Benefits |  | Premium |  
|                                      |  | Costs       |       |               | Expenses |   |         | Premium  |  |              | Payable  |  | Revenue |  
|                                      |  |             |       |               |          |   |         |          |  |              |          |  |         |  
|Speciality Risk Management Operations |  | $           | 6,624 |               |          | $ | 341,824 |          |  | $            | 94,142   |  |         | $ |  |  |  | $ | 146,000 | 
|Agency Operations                     |  |             |      |               |          |   |        |          |  |              |         |  |         |   |  |  |  |   |        | 
|Reconciling Items                     |  |             |      |               |          |   |        |          |  |              |         |  |         |   |  |  |  |   |        | 
|                                      |  |             |       |               |          |   |         |          |  |              |          |  |         |   |  
|                                      |  | $           | 6,624 |               |          | $ | 341,824 |          |  | $            | 94,142   |  |         | $ |  |  |  | $ | 146,000 | 

|                                      |  |            |        |           |            |   |              |             |  |   |           |  |  |         |        |  |  |   |         | 
|------------------------------------- |  | ---------- | ------ | --------- | ---------- | - | ------------ | ----------- |  | - | --------- |  |  | ------- | ------ |  |  | - | ------- | 
|                                      |  |            |        | Benefits, |            |   | Amortization |             |  |   |           | 
|                                      |  |            |        | Claims,   |            |   | of Deferred  |             |  |   |           | 
|                                      |  | Net        |        |           | Losses &   |   |              | Policy      |  |   | Other     |  |  |        
|                                      |  | Investment |        |           | Settlement |   |              | Acquisition |  |   | Operating |  |  | Premium |       
|                                      |  | Income     |        |           | Expenses   |   |              | Costs       |  |   | Expenses  |  |  | Written |       
|                                      |  |            |        |           |            |   |              |             |  |   |           |  |  |         |       
|Speciality Risk Management Operations |  | $          | 13,663 |           |            | $ | 127,619      |             |  | $ | 31,192    |  |  | $       | 50,201 |  |  | $ | 136,324 | 
|Agency Operations                     |  |            |       |           |            |   |             |             |  |   |          |  |  |         | 13,119 |  |  |   |        | 
|Reconciling Items                     |  |            | 52     |           |            |   |             |             |  |   |          |  |  |         | 6,977  |  |  |   |        | 
|                                      |  |            |        |           |            |   |              |             |  |   |           |  |  |         |       
|                                      |  | $          | 13,715 |           |            | $ | 127,619      |             |  | $ | 31,192    |  |  | $       | 70,297 |  |  | $ | 136,324 | 

79



---



##### Table of Contents



SCHEDULE IV

MEADOWBROOK INSURANCE GROUP, INC.

REINSURANCE


For the Years Ended
December 31,

(in thousands)


|                                 |  |        |         |          |           |   |         |            |  |            |        |           |  |         |         |  |  |  |        | 
|-------------------------------- |  | ------ | ------- | -------- | --------- | - | ------- | ---------- |  | ---------- | ------ | --------- |  | ------- | ------- |  |  |  | ------ | 
|                                 |  |        |         |          |           |   |         |            |  | Percentage |       
|                                 |  |        |         | Ceded to |           |   | Assumed |            |  |            |        | of amount | 
|                                 |  | Gross  |         |          | other     |   |         | from other |  |            | Net    |           |  | assumed |        
|Property and Liability Insurance |  | Amount |         |          | companies |   |         | companies  |  |            | amount |           |  | to net  |        
|                                 |  |        |         |          |           |   |         |            |  |            |        |           |  |         |        
|2002                             |  | $      | 195,186 |          |           | $ | 63,578  |            |  | $          | 13,775 |           |  | $       | 145,383 |  |  |  | 9.47%  | 
|2001                             |  | $      | 277,516 |          |           | $ | 129,985 |            |  | $          | 16,134 |           |  | $       | 163,665 |  |  |  | 9.86%  | 
|2000                             |  | $      | 262,069 |          |           | $ | 164,697 |            |  | $          | 48,628 |           |  | $       | 146,000 |  |  |  | 33.31% | 

80



---



##### Table of Contents



SCHEDULE V

MEADOWBROOK INSURANCE GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS


For the Years Ended
December 31,

(in thousands)


|                                |  |              |       |           |            |  |            |            |  |  |           |  |  |            |       |  |  |   |       | 
|------------------------------- |  | ------------ | ----- | --------- | ---------- |  | ---------- | ---------- |  |  | --------- |  |  | ---------- | ----- |  |  | - | ----- | 
|                                |  |              |       |           |            |  |            |           
|                                |  |              |       | Additions |            |  |            |            | 
|                                |  |              |       |           |            |  | Deductions |            |  | 
|                                |  | Balance at   |       |           | Charged to |  |            | Charged to |  |  | from      |  |  | Balance at |      
|                                |  | beginning of |       |           | costs and  |  |            | other      |  |  | allowance |  |  | end of     |      
|Allowance for doubtful accounts |  | period       |       |           | expense    |  |            | accounts   |  |  | account   |  |  | period     |      
|                                |  |              |       |           |            |  |            |            |  |  |           |  |  |            |      
|2002                            |  | $            | 4,932 |           |            |  | 1,497      |            |  |  |          |  |  |            | 1,682 |  |  | $ | 4,747 | 
|2001                            |  | $            | 5,242 |           |            |  | 1,065      |            |  |  |          |  |  |            | 1,375 |  |  | $ | 4,932 | 
|2000                            |  | $            | 2,225 |           |            |  | 6,337      |            |  |  |          |  |  |            | 3,320 |  |  | $ | 5,242 | 

81



---



##### Table of Contents



SCHEDULE VI

MEADOWBROOK INSURANCE GROUP, INC.

SUPPLEMENTAL INFORMATION CONCERNING PROPERTY
AND


CASUALTY INSURANCE OPERATIONS


|                                                   |  |                                  |        |              |             |   |         |                   |  |  |             |  |     |          |        |     |            |   |         |  |  |   |        | 
|-------------------------------------------------- |  | -------------------------------- | ------ | ------------ | ----------- | - | ------- | ----------------- |  |  | ----------- |  | --- | -------- | ------ | --- | ---------- | - | ------- |  |  | - | ------ | 
|                                                   |  |                                 
|                                                   |  | For the Years Ended December 31, |       
|                                                   |  | (in thousands)                   |       
|                                                   |  |                                  |       
|                                                   |  |                                  |        | Reserves for |             |   |        
|                                                   |  | Deferred                         |        |              | Losses and  |   |         | Discount, if any, |  |  |            
|                                                   |  | Policy                           |        |              | Loss        |   |         | deducted from     |  |  |             |  | Net |          |        | Net |           
|                                                   |  | Acquisition                      |        |              | Adjustment  |   |         | previous          |  |  | Unearned    |  |     | Premiums |        |     | Investment |  
|Affiliation with Registrant                        |  | Costs                            |        |              | Expenses(2) |   |         | column(1)         |  |  | Premiums(2) |  |     | Earned   |        |     | Income     |  
|                                                   |  |                                  |        |              |             |   |         |                   |  |  |             |  |     |          |        |     |            |  
|(a)Consolidated Property and Casualty Subsidiaries |  |                                  |        |              |             |   |         |                   |  |  |             |  |     |          |        |     |            |   |         |  |  |   |        | 
|2002                                               |  | $                                | 12,140 |              |             | $ | 374,933 |                   |  |  |            |  |     | $        | 68,678 |     |            | $ | 145,383 |  |  | $ | 13,906 | 
|2001                                               |  | $                                | 13,953 |              |             | $ | 394,596 |                   |  |  |            |  |     | $        | 94,002 |     |            | $ | 163,665 |  |  | $ | 14,176 | 
|2000                                               |  | $                                | 6,624  |              |             | $ | 341,824 |                   |  |  |            |  |     | $        | 94,142 |     |            | $ | 146,000 |  |  | $ | 13,664 | 

|     |  |                    |         |  |                 |   |        |             |  |   |          |  |  |         |         |  |  |   |         | 
|---- |  | ------------------ | ------- |  | --------------- | - | ------ | ----------- |  | - | -------- |  |  | ------- | ------- |  |  | - | ------- | 
|     |  |                    |         |  |                 |   |        |            
|     |  | Losses and loss    |         |  | Amortization of |   |        | Paid losses |  |   |         
|     |  | adjustment expense |         |  | deferred policy |   |        | and loss    |  |   | Net      | 
|     |  |                    |         |  | acquisition     |   |        | adjustment  |  |   | Premiums | 
|     |  | Current Year       |         |  | Prior Years     |   |        | expenses    |  |   | expenses |  |  | Written |        
|     |  |                    |         |  |                 |   |        |             |  |   |          |  |  |         |        
|2002 |  | $                  | 92,644  |  |                 | $ | 6,090  |             |  | $ | 35,378   |  |  | $       | 104,271 |  |  | $ | 139,795 | 
|2001 |  | $                  | 110,797 |  |                 | $ | 14,386 |             |  | $ | 39,150   |  |  | $       | 99,392  |  |  | $ | 186,083 | 
|2000 |  | $                  | 107,371 |  |                 | $ | 20,248 |             |  | $ | 31,192   |  |  | $       | 82,257  |  |  | $ | 136,324 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company does not employ any discounting
    techniques.                                                                                                                                                                                                                                                                                                                     
|   
|(2) | Reserves for losses and loss adjustment expenses
    are shown gross of $181.8 million, $195.9 million and
    $169.0 million of reinsurance recoverable on unpaid losses
    in 2002, 2001, and 2000, respectively. Unearned premiums are
    shown gross of prepaid premiums of $18.1 million,
    $37.9 million, and $55.9 million in 2002, 2001, and
    2000, respectively.

82



---



##### 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: | /s/ ROBERT S. CUBBIN

| |                              
| | -----------------------------
| |                              
| | Robert S. Cubbin             
| | Chief Executive Officer      
| | (Principal Executive Officer)



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

| |                               
| | ------------------------------
| |                               
| | Karen M. Spaun                
| | Senior Vice President and     
| | Acting Chief Financial Officer
| | (Principal Financial Officer) 

Dated: March 31, 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 and Director                                                             |  | March 31, 2003
|                                    
|/s/ ROBERT S. CUBBINRobert S. Cubbin |  | President, Chief Executive Officer and Director
    (Principal Executive Officer) |  | March 31, 2003
|                                    
|**Joseph C. Henry                    |  | Executive Vice President and Director                                             |  | March 31, 2003
|                                    
|**Joseph S. Dresner                  |  | Director                                                                          |  | March 31, 2003
|                                    
|**Hugh W. Greenberg                  |  | Director                                                                          |  | March 31, 2003
|                                    
|**Florine Mark                       |  | Director                                                                          |  | March 31, 2003
|                                    
|**Ralph Milo                         |  | Director                                                                          |  | March 31, 2003
|                                    
|**Robert H. Naftaly                  |  | Director                                                                          |  | March 31, 2003
|                                    
|**David K. Page                      |  | Director                                                                          |  | March 31, 2003
|                                    
|**Robert W. Sturgis                  |  | Director                                                                          |  | March 31, 2003
|                                    
|**Irvin F. Swider, Sr.               |  | Director                                                                          |  | March 31, 2003

83



---



##### Table of Contents



|                                                                 |  |          |  |               
|---------------------------------------------------------------- |  | -------- |  | --------------
|Signature                                                        |  | Title    |  | Date          
|                                                                 |  |          |  |               
|                                                                
|**Bruce E. Thal                                                  |  | Director |  | March 31, 2003
|                                                                
|**Herbert Tyner                                                  |  | Director |  | March 31, 2003
|                                                                
|**By: /s/ ROBERT S. CUBBINRobert S. Cubbin,
    Attorney-in-fact |  |          |  |               

84



---



##### Table of Contents



Form of Certification for Annual Reports on
Form 10-K

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



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



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



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



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



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

|                     |  |                                             
|-------------------- |  | --------------------------------------------
|Date: March 31, 2003 |  | /s/ ROBERT S. CUBBIN                        
|                     |  |                                             
|                     |  | Robert S. Cubbin
    Chief Executive Officer



---



##### Table of Contents



Form of Certification for Annual Reports on
Form 10-K

I, Karen M. Spaun, Senior Vice President and
Acting Chief Financial Officer, certify that:



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



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



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



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



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

|                     |  |                                                                                
|-------------------- |  | -------------------------------------------------------------------------------
|Date: March 31, 2003 |  | /s/ KAREN M. SPAUN                                                             
|                     |  |                                                                                
|                     |  | Karen M. Spaun
    Senior Vice President and Acting Chief
    Financial Officer