##### 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,
    2003                                                 
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-14094



---

Meadowbrook Insurance Group, Inc.

(Exact name of registrant as specified in its
charter)


|                                             |  |                                  
|-------------------------------------------- |  | ---------------------------------
|Michigan                                     |  | 38-2626206                       
|(State of Incorporation)                     |  | (IRS Employer Identification No.)
|                                            
|26600 Telegraph Road, Southfield, 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 $78,205,434 on June 30, 2003, 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 1, 2004 was 29,023,933.

Documents Incorporated by Reference

Certain portions of the Registrants Proxy
Statement for the Annual Meeting scheduled for May 11, 2004
are incorporated by reference into Part III of this report.



---






---

TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 2. Properties                                                                           
|                                                   | Item 4. Submission of Matters To A Vote of Security Holders                                  
|PART II                                           
|                                                   | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|MANAGEMENTS DISCUSSION AND ANALYSIS              
|                                                   | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 7a. Qualitative and Quantitative Disclosures about Market Risk                          
|                                                   | Item 8. Financial Statements and Supplementary Data                                          
|                                                   | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|                                                   | Item 9A. Controls and Procedures                                                             
|PART III                                          
|                                                   | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                   | Item 11. Executive Compensation                                                              
|                                                   | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                   | Item 13. Certain Relationships and Related Transactions                                      
|                                                   | Item 14. Principal Accountant Fees and Services                                              
|PART IV                                           
|REPORT OF INDEPENDENT AUDITORS                    
|CONSOLIDATED BALANCE SHEET                        
|CONSOLIDATED STATEMENT OF INCOME                  
|CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY    
|Guaranty Agreement                                
|Development Agreement                             
|Employment Agreement between Robert S. Cubbin     
|Employment Agreement between Merton J. Segal      
|Employment Agreement between Michael G. Costello  
|Ninth Amendment to Lease                          
|Compliance Program/Code of Conduct                
|List of Subsidiaries                              
|Consent of Independent Accountants                
|Power of Attorney                                 
|Section 302 Certification of Robert S. Cubbin, CEO
|Section 302 Certification of Karen M. Spaun, CFO  
|Section 906 Certification of Robert S. Cubbin, CEO
|Section 906 Certification of Karen M. Spaun, CFO  



---



##### 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 were 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.

On September 30, 2003, the Company formed
Meadowbrook Capital Trust I, a Delaware trust. The trust issued
$10.0 million of mandatorily redeemable trust preferred
securities (TPS) to a trust formed by an
institutional investor.

2



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


At December 31, 2003, Meadowbrook and its
subsidiaries employed approximately 673 associates to service
the Companys clients and provide management services to
the Insurance Operations as defined below.

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 industry
reports, the alternative market accounts for nearly 50% of the
U.S. commercial property / casualty marketplace. 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 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. In a risk-sharing program, the Company
participates with the client or producing agent in the operating
results of the programs through the utilization of 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, fee revenue and commissions,
and investment income. In addition, the Company may benefit from
any margin included in the ceding commissions for services it
renders on behalf of the risk-sharing partner for the program.
In a fully-insured program, the Company provides commercial
insurance coverage and derives revenue 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.

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



| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | program and product design;                                                                                                                                                                      
|
| |  | underwriting / risk selection and policy issuance;                                                                                                                                               
|
| |  | sales, marketing and public relations to members
    of groups;                                                                                                                                  
|
| |  | 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;
|
| |  | claims handling and administration;                                                                                                                                                              
|
| |  | loss prevention and control:                                                                                                                                                                     
|
| |  | reinsurance brokerage;                                                                                                                                                                           
|
| |  | risk analysis and identification;                                                                                                                                                                
|
| |  | actuarial and loss reserve analysis;                                                                                                                                                             
|
| |  | information technology and processing;                                                                                                                                                           
|
| |  | feasibility studies;                                                                                                                                                                             

3



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.




| |   |                                                
| | - | -----------------------------------------------
| |  | litigation management;                         
|
| |  | accounting and financial statement preparation;
|
| |  | regulatory compliance; and                     
|
| |  | audit support.                                 

Company Segments



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

The Company earns commissions through the
operation of its retail property and casualty insurance agency,
which was formed in 1955. The agency has grown to be one of the
largest agencies in Michigan and, with acquisitions, has
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.

In total, the Companys agency operations
generated commissions of $15.0 million, $14.3 million, and
$15.7 million for the years ended December 31, 2003,
2002, and 2001, respectively.

Specialty
Risk Management Operations

The specialty risk management operations segment
focuses on specialty or niche insurance business in which it
provides various services and coverages that are tailored to
meet specific requirements of defined client groups and their
members. This includes, but is not limited to, providing
services, such as risk management consulting, claims
administration and handling, loss control, and reinsurance
brokering, along with various types of property and casualty
insurance coverage, including workers compensation,
commercial multiple peril, general liability, commercial auto
liability, and inland marine. Insurance coverage is provided
primarily to associations or similar groups of members and to
specified classes of business of the Companys
agent-partners. The Company recognizes revenue related to the
services and coverages the specialty risk management operations
provides within seven categories: net earned premiums,
management fees, claims fees, loss control fees, reinsurance
brokerage, investment income, and net realized gain
(loss) on investments.

Net earned premiums include the following lines
of business:



| |   |                          
| | - | -------------------------
| |  | Workers Compensation    
|
| |  | Commercial Multiple Peril
|
| |  | General Liability        

 Errors and Omissions

 Automobile

 Owners, Landlord and Tenant



| |   |                               
| | - | ------------------------------
| |  | Employment Practices Liability
|
| |  | Professional Liability        

 Medical

 Real Estate Appraisers

 Pharmacists



| |   |                    
| | - | -------------------
| |  | Inland Marine      
|
| |  | Product Liability  
|
| |  | Excess Reinsurance 
|
| |  | Commercial Property

4



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Description of
Specialty Risk Management Programs

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 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; claims
administration and handling, 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 1,800 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.

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.

5



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


CAPTIVE RISK-SHARING STRUCTURE

(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.

The Company assists the client with the formation
of the captive, which is capitalized by contributions from the
producers, or an association, or group of 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

6



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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 variable
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 from net 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
Major Specialty Risk Management Services

Program and Product 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.

Underwriting/ Risk Selection and Policy
Issuance.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.

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 captives
and/or rent-a-captives and holds a minority interest in three of
these captives. The Company also holds a minority interest in
two former captives which are no longer managed by the Company
and are currently in run-off, or have been commuted. The
offshore captives are managed by one of the Companys
subsidiaries in Bermuda or Barbados.

Claims Handling and Administration.The Company earns fees for 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.

Loss Prevention and Control.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.

Reinsurance Brokerage.Through its reinsurance brokerage
subsidiary, Meadowbrook Intermediaries, Inc., the Company earns
commissions by placing excess-of-loss reinsurance and insurance
coverage with high

7



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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.

Sales, Marketing, and Public Relations.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 website
(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 Company is currently writing Agents Edge in
fourteen states for its workers compensation programs and
has plans to expand into other states in the future.

Insurance Operations

The Companys four wholly-owned domestic
insurance company subsidiaries, Star, Savers, Ameritrust, and
Williamsburg (collectively referred to as the Insurance
Company Subsidiaries) issue insurance policies. Through
the Insurance Company Subsidiaries, the Company engages in
specialty risk management programs where the Company takes
underwriting risks in exchange for premiums. The Insurance
Company Subsidiaries primarily focus on specialty programs
designed specifically for trade groups and associations, whose
members are homogeneous in nature. Member insureds are typically
small-to-medium sized businesses. The Companys programs
focus on select classes of property/casualty business which,
through its due diligence process, the Company believes
demonstrate a fundamentally sound prospect for generating
underwriting profits. The Company does not generally offer its
programs on a nationwide basis; rather, the programs operate on
a regional or state-specific basis. The Company avoids
geographic concentration of risks that might lead to natural or
intentionally caused catastrophic events. The Companys
offshore captives, American Indemnity and PICL, which offer
clients captive or rent-a-captive options, complement the
Insurance Company Subsidiaries.

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

The Company may at times place risks directly
with third-party insurance carriers and participate in the risk
as a reinsurance partner. Such arrangements typically generate
management fee income and provide a means to manage premium
leverage ratios.

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, general liability, inland marine, and other liability
coverages. For the year ended December 31, 2003, the
workers compensation line of business accounted for 55.9%
and 61.7% of gross written premiums and net earned premiums,
respectively.

Despite the losses reported from 1999 to 2001,
the Company is dedicated to achieving consistent operating
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.

8



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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
through 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, 2003, 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. While the Company believes it has
adequate reserves, there can be no assurances that there will
not be additional losses in the future relating to 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 of the Company, which are considered to be
its 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 and
indicates the potential for a near term upgrade. The Company
believes that as a result of its improved balance sheet and
operating performance its rating will remain at least at its
current level, if not at an upgraded level. However, there can
be no assurance that A.M. Best will not change its rating of the
Insurance Company Subsidiaries in the future.

On September 30, 2003, the Company issued
$10.3 million of junior subordinated debentures
(Debentures) to an unconsolidated subsidiary trust
of the Company. The Company received a total of
$9.7 million in net proceeds from the issuance of the
Debentures. The Company contributed $6.3 million of the
proceeds to the surplus of Star.

9



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


The following table summarizes the gross written
premium and net earned premium for the years ended
December 31, 2003, 2002, 2001, 2000, and 1999.

|                                |       |                          |         |         |      |   |         |         |  |   |         |         |  |      |         |         |  |   |        |         | 
|------------------------------- | ----- | ------------------------ | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- |  | ---- | ------- | ------- |  | - | ------ | ------- | 
|                                |       |                         
|                                |       | Years Ended December 31, |        
|                                |       |                          |        
|Gross Written Premium           |       | 2003                     |         |         | 2002 |   |         | 2001    |  |   | 2000    |         |  | 1999 |        
|                                |       |                          |         |         |      |   |         |         |  |   |         |         |  |      |        
|                                |       |                         
|                                |       | (in thousands)           |        
|Workers Compensation           |       | $                        | 141,456 |         |      | $ | 104,822 |         |  | $ | 147,654 |         |  | $    | 132,108 |         |  | $ | 95,284 |        
|Commercial Multi-Peril          |       |                          | 48,091  |         |      |   | 33,072  |         |  |   | 44,513  |         |  |      | 42,170  |         |  |   | 36,123 |        
|Inland Marine                   |       |                          | 9,758   |         |      |   | 8,886   |         |  |   | 12,048  |         |  |      | 11,752  |         |  |   | 11,044 |        
|Other Liability                 |       |                          | 10,473  |         |      |   | 10,442  |         |  |   | 28,856  |         |  |      | 32,173  |         |  |   | 29,312 |        
|Other Commercial Auto Liability |       |                          | 26,902  |         |      |   | 9,894   |         |  |   | 38,191  |         |  |      | 44,070  |         |  |   | 35,462 |        
|Surety Bonds                    |       |                          | 5       |         |      |   | 2,998   |         |  |   | 7,377   |         |  |      | 5,116   |         |  |   | 6,651  |        
|All Other Lines                 |       |                          | 16,595  |         |      |   | 13,523  |         |  |   | 20,465  |         |  |      | 20,463  |         |  |   | 16,598 |        
|                                |       |                          |         |         |      |   |         |         |  |   |         |         |  |      |        
|                                | Total |                          | $       | 253,280 |      |   | $       | 183,637 |  |   | $       | 299,104 |  |      | $       | 287,852 |  |   | $      | 230,474 | 
|                                |       |                          |         |         |      |   |         |         |  |   |         |         |  |      |        

|                                |       |                          |        |         |      |   |        |         |  |   |        |         |  |      |        |         |  |   |        |         | 
|------------------------------- | ----- | ------------------------ | ------ | ------- | ---- | - | ------ | ------- |  | - | ------ | ------- |  | ---- | ------ | ------- |  | - | ------ | ------- | 
|                                |       |                         
|                                |       | Years Ended December 31, |       
|                                |       |                          |       
|Net Earned Premium              |       | 2003                     |        |         | 2002 |   |        | 2001    |  |   | 2000   |         |  | 1999 |       
|                                |       |                          |        |         |      |   |        |         |  |   |        |         |  |      |       
|                                |       |                         
|                                |       | (in thousands)           |       
|Workers Compensation           |       | $                        | 93,324 |         |      | $ | 80,795 |         |  | $ | 69,360 |         |  | $    | 83,301 |         |  | $ | 67,153 |        
|Commercial Multi-Peril          |       |                          | 26,075 |         |      |   | 23,462 |         |  |   | 27,004 |         |  |      | 18,567 |         |  |   | 15,608 |        
|Inland Marine                   |       |                          | 1,556  |         |      |   | 1,716  |         |  |   | 3,782  |         |  |      | 2,915  |         |  |   | 2,914  |        
|Other Liability                 |       |                          | 4,849  |         |      |   | 9,325  |         |  |   | 22,539 |         |  |      | 22,261 |         |  |   | 22,982 |        
|Other Commercial Auto Liability |       |                          | 12,940 |         |      |   | 17,548 |         |  |   | 27,535 |         |  |      | 9,725  |         |  |   | 8,545  |        
|Surety Bonds                    |       |                          | 73     |         |      |   | 97     |         |  |   | 173    |         |  |      | 32     |         |  |   | 133    |        
|All Other Lines                 |       |                          | 12,388 |         |      |   | 12,440 |         |  |   | 13,272 |         |  |      | 9,199  |         |  |   | 7,571  |        
|                                |       |                          |        |         |      |   |        |         |  |   |        |         |  |      |       
|                                | Total |                          | $      | 151,205 |      |   | $      | 145,383 |  |   | $      | 163,665 |  |      | $      | 146,000 |  |   | $      | 124,906 | 
|                                |       |                          |        |         |      |   |        |         |  |   |        |         |  |      |       

Reserves

The information required by this item is
incorporated by reference to pages 54 and 61-62 of the
Notes to the Consolidated Financial Statements, and
pages 21-22 and 29-32 of Item 7, Managements
Discussion and Analysis.

10



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


The following table shows the development of
reserves for unpaid losses and loss adjustment expenses
(LAE) from 1994 through 2003 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 2003, 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, |       
|                                             |               |                          |       
|                                             |               | 1994                     |        |        | 1995 |   |         | 1996   |   |   | 1997    |         |   | 1998 |         |         | 1999 |   |         | 2000    |   |   | 2001    |         |   | 2002 |         |         | 2003 |  
|                                             |               |                          |        |        |      |   |         |        |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |  
|                                             |               |                         
|                                             |               | (Dollars in thousands)   |       
|Reserves for losses and LAE at end of period |               | $                        | 47,149 |        |      | $ | 64,668  |        |   | $ | 65,775  |         |   | $    | 60,786  |         |      | $ | 84,254  |         |   | $ | 127,500 |         |   | $    | 172,862 |         |      | $ | 198,653 |         |   | $ | 193,116 |         |   | $ | 192,019 | 
|Cumulative paid as of
    1 year later       |               |                          | 15,792 |        |      |   | 25,659  |        |   |   | 31,626  |         |   |      | 31,368  |         |      |   | 39,534  |         |   |   | 55,361  |         |   |      | 73,079  |         |      |   | 81,024  |         |   |   | 78,123  |         |   |   |         | 
|                                             | 2 years later |                          |        | 26,227 |      |   |         | 42,969 |   |   |         | 49,930  |   |      |         | 47,313  |      |   |         | 57,192  |   |   |         | 91,088  |   |      |         | 119,449 |      |   |         | 134,896 |   |   |         |         |   |   |         |  | 
|                                             | 3 years later |                          |        | 33,227 |      |   |         | 52,222 |   |   |         | 58,362  |   |      |         | 56,848  |      |   |         | 77,214  |   |   |         | 117,159 |   |      |         | 150,548 |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 4 years later |                          |        | 36,644 |      |   |         | 57,443 |   |   |         | 64,018  |   |      |         | 65,517  |      |   |         | 86,229  |   |   |         | 134,294 |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 5 years later |                          |        | 37,450 |      |   |         | 59,182 |   |   |         | 67,928  |   |      |         | 68,138  |      |   |         | 93,799  |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 6 years later |                          |        | 38,865 |      |   |         | 60,653 |   |   |         | 69,503  |   |      |         | 72,063  |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 7 years later |                          |        | 39,929 |      |   |         | 60,630 |   |   |         | 72,337  |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 8 years later |                          |        | 39,926 |      |   |         | 63,348 |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 9 years later |                          |        | 41,532 |      |   |         |        |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|Reserves re-estimated as of end of year:     |               |                          |        |        |      |   |         |        |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         | 
|                                             | 1 year later  |                          |        | 46,738 |      |   |         | 65,058 |   |   |         | 67,010  |   |      |         | 69,012  |      |   |         | 99,316  |   |   |         | 147,748 |   |      |         | 187,248 |      |   |         | 204,743 |   |   |         | 196,023 |   |   |         |  | 
|                                             | 2 years later |                          |        | 45,578 |      |   |         | 65,312 |   |   |         | 69,536  |   |      |         | 73,591  |      |   |         | 106,734 |   |   |         | 145,745 |   |      |         | 190,463 |      |   |         | 210,522 |   |   |         |         |   |   |         |  | 
|                                             | 3 years later |                          |        | 45,255 |      |   |         | 66,692 |   |   |         | 74,796  |   |      |         | 74,009  |      |   |         | 102,438 |   |   |         | 153,922 |   |      |         | 194,096 |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 4 years later |                          |        | 45,592 |      |   |         | 68,557 |   |   |         | 74,439  |   |      |         | 77,771  |      |   |         | 104,379 |   |   |         | 158,460 |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 5 years later |                          |        | 43,031 |      |   |         | 65,795 |   |   |         | 76,025  |   |      |         | 78,490  |      |   |         | 107,036 |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 6 years later |                          |        | 42,519 |      |   |         | 65,874 |   |   |         | 77,239  |   |      |         | 80,084  |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 7 years later |                          |        | 43,116 |      |   |         | 66,521 |   |   |         | 79,142  |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 8 years later |                          |        | 43,928 |      |   |         | 68,674 |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|                                             | 9 years later |                          |        | 45,259 |      |   |         |        |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         |  | 
|Net cumulative redundancy (deficiency):      |               |                          |        |        |      |   |         |        |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |   |         | 
|                                             | Dollars       |                          | $      | 1,890  |      |   | $       | (4,006 | ) |   | $       | (13,367 | ) |      | $       | (19,298 | )    |   | $       | (22,782 | ) |   | $       | (30,960 | ) |      | $       | (21,234 | )    |   | $       | (11,869 | ) |   | $       | (2,907  | ) |   |         |  | 
|                                             | Percentage    |                          |        | 4.0    | %    |   |         | -6.2   | % |   |         | -20.3   | % |      |         | -31.7   | %    |   |         | -27.0   | % |   |         | -24.3   | % |      |         | -12.3   | %    |   |         | -6.0    | % |   |         | -1.5    | % |   |         |  | 
|Net reserves                                 |               |                          |        |        |      |   | 64,668  |        |   |   | 65,775  |         |   |      | 60,786  |         |      |   | 84,254  |         |   |   | 127,500 |         |   |      | 172,862 |         |      |   | 198,653 |         |   |   | 193,116 |         |   |   | 192,019 | 
|Ceded reserves                               |               |                          |        |        |      |   | 22,318  |        |   |   | 26,615  |         |   |      | 38,193  |         |      |   | 64,590  |         |   |   | 101,744 |         |   |      | 168,962 |         |      |   | 195,943 |         |   |   | 181,817 |         |   |   | 147,446 | 
|Gross reserves                               |               |                          |        |        |      |   | 86,986  |        |   |   | 92,390  |         |   |      | 98,979  |         |      |   | 148,844 |         |   |   | 229,244 |         |   |      | 341,824 |         |      |   | 394,596 |         |   |   | 374,933 |         |   |   | 339,465 | 
|                                             |               |                          |        |        |      |   |         |        |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |  
|Net re-estimated                             |               |                          |        |        |      |   | 68,674  |        |   |   | 79,142  |         |   |      | 80,084  |         |      |   | 107,036 |         |   |   | 158,460 |         |   |      | 194,096 |         |      |   | 210,522 |         |   |   | 196,023 |         |   |   |         | 
|Ceded re-estimated                           |               |                          |        |        |      |   | 39,154  |        |   |   | 41,899  |         |   |      | 58,096  |         |      |   | 98,081  |         |   |   | 157,405 |         |   |      | 222,657 |         |      |   | 236,692 |         |   |   | 199,675 |         |   |   |         | 
|Gross re-estimated                           |               |                          |        |        |      |   | 107,828 |        |   |   | 121,041 |         |   |      | 138,180 |         |      |   | 205,117 |         |   |   | 315,865 |         |   |      | 416,753 |         |      |   | 447,214 |         |   |   | 395,698 |         |   |   |         | 
|                                             |               |                          |        |        |      |   |         |        |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |  
|Gross cumulative redundancy (deficiency)*    |               |                          |        |        |      | $ | (20,842 | )      |   | $ | (28,651 | )       |   | $    | (39,201 | )       |      | $ | (56,273 | )       |   | $ | (86,621 | )       |   | $    | (74,929 | )       |      | $ | (52,618 | )       |   | $ | (20,765 | )       |   |   |         | 
|                                             |               |                          |        |        |      |   |         |        |   |   |         |         |   |      |         |         |      |   |         |         |   |   |         |         |   |      |         |         |      |  

11



---



##### 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):

|                                               |                       |      |          |        |      |   |          |        |  
|---------------------------------------------- | --------------------- | ---- | -------- | ------ | ---- | - | -------- | ------ | -
|                                               |                       | 2003 |          |        | 2002 |  
|                                               |                       |      |          |        |      |  
|GAAP reserves for loss and LAE                 |                       | $    | 339,465  |        |      | $ | 374,933  |       
|Reinsurance recoverables for unpaid losses     |                       |      | (147,446 | )      |      |   | (181,817 | )     
|Allowances against reinsurance recoverables ** |                       |      | (1,785   | )      |      |   | (1,400   | )     
|Non-regulated foreign insurance subsidiaries   |                       |      |          |        |      |   |          |       
|                                               | American Indemnity*** |      |          | (2,989 | )    |   |          | (2,973 | )
|                                               | PICL***               |      |          | (2,216 | )    |   |          | (3,363 | )
|                                               |                       |      |          |        |      |  
|Statutory reserves for loss and LAE            |                       | $    | 185,029  |        |      | $ | 185,380  |       
|                                               |                       |      |          |        |      |  



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | For the year ended December 31, 2003, the
    Company reported an increase of $20.8 million in gross
    ultimate loss estimates for accident years 2002 and prior, or
    5.5% of $374.9 million of gross loss and LAE reserves at
    December 31, 2002. The Company reported a $2.9 million
    increase in net ultimate loss and LAE estimates for accident
    years 2002 and prior, or 1.5% of $193.1 million. The change
    in gross ultimate loss estimates for accident years 2002 and
    prior is greater than the change in net ultimate loss estimates
    as a result of gross development on three programs in which the
    Company retained less than 2.5% of the risk, also known as
    fronted business.



|   |                                                                                                                                              
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------
|** | 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 $2.9 million,
$6.1 million, and $14.4 million in calendar years
2003, 2002, and 2001, respectively.

Investments

Certain information required by this item is
incorporated by reference to pages 53 and 58-60 of the
Notes to the Consolidated Financial Statements, and
pages 24-25 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

12



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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 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.

13



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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 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
$783,000, $1,614,000, and $991,000, respectively, for 2003,
2002, and 2001. 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 $2,379,000, $2,800,000, and
$1,918,000, respectively, during 2003, 2002, and 2001.

Restrictions on Dividends and Risk-Based
Capital

The information required by this item is
incorporated by reference to pages 68-69 of the Notes to
the Consolidated Financial Statements, and pages 36-38 of
Item 7, Managements Discussion and Analysis.

14



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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.

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.
Refer to pages 37-38 of Item 7, Managements
Discussion and Analysis.

Available Information

The Companys internet address is
www.meadowbrook.com. There the Company makes available,
free of charge, the Companys annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports,
as soon as reasonable practicable after the Company
electronically files such material with, or furnishes it to, the
Securities and Exchange Commission (SEC). The
Companys SEC reports can be accessed through the investor
relations section of the Companys website. The information
found on the Companys website is not part of this or any
other report the Company files with, or furnishes to the SEC.




Item
2.     Properties

The Company currently leases its corporate
offices in Southfield, Michigan from an unaffiliated third
party. In 2003, 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. On September 30, 2003, the Company
purchased the land from Star at fair market value.

On December 3, 2003, the Company entered
into a Development Agreement with an unaffiliated third party
for the construction of an office building on the above
mentioned land for a contract price of $11.0 million. The
office building will serve as the new location for the
Companys corporate offices. The office building will
consist of approximately 72,000 gross square feet.

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, 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

15



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


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 Plaintiffs were tried. On
February 3, 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 into with the
Court. All plaintiffs have filed an appeal with the Nevada
Supreme Court. One of the plaintiffs has been discharged
from bankruptcy and another has had a Receiver appointed for
him. The case remains stayed before the Nevada Supreme Court. It
is not expected that the outcome of this litigation will have a
material impact on the financial statements of the Company.

The Company is involved in other litigation
arising in the ordinary course of operations. 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.




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) 358-1100AuditorsPricewaterhouseCoopers LLP
    Grand Rapids, MICorporate CounselHoward & Howard Attorneys, P.C.
    Bloomfield Hills, MI |  | Transfer Agent & RegistrarLaSalle Bank National Association
    Shareholder Services Division
    135 South LaSalle Street,
    Suite 1811
    Chicago, IL 60603Stock ListingNew York Stock Exchange
    Symbol: MIG |  | Annual MeetingThe Annual Meeting of
    Meadowbrook Shareholders
    will be held at:2:00 p.m.
    May 11, 2004
    Temple Beth-El
    7400 Telegraph Road
    Bloomfield Hills, MI

16



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Shareholder Relations and
Form 10-K

A copy of Meadowbrook Insurance Group,
Inc.s 2003 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 Chief
    Financial Officer 

    (248) 204-8178     karen.spaun@meadowbrook.com
|
| | Jennifer La, Director of Financial Analysis 

    (248) 204-8159     jennifer.la@meadowbrook.com                          

Direct Investment Plan

Meadowbrooks Shareholder Investment Plan
(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: LaSalle Bank National Association
(800) 246-5761, option 2.

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, 2003 |  | High |      |  | Low |  |      | Dividends | 
|                  |  |      |      |  |     |  |      |           | 
|First Quarter     |  |      | 2.67 |  |     |  | 2.00 |           |  |  |  | 
|Second Quarter    |  |      | 3.43 |  |     |  | 2.30 |           |  |  |  | 
|Third Quarter     |  |      | 4.18 |  |     |  | 2.90 |           |  |  |  | 
|Fourth Quarter    |  |      | 4.51 |  |     |  | 3.92 |           |  |  |  | 
|                  |  |      |      |  |     |  |      |           | 
|                  |  |      |      |  |     |  |      |           |  |  |  | 
|                  |  |      |      |  |     |  |      |           | 

|                  |  |      |      |  |     |  |      |           |  |  |   | 
|----------------- |  | ---- | ---- |  | --- |  | ---- | --------- |  |  | - | 
|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 |           |  |  |  | 
|                  |  |      |      |  |     |  |      |           | 
|                  |  |      |      |  |     |  |      |           |  |  |  | 
|                  |  |      |      |  |     |  |      |           | 

For additional information regarding dividend
restrictions, refer to Managements Discussion and
Analysis  Liquidity and Capital Resources.

As of March 1, 2004 there were approximately
271 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.

17



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


Item
6.     Selected Financial
Data

Selected Consolidated Financial Data

|                                                             |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------ | ------------------------ | ----------------------------------------------- | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                             |                          |                                                
|                                                             |                          | For the Years Ended December 31,                |        
|                                                             |                          |                                                 |        
|                                                             |                          | 2003                                            |         |       | 2002 |   |         | 2001  |   |   | 2000    |       |   | 1999 |        
|                                                             |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |        
|                                                             |                          |                                                
|                                                             |                          | (In thousands, except per share and ratio data) |        
|Income Statement Data:                                       |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |      
|Gross written premium                                        |                          | $                                               | 253,280 |       |      | $ | 183,637 |       |   | $ | 299,104 |       |   | $    | 287,852 |       |   | $ | 230,474 |      
|Net written premium                                          |                          |                                                 | 189,827 |       |      |   | 139,795 |       |   |   | 186,083 |       |   |      | 136,324 |       |   |   | 122,819 |      
|Net earned premium                                           |                          |                                                 | 151,205 |       |      |   | 145,383 |       |   |   | 163,665 |       |   |      | 146,000 |       |   |   | 124,906 |      
|Net commissions and fees                                     |                          |                                                 | 45,291  |       |      |   | 37,581  |       |   |   | 40,675  |       |   |      | 41,251  |       |   |   | 38,697  |      
|Net investment income                                        |                          |                                                 | 13,484  |       |      |   | 13,958  |       |   |   | 14,228  |       |   |      | 13,715  |       |   |   | 11,618  |      
|Net realized gain (loss) on investments                      |                          |                                                 | 823     |       |      |   | 666     |       |   |   | 735     |       |   |      | 540     |       |   |   | (227    | )    
|Gain (loss) of sale of subsidiary                            |                          |                                                 |        |       |      |   | 199     |       |   |   | (1,097  | )     |   |      |        |       |   |   |        |      
|Total revenue                                                |                          |                                                 | 210,803 |       |      |   | 197,787 |       |   |   | 218,206 |       |   |      | 201,506 |       |   |   | 174,994 |      
|Net losses and LAE(1)                                        |                          |                                                 | 98,472  |       |      |   | 98,734  |       |   |   | 125,183 |       |   |      | 127,619 |       |   |   | 95,358  |      
|Policy acquisition and other underwriting
    expenses(1)    |                          |                                                 | 23,618  |       |      |   | 33,635  |       |   |   | 31,662  |       |   |      | 25,422  |       |   |   | 22,067  |      
|Other administrative expenses                                |                          |                                                 | 24,457  |       |      |   | 23,016  |       |   |   | 22,778  |       |   |      | 27,894  |       |   |   | 25,516  |      
|Salaries and employee benefits                               |                          |                                                 | 48,238  |       |      |   | 37,659  |       |   |   | 44,179  |       |   |      | 43,038  |       |   |   | 42,473  |      
|Interest on notes payable                                    |                          |                                                 | 977     |       |      |   | 3,021   |       |   |   | 4,516   |       |   |      | 5,135   |       |   |   | 3,636   |      
|Gain on debt reduction                                       |                          |                                                 |        |       |      |   | (359    | )     |   |   |        |       |   |      |        |       |   |   |        |      
|Income (loss) before income taxes and equity
    earnings    |                          |                                                 | 15,041  |       |      |   | 2,081   |       |   |   | (10,112 | )     |   |      | (27,602 | )     |   |   | (14,056 | )    
|Equity earnings of affiliates                                |                          |                                                 | 3       |       |      |   |        |       |   |   |        |       |   |      |        |       |   |   |        |      
|Net income (loss) before cumulative effect(2)                |                          |                                                 | 10,099  |       |      |   | 1,650   |       |   |   | (6,510  | )     |   |      | (17,473 | )     |   |   | (7,847  | )    
|Net income (loss)                                            |                          |                                                 | 10,099  |       |      |   | 1,650   |       |   |   | (6,510  | )     |   |      | (17,473 | )     |   |   | (9,553  | )    
|Earnings per share before cumulative
    effect  Diluted(2) |                          | $                                               | 0.35    |       |      | $ | 0.08    |       |   | $ | (0.76   | )     |   | $    | (2.05   | )     |   | $ | (0.91   | )    
|Earnings per share  Diluted                                 |                          | $                                               | 0.35    |       |      | $ | 0.08    |       |   | $ | (0.76   | )     |   | $    | (2.05   | )     |   | $ | (1.11   | )    
|Dividends declared per share                                 |                          | $                                               |        |       |      | $ |        |       |   | $ | 0.09    |       |   | $    | 0.12    |       |   | $ | 0.12    |      
|Balance Sheet Data:                                          |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |      
|Total investments and cash and cash equivalents              |                          | $                                               | 324,235 |       |      | $ | 286,050 |       |   | $ | 233,723 |       |   | $    | 240,083 |       |   | $ | 225,523 |      
|Total assets                                                 |                          |                                                 | 692,266 |       |      |   | 674,839 |       |   |   | 687,888 |       |   |      | 661,183 |       |   |   | 551,977 |      
|Loss and LAE reserves                                        |                          |                                                 | 339,465 |       |      |   | 374,933 |       |   |   | 394,596 |       |   |      | 341,824 |       |   |   | 229,244 |      
|Debt                                                         |                          |                                                 | 17,506  |       |      |   | 32,497  |       |   |   | 54,741  |       |   |      | 53,013  |       |   |   | 58,463  |      
|Junior subordinated debentures                               |                          |                                                 | 10,310  |       |      |   |        |       |   |   |        |       |   |      |        |       |   |   |        |      
|Shareholders equity                                         |                          |                                                 | 155,113 |       |      |   | 147,395 |       |   |   | 80,316  |       |   |      | 85,975  |       |   |   | 100,408 |      
|Book value per share                                         |                          | $                                               | 5.34    |       |      | $ | 4.98    |       |   | $ | 9.44    |       |   | $    | 10.10   |       |   | $ | 11.80   |      
|Other Data:                                                  |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |      
|GAAP ratios (insurance companies only):                      |                          |                                                 |         |       |      |   |         |       |   |   |         |       |   |      |         |       |   |   |         |      
|                                                             | Net loss and LAE ratio   |                                                 |         | 70.1  | %    |   |         | 72.1  | % |   |         | 81.1  | % |      |         | 90.9  | % |   |         | 79.0  | %
|                                                             | Expense ratio            |                                                 |         | 34.3  | %    |   |         | 36.5  | % |   |         | 36.0  | % |      |         | 35.9  | % |   |         | 34.5  | %
|                                                             | Combined ratio           |                                                 |         | 104.4 | %    |   |         | 108.6 | % |   |         | 117.1 | % |      |         | 126.8 | % |   |         | 113.5 | %
|                                                             | Statutory combined ratio |                                                 |         | 101.9 | %    |   |         | 109.7 | % |   |         | 113.0 | % |      |         | 126.4 | % |   |         | 114.2 | %

18



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.




---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Both the loss and loss adjustment expense ratios
    are calculated based upon unconsolidated insurance company
    operations. Certain intercompany costs directly related to
    policy acquisition and other underwriting expenses are
    classified as salary and employee benefit expenses in the
    consolidated financial statements. 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, |        
|                                                                      |                             |                                  |        
|                                                                      |                             | 2003                             |         |      | 2002 |   |         | 2001 |   |   | 2000    |      |   | 1999 |        
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|Net earned premium                                                    |                             | $                                | 151,205 |      |      | $ | 145,383 |      |   | $ | 163,665 |      |   | $    | 146,000 |      |   | $ | 124,906 |     
|Consolidated net loss and LAE                                         |                             | $                                | 98,472  |      |      | $ | 98,734  |      |   | $ | 125,183 |      |   | $    | 127,619 |      |   | $ | 95,358  |     
|Intercompany claim fees                                               |                             |                                  | 7,514   |      |      |   | 6,154   |      |   |   | 7,520   |      |   |      | 5,026   |      |   |   | 3,271   |     
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|Unconsolidated net loss and LAE                                       |                             | $                                | 105,986 |      |      | $ | 104,888 |      |   | $ | 132,703 |      |   | $    | 132,645 |      |   | $ | 98,629  |     
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|                                                                      | GAAP net loss and LAE ratio |                                  |         | 70.1 | %    |   |         | 72.1 | % |   |         | 81.1 | % |      |         | 90.9 | % |   |         | 79.0 | %
|Consolidated policy acquisition and other
    underwriting expenses   |                             | $                                | 23,618  |      |      | $ | 33,635  |      |   | $ | 31,662  |      |   | $    | 25,422  |      |   | $ | 22,067  |     
|Intercompany administrative and other
    underwriting fees           |                             |                                  | 28,296  |      |      |   | 19,445  |      |   |   | 27,309  |      |   |      | 27,002  |      |   |   | 21,025  |     
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|Unconsolidated policy acquisition and other
    underwriting expenses |                             | $                                | 51,914  |      |      | $ | 53,080  |      |   | $ | 58,971  |      |   | $    | 52,424  |      |   | $ | 43,092  |     
|                                                                      |                             |                                  |         |      |      |   |         |      |   |   |         |      |   |      |        
|                                                                      | GAAP expense ratio          |                                  |         | 34.3 | %    |   |         | 36.5 | % |   |         | 36.0 | % |      |         | 35.9 | % |   |         | 34.5 | %
|GAAP combined ratio                                                   |                             |                                  | 104.4   | %    |      |   | 108.6   | %    |   |   | 117.1   | %    |   |      | 126.8   | %    |   |   | 113.5   | %   



|    |                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 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.

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 statutory net loss and loss adjustment
expense 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 publicly traded specialty risk
management company, specializing in alternative market insurance
and risk management solutions for agents, brokers, professional
and trade associations, and insureds of all sizes. The
alternative market includes a wide range of approaches to
financing and managing risk exposures, such as captives, risk
retention and risk purchasing groups, governmental pools and
trusts, and self-insurance plans. The alternative market
developed as a result of the historical volatility in the cost
and availability of traditional commercial insurance coverages,
and usually involves some form of self-insurance or risk-sharing
on the part of the client. The Company develops and manages
alternative risk management programs for defined 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 segment
focuses on specialty or niche insurance business in which the
Company provides various services and coverages that are
tailored to meet the specific requirements of defined client
groups and their members. This includes, but is not limited to,
providing services, such as risk management consulting, claims
administration and handling, loss control, and reinsurance
brokering, along with various types of property and casualty
insurance coverage, including workers compensation,
commercial multiple peril, general liability, commercial auto
liability, and inland marine. Insurance coverage is provided
primarily to associations or similar groups of members and to
specified classes of business of the Companys
agent-partners. The Company recognizes revenue related to the
services and coverages the specialty risk management operations
provides within seven categories: net earned premiums,
management fees, claims fees, loss control fees, reinsurance
brokerage, investment income, and net realized gain (loss) on
investments.

The Company categorizes its programs into three
categories: managed, risk-sharing, and fully insured. In managed
programs, 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.
In risk-sharing programs, the Company participates with the
client or producing agent in the operating results of the
programs through the utilization of 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, fee revenue
and commissions, 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 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.

20



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued



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

The Company earns commissions through the
operation of its retail property and casualty insurance agency,
which was formed in 1955. The agency has grown to be one of the
largest agencies in Michigan and, with acquisitions, has
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.

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

|         |                                   |                                  |   |         |      |  |   |         |   |  |   |         |  
|-------- | --------------------------------- | -------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|         |                                   |                                 
|         |                                   | For the Years Ended December 31, |  
|         |                                   |                                  |  
|         |                                   | 2003                             |   |         | 2002 |  |   | 2001    |  
|         |                                   |                                  |   |         |      |  |   |         |  
|Revenues |                                   |                                  |   |         |      |  |   |         |   |  |   |        
|         | Net earned premiums               |                                  | $ | 151,205 |      |  | $ | 145,383 |   |  | $ | 163,665 |  
|         | Management fees                   |                                  |   | 18,751  |      |  |   | 12,761  |   |  |   | 13,318  |  
|         | Claims fees                       |                                  |   | 14,756  |      |  |   | 8,076   |   |  |   | 8,594   |  
|         | Loss control fees                 |                                  |   | 2,303   |      |  |   | 2,590   |   |  |   | 2,326   |  
|         | Reinsurance brokerage             |                                  |   | 308     |      |  |   | 309     |   |  |   | 1,233   |  
|         | Investment income                 |                                  |   | 13,471  |      |  |   | 13,906  |   |  |   | 14,177  |  
|         | Net realized gain on investments  |                                  |   | 823     |      |  |   | 666     |   |  |   | 735     |  
|         |                                   |                                  |   |         |      |  |   |         |  
|         | Specialty risk management         |                                  |   | 201,617 |      |  |   | 183,691 |   |  |   | 204,048 |  
|         | Agency operations                 |                                  |   | 14,954  |      |  |   | 14,330  |   |  |   | 15,706  |  
|         | Reconciling items                 |                                  |   | 13      |      |  |   | 52      |   |  |   | 52      |  
|         | Gain (loss) on sale of subsidiary |                                  |   |        |      |  |   | 199     |   |  |   | (1,097  | )
|         | Intersegment revenue              |                                  |   | (5,781  | )    |  |   | (485    | ) |  |   | (503    | )
|         |                                   |                                  |   |         |      |  |   |         |  
|         | Consolidated revenue              |                                  | $ | 210,803 |      |  | $ | 197,787 |   |  | $ | 218,206 |  
|         |                                   |                                  |   |         |      |  |   |         |  

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 adjustment
expenses (LAE), insurers establish reserves as
balance sheet liabilities representing estimates of amounts
needed to pay reported and unreported net losses and LAE As of
December 31, 2003, the Company had accrued
$339.5 million of gross loss and LAE reserves compared with
$374.9 million at December 31, 2002.

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 (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, 2003 and 2002, reinsurance
recoverables on paid and unpaid losses were $165.0 million and
$202.2 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

21



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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 LAE incurred but not yet reported. The Company
projects an estimate of ultimate losses and LAE expenses at each
reporting date. The difference between: (i) projected
ultimate loss and LAE reserves and (ii) case loss reserves
and LAE 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.

Reserves are reviewed by internal and independent
actuaries for adequacy on a quarterly 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 no
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, 2003, 2002, and 2001.



| |                      
| | ---------------------
| | 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, 2003, 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. While the Company believes it has
adequate reserves, there can be no assurances that there will
not be additional losses in the future related to these programs.

22



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued



| |            
| | -----------
| | 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, 2003, the Company had risk exposure in excess
of collateral in the amount of $9.5 million, compared to
$11.6 million at December 31, 2002, on these programs,
for which the Company has an allowance of $6.4 million at
December 31, 2003, compared to $6.8 million at
December 31, 2002, 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, some of which are in litigation with the
Company. At the end of each quarter an analysis of these
exposures is conducted to determine the potential exposure to
uncollectibility. At December 31, 2003, management believes
that this allowance is adequate. To date, the Company has not,
in the aggregate, experienced material difficulties in
collecting balances from its risk-sharing partners. No assurance
can be given, however, regarding the future ability of any of
the Companys risk-sharing partners to meet their
obligations. At December 31, 2003 and 2002, the exposure
amount in litigation with former risk-sharing partners which is
not reserved or collateralized is $1.3 million and
$1.9 million, respectively. During the third quarter of
2003, a settlement agreement was reached with a former
risk-sharing partner that was previously in litigation. The
agreement included receipt of cash and a collateralized note
receivable approximating net book value. As a result of this
agreement, exposures in excess of collateral amounts and related
allowances have been reduced by $1.3 million and $600,000,
respectively.



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

At December 31, 2003, the Company had a
deferred tax asset of $15.2 million, $3.4 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, 2003, management concluded that the positive
evidence, which includes cumulative pre-tax income of
$7.0 million for the three years ended December 31,
2003, supporting the generation of future taxable income
sufficient to realize the deferred tax asset outweighed the
negative evidence of the previous cumulative losses reported for
the periods ended December 31, 2001, 2000, and 1999, which
generated the NOL. Furthermore, the current market conditions
that supported the cumulative rate increases of 66.4% since the
beginning of 2000 is expected to continue. In addition, while
the Company had adverse development of $2.9 million, or
1.5% of $193.1 million of net loss and LAE reserves at
December 31, 2002, loss reserves continue to stabilize with
a calendar year 2003 loss and LAE ratio of 70.1% for the year
ended December 31, 2003. Also, the Company continues to
have alternative tax strategies, which could generate capital
gains of $52.0 million, or utilization of
$17.7 million of taxes. This capital gain would fully
utilize the net operating loss of $3.4 million at
December 31, 2003 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 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.

23



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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, 2003 and 2002, the net
goodwill was $29.0 million. Amortization expense in
relation to goodwill in 2001 was $2.3 million. In
accordance with SFAS No. 142, there was no amortization
expense recorded in relation to goodwill in 2003 or 2002.



| |                        
| | -----------------------
| | Other Intangible Assets

At December 31, 2003 and 2002, the Company
had other intangible assets, net of related accumulated
amortization, of $1.4 million and $206,000, respectively,
recorded as part of other assets. The Company did not have any
other intangible assets in 2001.

During the fourth quarter of 2002 and the first
quarter of 2003, the Company purchased three 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 a weighted average amortization period of five years.

Also during the first quarter of 2003, the
Company completed an asset purchase related to the renewal
rights of a book of business. The total purchase price of this
agreement was determined based on a percentage of estimated
gross written premium collected by the Company. The actual
purchase price is contingent upon actual written premium
collected over a three year period. As of December 31,
2003, the total purchase price was estimated at
$2.3 million, consisting of $1.3 million of fixed
assets and $994,000 recognized as an other intangible asset
being amortized over a five year period.

At December 31, 2003 and 2002, the gross
carrying amount of other intangible assets was $1.8 million
and $221,000, respectively, and the accumulated amortization was
$368,000 and $15,000, respectively. Amortization expense related
to other intangible assets was $353,000 for 2003 and $15,000 for
2002. Amortization expense for the five succeeding years is as
follows (in thousands):

|     |                            |   |     |       | 
|---- | -------------------------- | - | --- | ----- | 
|2004 |                            | $ | 359 |      
|2005 |                            |   | 359 |      
|2006 |                            |   | 359 |      
|2007 |                            |   | 344 |      
|2008 |                            |   | 6   |      
|     |                            |   |    
|     | Total amortization expense |   | $   | 1,427 | 
|     |                            |   |    



| |            
| | -----------
| | Investments

The Companys investment securities at
December 31, 2003 and 2002 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.

24



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

As of December 31, 2003 and 2002, gross
unrealized gains on available for sale securities were
$12.2 million and $13.5 million, respectively.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | Other Than Temporary Impairments of
    Securities and Unrealized Losses on Investments

The Companys investment portfolio is
primarily invested in debt securities classified as available
for sale, with a concentration in fixed income securities of a
high quality. The Companys investment philosophy is to
maximize after-tax earnings and maintain significant investments
in tax-exempt bonds. The Companys policy for the valuation
of temporarily impaired securities is to determine impairment
based on analysis of the following factors: market value less
than 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; and intent and ability of the Company to retain the
investment for a period of time sufficient to allow for
anticipated recovery in market value. The Company evaluates its
investments in securities to determine other than temporary
impairment, no less than quarterly. Investments which are deemed
impaired are written down to their estimated net realizable
value and the related losses recognized in income.

At December 31, 2003, the Company had
fifty-six securities that were in an unrealized loss position
deemed to be temporary. These investments all had unrealized
losses of less than 10%. Two investments have been in an
unrealized loss position for more than one year, one of which,
with a $71,000 unrealized loss, has been in an unrealized loss
position for greater than 18 months. Positive evidence
considered in reaching the Companys conclusion that the
investments in an unrealized loss position are not other than
temporarily impaired consisted of: 1) there were no specific
events which caused concerns; 2) there were no past due interest
payments; 3) there has been a rise in market prices; 4) the
Companys ability and intent to retain the investment for a
sufficient amount of time to allow an anticipated recovery in
value; and 5) the Company also determined that the changes in
market value were considered normal in relation to overall
fluctuations in interest rates.

As of December 31, 2003 and 2002, gross
unrealized losses on available for sale securities were $893,000
and $648,000, respectively.

Results of Operations



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

In 2003, the Company reported consistent,
profitable financial results and continued to achieve
operational efficiencies and enhancements.

Since raising capital in June 2002, the Company
remained focused on a systematic deployment of the proceeds with
controlled growth of historically profitable underwriting
programs. The Company successfully integrated new
fee-for-service agreements and $70.0 million, or 38%,
growth in gross written premiums. This growth in gross written
premiums is related to programs which have long-term
statistically proven profitable experience and, for which, the
Company has the underwriting expertise. With this growth, the
Company has leveraged fixed costs, and maximized statutory
surplus and cash flows.

In 2003, the Company reported positive cash flow
from operations of $47.5 million, increased statutory surplus
$6.1 million to $99.9 million, and stabilized
reserves. In 2003, net income improved $8.4 million to
$10.1 million, compared to a net income of $1.7 million in
2002.

The Companys combined ratio improved
4.2 percentage points to 104.4% in 2003 from 108.6% in
2002. This improvement is the result of continued rate
increases, the growth of fee-for-service contracts, and on-

25



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

going expense control initiatives. These efforts
have allowed for growth with a limited increase in fixed costs,
thus improving profit margins and return on equity.



| |                       
| | ----------------------
| | 2003 compared to 2002:

Results from operations improved
$8.4 million from a net income of $1.7 million, or $0.08
per diluted share, in 2002 to net income of $10.1 million,
or $0.35 per diluted share, in 2003. This improvement reflects
the addition of new fee-for-service agreements, the absence of
reserve strengthening on discontinued programs, and continued
expense controls. The new fee revenue and expense controls have
allowed the Company to leverage its fixed costs. This
improvement in net income also reflects the impact of rate
increases achieved in 2003 and 2002 of 13.6% and 15.7%,
respectively.



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

Results from operations improved
$8.2 million from a net loss of ($6.5) million, or ($0.76)
per dilutive share, in 2001 to net income of $1.7 million,
or $0.08 per dilutive share, 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. This improvement is also the result
of the elimination of amortization of goodwill, which was
$2.3 million in 2001.



| |                                         
| | ----------------------------------------
| | 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, |  
|                      |                                      |                                  |  
|                      |                                      | 2003                             |   |         | 2002 |  |   | 2001    |  
|                      |                                      |                                  |   |         |      |  |   |         |  
|Revenue:              |                                      |                                  |   |         |      |  |   |         |   |  |   |        
|                      | Net earned premiums                  |                                  | $ | 151,205 |      |  | $ | 145,383 |   |  | $ | 163,665 |  
|                      | Management fees                      |                                  |   | 18,751  |      |  |   | 12,761  |   |  |   | 13,318  |  
|                      | Claims fees                          |                                  |   | 14,756  |      |  |   | 8,076   |   |  |   | 8,594   |  
|                      | Loss control fees                    |                                  |   | 2,303   |      |  |   | 2,590   |   |  |   | 2,326   |  
|                      | Reinsurance brokerage                |                                  |   | 308     |      |  |   | 309     |   |  |   | 1,233   |  
|                      | Investment income                    |                                  |   | 13,471  |      |  |   | 13,906  |   |  |   | 14,177  |  
|                      | Net realized gain on investments     |                                  |   | 823     |      |  |   | 666     |   |  |   | 735     |  
|                      |                                      |                                  |   |         |      |  |   |         |  
|                      | Total revenue                        |                                  | $ | 201,617 |      |  | $ | 183,691 |   |  | $ | 204,048 |  
|                      |                                      |                                  |   |         |      |  |   |         |  
|Pre-tax income (loss) |                                      |                                  |   |         |      |  |   |         |   |  |   |        
|                      | Specialty risk management operations |                                  | $ | 10,755  |      |  | $ | (1,081  | ) |  | $ | (7,624  | )



| |                       
| | ----------------------
| | 2003 compared to 2002:

Revenues from specialty risk management
operations increased $17.9 million, or 9.8%, to
$201.6 million for the year ended December 31, 2003,
from $183.7 million for the comparable period in 2002.

Net earned premiums increased $5.8 million,
or 4.0%, to $151.2 million in the year ended
December 31, 2003, from $145.4 million in the
comparable period in 2002. This increase reflects net earned
premiums on

26



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

new business written in 2003 of
$22.7 million. This includes $1.5 million of net
earned premium from the conversion of existing business into an
insured program within the Companys underwriting
subsidiary. The increase in net earned premiums is also the
result of growth in existing business of $19.7 million
primarily related to rate increases. Offsetting the increase in
net earned premiums is a $36.6 million reduction in net earned
premium related to programs discontinued in 1999 and programs
terminated for leverage ratio purposes.

Management fees increased $6.0 million, or
46.9%, to $18.8 million from $12.8 million for the
comparable period in 2002. This increase in management fees
reflects revenue from new fee-for-service agreements of
$5.6 million. The remaining increase is the result of an
overall net increase in management fees within the
Companys existing managed programs.

Claim fees increased $6.7 million, or 82.7%,
to $14.8 million from $8.1 million for the comparable
period in 2002. This increase in claim fees reflects revenue
from new fee-for-service agreements of $9.0 million. As
anticipated, as this claims fee-for-service agreement expires,
the related revenue will decrease. This increase is partially
offset by a decrease in discontinued programs and the impact of
the conversion of an existing fee-based program into an insured
program within the Companys underwriting subsidiary. Those
fees are now intercompany fees and are eliminated in
consolidation.

Loss control fees decreased $287,000, or 11.1%,
to $2.3 million from $2.6 million for the comparable
period in 2002. This decrease is mainly the result of the
previously mentioned conversion of an existing fee-based program
into an insured program within the Companys underwriting
subsidiary.

Net investment income decreased $474,000, or
3.4%, to $13.5 million in 2003, from $14.0 million in
2002. Average invested assets increased $41.7 million, or
16.0%, to $301.6 million in 2003, from $259.9 million
in 2002. The average investment yield for 2003 was 4.5% compared
to 5.4% in 2002. The current pre-tax book yield is 4.2% and
current after tax book yield is 2.9%. The current pre-tax
reinvested yield is 3.2%. The decrease in investment yields
reflects the accelerated prepayments in the mortgage-backed
securities, and reinvestment of cashflows in municipal bonds and
other securities in an interest rate environment where interest
rates are still relatively low compared with recent history. The
average increase in invested assets reflects $37.5 million
in proceeds from the public offering in June 2002 and cash flows
from underwriting.

Specialty risk management operations generated a
pre-tax income of $10.8 million for the year ended
December 31, 2003 compared to a pre-tax loss of
($1.1) million for the comparable period in 2002. This
improvement reflects the favorable impact of the previously
indicated fee-for-service agreements and improved underwriting
results. The generally accepted accounting principles
(GAAP) combined ratio was 104.4% for the year ended
December 31, 2003, compared to 108.6% for the comparable
period in 2002.

Net loss and LAE decreased $262,000, or 0.3%, to
$98.5 million for the year ended December 31, 2003,
from $98.7 million for the same period in 2002. The
Companys loss and LAE ratio decreased by
2.0 percentage points to 70.1% for the year ended
December 31, 2003, from 72.1% for the same period in 2002.
This ratio is the unconsolidated net loss and LAE in relation to
net earned premium. This improvement in the loss and LAE ratio
reflects continued disciplined underwriting and rate increases.
In addition, while the Company had adverse development of
$2.9 million, or 1.5% of $193.1 million of net loss
and LAE reserves at December 31, 2002, reserves continue to
stabilize.

The Companys expense ratio improved
2.2 percentage points to 34.3% for the year ended
December 31, 2003, from 36.5% for the same period in 2002.
This ratio is the unconsolidated policy acquisition and other
underwriting expenses in relation to net earned premium. The
improvement reflects a reduction in gross commissions and the
effect of leveraging fixed costs.

27



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

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.

Net earned premiums decreased $18.3 million,
or 11.2%, 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 $557,000, or 4.2%, to
$12.8 million from $13.3 million. This decrease is the
result of a $1.1 million decrease in fees related to a
specific account for which the client moved the services
in-house. This decrease is partially offset by $248,000 in fees
related to the addition of new fee-for-service agreements. The
overall decrease is also offset by net growth in the
Companys existing managed programs.

Claim fees decreased $518,000, or 6.0%, to
$8.1 million from $8.6 million. This decrease is the
result of a $1.6 million profit sharing fee recognized in
2001. Also contributing to this decrease is a $311,000 decrease
in fees related to a specific account for which the client moved
the services in-house. Offsetting this decrease is $500,000 in
fees related to the addition of new fee-for-service agreements,
as well as, net growth in existing programs.

Loss control fees increased $264,000, or 11.3%,
to $2.6 million from $2.3 million. This increase is
the result of net growth in existing programs. Offsetting this
increase is a $153,000 decrease in fees related to a specific
account for which the client moved the services in-house.

Reinsurance brokerage decreased $924,000, or
74.9%, to $309,000 from $1.2 million. This decrease is the
result of a $390,000 decrease in commissions related to the sale
of a Bermuda-based subsidiary, effective January 30, 2002.
Also contributing to this decrease is an overall decrease in
commissions related to existing business.

Net investment income decreased $271,000, or
1.9%, to $14.0 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 5.4%
in 2002 from 6.0% 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 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,
compared to net adverse development of $14.4 million
reported in 2001. 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 net adverse development reflects
$3.3 million related to unprofitable discontinued programs
and

28



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

$3.3 million related to programs terminated
in late 2000 and 2001 to reduce leverage ratios. The net adverse
development was offset by net favorable development of $515,000
related to continuing programs. The net adverse development in
2001 reflected adverse development related to unprofitable
discontinued programs, a provision for uncollectible
reinsurance, and claims activity.

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.

Agency Operations

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

|                |  |                                  |        |  |      |   |        |      |  |   |        | 
|--------------- |  | -------------------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                |  |                                 
|                |  | For the Years Ended December 31, |       
|                |  |                                  |       
|                |  | 2003                             |        |  | 2002 |   |        | 2001 | 
|                |  |                                  |        |  |      |   |        |      | 
|Net commission  |  | $                                | 14,954 |  |      | $ | 14,330 |      |  | $ | 15,706 | 
|Pre-tax income* |  | $                                | 6,440  |  |      | $ | 6,131  |      |  | $ | 5,348  | 



---



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

2003 compared to
2002:

Revenue from agency operations, which consists
primarily of agency commission revenue, increased $624,000, or
4.4%, to $15.0 million for the year ended December 31,
2003, from $14.3 million for the comparable period in 2002.
This increase is primarily the result of rate increases,
increases in contingent commissions, and an increase in revenue
from new producers. This increase is partially offset by
$220,000 of commission revenue earned in 2002 related to the
sale of a book of business, which was sold in 2002.

Agency operations generated pre-tax income of
$6.4 million for the year ended December 31, 2003,
compared to $6.1 million for the comparable period in 2002.
The slight improvement in the pre-tax margin is primarily
attributable to the overall increase in revenue.

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.

Other Items

Reserves

At December 31, 2003, managements best
estimate for the ultimate liability for loss and LAE reserves,
net of reinsurance recoverables, was $192.0 million.
Management established a reasonable range of reserves of
approximately $178.7 million to $205.9 million. This
range was established primarily by considering the

29



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

various indications derived from standard
actuarial techniques and other appropriate reserve
considerations. The following table sets forth this range by
line of business.

|                                            |  |               |         |  |               |   |         |          |  |   |         | 
|------------------------------------------- |  | ------------- | ------- |  | ------------- | - | ------- | -------- |  | - | ------- | 
|                                            |  | Minimum       |         |  | Maximum       |   |         | Selected | 
|Line of Business                            |  | Reserve Range |         |  | Reserve Range |   |         | Reserves | 
|                                            |  |               |         |  |               |   |         |          | 
|Workers Compensation(1)                    |  | $             | 99,784  |  |               | $ | 111,875 |          |  | $ | 106,093 | 
|Commercial Multiple Peril/General Liability |  |               | 38,559  |  |               |   | 47,351  |          |  |   | 42,389  | 
|Commercial Automobile                       |  |               | 25,890  |  |               |   | 29,215  |          |  |   | 27,515  | 
|Other                                       |  |               | 14,440  |  |               |   | 17,499  |          |  |   | 16,022  | 
|                                            |  |               |         |  |               |   |         |          | 
|Net Reserves                                |  | $             | 178,673 |  |               | $ | 205,940 |          |  | $ | 192,019 | 
|                                            |  |               |         |  |               |   |         |          | 



---



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

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

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

For the year ended December 31, 2003, the
Company reported an increase in net ultimate loss estimates for
accident years 2002 and prior to be $2.9 million, or 1.5% of
$193.1 million of net loss and LAE reserves at
December 31, 2002. The increase in net ultimate loss
estimates reflected revisions in the estimated reserves as a
result of actual claims activity in calendar year 2003 that
differed from the projected activity. There were no significant
changes in the key assumptions utilized in the analysis and
calculations of the Companys reserves during 2003. The
major components of this change in ultimates are as follows:

|                                            |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |        |       |  |   |              |  |  |   |        |  |  |   |         | 
|------------------------------------------- |  | ------------ | ------- | --------------- | ------- | - | ----------- | ----- |  | - | ----------- | - |  | ------- | ------ |  | ----- | - | ------ | ----- |  | - | ------------ |  |  | - | ------ |  |  | - | ------- | 
|                                            |  |              |         |                 |         |   |             |      
|                                            |  |              |         | Incurred Losses |         |   | Paid Losses |       |  |  
|                                            |  | Reserves at  |         |                 |         |   |             |       |  |   | Reserves at |  
|                                            |  | December 31, |         |                 | Current |   |             | Prior |  |   | Total       |   |  | Current |        |  | Prior |   |        | Total |  |   | December 31, | 
|Line of Business                            |  | 2002         |         |                 | Year    |   |             | Year  |  |   | Incurred    |   |  | Year    |        |  | Year  |   |        | Paid  |  |   | 2003         | 
|                                            |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |        |       |  |   |              | 
|Workers Compensation                       |  | $            | 88,888  |                 |         | $ | 48,225      |       |  | $ | (2,722      | ) |  | $       | 45,503 |  |       | $ | 9,500  |       |  | $ | 33,304       |  |  | $ | 42,804 |  |  | $ | 91,587  | 
|Residual Markets                            |  |              | 9,496   |                 |         |   | 9,949       |       |  |   | (208        | ) |  |         | 9,741  |  |       |   | 2,819  |       |  |   | 1,912        |  |  |   | 4,731  |  |  |   | 14,506  | 
|Commercial Multiple Peril/General Liability |  |              | 45,338  |                 |         |   | 12,183      |       |  |   | 5,275       |   |  |         | 17,458 |  |       |   | 662    |       |  |   | 19,745       |  |  |   | 20,407 |  |  |   | 42,389  | 
|Commercial Automobile                       |  |              | 35,547  |                 |         |   | 13,131      |       |  |   | (35         | ) |  |         | 13,096 |  |       |   | 3,762  |       |  |   | 17,366       |  |  |   | 21,128 |  |  |   | 27,515  | 
|Other                                       |  |              | 13,847  |                 |         |   | 12,077      |       |  |   | 597         |   |  |         | 12,674 |  |       |   | 4,703  |       |  |   | 5,796        |  |  |   | 10,499 |  |  |   | 16,022  | 
|                                            |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |        |       |  |   |              | 
|Net Reserves                                |  |              | 193,116 |                 |         | $ | 95,565      |       |  | $ | 2,907       |   |  | $       | 98,472 |  |       | $ | 21,446 |       |  | $ | 78,123       |  |  | $ | 99,569 |  |  |   | 192,019 | 
|                                            |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |        |       |  |   |              | 
|Reinsurance Recoverable                     |  |              | 181,817 |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |        |       |  |   |              |  |  |   |        |  |  |   | 147,446 | 
|                                            |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |        |       |  |   |              | 
|Consolidated                                |  | $            | 374,933 |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |        |       |  |   |              |  |  |   |        |  |  | $ | 339,465 | 
|                                            |  |              |         |                 |         |   |             |       |  |   |             |   |  |         |        |  |       |   |        |       |  |   |              | 

30



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

|                                            |  |              |         |              |              |   |             |                 |  |  |      |   
|------------------------------------------- |  | ------------ | ------- | ------------ | ------------ | - | ----------- | --------------- |  |  | ---- | --
|                                            |  |              |         | Re-estimated |              |   |            
|                                            |  |              |         | reserves at  |              |   | Development |                
|                                            |  | Reserves at  |         |              | December 31, |   |             | as a percentage | 
|                                            |  | December 31, |         |              | 2003 on      |   |             | of prior        | 
|Line of Business                            |  | 2002         |         |              | prior years  |   |             | year reserves   | 
|                                            |  |              |         |              |              |   |             |                 | 
|Workers Compensation                       |  | $            | 88,888  |              |              | $ | 86,166      |                 |  |  | (3.2 | )%
|Commercial Multiple Peril/General Liability |  |              | 45,338  |              |              |   | 50,613      |                 |  |  | 10.4 | % 
|Commercial Automobile                       |  |              | 35,547  |              |              |   | 35,512      |                 |  |  | (0.1 | )%
|Other                                       |  |              | 13,847  |              |              |   | 14,444      |                 |  |  | 4.1  | % 
|                                            |  |              |         |              |              |   |             |                 | 
|Sub-total                                   |  |              | 183,620 |              |              |   | 186,735     |                 |  |  | 1.7  | % 
|Residual Markets                            |  |              | 9,496   |              |              |   | 9,288       |                 |  |  | (2.2 | )%
|                                            |  |              |         |              |              |   |             |                 | 
|Total Net Reserves                          |  | $            | 193,116 |              |              | $ | 196,023     |                 |  |  | 1.5  | % 
|                                            |  |              |         |              |              |   |             |                 | 



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

The projected net ultimate loss estimate for the
workers compensation line of business, excluding residual
markets, decreased $2.7 million, or 3.2% of net reserves.
This net overall decrease reflects an increase of $350,000 in
accident year 2002 and a reduction of $3.1 million in the
ultimate estimate for loss and loss adjustment for accident year
2001 and prior. The reduction in loss and allocated expense
reserves primarily reflects a decrease in net ultimate loss
estimates of $1.6 million in accident year 2001,
$2.0 million in accident year 2000, and an increase of
$500,000 in accident year 1996. The increase in ultimate loss
estimates for accident years 2002 and 1996, during the twelve
months ended December 31, 2003, reflect higher than
expected emergence of claim activity, primarily in the Florida
operations. The decreases in ultimate loss estimates for
accident years 2001 and 2000, during the twelve months ended
December 31, 2003, reflect lower than expected emergence of
claim activity primarily with discontinued programs which had
aggregate stop loss provisions and the impact of a commutation
of a terminated program with a risk-sharing partner.



| |                                                 
| | ------------------------------------------------
| | Commercial Multiple Peril/ General
    Liability

The commercial multiple peril/ general liability
line of business had an increase in net ultimate loss estimates
of $5.3 million, or 10.4% of commercial multiple peril/
general liability line of business net reserves. The net
increase was $2.1 million, $900,000, $1.5 million, and
$950,000 in accident years 2001, 2000, 1999, and 1994,
respectively. These increases in ultimate loss estimates reflect
higher than expected emergence in claim activity, primarily
related to general liability occurrence policies within the
Kansas City branch, during the twelve months ended
December 31, 2003. The 2002 accident year resulted in a
$250,000 decrease in ultimate loss estimates. The change in
ultimate net loss estimates for all other accident years was
insignificant.



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

The projected net ultimate loss estimate for the
commercial automobile line of business decreased $35,000, or
0.1% of net commercial automobile reserves. This net overall
decrease reflects reductions of $1.4 million, $900,000, and
$200,000 in accident years 2002, 2000, and 1999, respectively.
The reduction in accident year 2002 primarily reflects lower
than expected claims activity in automobile physical damage.
These reductions were offset by an increase of $3.1 million
in the ultimate estimate for loss and loss adjustment for
accident year 2001. The increase in accident year 2001 includes
a $2.2 million increase from one commercial trucking
program which was terminated during 2001. The change in ultimate
net loss estimates for all other accident years was
insignificant.

31



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued



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

The other lines of business had an increase in
net ultimate loss estimates of $600,000, or 4.1% of net reserves
on the other lines of business. The change reflects reductions
of $400,000 and $600,000 in accident years 2002 and 2001,
respectively, primarily from the property and inland marine
lines of business. This decrease in ultimate loss estimates
reflects lower than expected emergence in claim activity during
the twelve months ended December 31, 2003. This was offset by an
increase in net ultimate loss estimates of $700,000 in accident
year 2000 primarily in the medical line of business and $600,000
in accident year 1995 primarily from legal expenses related to
the recovery of losses on the surety line of business. The
change in ultimate net loss estimates for all other accident
years was insignificant.



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

The workers compensation residual markets
line of business had a decrease in net ultimate loss estimates
of $200,000, or 2.2% of net reserves. The change reflects a
reduction of $400,000 in accident year 2001. This decrease in
ultimate loss estimates reflects lower than expected emergence
in claim activity during the twelve months ended
December 31, 2003. This was partially offset by an increase
in net ultimate loss estimates of $100,000 in accident year
2002. The change in ultimate net loss estimates for all other
accident years was insignificant.

Salary and Employee Benefits and Other
Administrative Expenses

Salary and employee benefits increased
$10.5 million, or 28.1%, to $48.2 million in 2003,
from $37.7 million for the comparable period in 2002. The
increase in 2003 in comparison to 2002 is primarily the result
of the hiring of employees to handle new fee-for-service
agreements. In addition, this increase reflects both merit pay
increases and the accrual of variable performance-based
compensation tied to profitability, and a slight increase in
staffing levels to support new managed programs.

Salary and employee benefits decreased
$6.5 million, or 14.8%, to $37.7 million in 2002, from
$44.2 million for the comparable period in 2001. The
decrease in salary and employee benefits in 2002 in comparison
to 2001 is primarily the result of staff reductions and
severance payments made in 2001. The staff reductions were a
result of the Companys expense control initiatives.

Other administrative expenses increased
$1.5 million, or 6.3%, to $24.5 million in 2003, from
$23.0 million for the comparable period in 2002. The
increase in administrative expenses is primarily attributable to
the new fee-for-service agreements.

Other administrative expenses increased $238,000,
or 1%, to $23.0 million in 2002, from $22.8 million
for the comparable period in 2001.

Salary and employee benefits and administrative
expenses include both corporate overhead and the holding company
expenses included in the reconciling items of the Companys
segment information.

Interest Expense

Interest expense for 2003, 2002, and 2001 was
$977,000, $3.0 million, and $4.5 million,
respectively. This interest expense relates primarily to the
Companys line of credit. The average debt outstanding was
approximately $26.0 million, $44.0 million, and
$54.0 million in 2003, 2002, and 2001, respectively. The
average interest rate was approximately 4.0%, 7.0%, and 8.0%, in
2003, 2002, and 2001, respectively.

On September 30, 2003, an unconsolidated
subsidiary trust of the Company issued $10.0 million of
mandatory redeemable trust preferred securities
(TPS) to a trust formed by an institutional
investor. The Companys trust received a total of
$9.7 million in net proceeds, after the deduction of
approximately $300,000 of commissions paid to the placement
agents in the transaction. The gross proceeds from the issuance
of the

32



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

TPS were used to purchase floating rate junior
subordinated deferrable interest debentures (the
Debentures) issued by the Company. The Debentures
have financial terms similar to those of the TPS, which includes
the deferral of interest payments at any time or from time to
time for a period not exceeding five years, provided there is no
event of default. The Debentures mature in 30 years and
provide for interest at the three-month LIBOR, plus 4.05%, which
started in December 2003. Refer to Note 1 for additional
information.

Taxes

Federal income tax expense for 2003 and 2002 was
$4.9 million and $431,000, or 32.9%, and 20.7% of income
before taxes, respectively. For 2001, the Company reflected a
federal income tax benefit of $3.6 million, or 35.6% of
loss before taxes. The Companys effective tax rate differs
from the 34% statutory rate primarily due to tax-exempt
investment income. Changes in the effective rate over prior
periods are related to changes in the proportion of tax-exempt
investment income to total underwriting results and elimination
of goodwill amortization.

Liquidity and Capital Resources

The principal sources of funds, which include
both regulated and non-regulated cash flows, 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 regulated sources of funds are
insurance premiums, investment income, and proceeds from the
maturity and sale of invested assets. These regulated funds are
used for the payment of claims, policy acquisition costs and
other underwriting expenses, and taxes relating to the regulated
portion of net income. The non-regulated sources of funds are in
the form of commission revenue, outside management fees, and
intercompany management fees. These non-regulated sources of
funds are used to meet debt service, shareholders
dividends, and other operating expenses of the holding company
and non-regulated subsidiaries. The following table illustrates
net income (loss), excluding interest, depreciation, and
amortization between the Companys regulated and
non-regulated subsidiaries, which reconciles to the
Companys consolidated statement of income and statement of
cash flows (in thousands):

|                        |                                                                           |                                                                                                           |        |        |        |   |       |       |       |   |        |        |        |  
|----------------------- | ------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ------ | ------ | ------ | - | ----- | ----- | ----- | - | ------ | ------ | ------ | -
|                        |                                                                           |                                                                                                          
|                        |                                                                           | For the Years Ended December 31,                                                                          |       
|                        |                                                                           |                                                                                                           |       
|                        |                                                                           | 2003                                                                                                      |        |        | 2002   |   |       | 2001  |      
|                        |                                                                           |                                                                                                           |        |        |        |   |       |       |      
|Net income (loss)       |                                                                           | $                                                                                                         | 10,099 |        |        | $ | 1,650 |       |       | $ | (6,510 | )     
|                        |                                                                           |                                                                                                           |        |        |        |   |       |       |      
|Regulated Subsidiaries: |                                                                           |                                                                                                           |        |        |        |   |       |       |       |   |        |       
|                        |                                                                           | Net income (loss)                                                                                         |        | $      | 3,928  |   |       | $     | (591  | ) |        | $      | (9,033 | )
|                        |                                                                           | Depreciation and amortization                                                                             |        |        | 6      |   |       |       | 12    |   |        |        | 376    |  
|                        |                                                                           | Interest                                                                                                  |        |        | 8      |   |       |       | 23    |   |        |        | (42    | )
|                        |                                                                           |                                                                                                           |        |        |        |   |       |       |      
|                        | Net income (loss), excluding interest,
    depreciation, and amortization |                                                                                                           |        | 3,942  |        |   |       | (556  | )     |   |        | (8,699 | )     
|                        |                                                                           |                                                                                                           |        |        |        |   |       |       |      
|                        |                                                                           | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities |        |        | 5,517  |   |       |       | 394   |   |        |        | (4,298 | )
|                        |                                                                           | Changes in operating assets and liabilities                                                               |        |        | 20,166 |   |       |       | 6,170 |   |        |        | 13,212 |  
|                        |                                                                           |                                                                                                           |        |        |        |   |       |       |      
|                        | Total adjustments                                                         |                                                                                                           |        | 25,683 |        |   |       | 6,564 |       |   |        | 8,914  |       
|                        | Depreciation and amortization                                             |                                                                                                           |        | (6     | )      |   |       | (12   | )     |   |        | (376   | )     
|                        | Interest                                                                  |                                                                                                           |        | (8     | )      |   |       | (23   | )     |   |        | 42     |       
|                        |                                                                           |                                                                                                           |        |        |        |   |       |       |      
|                        | Net cash provided by (used in) operating
    activities                   |                                                                                                           | $      | 29,611 |        |   | $     | 5,973 |       |   | $      | (119   | )     
|                        |                                                                           |                                                                                                           |        |        |        |   |       |       |      

33



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |         |   |        |        |        |  
|-------------------------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------- | ------ | ------ | ----- | - | ----- | ------ | ------- | - | ------ | ------ | ------ | -
|                                                                     |                                                                    |                                                                                               
|                                                                     |                                                                    | For the Years Ended December 31,                                                               |       
|                                                                     |                                                                    |                                                                                                |       
|                                                                     |                                                                    | 2003                                                                                           |        |        | 2002  |   |       | 2001   |        
|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |        
|Non-regulated Subsidiaries:                                          |                                                                    |                                                                                                |        |        |       |   |       |        |         |   |        |       
|                                                                     |                                                                    | Net income                                                                                     |        | $      | 6,171 |   |       | $      | 2,241   |   |        | $      | 2,523  |  
|                                                                     |                                                                    | Depreciation and amortization                                                                  |        |        | 1,765 |   |       |        | 2,411   |   |        |        | 4,745  |  
|                                                                     |                                                                    | Interest                                                                                       |        |        | 1,229 |   |       |        | 3,337   |   |        |        | 4,585  |  
|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |        
|                                                                     | Net income, excluding interest, depreciation,
    and amortization |                                                                                                |        | 9,165  |       |   |       | 7,989  |         |   |        | 11,853 |       
|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |        
|                                                                     |                                                                    | Adjustments to reconcile net income to net cash
    provided by (used in) operating activities |        |        | 2,365 |   |       |        | 4,270   |   |        |        | 3,796  |  
|                                                                     |                                                                    | Changes in operating assets and liabilities                                                    |        |        | 9,383 |   |       |        | (10,701 | ) |        |        | (8,977 | )
|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |        
|                                                                     | Total adjustments                                                  |                                                                                                |        | 11,748 |       |   |       | (6,431 | )       |   |        | (5,181 | )     
|                                                                     | Depreciation and amortization                                      |                                                                                                |        | (1,765 | )     |   |       | (2,411 | )       |   |        | (4,745 | )     
|                                                                     | Interest                                                           |                                                                                                |        | (1,229 | )     |   |       | (3,337 | )       |   |        | (4,585 | )     
|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |        
|                                                                     | Net cash provided by (used in) operating
    activities            |                                                                                                | $      | 17,919 |       |   | $     | (4,190 | )       |   | $      | (2,658 | )     
|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |        
|Consolidated total adjustments                                       |                                                                    |                                                                                                | 37,431 |        |       |   | 133   |        |         |   | 3,733  |       
|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |        
|Consolidated net cash provided by (used in)
    operating activities |                                                                    | $                                                                                              | 47,530 |        |       | $ | 1,783 |        |         | $ | (2,777 | )     
|                                                                     |                                                                    |                                                                                                |        |        |       |   |       |        |        

Cash flow provided by operations was
$47.5 million in 2003, compared to $1.8 million in
2002. Cash flow used in operations in 2001 was
$2.8 million. The increase in cash flow from operations
primarily reflects an increase in earnings, growth in written
premiums, growth in fee-for-service revenue, and collections of
reinsurance recoverables. The increase in cash flow in 2002
primarily reflected 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.

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.

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 30, 2003, an unconsolidated
subsidiary trust of the Company issued $10.0 million of
mandatory redeemable trust preferred securities
(TPS) to a trust formed by an institutional
investor. The Companys trust received a total of
$9.7 million in net proceeds, after the deduction of
approximately $300,000 of commissions paid to the placement
agents in the transaction. The gross proceeds from the issuance
of the TPS were used to purchase floating rate junior
subordinated deferrable interest debentures (the
Debentures) issued by the Company. The Company
contributed $6.3 million of the proceeds to its insurance
company subsidiaries and the remaining balance will be used for
general corporate purposes. The Debentures mature in
30 years and provide for interest at the three-month LIBOR,
plus 4.05%, which started in December 2003.

The Company has a credit agreement that includes
a term loan and a revolving line of credit. This credit
agreement consists of a $20.0 million term loan and a
revolving line of credit for up to $8.0 million. The

34



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

Company uses the revolving line of credit to meet
short-term working capital needs. At December 31, 2003, the
Companys term loan had an outstanding balance of $14.0
million. The Company had no outstanding balance on the revolving
line of credit at December 31, 2003. At December 31,
2002, the outstanding balance on the term loan and revolving
line of credit was $18.8 million and $5.3 million,
respectively. The term loan calls for quarterly amortization
through July 1, 2006, at which time the term loan will be
paid in full. The quarterly amortization requires payments of
$1.25 million 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. 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 then existing line of credit. This settlement
resulted in a gain on debt reduction of $359,000, which was to
the benefit of the Company.

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 based rate. The applicable margin, which ranges
from 200 to 300 basis points above eurocurrency based rates, is
determined by the level of the fixed charge coverage ratio. Of
all the covenants, the most restrictive covenant is the fixed
charge coverage ratio. The fixed charge coverage ratio, as
defined by the credit facility, is the ratio of the
non-regulated earnings before interest and taxes for the four
preceding fiscal quarters to the sum of fixed charges which
include interest expense, principal payments payable, stock
repurchases, and dividends declared during the period. Any
unused portion of the revolving credit as of the date of
determination reduces the sum of these fixed charges. At
December 31, 2003, this ratio was 5.7 to 1.0, compared to
the covenant minimum of 1.2 to 1.0. As of December 31,
2003, the Company was in compliance with all debt covenants. The
eurocurrency based rate as of December 31, 2003, for the
term loan was 3.3%.

A non-insurance premium finance subsidiary of the
Company maintains a line of credit with a bank, which permits
borrowings up to 80% of the accounts receivable, which
collateralize the line of credit. At December 31, 2003 and
2002, $3.5 million and $4.9 million, respectively,
were outstanding under this line of credit. The line will expire
on May 14, 2004. Management expects to renegotiate the line
of credit prior to its expiration. The line bears interest at
the Prime Rate, which was 4.00% and 4.25% at December 31,
2003 and 2002, respectively.

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 based margin. On
January 14, 2003, the Company paid in full the
$3.5 million subordinated promissory note.

At December 31, 2003 and 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. The letter of credit
is collateralized by a certificate of deposit for the same
amount.

As of December 31, 2003 and 2002, the
recorded values of the Companys investment portfolio,
including cash and cash equivalents, were $324.2 million
and $286.1 million, respectively. The debt securities in
the investment portfolio, at December 31, 2003, were 93.7%
investment grade A or above bonds as defined by Standard and
Poors.

Shareholders equity increased to
$155.1 million, or a book value of $5.34 per common share,
at December 31, 2003, compared to $147.4 million, or a
book value of $4.98 per common share, at December 31, 2002.

On September 17, 2002, the Companys
Board of Directors authorized management to repurchase up to
1,000,000 shares of the Companys common stock in market
transactions for a period not to exceed twenty-four months. On
August 6, 2003, the Companys Board of Directors
authorized management to repurchase up

35



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

to an additional 1,000,000 shares of the
Companys common stock under the existing share repurchase
plan. For the year ended December 31, 2003, the Company
repurchased and retired 569,100 shares of common stock for a
total cost of $1.6 million. For the year ended
December 31, 2002, the Company repurchased and retired
195,700 shares of common stock for a total cost of $455,000. As
of December 31, 2003, the cumulative amount the Company
repurchased and retired was 764,800 shares of common stock for a
total cost of approximately $2.0 million.

The Board of Directors of the Company did not
declare a dividend in 2003 or 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 2003 or 2002.

A significant portion of the Companys
consolidated assets represent assets of the Insurance Company
Subsidiaries that at this time, without prior approval of the
Michigan Office of Financial and Insurance Services
(OFIS), cannot be transferred to the holding company
in the form of dividends, loans or advances. The restriction on
the transferability to the holding company from its Insurance
Company Subsidiaries is dictated by Michigan insurance
regulatory guidelines which, in general, are as follows: the
maximum discretionary dividend that may be declared, based on
data from the preceding calendar year, is the greater of each
insurance companys net income (excluding realized capital
gains) or ten percent of the insurance companys surplus
(excluding unrealized gains). These dividends are further
limited by a clause in the Michigan law that prohibits an
insurer from declaring dividends except 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
Company Subsidiaries surplus. Based upon the 2003
statutory financial statements, Star may only pay dividends to
the Company during 2004 with the prior approval of OFIS.
Stars earned surplus position at December 31, 2003
was negative $24.6 million. No dividends were paid in 2003
or 2002.

The Insurance Company Subsidiaries are required
to maintain certain deposits with regulatory authorities, which
totaled $102.4 million and $89.8 million at
December 31, 2003 and 2002, respectively.

Tabular Disclosure of Contractual
Arrangements

The following table is a summary of the
Companys contractual obligations as of December 31,
2003 (in thousands):

|                               |  |                        |        |           |          |   |        |             |  |          |            |  |           |            |       |  |  |   |        | 
|------------------------------ |  | ---------------------- | ------ | --------- | -------- | - | ------ | ----------- |  | -------- | ---------- |  | --------- | ---------- | ----- |  |  | - | ------ | 
|                               |  |                       
|                               |  | Payments due by period |       
|                               |  |                        |       
|                               |  |                        |        | Less than |          |   | One to |             |  | Three to |            |  | More than |           
|Contractual Obligations        |  | Total                  |        |           | one year |   |        | three years |  |          | five years |  |           | five years |      
|                               |  |                        |        |           |          |   |        |             |  |          |            |  |           |            |      
|Long-term debt                 |  | $                      | 14,000 |           |          | $ | 5,000  |             |  | $        | 9,000      |  |           | $          |      |  |  | $ |       | 
|Operating lease obligations    |  |                        | 11,019 |           |          |   | 2,716  |             |  |          | 3,088      |  |           |            | 1,730 |  |  |   | 3,485  | 
|Junior subordinated debentures |  |                        | 10,310 |           |          |   |       |             |  |          |           |  |           |            |      |  |  |   | 10,310 | 
|                               |  |                        |        |           |          |   |        |             |  |          |            |  |           |            |      
|Total                          |  | $                      | 35,329 |           |          | $ | 7,716  |             |  | $        | 12,088     |  |           | $          | 1,730 |  |  | $ | 13,795 | 
|                               |  |                        |        |           |          |   |        |             |  |          |            |  |           |            |      

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. The
premium leverage ratios as of December 31, 2003, on a
statutory consolidated basis, were 2.54 to 1 and 1.89 to 1 on a
gross and net written premium basis, respectively.

36



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

The National Association of Insurance
Commissioners (NAIC) has adopted a risk-based
capital (RBC) formula to be applied to all property
and casualty insurance companies. The formula measures required
capital and surplus based on an insurance companys
products and investment portfolio and is used as a tool to
evaluate the capital of regulated companies. The RBC formula is
used by state insurance regulators to monitor trends in
statutory capital and surplus for the purpose of initiating
regulatory action. In general, an insurance company must submit
a report of its RBC formula to the insurance department of its
state of domicile as of the end of the previous calendar year.
These laws require increasing degrees of regulatory oversight
and intervention as an insurance companys RBC declines.
The level of regulatory oversight ranges from requiring the
insurance company to inform and obtain approval from the
domiciliary insurance commissioner of a comprehensive financial
plan for increasing its RBC to mandatory regulatory intervention
requiring an insurance company to be placed under regulatory
control in a rehabilitation or 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, 2003, all of the Insurance
Company Subsidiaries were in compliance with RBC requirements.
Star reported statutory surplus of $99.9 million and
$93.8 million at December 31, 2003 and 2002,
respectively. The calculated RBC was $22.8 million in 2003
and $24.8 million in 2002. The threshold requiring the
minimum regulatory involvement was $45.7 million in 2003
and $49.7 million in 2002.

The NAICs Insurance Regulatory Information
System (IRIS) was developed by a committee of state
insurance regulators and is primarily intended to assist state
insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating
in their respective states. IRIS identifies 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.

37



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

In 2003, 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% |            |  | 44%   | (1)
|Liabilities to Liquid Assets                    |  |                | Under 105% |  |       |     | 110% | (2)
|Investment Yield                                |  | <10% or  >4.5% |            |  | 3.1%  | (3)
|Two-Year Reserve Development to Surplus         |  |                | Under 20%  |  |       |     | 23%  | (4)
|Company: Savers                                 |  |                |            |  |       |     |      |    
|Two-year Overall Operating Ratio                |  |                | Under 100% |  |       |     | 103% | (5)
|Company: Williamsburg                           |  |                |            |  |       |     |      |    
|Change in Net Writings                          |  | <33% or  >-33% |            |  | 106%  | (6)
|Investment Yield                                |  | <10% or  >4.5% |            |  | 3.7%  | (3)
|Company: Ameritrust                             |  |                |            |  |       |     |      |    
|Investment Yield                                |  | <10% or  >4.5% |            |  | 4.4%  | (3)
|Estimated Current Reserve Deficiency to Surplus |  |                | Under 25%  |  |       |     | 42%  | (7)



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The increase in Stars net written premium
    in 2003 reflected anticipated growth from premium rate
    increases, the conversion of existing controlled programs to the
    Companys subsidiarys paper, controlled growth
    related to select new business, and the renewal rights contract
    announced in November 2002. In addition, 2002 net written
    premium reflected the termination of unprofitable business,
    specifically in the commercial automobile line of business.
|   
|(2) | While this ratio continues to show improvement
    from 116% in 2002 to 110% in 2003, 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.                                                                                                                                                                                                                    
|   
|(3) | The average investment yield for 2003 was 4.5%
    compared to 5.4% in 2002. The current pre-tax book yield is 4.2%
    and the current pre-tax reinvestment yield is 3.2%. The decrease
    in investment yields reflects the accelerated prepayments in the
    mortgage-backed securities, and reinvestment of cashflows in
    municipal bonds and other securities in an interest rate
    environment where interest rates are still relatively low
    compared with recent history.     
|   
|(4) | The Two-Year Reserve Development to Surplus
    Ratios primarily relates to development from accident years 1999
    and 2001. This development primarily relates to previously
    discontinued programs.                                                                                                                                                                                                                                                                                      
|   
|(5) | The overall operating ratio on Savers in 2003 was
    101%, an improvement from the overall operating ratio for 2002
    of 105%. The Two-Year Overall Operating Ratio was 103%, just
    above the usual range. Incurred large loss activity on the
    workers compensation, commercial multiple peril and
    commercial auto liability lines of business contributed to the
    high two-year operating ratio.                                                                             
|   
|(6) | The growth in Williamsburgs net written
    premium related to a managed program that has been converted to
    an insured program. This program primarily writes commercial
    auto liability coverage, which the Company has managed since
    1997.                                                                                                                                                                                                                                        
|   
|(7) | The Estimated Current Reserve Deficiency to
    Policyholders Surplus on Ameritrust was impacted by the
    elimination of the surplus relief reinsurance treaty in 2002.                                                                                                                                                                                                                                                                                                                      

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

38



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

and its debt reduction and indicates the
potential for a near term upgrade. The Company believes that as
a result of its improved balance sheet and operating performance
its rating will remain at least at its current level, if not at
an upgraded level. 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 Company 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 Connecticut Insurance Company (CSC) and
HIH America Compensation & Liability Company
(HIH) in 2001, 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, 2003:

|                                    |  |                           |        |  |                         |   |        |           |  |  |     | 
|----------------------------------- |  | ------------------------- | ------ |  | ----------------------- | - | ------ | --------- |  |  | --- | 
|                                    |  | Reinsurance Premium Ceded |        |  | Reinsurance Recoverable |   |        | A.M. Best | 
|Reinsurer                           |  | December 31, 2003         |        |  | December 31, 2003       |   |        | Rating    | 
|                                    |  |                           |        |  |                         |   |        |           | 
|                                    |  | (In thousands)            |        |  | (In thousands)          |   |        |          
|Employers Reinsurance Corporation   |  | $                         | 18,824 |  |                         | $ | 57,153 |           |  |  | A   | 
|Motors Insurance Company            |  |                           | 7,688  |  |                         |   | 318    |           |  |  | A   | 
|Accident Fund Insurance Company     |  |                           | 5,914  |  |                         |   | 5,633  |           |  |  | A   | 
|General Reinsurance Company         |  |                           | 3,268  |  |                         |   | 0      |           |  |  | A++ | 
|American National Insurance Company |  |                           | 1,410  |  |                         |   | 0      |           |  |  | 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, 2003, the Company had risk exposure in excess
of collateral in the amount of $9.5 million, compared to
and $11.6 million at December 31, 2002, on these
programs, of which the Company has an allowance of
$6.4 million at December 31, 2003, compared to
$6.8 million at December 31, 2002, 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, some of which are
in litigation with the Company. At the end of each quarter, an
analysis of these exposures is conducted to determine the
potential exposure to uncollectibility. At December 31,
2003, management believes that this allowance is adequate. To
date, the Company has not, in the aggregate, experienced
material difficulties in collecting balances from its
risk-sharing partners. No assurance can be given, however,
regarding the future ability of any of the Companys
risk-sharing partners to meet their obligations. At
December 31, 2003 and 2002, the exposure amount in
litigation with former risk-sharing partners which is not
reserved or collateralized is $1.3 million and
$1.9 million, respectively. During the third quarter of
2003, a settlement agreement was reached with a former
risk-sharing partner that was previously in litigation. The
agreement included receipt of cash and a collateralized note
receivable

39



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

approximating net book value. As a result of this
agreement, exposures in excess of collateral amounts and related
allowances have been reduced by $1.3 million and $600,000,
respectively.

Off-Balance Sheet Arrangements

On June 6, 2003, the Company entered into a
Guaranty Agreement with a bank. The Company is guaranteeing
payment of a $1.5 million term loan issued by the bank to
an unaffiliated insurance agency. In the event of default on the
term loan by the insurance agency, the Company is obligated to
pay any outstanding principal (up to a maximum of
$1.5 million), as well as any accrued interest on the loan,
and any costs incurred by the bank in the collection process. In
exchange for the Companys guaranty, the president and
member of the insurance agency pledged 100% of the common shares
of two other insurance agencies that he wholly owns. In the
event of default on the term loan by the insurance agency, the
Company has the right to sell any or all of the pledged
insurance agencies common shares and use the proceeds from
the sale to recover any amounts paid under the guaranty
agreement. Any excess proceeds would be paid to the shareholder.
As of December 31, 2003, no liability has been recorded
with respect to the Companys obligations under the
guaranty agreement, since no premium exists in excess of the
guaranteed amount.

New Accounting Pronouncements

Effective January 1, 2002, the Company
adopted SFAS No. 142 Goodwill and Other Intangible
Assets. SFAS No. 142 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 in 2001
if the amortization of goodwill had ceased as of January 1,
2001.

The Financial Account Standards Board
(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 statement had no effect on the Companys
financial statements.

Effective January 1, 2003, the Company
adopted the requirements of SFAS No. 148 Accounting
for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement
No. 123 utilizing the prospective method. SFAS
No. 148, for periods starting after December 15, 2003
or thereafter, 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. Upon implementation of SFAS
No. 148 in 2003, the Company is recognizing stock-based
compensation expense for awards granted after January 1,
2003. Compensation expense of $189,000 has been recorded for
stock option grants issued during 2003. See Note 11 for
additional information regarding the effect of the adoption of
SFAS No. 148.

On May 15, 2003, the FASB issued SFAS
No. 150 Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. The
statement requires issuers to classify as liabilities (or

40



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued

assets in some circumstances) three classes of
freestanding financial instruments that embody obligations for
the issuer. Generally, the statement is effective for financial
instruments entered into or modified after May 31, 2003 and
is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of this
standard had no effect on the Companys financial
statements.

In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 clarifies the requirements of SFAS
No. 5, Accounting for Contingencies, relating
to a guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. For certain guarantees
issued after December 31, 2002, FIN No. 45 requires a
guarantor to recognize, upon issuance of a guarantee, a
liability for the fair value of the obligations it assumes under
the guarantee. Guarantees issued prior to January 1, 2003
are not subject to liability recognition, but are subject to
expanded disclosure requirements. See Note 7 and
Note 14 for additional information regarding the effect of
the adoption of FIN No. 45.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities. The
primary objective of FIN No. 46 is to provide guidance on
the identification of, and financial reporting for, entities
over which control is achieved through means other than voting
rights; such entities are known as variable interest entities.
FIN No. 46 requires variable interest entities to be
consolidated by the primary beneficiary of the variable interest
entities and expands disclosure requirements for both variable
interest entities that are consolidated as well as those within
which an enterprise holds a significant variable interest. In
accordance with FIN 46, the Company performed an evaluation of
its business relationships and determined that Meadowbrook
Capital Trust I (Trust) is a variable interest
entity; however, the Trust did not meet the qualifications for
consolidation as the Trust equity was deemed to not be at risk.
The adoption of FIN No. 46 did not have a material impact
on the Companys consolidated balance sheet and had no
impact on its consolidated statement of income. See Note 7 for
additional information regarding the Companys
unconsolidated subsidiary trust.

In December 2003, the FASB issued FIN
No. 46(R), Consolidation of Variable Interest
Entities. FIN No. 46(R) addresses certain
implementation issues that arose after the issuance of
FIN No. 46, which it supercedes. The Company is
required to adopt FIN No. 46(R) for the first quarter
ending March 31, 2004. The Company is currently evaluating
the impact FIN No. 46(R) will have on its financial
statements.

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.

41



---



##### 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, 2003. 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 strategy where the target
duration for the fixed income portfolio is based on the estimate
of the liability duration and takes into consideration the
Companys surplus. The investment policy guidelines provide
for a fixed income portfolio duration of between three and five
years. At December 31, 2003, the Companys fixed
income portfolio had a modified duration of 3.27.

At December 31, 2003 the fair value of the
Companys investment portfolio was $273.6 million,
99.1% of which is invested in debt securities. The remaining
0.9% 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. In 2002 the Company emphasized taxable
securities over tax-exempt securities in order to maximize
after-tax income and the utilization of the net operating loss
carryforward. During the year, the Company began to increase its
holdings of tax-exempt securities based on the Companys
return to profitability and its desire to maximize after-tax
investment income. 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, 2002. 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 immediate increase in interest rates produces a loss in
fair value of market sensitive instruments of approximately
$10.2 million, or 3.73%. This loss in fair value only
reflects the impact of interest rate increases on the fair value
of the Companys debt securities. This loss after tax
constitutes 4.3% 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 45 and Note 19 on page 76 of the Notes to
the Consolidated Financial Statements.

42



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued








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

None






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The Company carried out an evaluation, as of
December 31, 2003, under the supervision and with the
participation of the Companys management, including the
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act
of 1934. Based upon that evaluation, the Companys Chief
Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective
to ensure that all material information relating to the Company
(including its consolidated subsidiaries) required to be
included in this 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 during the year
ended December 31, 2003.

43



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


MANAGEMENTS DISCUSSION AND
ANALYSIS  continued






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,
Audit Committee Financial Expert, Code of
Ethics, Report of the Audit Committee, 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 11,
2004, which is hereby incorporated by reference. A copy of the
Companys code of ethics can be found on the Companys
website (www.meadowbrook.com).






|         |                       
|-------- | ----------------------
|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 11,
2004, 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 captions Security Ownership of Certain
Beneficial Owners and Management and The Third
Proposal on Which You Are Voting  Amendments to Stock
Option Plans to Permit Restricted Stock Awards of the
Companys Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 11, 2004, 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 11,
2004, which is hereby incorporated by reference.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this item is included
under the caption The Second Proposal on Which You Are
Voting  Ratification of Appointment of Independent
Accountants of the Companys Proxy Statement relating
to the Annual Meeting of Shareholders to be held on May 11,
2004, which is hereby incorporated by reference.

44



---



##### 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
    Auditors                                                                                                                                              |  |      | 46    | 
|   |  | Consolidated Balance Sheet 
    December 31, 2003 and 2002                                                                                                                                                 |  |      | 47    | 
|   |  | Consolidated Statement of Income  For
    Years Ended December 31, 2003, 2002, and 2001                                                                                                                    |  |      | 48    | 
|   |  | Consolidated Statement of Comprehensive
    Income  For Years Ended December 31, 2003, 2002,
    and 2001                                                                                                  |  |      | 49    | 
|   |  | Consolidated Statement of Shareholders
    Equity  For Years Ended December 31, 2003, 2002,
    and 2001                                                                                                  |  |      | 50    | 
|   |  | Consolidated Statement of Cash Flows 
    For Years Ended December 31, 2003, 2002, and 2001                                                                                                                |  |      | 51    | 
|   |  | Notes to Consolidated Financial Statements                                                                                                                                                                  |  |      | 52-76 | 
|2. |  | Financial Statement Schedules                                                                                                                                                                               |  |      |       | 
|   |  | Schedule I Summary of Investments Other Than
    Investments in Related Parties                                                                                                                             |  |      | 80    | 
|   |  | Schedule II Condensed Financial Information
    of Registrant                                                                                                                                               |  |      | 81-84 | 
|   |  | Schedule III Supplementary Insurance
    Information                                                                                                                                                        |  |      | 85-87 | 
|   |  | Schedule IV Reinsurance                                                                                                                                                                                     |  |      | 88    | 
|   |  | Schedule V Valuation and qualifying accounts                                                                                                                                                                |  |      | 89    | 
|   |  | Schedule VI Supplemental Information
    Concerning Property and Casualty Insurance Operations                                                                                                              |  |      | 90    | 
|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 2, 2003, announcing the
appointment of LaSalle National Bank Association as transfer
agent. A copy of the press release was included by exhibit.

The Registrant filed a Current Report on
Form 8-K on October 2, 2003, announcing the completion
of a trust preferred pooled transaction. A copy of the press
release was included by exhibit.

The Registrant filed a Current Report on
Form 8-K dated November 19, 2003 for the purpose of
furnishing the Companys third quarter 2003 earnings
release.

45



---



##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

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. and its
subsidiaries (the Company) at December 31, 2003
and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2003 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 Notes 1 and 11 to the
consolidated financial statements, the Company changed its
method of accounting for stock options in conformity with SFAS
No. 148, Accounting for Stock-based Compensation
Transition and Disclosure  an amendment to FASB
Statement No. 123, which was adopted as of
January 1, 2003. Additionally, as discussed in Note 12
to the consolidated financial statements, the Company changed
its method of accounting for goodwill in conformity with
Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets,
which was adopted as of January 1, 2002.

(PricewaterhouseCoopers LLP)

Grand Rapids, Michigan

February 12, 2004


46



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED BALANCE SHEET


|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |         |   |         |         |         | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                         |                                                                                                                                    |                                                                                                                                                  
|                                         |                                                                                                                                    | December 31,                                                                                                                                      |                                           
|                                         |                                                                                                                                    |                                                                                                                                                   |                                           
|                                         |                                                                                                                                    | 2003                                                                                                                                              |                                            |         | 2002    |        
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                    |                                                                                                                                                  
|                                         |                                                                                                                                    | (In thousands, except                                                                                                                             |                                           
|                                         |                                                                                                                                    | share data)                                                                                                                                       |                                           
|ASSETS                                  
|Investments                              |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |         |   |        
|                                         | Debt securities available for sale, at fair value
    (amortized cost of $260,330 and $231,876 in 2003 and 2002,
    respectively) |                                                                                                                                                   | $                                          | 271,217 |         |         | $ | 244,861 |        
|                                         | Equity securities available for sale, at fair
    value (cost of $1,980 and $1,980 in 2003 and 2002, respectively)                 |                                                                                                                                                   |                                            | 2,371   |         |         |   | 1,804   |        
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                    |                                                                                                                                                   | Total investments                          |         |         | 273,588 |   |         |         | 246,665 | 
|                                         | Cash and cash equivalents                                                                                                          |                                                                                                                                                   |                                            | 50,647  |         |         |   | 39,385  |        
|                                         | Accrued investment income                                                                                                          |                                                                                                                                                   |                                            | 3,441   |         |         |   | 2,800   |        
|                                         | Premiums and agent balances receivable (net of
    allowance of $4,651 and $4,747 in 2003 and 2002, respectively)                  |                                                                                                                                                   |                                            | 77,554  |         |         |   | 71,420  |        
|                                         | Reinsurance recoverable on:                                                                                                        |                                                                                                                                                   |                                            |         |         |         |   |         |        
|                                         |                                                                                                                                    | Paid losses                                                                                                                                       |                                            |         | 17,566  |         |   |         | 20,396  |        
|                                         |                                                                                                                                    | Unpaid losses                                                                                                                                     |                                            |         | 147,446 |         |   |         | 181,817 |        
|                                         | Prepaid reinsurance premiums                                                                                                       |                                                                                                                                                   |                                            | 20,492  |         |         |   | 18,115  |        
|                                         | Deferred policy acquisition costs                                                                                                  |                                                                                                                                                   |                                            | 19,564  |         |         |   | 12,140  |        
|                                         | Deferred federal income taxes                                                                                                      |                                                                                                                                                   |                                            | 15,201  |         |         |   | 19,099  |        
|                                         | Goodwill                                                                                                                           |                                                                                                                                                   |                                            | 28,997  |         |         |   | 28,997  |        
|                                         | Other assets                                                                                                                       |                                                                                                                                                   |                                            | 37,770  |         |         |   | 34,005  |        
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                    |                                                                                                                                                   | Total assets                               |         | $       | 692,266 |   |         | $       | 674,839 | 
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Liabilities                              |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |         |   |        
|                                         | Losses and loss adjustment expenses                                                                                                |                                                                                                                                                   | $                                          | 339,465 |         |         | $ | 374,933 |        
|                                         | Unearned premiums                                                                                                                  |                                                                                                                                                   |                                            | 109,677 |         |         |   | 68,678  |        
|                                         | Debt                                                                                                                               |                                                                                                                                                   |                                            | 17,506  |         |         |   | 32,497  |        
|                                         | Accounts payable and accrued expenses                                                                                              |                                                                                                                                                   |                                            | 26,283  |         |         |   | 18,665  |        
|                                         | Reinsurance funds held and balances payable                                                                                        |                                                                                                                                                   |                                            | 13,961  |         |         |   | 16,199  |        
|                                         | Junior subordinated debentures                                                                                                     |                                                                                                                                                   |                                            | 10,310  |         |         |   |        |        
|                                         | Payable to insurance companies                                                                                                     |                                                                                                                                                   |                                            | 7,853   |         |         |   | 8,358   |        
|                                         | Other liabilities                                                                                                                  |                                                                                                                                                   |                                            | 12,098  |         |         |   | 8,114   |        
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                    |                                                                                                                                                   | Total liabilities                          |         |         | 537,153 |   |         |         | 527,444 | 
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        
|Commitments and contingencies (note 14)  |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |         |   |        
|Shareholders Equity                     |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |         |   |        
|                                         | Common stock, $0.01 stated value; authorized
    50,000,000 shares; 29,022,435 and 29,591,494 shares issued and
    outstanding    |                                                                                                                                                   |                                            | 290     |         |         |   | 296     |        
|                                         | Additional paid-in capital                                                                                                         |                                                                                                                                                   |                                            | 125,181 |         |         |   | 127,429 |        
|                                         | Retained earnings                                                                                                                  |                                                                                                                                                   |                                            | 23,069  |         |         |   | 12,073  |        
|                                         | Note receivable from officer                                                                                                       |                                                                                                                                                   |                                            | (886    | )       |         |   | (876    | )      
|                                         | Accumulated other comprehensive income:                                                                                            |                                                                                                                                                   |                                            |         |         |         |   |         |        
|                                         |                                                                                                                                    | Unrealized appreciation on available for sale
    securities, net of deferred tax expense of $3,819 and $4,336 in
    2003 and 2002, respectively |                                            |         | 7,459   |         |   |         | 8,473   |        
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                    |                                                                                                                                                   | Total shareholders equity                 |         |         | 155,113 |   |         |         | 147,395 | 
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        
|                                         |                                                                                                                                    |                                                                                                                                                   | Total liabilities and shareholders equity |         | $       | 692,266 |   |         | $       | 674,839 | 
|                                         |                                                                                                                                    |                                                                                                                                                   |                                            |         |         |        

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

47



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF INCOME


|                                         |                                                    |                                       |                                                    |         |         |            |  |         |         |            |  |          |          |           |  
|---------------------------------------- | -------------------------------------------------- | ------------------------------------- | -------------------------------------------------- | ------- | ------- | ---------- |  | ------- | ------- | ---------- |  | -------- | -------- | --------- | -
|                                         |                                                    |                                      
|                                         |                                                    | For the Years Ended December 31,      |                                                   
|                                         |                                                    |                                       |                                                   
|                                         |                                                    | 2003                                  |                                                    |         | 2002    |            |  | 2001    |        
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         |                                                    |                                      
|                                         |                                                    | (In thousands, except per share data) |                                                   
|Revenues                                 |                                                    |                                       |                                                    |         |         |            |  |         |         |            |  |         
|                                         | Premiums earned                                    |                                       |                                                    |         |         |            |  |         |         |            |  |          |         
|                                         |                                                    | Gross                                 |                                                    | $       | 212,281 |            |  | $       | 208,961 |            |  | $        | 293,650  |          
|                                         |                                                    | Ceded                                 |                                                    |         | (61,076 | )          |  |         | (63,578 | )          |  |          | (129,985 | )        
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         | Net earned                                         |                                       |                                                    | 151,205 |         |            |  | 145,383 |         |            |  | 163,665  |         
|                                         | Net commissions and fees                           |                                       |                                                    | 45,291  |         |            |  | 37,581  |         |            |  | 40,675   |         
|                                         | Net investment income                              |                                       |                                                    | 13,484  |         |            |  | 13,958  |         |            |  | 14,228   |         
|                                         | Net realized gains on disposition of investments   |                                       |                                                    | 823     |         |            |  | 666     |         |            |  | 735      |         
|                                         | Gain (loss) on sale of subsidiary                  |                                       |                                                    |        |         |            |  | 199     |         |            |  | (1,097   | )       
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         |                                                    |                                       | Total revenues                                     |         |         | 210,803    |  |         |         | 197,787    |  |          |          | 218,206   |  
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|Expenses                                 |                                                    |                                       |                                                    |         |         |            |  |         |         |            |  |         
|                                         | Losses and loss adjustment expenses                |                                       |                                                    | 150,998 |         |            |  | 171,226 |         |            |  | 247,122  |         
|                                         | Reinsurance recoveries                             |                                       |                                                    | (52,526 | )       |            |  | (72,492 | )       |            |  | (121,939 | )       
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         | Net losses and loss adjustment expenses            |                                       |                                                    | 98,472  |         |            |  | 98,734  |         |            |  | 125,183  |         
|                                         | Salaries and employee benefits                     |                                       |                                                    | 48,238  |         |            |  | 37,659  |         |            |  | 44,179   |         
|                                         | Policy acquisition and other underwriting expenses |                                       |                                                    | 23,618  |         |            |  | 33,635  |         |            |  | 31,662   |         
|                                         | Other operating expenses                           |                                       |                                                    | 24,457  |         |            |  | 23,016  |         |            |  | 22,778   |         
|                                         | Interest expense                                   |                                       |                                                    | 977     |         |            |  | 3,021   |         |            |  | 4,516    |         
|                                         | Gain on debt reduction                             |                                       |                                                    |        |         |            |  | (359    | )       |            |  |         |         
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         |                                                    |                                       | Total expenses                                     |         |         | 195,762    |  |         |         | 195,706    |  |          |          | 228,318   |  
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         |                                                    |                                       | Income (loss) before taxes and equity
    earnings |         |         | 15,041     |  |         |         | 2,081      |  |          |          | (10,112   | )
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         | Federal income tax expense (benefit)               |                                       |                                                    | 4,945   |         |            |  | 431     |         |            |  | (3,602   | )       
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         | Equity earnings of affiliates                      |                                       |                                                    | 3       |         |            |  |        |         |            |  |         |         
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|                                         |                                                    |                                       | Net income (loss)                                  |         | $       | 10,099     |  |         | $       | 1,650      |  |          | $        | (6,510    | )
|                                         |                                                    |                                       |                                                    |         |         |            |  |         |        
|Earnings Per Share                       |                                                    |                                       |                                                    |         |         |            |  |         |         |            |  |         
|                                         | Basic                                              |                                       |                                                    |         |         |            |  |         |         |            |  |          |         
|                                         |                                                    |                                       | Net income (loss)                                  |         | $       | 0.35       |  |         | $       | 0.08       |  |          | $        | (0.76     | )
|                                         | Diluted                                            |                                       |                                                    |         |         |            |  |         |         |            |  |          |         
|                                         |                                                    |                                       | Net income (loss)                                  |         | $       | 0.35       |  |         | $       | 0.08       |  |          | $        | (0.76     | )
|Weighted average number of common shares |                                                    |                                       |                                                    |         |         |            |  |         |         |            |  |         
|                                         |                                                    |                                       | Basic                                              |         |         | 29,188,967 |  |         |         | 20,543,878 |  |          |          | 8,512,186 |  
|                                         |                                                    |                                       | Diluted                                            |         |         | 29,268,799 |  |         |         | 20,543,878 |  |          |          | 8,512,186 |  

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

48



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE
INCOME

|                  |                                         |                                                                        |        |        |      |   |       |       |       |   |        |        |        |  
|----------------- | --------------------------------------- | ---------------------------------------------------------------------- | ------ | ------ | ---- | - | ----- | ----- | ----- | - | ------ | ------ | ------ | -
|                  |                                         |                                                                       
|                  |                                         | For the Years Ended December 31,                                       |       
|                  |                                         |                                                                        |       
|                  |                                         | 2003                                                                   |        |        | 2002 |   |       | 2001  |      
|                  |                                         |                                                                        |        |        |      |   |       |       |      
|                  |                                         |                                                                       
|                  |                                         | (In thousands)                                                         |       
|Net income (loss) |                                         | $                                                                      | 10,099 |        |      | $ | 1,650 |       |       | $ | (6,510 | )     
|                  | Other comprehensive income, net of tax: |                                                                        |        |        |      |   |       |       |       |   |        |        |       
|                  |                                         | Unrealized (losses) gains on securities                                |        |        | (814 | ) |       |       | 5,889 |   |        |        | 2,979  |  
|                  |                                         | Less: reclassification adjustment for gains
    included in net income |        |        | (200 | ) |       |       | (489  | ) |        |        | (1,331 | )
|                  |                                         |                                                                        |        |        |      |   |       |       |      
|                  | Other comprehensive (loss) income       |                                                                        |        | (1,014 | )    |   |       | 5,400 |       |   |        | 1,648  |       
|                  |                                         |                                                                        |        |        |      |   |       |       |      
|                  | Comprehensive income (loss)             |                                                                        | $      | 9,085  |      |   | $     | 7,050 |       |   | $      | (4,862 | )     
|                  |                                         |                                                                        |        |        |      |   |       |       |      

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

49



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.






CONSOLIDATED STATEMENT OF SHAREHOLDERS
EQUITY


|                                                             |  |                                                       |     |             |         |   |         |          |      |   |              |       |  |               |       |   |               |   |        |   |  |   |         |  
|------------------------------------------------------------ |  | ----------------------------------------------------- | --- | ----------- | ------- | - | ------- | -------- | ---- | - | ------------ | ----- |  | ------------- | ----- | - | ------------- | - | ------ | - |  | - | ------- | -
|                                                             |  |                                                      
|                                                             |  | For the Years ended December 31, 2003, 2002, and 2001 |    
|                                                             |  |                                                       |    
|                                                             |  |                                                       |     | Accumulated |         |   |        
|                                                             |  |                                                       |     | Additional  |         |   |         |          | Note |   |              | Other |  |               | Total |  
|                                                             |  | Common                                                |     |             | Paid-In |   |         | Retained |      |   | Receivable   |       |  | Comprehensive |       |   | Shareholders |  
|                                                             |  | Stock                                                 |     |             | Capital |   |         | Earnings |      |   | from Officer |       |  | Income        |       |   | Equity        |  
|                                                             |  |                                                       |     |             |         |   |         |          |      |   |              |       |  |               |       |   |               |  
|                                                             |  |                                                      
|                                                             |  | (In thousands)                                        |    
|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 |  
|Unrealized depreciation on available for sale
    securities |  |                                                       |    |             |         |   |        |          |      |   |             |       |  |               |      |   |               |   | (1,014 | ) |  |   | (1,014  | )
|Stock-based employee compensation                            |  |                                                       |    |             |         |   | 189     |          |      |   |             |       |  |               |      |   |               |   |       |   |  |   | 189     |  
|Retirement of 569,059 shares of common stock                 |  |                                                       | (6  | )           |         |   | (2,437  | )        |      |   | 897          |       |  |               |      |   |               |   |       |   |  |   | (1,546  | )
|Note receivable from an officer                              |  |                                                       |    |             |         |   |        |          |      |   |             |       |  |               | (10   | ) |               |   |       |   |  |   | (10     | )
|Net income                                                   |  |                                                       |    |             |         |   |        |          |      |   | 10,099       |       |  |               |      |   |               |   |       |   |  |   | 10,099  |  
|                                                             |  |                                                       |     |             |         |   |         |          |      |   |              |       |  |               |       |   |               |  
|Balances December 31, 2003                                   |  | $                                                     | 290 |             |         | $ | 125,181 |          |      | $ | 23,069       |       |  | $             | (886  | ) |               | $ | 7,459  |   |  | $ | 155,113 |  
|                                                             |  |                                                       |     |             |         |   |         |          |      |   |              |       |  |               |       |   |               |  

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

50



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |          |         |   |        |          |         |  
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | - | ----- | -------- | ------- | - | ------ | -------- | ------- | -
|                                                                            |                                                                                                            |                                                                             
|                                                                            |                                                                                                            | For the Years Ended                                                          |                                                        
|                                                                            |                                                                                                            | December 31,                                                                 |                                                        
|                                                                            |                                                                                                            |                                                                              |                                                        
|                                                                            |                                                                                                            | 2003                                                                         |                                                         |        | 2002    |         |   | 2001  |         
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|                                                                            |                                                                                                            |                                                                             
|                                                                            |                                                                                                            | (In thousands)                                                               |                                                        
|Cash Flows From Operating Activities                                        |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |          |         |   |       
|                                                                            | Net income (loss)                                                                                          |                                                                              | $                                                       | 10,099 |         |         | $ | 1,650 |          |         | $ | (6,510 | )       
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|                                                                            | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                              |                                                         |        |         |         |   |       |          |         |   |        |         
|                                                                            |                                                                                                            | Amortization of goodwill and other intangible
    assets                     |                                                         |        | 353     |         |   |       | 15       |         |   |        | 2,336    |        
|                                                                            |                                                                                                            | Amortization of deferred debenture issuance costs                            |                                                         |        | 11      |         |   |       |         |         |   |        |         |        
|                                                                            |                                                                                                            | Depreciation of furniture and equipment                                      |                                                         |        | 1,418   |         |   |       | 2,408    |         |   |        | 2,785    |        
|                                                                            |                                                                                                            | Net accretion of discount and premiums on bonds                              |                                                         |        | 1,798   |         |   |       | 700      |         |   |        | 26       |        
|                                                                            |                                                                                                            | Gain on sale of investments                                                  |                                                         |        | (303    | )       |   |       | (741     | )       |   |        | (2,017   | )      
|                                                                            |                                                                                                            | Gain on debt reduction                                                       |                                                         |        |        |         |   |       | (359     | )       |   |        |         |        
|                                                                            |                                                                                                            | Stock-based employee compensation                                            |                                                         |        | 189     |         |   |       |         |         |   |        |         |        
|                                                                            |                                                                                                            | Deferred income tax expense (benefit)                                        |                                                         |        | 4,415   |         |   |       | 2,642    |         |   |        | (3,633   | )      
|                                                                            | Changes in operating assets and liabilities:                                                               |                                                                              |                                                         |        |         |         |   |       |          |         |   |        |         
|                                                                            | Decrease (increase) in:                                                                                    |                                                                              |                                                         |        |         |         |   |       |          |         |   |        |         
|                                                                            |                                                                                                            | Premiums and agent balances receivable                                       |                                                         |        | (6,134  | )       |   |       | 6,750    |         |   |        | 951      |        
|                                                                            |                                                                                                            | Reinsurance recoverable on paid and unpaid losses                            |                                                         |        | 37,201  |         |   |       | 20,245   |         |   |        | (37,071  | )      
|                                                                            |                                                                                                            | Prepaid reinsurance premiums                                                 |                                                         |        | (2,377  | )       |   |       | 19,736   |         |   |        | 18,002   |        
|                                                                            |                                                                                                            | Deferred policy acquisition costs                                            |                                                         |        | (7,424  | )       |   |       | 1,813    |         |   |        | (7,329   | )      
|                                                                            |                                                                                                            | Other assets                                                                 |                                                         |        | (3,747  | )       |   |       | 5,640    |         |   |        | (546     | )      
|                                                                            | Increase (decrease) in:                                                                                    |                                                                              |                                                         |        |         |         |   |       |          |         |   |        |         
|                                                                            |                                                                                                            | Losses and loss adjustment expenses                                          |                                                         |        | (35,468 | )       |   |       | (19,663  | )       |   |        | 52,772   |        
|                                                                            |                                                                                                            | Unearned premiums                                                            |                                                         |        | 40,999  |         |   |       | (25,324  | )       |   |        | (140     | )      
|                                                                            |                                                                                                            | Payable to insurance companies                                               |                                                         |        | (505    | )       |   |       | 2,518    |         |   |        | (13,286  | )      
|                                                                            |                                                                                                            | Reinsurance funds held and balances payable                                  |                                                         |        | (2,238  | )       |   |       | (10,688  | )       |   |        | (11,284  | )      
|                                                                            |                                                                                                            | Other liabilities                                                            |                                                         |        | 9,243   |         |   |       | (5,559   | )       |   |        | 2,167    |        
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|                                                                            |                                                                                                            |                                                                              | Total Adjustments                                       |        |         | 37,431  |   |       |          | 133     |   |        |          | 3,733   |  
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|                                                                            |                                                                                                            | Net cash provided by (used in) operating
    activities                      |                                                         |        | 47,530  |         |   |       | 1,783    |         |   |        | (2,777   | )      
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|Cash Flows From Investing Activities                                        |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |          |         |   |       
|                                                                            |                                                                                                            | Purchase of equity securities available for sale                             |                                                         |        |        |         |   |       |         |         |   |        | (450     | )      
|                                                                            |                                                                                                            | Purchase of debt securities available for sale                               |                                                         |        | (89,433 | )       |   |       | (162,327 | )       |   |        | (110,906 | )      
|                                                                            |                                                                                                            | Proceeds from sale of equity securities available
    for sale               |                                                         |        |        |         |   |       | 900      |         |   |        | 15,189   |        
|                                                                            |                                                                                                            | Proceeds from sales and maturities of debt
    securities available for sale |                                                         |        | 59,483  |         |   |       | 123,416  |         |   |        | 83,510   |        
|                                                                            |                                                                                                            | Capital expenditures                                                         |                                                         |        | (2,155  | )       |   |       | (658     | )       |   |        | (1,381   | )      
|                                                                            |                                                                                                            | Purchase of books of business                                                |                                                         |        | (738    | )       |   |       | (221     | )       |   |        |         |        
|                                                                            |                                                                                                            | Sale of subsidiaries                                                         |                                                         |        |        |         |   |       |         |         |   |        | 3,752    |        
|                                                                            |                                                                                                            | Cash advance to agent                                                        |                                                         |        | 1,002   |         |   |       | (1,002   | )       |   |        |         |        
|                                                                            |                                                                                                            | Net cash deposited (withheld) in funds held                                  |                                                         |        | 1,208   |         |   |       | 5,215    |         |   |        | (12,790  | )      
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|                                                                            |                                                                                                            |                                                                              | Net cash used in investing activities                   |        |         | (30,633 | ) |       |          | (34,677 | ) |        |          | (23,076 | )
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|Cash Flows From Financing Activities                                        |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |          |         |   |       
|                                                                            |                                                                                                            | Proceeds from lines of credit                                                |                                                         |        | 18,957  |         |   |       | 19,710   |         |   |        | 12,780   |        
|                                                                            |                                                                                                            | Payment of lines of credit                                                   |                                                         |        | (33,948 | )       |   |       | (41,595  | )       |   |        | (11,052  | )      
|                                                                            |                                                                                                            | Book overdraft                                                               |                                                         |        | 1,212   |         |   |       | 832      |         |   |        | 1,642    |        
|                                                                            |                                                                                                            | Dividend paid on common stock                                                |                                                         |        |        |         |   |       |         |         |   |        | (1,021   | )      
|                                                                            |                                                                                                            | Net proceeds from issuance of common stock                                   |                                                         |        |        |         |   |       | 60,516   |         |   |        |         |        
|                                                                            |                                                                                                            | Net proceeds from junior subordinated debentures                             |                                                         |        |         |         |   |       |          |         |   |        | 9,700    |        
|                                                                            |                                                                                                            | Retirement of common stock                                                   |                                                         |        | (1,556  | )       |   |       | (486     | )       |   |        | (32      | )      
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|                                                                            |                                                                                                            |                                                                              | Net cash (used in) provided by financing
    activities |        |         | (5,635  | ) |       |          | 38,977  |   |        |          | 2,317   |  
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|                                                                            |                                                                                                            | Net increase (decrease) in cash and cash
    equivalents                     |                                                         |        | 11,262  |         |   |       | 6,083    |         |   |        | (23,536  | )      
|                                                                            |                                                                                                            | Cash and cash equivalents, beginning of year                                 |                                                         |        | 39,385  |         |   |       | 33,302   |         |   |        | 56,838   |        
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|                                                                            |                                                                                                            | Cash and cash equivalents, end of year                                       |                                                         | $      | 50,647  |         |   | $     | 39,385   |         |   | $      | 33,302   |        
|                                                                            |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |         
|Supplemental Disclosure of Cash Flow
    Information:                       |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |          |         |   |       
|                                                                            |                                                                                                            | Interest paid                                                                |                                                         | $      | 835     |         |   | $     | 3,681    |         |   | $      | 3,671    |        
|                                                                            |                                                                                                            | Income taxes received, net of paid                                           |                                                         | $      | (368    | )       |   | $     | (1,842   | )       |   | $      | (1,176   | )      
|Supplemental Disclosure of Non Cash Investing
    and Financing Activities: |                                                                                                            |                                                                              |                                                         |        |         |         |   |       |          |         |   |       
|                                                                            |                                                                                                            | Tax benefit from stock options                                               |                                                         | $      |        |         |   | $     |         |         |   | $      | 1        |        
|                                                                            |                                                                                                            | Stock-based employee compensation                                            |                                                         | $      | 189     |         |   | $     |         |         |   | $      |         |        

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

51



---



##### 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.
The consolidated financial statements also include equity
earnings of Meadowbrook Capital Trust I, a wholly owned
unconsolidated subsidiary of the Company.

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, but is not limited to, providing services, such as
risk management consulting, claims administration and handling,
loss control, and reinsurance brokering, along with various
types of property and casualty insurance coverage, including
workers compensation, commercial multiple peril, general
liability, commercial auto liability, and inland marine. The
Company, through its Insurance Company Subsidiaries, issues
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.

On September 30, 2003, an unconsolidated
subsidiary trust of the Company issued $10.0 million of
mandatorily redeemable trust preferred securities
(TPS) to a trust formed by an institutional
investor. After deducting commissions and expenses, the
Companys trust received net proceeds from the transaction
of $9.7 million. The Company contributed $6.3 million
of the proceeds to the surplus of Star. Refer to Note 7 for
additional information.

52



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Use of Estimates

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

Investments

The Companys investment securities at
December 31, 2003 and 2002, 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 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.

Other Than Temporary Impairments of Securities
and Unrealized Losses on Investments

The Companys investment portfolio is
primarily invested in debt securities classified as available
for sale, with a concentration in fixed income securities of a
high quality. The Companys policy for the valuation of
temporarily impaired securities is to determine impairment based
on analysis of the following factors: market value less than
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, and
intent and ability of the Company to retain the investment for a
period of time sufficient to allow for anticipated recovery in
market value. The Company evaluates its investments in
securities to determine other than temporary impairment, no less
than quarterly. Investments which are deemed impaired are
written down to their estimated net realizable value and the
related losses are recognized in income. There were no impaired
investments written down in 2003. There were $75,000 and $1.3
million in impaired investments written down in 2002 and 2001,
respectively.

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. The
Company reduces these costs for premium deficiencies. There were
no premium deficiencies at December 31, 2003 and 2002. At
December 31, 2001, deferred policy acquisition costs were
reduced for premium deficiencies of $72,000. Certain
intercompany costs directly related to policy acquisition and
other underwriting expenses are classified as salary and
employee benefit expenses in the consolidated financial
statements.

53



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Furniture and Equipment

Furniture and equipment are stated at cost, net
of accumulated depreciation, 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 eliminates the
amortization of goodwill. Prior to 2002, goodwill was amortized
on a straight-line basis over 15 to 20 years. 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 12
for additional information regarding the effect of the adoption
of SFAS No. 142.

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 2003.

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 and
actuarial estimates. Certain premiums are subject to
retrospective premium adjustments. The estimated ultimate
premium is recognized over the term of the insurance contract.

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

Commission income, which includes reinsurance
brokerage, is 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

54



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

commission expense. Commission and other
adjustments are recorded when they occur and the Company
maintains an allowance for estimated policy cancellations and
commission returns.

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.

At December 31, 2003, the Company had a
deferred tax asset of $15.2 million, $3.4 million of which
is related to a net operating loss carryforward
(NOL). 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, 2003,
management concluded that the positive evidence, which includes
cumulative pre-tax income of $7.0 million for the three
years ended December 31, 2003, supporting the generation of
future taxable income sufficient to realize the deferred tax
asset outweighed the negative evidence of the previous losses
reported which generated the NOL. Furthermore, the current
market conditions that supported the cumulative rate increases
of 66.4% since the beginning of 2000 is expected to continue. In
addition, while the Company had adverse development of
$2.9 million, or 1.5% of $193.1 million of net loss
and LAE reserves at December 31, 2002, loss reserves
continue to stabilize with a calendar year 2003 loss and LAE
ratio of 70.1% for the year ended December 31, 2003. Also,
the Company continues to have alternative tax strategies, which
could generate capital gains of $52.0 million, or
utilization of $17.7 million of taxes. This capital gain
would fully utilize the net operating loss of $3.4 million
at December 31, 2003 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

Effective January 1, 2003, the Company
adopted the requirements of SFAS No. 148 Accounting
for Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement
No. 123 utilizing the prospective method. SFAS
No. 148, for periods starting after December 15, 2003
or thereafter, 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. Upon implementation of SFAS
No. 148 in 2003, the Company is recognizing stock-based
compensation expense for awards granted after January 1,
2003.

Prior to the adoption of SFAS No. 148, the
Company applied 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

55



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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
2003, 2002, and 2001 would be as follows (in thousands):

|                                                                                                                                                     |                       |      |        |      |      |   |        |      |  |   |        |       |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ---- | ------ | ---- | ---- | - | ------ | ---- |  | - | ------ | ----- | -
|                                                                                                                                                     |                       | 2003 |        |      | 2002 |   |        | 2001 | 
|                                                                                                                                                     |                       |      |        |      |      |   |        |      | 
|Net income (loss), as reported                                                                                                                       |                       | $    | 10,099 |      |      | $ | 1,650  |      |  | $ | (6,510 | )    
|Add: Stock-based employee compensation expense
    included in reported income, net of related tax effects                                           |                       |      | 125    |      |      |   |       |      |  |   |       |      
|Deduct: Total stock-based employee compensation
    expense determined under fair-value-based methods for all
    awards, net of related tax effects |                       |      | (882   | )    |      |   | (1,106 | )    |  |   | (881   | )    
|                                                                                                                                                     |                       |      |        |      |      |   |        |      | 
|Pro forma net income (loss)                                                                                                                          |                       | $    | 9,342  |      |      | $ | 544    |      |  | $ | (7,391 | )    
|                                                                                                                                                     |                       |      |        |      |      |   |        |      | 
|Earnings per share:                                                                                                                                  |                       |      |        |      |      |   |        |      |  |   |        |      
|                                                                                                                                                     | Basic  as reported   |      | $      | 0.35 |      |   | $      | 0.08 |  |   | $      | (0.76 | )
|                                                                                                                                                     | Basic  pro forma     |      | $      | 0.32 |      |   | $      | 0.03 |  |   | $      | (0.87 | )
|                                                                                                                                                     | Diluted  as reported |      | $      | 0.35 |      |   | $      | 0.08 |  |   | $      | (0.76 | )
|                                                                                                                                                     | Diluted  pro forma   |      | $      | 0.32 |      |   | $      | 0.03 |  |   | $      | (0.87 | )

The Black-Scholes valuation model utilized the
following annualized assumptions for all applicable years:
Risk-free interest rate of 2.90%, 4.46%, and 5.0% for 2003,
2002, and 2001, respectively. No dividends were declared in 2003
or 2002. The dividend declared was $0.09 per share in 2001. The
volatility factor for the expected market price of the
Companys common stock is 0.586, 0.562, and 0.516, in 2003,
2002, and 2001, respectively. The weighted-average expected life
of options is 5.0 for the 2003, 2002, and 2001 grants.

Compensation expense of $189,000 has been
recorded for stock options granted in 2003 under SFAS
No. 148. No compensation cost has been recorded for stock
option grants issued during 2002 and 2001 as the market value
equaled the exercise price at the date of grant.

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 1,693,119, 2,693,223, and
1,582,716 for the periods ended December 31, 2003, 2002,
and 2001, respectively, have been excluded from the diluted
earnings per share as they were anti-dilutive. Shares issuable
pursuant to stock options included in diluted earnings per share
were 71,154 for the year ended December 31, 2003. There
were no shares issuable pursuant to stock options included in
diluted earnings for the years ended December 31, 2002 and
2001. In addition, shares issuable pursuant to outstanding
warrants included in diluted earnings per share were 8,678 for
the year ended December 31, 2003. Outstanding warrants of
300,000 for the year ended December 31, 2002 have been
excluded from the diluted earnings per share as they were
anti-dilutive.

56



---



##### 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 eliminates the amortization of
goodwill. Upon implementation of SFAS No. 142 in 2002, the
Company is no longer amortizing goodwill. Net income would have
increased by $1,561,000 in 2001 if the amortization of goodwill
had ceased as of January 1, 2001. See Note 12 for
additional information regarding the effect of the adoption of
SFAS No. 142.

The Financial Account Standards Board
(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 had no effect on the Companys
financial statements.

On May 15, 2003, the FASB issued SFAS
No. 150 Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity. The
statement requires issuers to classify as liabilities (or assets
in some circumstances) three classes of freestanding financial
instruments that embody obligations for the issuer. Generally,
the statement is effective for financial instruments entered
into or modified after May 31, 2003 and is otherwise
effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of this standard had no
effect on the Companys financial statements.

In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 clarifies the requirements of SFAS
No. 5, Accounting for Contingencies, relating
to a guarantors accounting for, and disclosure of, the
issuance of certain types of guarantees. For certain guarantees
issued after December 31, 2002, FIN No. 45 requires a
guarantor to recognize, upon issuance of a guarantee, a
liability for the fair value of the obligations it assumes under
the guarantee. Guarantees issued prior to January 1, 2003
are not subject to liability recognition, but are subject to
expanded disclosure requirements. See Note 7 and
Note 14 for additional information regarding the effect of
the adoption of FIN No. 45.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities. The
primary objective of FIN No. 46 is to provide guidance on
the identification of, and financial reporting for, entities
over which control is achieved through means other than voting
rights; such entities are known as variable interest entities.
FIN No. 46 requires variable interest entities to be
consolidated by the primary beneficiary of the variable interest
entities and expands disclosure requirements for both variable
interest entities that are consolidated as well as those within
which an enterprise holds a significant variable interest. In
accordance with FIN 46, the Company performed an evaluation of
its business relationships and determined that Meadowbrook
Capital Trust I (Trust) is a variable interest
entity; however, the Trust did not meet the qualifications for
consolidation as the Trust equity was deemed to not be at risk.
The adoption of FIN No. 46 did not have a material impact
on the Companys consolidated balance sheet and had no
impact on its consolidated statement of income. See Note 7 for
additional information regarding the Companys
unconsolidated subsidiary trust.

In December 2003, the FASB issued FIN
No. 46(R), Consolidation of Variable Interest
Entities. FIN No. 46(R) addresses certain
implementation issues that arose after the issuance of FIN
No. 46, which it supercedes. The Company is required to
adopt FIN No. 46(R) for the first quarter ending
March 31, 2004. The Company is currently evaluating the
impact FIN No. 46(R) will have on its financial statements.

Reclassifications

Certain amounts in the 2002 and 2001 financial
statements and notes to consolidated financial statements have
been reclassified to conform to the 2003 presentation.

57



---



##### 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
and broker/dealer quotations. The cost or amortized cost and
estimated fair value of investments in securities at
December 31, 2003 and 2002 are as follows (in thousands):

|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |      |      |   |        |         |         | 
|-------------------------------------------------------------- | ------------------------------------------ | ----------------------------------- | ------ | ------- | ---------- | - | ----- | ---------- | ------ | - | --------- | ---- | ---- | - | ------ | ------- | ------- | 
|                                                               |                                            |                                    
|                                                               |                                            | December 31, 2003                   |       
|                                                               |                                            |                                     |       
|                                                               |                                            | 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 |                                            | $                                   | 58,616 |         |            | $ | 2,300 |            |        | $ | (232      | )    |      | $ | 60,683 |        
|Obligations of states and political subdivisions               |                                            |                                     | 47,597 |         |            |   | 2,030 |            |        |   | (37       | )    |      |   | 49,590 |        
|Corporate securities                                           |                                            |                                     | 93,701 |         |            |   | 6,392 |            |        |   | (432      | )    |      |   | 99,661 |        
|Mortgage-backed securities                                     |                                            |                                     | 60,416 |         |            |   | 1,058 |            |        |   | (192      | )    |      |   | 61,283 |        
|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |     
|                                                               | Total Debt Securities available for sale   |                                     |        | 260,330 |            |   |       | 11,780     |        |   |           | (893 | )    |   |        | 271,217 |        
|Equity Securities:                                             |                                            |                                     |        |         |            |   |       |            |        |   |           |      |      |   |        |        
|Preferred Stocks                                               |                                            |                                     | 1,980  |         |            |   | 352   |            |        |   | 0         |      |      |   | 2,332  |        
|Common Stocks                                                  |                                            |                                     | 0      |         |            |   | 39    |            |        |   | 0         |      |      |   | 39     |        
|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |     
|                                                               | Total Equity Securities available for sale |                                     |        | 1,980   |            |   |       | 391        |        |   |           | 0    |      |   |        | 2,371   |        
|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |     
|                                                               |                                            | Total Securities available for sale |        | $       | 262,310    |   |       | $          | 12,171 |   |           | $    | (893 | ) |        | $       | 273,588 | 
|                                                               |                                            |                                     |        |         |            |   |       |            |        |   |           |     

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

58



---



##### 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, |       
|                                                                                     |  |              |       
|                                                                                     |  | 2003         |        |   | 2002 |  
|                                                                                     |  |              |        |   |      |  
|Unrealized appreciation                                                              |  | $            | 12,171 |   |      | $ | 13,457 |  
|Unrealized depreciation                                                              |  |              | (893   | ) |      |   | (648   | )
|                                                                                     |  |              |        |   |      |  
|Net unrealized appreciation                                                          |  |              | 11,278 |   |      |   | 12,809 |  
|Deferred federal income tax benefit                                                  |  |              | (3,819 | ) |      |   | (4,336 | )
|                                                                                     |  |              |        |   |      |  
|Net unrealized appreciation on investments, net
    of deferred federal income taxes |  | $            | 7,459  |   |      | $ | 8,473  |  
|                                                                                     |  |              |        |   |      |  

The gross realized gains and gross realized
losses on the sale of available for sale debt securities were
$406,200 and $103,700, respectively, for the year ended
December 31, 2003. There were no sales of available for
sale equity securities for the year ended December 31,
2003. The proceeds from these sales were $13.7 million and
$0, respectively.

The gross realized gains and gross realized
losses on the sale of available for sale debt securities were
$2,384,000 and $1,765,800, respectively, for the year ended
December 31, 2002. The gross realized gains and gross
realized losses on the sale of available for sale equity
securities were $122,700, and $0, respectively, for the year
ended December 31, 2002. The proceeds from these sales were
$93.8 million and $0.9 million, respectively.

The gross realized gains and gross realized
losses on the sale of available for sale debt securities were
$1,034,700 and $68,900, respectively, for the year ended
December 31, 2001. The gross realized gains and gross
realized losses on the sale of available for sale equity
securities were $2,465,600 and $1,414,600, respectively. The
proceeds from these sales were $49.7 million and
$15.2 million, respectively.

The amortized cost and estimated fair value of
available for sale debt securities at December 31, 2003, 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                |  | $                  | 12,097  |  |            | $ | 12,369  | 
|Due after one year through five years  |  |                    | 92,147  |  |            |   | 95,864  | 
|Due after five years through ten years |  |                    | 77,074  |  |            |   | 82,267  | 
|Due after ten years                    |  |                    | 18,596  |  |            |   | 19,434  | 
|Mortgage-backed securities             |  |                    | 60,416  |  |            |   | 61,283  | 
|                                       |  |                    |         |  |            |  
|                                       |  | $                  | 260,330 |  |            | $ | 271,217 | 
|                                       |  |                    |         |  |            |  

59



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net investment income for the three years ended
December 31, 2003, 2002, and 2001 was as follows (in
thousands):

|                              |  |      |        |  |      |   |        |      |  |   |        | 
|----------------------------- |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                              |  | 2003 |        |  | 2002 |   |        | 2001 | 
|                              |  |      |        |  |      |   |        |      | 
|Investment Income On:         |  |      |        |  |      |   |        |      |  |   |        | 
|Debt securities               |  | $    | 12,481 |  |      | $ | 12,572 |      |  | $ | 11,856 | 
|Equity securities             |  |      | 182    |  |      |   | 230    |      |  |   | 523    | 
|Cash and cash equivalents     |  |      | 1,425  |  |      |   | 1,736  |      |  |   | 2,333  | 
|                              |  |      |        |  |      |   |        |      | 
|Total gross investment income |  |      | 14,088 |  |      |   | 14,538 |      |  |   | 14,712 | 
|Less investment expenses      |  |      | 604    |  |      |   | 580    |      |  |   | 484    | 
|                              |  |      |        |  |      |   |        |      | 
|Net investment income         |  | $    | 13,484 |  |      | $ | 13,958 |      |  | $ | 14,228 | 
|                              |  |      |        |  |      |   |        |      | 

United States government obligations, municipal
bonds, and bank certificates of deposit aggregating $102,426,960
and $89,767,585 were on deposit at December 31, 2003 and
2002, respectively, with state regulatory authorities or
otherwise pledged as required by law or contract.

Other Than Temporary Impairments of Securities
and Unrealized Losses on Investments

At December 31, 2003, the Company had
fifty-six securities that were in an unrealized loss position
deemed to be temporarily impaired. These investments all had
unrealized losses of less than 10%. Two investments have been in
an unrealized loss position for more than one year, one of
which, with a $71,000 unrealized loss, has been in an unrealized
loss position for greater than 18 months. Positive evidence
considered in reaching the Companys conclusion that the
investments in an unrealized loss position are not
other-than-temporarily impaired consisted of: 1) there were
no specific events which caused concerns; 2) there were no
past due interest payments; 3) there has been a rise in
market prices; 4) the Companys ability and intent to
retain the investment for a sufficient amount of time to allow
an anticipated recovery in value; and 5) the Company also
determined that the changes in market value were considered
normal in relation to overall fluctuations in interest rates.

The fair value and amount of unrealized losses
segregated by the time period the investment has been in an
unrealized loss position is as follows (in thousands):

|                                                               |        |                     |        |        |                        |   |               |            |   |   |            |       |  |   |     |     |  
|-------------------------------------------------------------- | ------ | ------------------- | ------ | ------ | ---------------------- | - | ------------- | ---------- | - | - | ---------- | ----- |  | - | --- | --- | -
|                                                               |        |                    
|                                                               |        | December 31, 2003   |       
|                                                               |        |                     |       
|                                                               |        |                     |        |       
|                                                               |        | Less than 12 months |        |        | Greater than 12 months |  
|                                                               |        |                     |        |        |                        |  
|                                                               |        | Fair Value of       |        |        |                        |   | Fair Value of |            |   |  
|                                                               |        | Investments         |        |        |                        |   | Investments   |            |   |  
|                                                               |        | with                |        |        | Gross                  |   |               | with       |   |   | Gross      |      
|                                                               |        | Unrealized          |        |        | Unrealized             |   |               | Unrealized |   |   | Unrealized |      
|                                                               |        | Losses              |        |        | Losses                 |   |               | Losses     |   |   | Losses     |      
|                                                               |        |                     |        |        |                        |   |               |            |   |   |            |      
|Debt Securities:                                               |        |                     |        |        |                        |   |               |            |   |   |            |       |  |   |     |    
|Debt securities issued by the U.S. government and
    agencies |        | $                   | 10,106 |        |                        | $ | (211          | )          |   | $ | 995        |       |  | $ | (21 | )  
|Obligations of states and political subdivisions               |        |                     | 2,467  |        |                        |   | (37           | )          |   |   |           |       |  |   |    |    
|Corporate securities                                           |        |                     | 20,550 |        |                        |   | (361          | )          |   |   | 1,137      |       |  |   | (71 | )  
|Mortgage-backed securities                                     |        |                     | 17,158 |        |                        |   | (192          | )          |   |   |           |       |  |   |    |    
|                                                               |        |                     |        |        |                        |   |               |            |   |   |            |      
|                                                               | Totals |                     | $      | 50,281 |                        |   | $             | (801       | ) |   | $          | 2,132 |  |   | $   | (92 | )
|                                                               |        |                     |        |        |                        |   |               |            |   |   |            |      

60



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, |        
|                               |                               |                                  |        
|                               |                               | 2003                             |         |         | 2002 |   |         | 2001    | 
|                               |                               |                                  |         |         |      |   |         |         | 
|Balance, beginning of year     |                               | $                                | 374,933 |         |      | $ | 394,596 |         |  | $ | 341,824 |        
|Less reinsurance recoverables  |                               |                                  | 181,817 |         |      |   | 195,943 |         |  |   | 168,962 |        
|                               |                               |                                  |         |         |      |   |         |         | 
|Net balance, beginning of year |                               |                                  | 193,116 |         |      |   | 198,653 |         |  |   | 172,862 |        
|                               |                               |                                  |         |         |      |   |         |         | 
|Incurred related to:           |                               |                                  |         |         |      |   |         |         |  |   |         |        
|                               | Current year                  |                                  |         | 95,565  |      |   |         | 92,644  |  |   |         | 110,797 | 
|                               | Prior years                   |                                  |         | 2,907   |      |   |         | 6,090   |  |   |         | 14,386  | 
|                               |                               |                                  |         |         |      |   |         |         | 
|Total incurred                 |                               |                                  | 98,472  |         |      |   | 98,734  |         |  |   | 125,183 |        
|                               |                               |                                  |         |         |      |   |         |         | 
|Paid related to:               |                               |                                  |         |         |      |   |         |         |  |   |         |        
|                               | Current year                  |                                  |         | 21,446  |      |   |         | 23,247  |  |   |         | 26,312  | 
|                               | Prior years                   |                                  |         | 78,123  |      |   |         | 81,024  |  |   |         | 73,080  | 
|                               |                               |                                  |         |         |      |   |         |         | 
|Total paid                     |                               |                                  | 99,569  |         |      |   | 104,271 |         |  |   | 99,392  |        
|                               |                               |                                  |         |         |      |   |         |         | 
|Net balance, end of year       |                               |                                  | 192,019 |         |      |   | 193,116 |         |  |   | 198,653 |        
|                               | Plus reinsurance recoverables |                                  |         | 147,446 |      |   |         | 181,817 |  |   |         | 195,943 | 
|                               |                               |                                  |         |         |      |   |         |         | 
|Balance, end of year           |                               | $                                | 339,465 |         |      | $ | 374,933 |         |  | $ | 394,596 |        
|                               |                               |                                  |         |         |      |   |         |         | 

As a result of adverse development on prior
accident years reserves, the provision for loss and loss
adjustment expenses increased by $2.9 million,
$6.1 million, and $14.4 million in calendar years
2003, 2002, and 2001, respectively.

For the year ended December 31, 2003, the
Company reported net adverse development on loss and LAE of
$2.9 million, or 1.5% of net loss and LAE reserves. There
were no significant changes in the key assumptions utilized in
the analysis and calculations of the Companys reserves
during 2003. The $2.9 million of adverse development
reflects $5.3 million related to commercial multiple peril
and general liability programs. Partially offsetting this
adverse development is favorable development on workers
compensation programs of $2.7 million.

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 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 changes in 2002 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

61



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

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

The Company receives ceding commissions in
conjunction with reinsurance activities. These ceding
commissions are offset against the related underwriting expenses
and were $11.7 million, $8.7 million, and
$32.3 million in 2003, 2002, and 2001, respectively.

At December 31, 2003 and 2002, the Company
had reinsurance recoverables for paid and unpaid losses of
$165.0 million and $202.2 million, respectively. 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 34.6% of the total recoverable for paid
and unpaid losses.

At December 31, 2003, the Company has an
allowance of $954,000 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 allowance relating to HIH was $976,000.

At December 31, 2003, the Company also has
an allowance of $3.9 million recorded related to
reinsurance balances due from CSC, a Connecticut domiciled
insurance company seized by the Connecticut Insurance
Department. At December 31, 2002, the allowance relating to
CSC was $3.7 million.

At December 31, 2003, the Company also has
an allowance of $230,000 related to balances due from Reliance
National Indemnity Company, following its insolvency and a
liquidation order by the Pennsylvania Insurance Department. No
allowance had been established at December 31, 2002.

The Companys insurance subsidiaries
maintain an excess-of-loss 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. To date, there have been no material disputes with
the Companys excess-of-loss reinsurers. No assurance can
be given, however, regarding the future ability of any of the
Companys excess-of-loss reinsurers to meet their
obligations.

62



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the workers compensation reinsurance
program, the reinsurers are responsible for 100% of each loss in
excess of $300,000 up to $5.0 million for each claimant. In
addition there is coverage for loss events involving more than
one claimant up to $50.0 million per occurrence. There were
no significant changes to the terms of this reinsurance treaty
from 2002 to 2003.

Under the core liability reinsurance treaty, the
reinsurers are responsible for 100% of each loss in excess of
$350,000 up to $2.0 million per occurrence. The Company
also purchases an additional $3.0 million of reinsurance
clash coverage in excess of the $2.0 million to cover
amounts that may be in excess of the $2.0 million policy
limit, such as expenses associated with the settlement of claims
or awards in excess of policy limits. The Company has a separate
structure to cover liability specifically related to commercial
trucking, where reinsurers are responsible for 100% of each loss
in excess of $350,000, up to $1.0 million. In addition, the
Company purchases an additional $1.0 million of reinsurance
clash coverage. There were no significant changes to the terms
of this reinsurance treaty from 2002 to 2003.

Under the property reinsurance program reinsurers
are responsible for 100% of the amount of each loss in excess of
$500,000 up to $5.0 million per location for an occurrence.
In addition there is coverage for loss events involving multiple
locations up to $20.0 million after the Company has
incurred $750,000 in loss. There were no significant changes to
the terms of this reinsurance treaty from 2002 to 2003.

Effective August 1, 2003, the Company
entered into a reinsurance agreement for reinsurance coverage of
$4,500,000 excess of $500,000 each occurrence for policies
covering losses in excess of the self insured retention level
for public entities. The reinsurance charge for this coverage is
a minimum of 11% of subject premium plus 110% of losses ceded
under this agreement; however, the adjusted premium cannot
exceed 54%, the maximum rate under the agreement, or be less
than the 11% minimum. Based upon an actuarial study, the
probability of a loss to reinsurers under this treaty is less
than 15% and does not transfer significant timing or
underwriting risk, therefore under the provisions of SFAS
No. 113 and Statement of Position 98-7 Deposit
Accounting: Accounting for Insurance and Reinsurance Contracts
That Do Not Transfer Insurance Risk, the transactions
under this treaty are accounted for using the interest method of
deposit accounting. At December 31, 2003, for transactions
under this contract, the Company carried a prepaid asset
$1.3 million and a deposit liability of $1.0 million.
For the year ended December 31, 2003, the Company recorded
an operating expense of $490,863 for the subject premium
described above.

In addition, the Company purchases
$10.0 million in excess of $5.0 million for each
occurrence which is layered on top of the underlying
$5.0 million of coverage for a specific program. Under this
agreement, reinsurers are responsible for 100% of each loss in
excess of $5.0 million for all lines except workers
compensation, which is covered by the Companys core
catastrophic workers compensation structure up to
$50.0 million per occurrence.

Additionally, several small programs have
separate reinsurance treaties in place, which limit the
Companys exposure to $250,000 or less.

Facultative reinsurance treaty is purchased for
property values in excess of $5.0 million and casualty
limits excess of $2.0 million or for coverage not protected
by the treaty. There were no significant changes to the terms of
this reinsurance treaty from 2002 to 2003.

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, 2003, the Company had risk exposure in excess
of collateral in the amount of $9.5 million, compared to
$11.6 million at December 31, 2002, on these programs,
of which the Company has an allowance of $6.4 million at
December 31, 2003,

63



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

compared to $6.8 million at
December 31, 2002, 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, some of which are in litigation with the
Company. At the end of each quarter, an analysis of these
exposures is conducted to determine the potential exposure to
uncollectibility. At December 31, 2003, management believes
that this allowance is adequate. To date, the Company has not,
in the aggregate, experienced material difficulties in
collecting balances from its risk-sharing partners. No assurance
can be given, however, regarding the future ability of any of
the Companys risk-sharing partners to meet their
obligations. At December 31, 2003 and 2002, the exposure
amount in litigation with former risk-sharing partners which is
not reserved or collateralized is $1.3 million and
$1.9 million, respectively.

Reconciliations of direct to net premiums, on a
written and earned basis, for 2003, 2002, and 2001 are as
follows (in thousands):

|        |  |         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |   |          |   |  |   |          |  
|------- |  | ------- | ------- | - | ------ | - | ------- | ------- |  | - | ------- | - |  | ------- | ------- | - | ------ | - | -------- | - |  | - | -------- | -
|        |  |         |         |   |        |  
|        |  | 2003    |         |   | 2002   |   |         | 2001    | 
|        |  |         |         |   |        |   |         |         | 
|        |  | Written |         |   | Earned |   |         | Written |  |   | Earned  |   |  | Written |         |   | Earned |  
|        |  |         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |  
|Direct  |  | $       | 229,647 |   |        | $ | 198,991 |         |  | $ | 167,629 |   |  | $       | 195,186 |   |        | $ | 282,588  |   |  | $ | 277,516  |  
|Assumed |  |         | 23,633  |   |        |   | 13,290  |         |  |   | 16,008  |   |  |         | 13,775  |   |        |   | 16,516   |   |  |   | 16,134   |  
|Ceded   |  |         | (63,453 | ) |        |   | (61,076 | )       |  |   | (43,842 | ) |  |         | (63,578 | ) |        |   | (113,021 | ) |  |   | (129,985 | )
|        |  |         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |  
|Net     |  | $       | 189,827 |   |        | $ | 151,205 |         |  | $ | 139,795 |   |  | $       | 145,383 |   |        | $ | 186,083  |   |  | $ | 163,665  |  
|        |  |         |         |   |        |   |         |         |  |   |         |   |  |         |         |   |        |  

One reinsurer, with a financial strength rating
of A (Excellent) rated by A.M. Best, accounts for
29.7% of ceded premiums in 2003.



|   |                                  
|-- | ---------------------------------
|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, |        
|                                       |  |                                  |        
|                                       |  | 2003                             |         |   | 2002 |   |         | 2001 | 
|                                       |  |                                  |         |   |      |   |         |      | 
|Balance, beginning of period           |  | $                                | 12,140  |   |      | $ | 13,953  |      |  | $ | 6,624   |  
|Acquisition costs deferred             |  |                                  | 35,014  |   |      |   | 33,565  |      |  |   | 46,479  |  
|Amortized to expense during the period |  |                                  | (27,590 | ) |      |   | (35,378 | )    |  |   | (39,150 | )
|                                       |  |                                  |         |   |      |   |         |      | 
|Balance, end of period                 |  | $                                | 19,564  |   |      | $ | 12,140  |      |  | $ | 13,953  |  
|                                       |  |                                  |         |   |      |   |         |      | 

The Company reduces deferred policy acquisition
costs for premium deficiencies. There were no premium
deficiencies at December 31, 2003 and 2002. Deferred policy
acquisition costs were reduced for premium deficiencies of
$72,000 at December 31, 2001. Certain intercompany costs
directly related to policy acquisition and other underwriting
expenses are classified as salary and employee benefit expenses
in the consolidated financial statements.



|   |             
|-- | ------------
|6. | Income Taxes

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

|                                                 |  |                                  |       |  |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | -------------------------------- | ----- |  | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  |                                 
|                                                 |  | For the Years Ended December 31, |      
|                                                 |  |                                  |      
|                                                 |  | 2003                             |       |  | 2002 |   |        | 2001 | 
|                                                 |  |                                  |       |  |      |   |        |      | 
|Current tax expense (benefit)                    |  | $                                | 530   |  |      | $ | (2,211 | )    |  | $ | 31     |  
|Deferred tax expense (benefit)                   |  |                                  | 4,415 |  |      |   | 2,642  |      |  |   | (3,633 | )
|                                                 |  |                                  |       |  |      |   |        |      | 
|Total provision for income tax expense (benefit) |  | $                                | 4,945 |  |      | $ | 431    |      |  | $ | (3,602 | )
|                                                 |  |                                  |       |  |      |   |        |      | 

64



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the Companys tax
provision on income from operations to the U.S. federal income
tax rate of 34% in 2003, 2002, and 2001 is as follows
(in thousands):

|                                     |                     |                                  |       |      |      |   |      |      |   |   |        |      |  
|------------------------------------ | ------------------- | -------------------------------- | ----- | ---- | ---- | - | ---- | ---- | - | - | ------ | ---- | -
|                                     |                     |                                 
|                                     |                     | For the Years Ended December 31, |      
|                                     |                     |                                  |      
|                                     |                     | 2003                             |       |      | 2002 |   |      | 2001 |  
|                                     |                     |                                  |       |      |      |   |      |      |  
|Tax provision at statutory rate      |                     | $                                | 5,114 |      |      | $ | 708  |      |   | $ | (3,438 | )   
|Tax effect of:                       |                     |                                  |       |      |      |   |      |      |   |   |        |     
|                                     | Tax exempt interest |                                  |       | (371 | )    |   |      | (367 | ) |   |        | (710 | )
|                                     | Other, net          |                                  |       | 202  |      |   |      | 90   |   |   |        | 546  |  
|                                     |                     |                                  |       |      |      |   |      |      |  
|Federal income tax expense (benefit) |                     | $                                | 4,945 |      |      | $ | 431  |      |   | $ | (3,602 | )   
|                                     |                     |                                  |       |      |      |   |      |      |  
|Effective tax expense (benefit) rate |                     |                                  | 32.9  | %    |      |   | 20.7 | %    |   |   | (35.6  | )%  
|                                     |                     |                                  |       |      |      |   |      |      |  

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.

The components of deferred tax assets and
liabilities as of December 31, 2003 and 2002 are as follows
(in thousands):

|                                           |                      |                         |        |        |             |   |       |          |  |   |             |        |        |   |       |       |  | 
|------------------------------------------ | -------------------- | ----------------------- | ------ | ------ | ----------- | - | ----- | -------- |  | - | ----------- | ------ | ------ | - | ----- | ----- |  | 
|                                           |                      |                         |        |       
|                                           |                      | 2003                    |        |        | 2002        |  
|                                           |                      |                         |        |        |             |  
|                                           |                      | Deferred                |        |        | Deferred    |   |       | Deferred |  |   | Deferred    |       
|                                           |                      | Tax                     |        |        | Tax         |   |       | Tax      |  |   | Tax         |       
|                                           |                      | Assets                  |        |        | Liabilities |   |       | Assets   |  |   | Liabilities |       
|                                           |                      |                         |        |        |             |   |       |          |  |   |             |       
|Unpaid losses and loss adjustment expenses |                      | $                       | 10,885 |        |             | $ |      |          |  | $ | 11,263      |        |        | $ |      |      
|Unearned premium reserves                  |                      |                         | 6,216  |        |             |   |      |          |  |   | 3,598       |        |        |   |      |      
|Unrealized gains on investments            |                      |                         |       |        |             |   | 3,819 |          |  |   |            |        |        |   | 4,336 |      
|Deferred policy acquisition expense        |                      |                         |       |        |             |   | 6,594 |          |  |   |            |        |        |   | 4,055 |      
|Allowance for doubtful accounts            |                      |                         | 1,458  |        |             |   |      |          |  |   | 1,580       |        |        |   |      |      
|Policyholder dividends                     |                      |                         | 17     |        |             |   |      |          |  |   | 770         |        |        |   |      |      
|Alternate minimum tax credit               |                      |                         | 2,427  |        |             |   |      |          |  |   | 2,015       |        |        |   |      |      
|Net operating loss carryforward            |                      |                         | 3,376  |        |             |   |      |          |  |   | 7,751       |        |        |   |      |      
|Goodwill                                   |                      |                         |       |        |             |   | 777   |          |  |   |            |        |        |   | 423   |      
|Deferred revenue                           |                      |                         | 930    |        |             |   |      |          |  |   | 34          |        |        |   |      |      
|Other                                      |                      |                         | 1,082  |        |             |   |      |          |  |   | 902         |        |        |   |      |      
|                                           |                      |                         |        |        |             |   |       |          |  |   |             |       
|                                           | Total deferred taxes |                         |        | 26,391 |             |   |       | 11,190   |  |   |             | 27,913 |        |   |       | 8,814 | 
|                                           |                      |                         |        |        |             |   |       |          |  |   |             |       
|                                           |                      | Net deferred tax assets |        | $      | 15,201      |   |       |          |  |   |             | $      | 19,099 |   |       |       |  | 
|                                           |                      |                         |        |        |             |   |       |          |  |   |             |       

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 $3.4 million will begin to expire in 2020.



|   |                               
|-- | ------------------------------
|7. | Junior Subordinated Debentures

On September 30, 2003, an unconsolidated
subsidiary trust (the Trust) of the Company issued
$10.0 million of mandatorily redeemable trust preferred
securities (TPS) to a trust formed by an
institutional investor. The Companys trust received a
total of $9.7 million in net proceeds, after the deduction
of approximately $300,000 of commissions paid to the placement
agents in the transaction.

65



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The gross proceeds from the issuance of the TPS
were used to purchase floating rate junior subordinated
deferrable interest debentures (the Debentures)
issued by the Company. The Debentures have financial terms
similar to those of the TPS, which includes the deferral of
interest payments at any time or from time to time for a period
not exceeding five years, provided there is no event of default.
The Debentures mature in 30 years and provide for interest
at the three-month LIBOR, plus 4.05%, which started in December
2003. The Debentures are callable by the Company at par
beginning in October, 2008. Associated with the Debentures, the
Company incurred $300,000 of issuance costs which have been
capitalized and are included in other assets on the balance
sheet. Issuance costs will be amortized over seven years as a
component of interest expense. The Company estimates that the
fair value of the Debentures issued approximates the gross
proceeds of cash received at the time of issuance.

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

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



|   |     
|-- | ----
|8. | Debt

Term Loan and Revolving Line of
Credit

The Company has a credit agreement that includes
a term loan and a revolving line of credit. This credit
agreement consists of a $20.0 million term loan and a
revolving line of credit for up to $8.0 million. The
Company uses the revolving line of credit to meet short-term
working capital needs. At December 31, 2003, the
Companys term loan had an outstanding balance of $14.0
million. The Company had no outstanding balance on the revolving
line of credit at December 31, 2003. At December 31,
2002, the outstanding balance on the term loan and revolving
line of credit was $18.8 million and $5.3 million,
respectively. The term loan calls for quarterly amortization
through July 1, 2006, at which time the term loan will be
paid in full. The quarterly amortization requires payments of
$1.25 million 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. 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 then existing line of credit. This settlement
resulted in a gain on debt reduction of $359,000, which was to
the benefit of the Company.

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 based rate. The applicable margin, which ranges
from 200 to 300 basis points above eurocurrency based rates, is
determined by the level of the fixed charge coverage ratio. Of
all the covenants, the most restrictive covenant is the fixed
charge coverage ratio. The fixed charge coverage ratio, as
defined by the credit facility, is the ratio of the
non-regulated earnings before interest and taxes for the four
preceding fiscal quarters to the sum of fixed charges which
include interest expense, principal payments payable, stock
repurchases, and dividends declared during the period. Any
unused portion of the revolving credit as of the date of
determination reduces the sum of these fixed charges. At
December 31, 2003, this ratio was 5.7 to 1.0, compared to
the covenant minimum of 1.2 to 1.0. As of December 31,
2003, the Company was in compliance with all debt covenants. The
eurocurrency based rate as of December 31, 2003, for the
term loan was 3.3%.

66



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. At December 31, 2003 and
2002, $3.5 million and $4.9 million, respectively,
were outstanding under this line of credit. The line will expire
on May 14, 2004. Management expects to renegotiate the line
of credit prior to its expiration. The line bears interest at
the Prime Rate, which was 4.00% and 4.25% at December 31,
2003 and 2002, respectively.

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 based margin. 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
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, 2003 and 2002, preferred shares totaling
$1,969,000 and $1,986,000, respectively, were included in other
liabilities. The redemption value for these preferred shares was
$1,604,000 at December 31, 2003.



|   |                     
|-- | --------------------
|9. | Shareholders Equity

At December 31, 2003, shareholders
equity was $155.1 million, or a book value of $5.34 per
common share, compared to $147.4 million, or a book value
of $4.98 per common share at December 31, 2002.

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 twenty-four months. On
August 6, 2003, the Companys Board of Directors
authorized management to repurchase up to an additional
1,000,000 shares of the Companys common stock under the
existing share repurchase plan. For the year ended
December 31, 2003, the Company repurchased and retired
569,100 shares of common stock for a total cost of
$1.6 million. For the year ended December 31, 2002,
the Company repurchased and retired 195,700 shares of common
stock for a total cost of $455,000. As of December 31,
2003, the cumulative amount the Company repurchased and retired
was 764,800 shares of common stock for a total cost of
approximately $2.0 million.

The Companys Board of Directors did not
declare a dividend in 2003 or 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 2003. Refer to Note 10 for additional information regarding
dividend restrictions.

67



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                     
|--- | ------------------------------------
|10. | 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, without prior approval of the
Michigan Office of Financial and Insurance Services
(OFIS), cannot be transferred to the holding company
in the form of dividends, loans or advances. The restriction on
the transferability to the holding company from its Insurance
Company Subsidiaries is dictated by Michigan insurance
regulatory guidelines which, in general, are as follows: the
maximum discretionary dividend that may be declared, based on
data from the preceding calendar year, is the greater of each
insurance companys net income (excluding realized capital
gains) or ten percent of the insurance companys surplus
(excluding unrealized gains). These dividends are further
limited by a clause in the Michigan law that prohibits an
insurer from declaring dividends, except from surplus earnings
of the company. Earned surplus balances are calculated on a
quarterly basis. Since Star is the parent insurance company, its
maximum dividend calculation represents the combined Insurance
Companies Subsidiaries surplus. Based upon the 2003
statutory financial statements, Star may only pay dividends to
the Company during 2004 with the prior approval of OFIS.
Stars earned surplus position at December 31, 2003
was negative $24.6 million. No dividends were paid in 2003
or 2002.

Summarized 2003 and 2002 statutory basis
information for the primary insurance subsidiaries, which
differs from generally accepted accounting principles, follows
(in thousands):

|                                      |  |      |        |   |        |   |        |              |  |   |            |  |  |      |        |   |        |   |        |              |  |   |            |   |  |   |        |   |  |   |        |  
|------------------------------------- |  | ---- | ------ | - | ------ | - | ------ | ------------ |  | - | ---------- |  |  | ---- | ------ | - | ------ | - | ------ | ------------ |  | - | ---------- | - |  | - | ------ | - |  | - | ------ | -
|                                      |  |      |        |  
|                                      |  | 2003 |        |   | 2002   |  
|                                      |  |      |        |   |        |  
|                                      |  | Star |        |   | Savers |   |        | Williamsburg |  |   | Ameritrust |  |  | Star |        |   | Savers |   |        | Williamsburg |  |   | Ameritrust |  
|                                      |  |      |        |   |        |   |        |              |  |   |            |  |  |      |        |   |        |   |        |              |  |   |            |  
|Statutory capital and surplus         |  | $    | 99,915 |   |        | $ | 30,066 |              |  | $ | 13,720     |  |  | $    | 13,053 |   |        | $ | 93,832 |              |  | $ | 31,342     |   |  | $ | 11,228 |   |  | $ | 10,648 |  
|Minimum statutory capital and surplus |  |      | 5,000  |   |        |   | 20,000 |              |  |   | 2,600      |  |  |      | 5,000  |   |        |   | 5,000  |              |  |   | 20,000     |   |  |   | 2,600  |   |  |   | 5,000  |  
|Statutory net (loss) income           |  |      | (1,624 | ) |        |   | (936   | )            |  |   | 2,689      |  |  |      | (863   | ) |        |   | 5,045  |              |  |   | (650       | ) |  |   | (1,030 | ) |  |   | (401   | )

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. The
Company contributed $6.3 million to the surplus of Star
during the third quarter of 2003. The premium leverage ratios as
of December 31, 2003, on a statutory consolidated basis,
were 2.54 to 1 and 1.89 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, an insurance company must submit
a calculation of its RBC formula to the insurance department of
its state of domicile as of the end of the previous calendar
year. These laws require increasing degrees of regulatory
oversight and intervention as an insurance companys RBC
declines. The level of regulatory oversight ranges from
requiring the insurance company to inform and obtain approval
from the domiciliary insurance commissioner of a comprehensive
financial plan for increasing its RBC to mandatory regulatory
intervention requiring an insurance company to be placed under
regulatory control in a rehabilitation or liquidation proceeding.

68



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003, all of the Insurance
Company Subsidiaries were in compliance with RBC requirements.
Star reported statutory surplus of $99.9 million and
$93.8 million at December 31, 2003 and 2002,
respectively. The calculated RBC was $22.8 million in 2003
and $24.8 million in 2002. The threshold requiring the
minimum regulatory involvement was $45.7 million in 2003
and $49.7 million in 2002.



|    |              
|--- | -------------
|11. | Stock Options

The Company, through its 1995 and 2002 Stock
Option Plans (the Plans), may grant options to key
executives and other members of management of the Company and
its subsidiaries in amounts not to exceed 2,000,000 shares
of the Companys common stock 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.

69



---



##### 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:

|                                                                   |  |         |           |           |       |   |      |         |           |   |           |   |  |           |       |  |       |   |           |   |  |   |       | 
|------------------------------------------------------------------ |  | ------- | --------- | --------- | ----- | - | ---- | ------- | --------- | - | --------- | - |  | --------- | ----- |  | ----- | - | --------- | - |  | - | ----- | 
|                                                                   |  |         |           |           |       |  
|                                                                   |  | 2003    |           |           | 2002  |   |      | 2001    |          
|                                                                   |  |         |           |           |       |   |      |         |          
|                                                                   |  |         |           | Weighted- |       |   |      |         | Weighted- |   |           |   |  | Weighted- |      
|                                                                   |  |         |           | Average   |       |   |      |         | Average   |   |           |   |  | Average   |      
|                                                                   |  |         |           | Exercise  |       |   |      |         | Exercise  |   |           |   |  | Exercise  |      
|                                                                   |  | Options |           |           | Price |   |      | Options |           |   | Price     |   |  | Options   |       |  | Price |  
|                                                                   |  |         |           |           |       |   |      |         |           |   |           |   |  |           |       |  |       |  
|Outstanding  beginning of year                                    |  |         | 2,693,223 |           |       | $ | 6.78 |         |           |   | 1,582,716 |   |  | $         | 9.87  |  |       |   | 1,288,644 |   |  | $ | 12.43 | 
|Granted                                                            |  |         | 331,490   |           |       |   | 2.17 |         |           |   | 1,276,220 |   |  |           | 3.26  |  |       |   | 636,500   |   |  |   | 6.51  | 
|Exercised                                                          |  |         | (550      | )         |       |   | 2.82 |         |           |   |          |   |  |           |      |  |       |   | (1,400    | ) |  |   | 5.67  | 
|Forfeited                                                          |  |         | (642,554  | )         |       |   | 8.01 |         |           |   | (165,713  | ) |  |           | 10.18 |  |       |   | (341,028  | ) |  |   | 13.28 | 
|                                                                   |  |         |           |           |       |   |      |         |           |   |           |   |  |           |       |  |       |  
|Outstanding  end of year                                          |  |         | 2,381,609 |           |       | $ | 5.80 |         |           |   | 2,693,223 |   |  | $         | 6.78  |  |       |   | 1,582,716 |   |  | $ | 9.87  | 
|                                                                   |  |         |           |           |       |   |      |         |           |   |           |   |  |           |       |  |       |  
|Exercisable at end of year                                         |  |         | 1,231,981 |           |       | $ | 6.75 |         |           |   | 1,063,387 |   |  | $         | 8.40  |  |       |   | 644,764   |   |  | $ | 10.87 | 
|Weighted-average fair value of options granted
    during the year |  | $       | 1.14      |           |       |   |     |         |           | $ | 1.77      |   |  |           |      |  |       | $ | 3.00      |   |  |   |      | 

The following table summarizes information about
stock options outstanding at December 31, 2003:

|                 |  |                     |           |           |                     |  |           |       |  |   |         |           |  |       |           |  |  |   |       | 
|---------------- |  | ------------------- | --------- | --------- | ------------------- |  | --------- | ----- |  | - | ------- | --------- |  | ----- | --------- |  |  | - | ----- | 
|                 |  |                     |           |          
|                 |  | Options Outstanding |           |           | Options Exercisable | 
|                 |  |                     |           |           |                     | 
|                 |  |                     |           | Weighted- |                     |  | Weighted- |       |  |   |         | Weighted- | 
|                 |  |                     |           | Average   |                     |  | Average   |       |  |   |         | Average   | 
|Range of         |  |                     |           | Remaining |                     |  | Exercise  |       |  |   |         | Exercise  | 
|Exercise Prices  |  | Options             |           |           | Life (Years)        |  |           | Price |  |   | Options |           |  | Price |          
|                 |  |                     |           |           |                     |  |           |       |  |   |         |           |  |       |          
|$2.17 to $3.51.  |  |                     | 688,490   |           |                     |  | 3.9       |       |  | $ | 2.67    |           |  |       | 213,998   |  |  | $ | 2.81  | 
|$4.57 to $7.31.  |  |                     | 585,000   |           |                     |  | 2.8       |       |  |   | 3.53    |           |  |       | 238,000   |  |  |   | 3.54  | 
|$8.11 to $16.26. |  |                     | 814,573   |           |                     |  | 1.7       |       |  |   | 6.14    |           |  |       | 566,473   |  |  |   | 6.09  | 
|$21.00 to $30.45 |  |                     | 293,546   |           |                     |  | 4.0       |       |  |   | 16.75   |           |  |       | 213,510   |  |  |   | 16.05 | 
|                 |  |                     |           |           |                     |  |           |       |  |   |         |           |  |       |          
|                 |  |                     | 2,381,609 |           |                     |  | 3.2       |       |  | $ | 5.80    |           |  |       | 1,231,981 |  |  | $ | 6.75  | 
|                 |  |                     |           |           |                     |  |           |       |  |   |         |           |  |       |          

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.

12.     Goodwill and
Other Intangible Assets

Goodwill

The Company evaluates existing goodwill for
impairment on an annual basis, or more frequently if events or
changes in circumstances indicate that the asset might be
impaired. 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.
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.

70



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table sets forth the
December 31, 2003 and 2002, carrying amount of goodwill by
business segment (in thousands):

|                                                         |  |            |       |  |                       |   |        |       |  |   |        | 
|-------------------------------------------------------- |  | ---------- | ----- |  | --------------------- | - | ------ | ----- |  | - | ------ | 
|                                                         |  | Agency     |       |  | Specialty Risk        |   |        |      
|                                                         |  | Operations |       |  | Management Operations |   |        | Total | 
|                                                         |  |            |       |  |                       |   |        |       | 
|Balance at January 1, 2003 and 2002.                     |  | $          | 3,964 |  |                       | $ | 25,033 |       |  | $ | 28,997 | 
|Goodwill acquired                                        |  |            |      |  |                       |   |       |       |  |   |       | 
|Impairment losses                                        |  |            |      |  |                       |   |       |       |  |   |       | 
|Goodwill written off related to the sale of
    business |  |            |      |  |                       |   |       |       |  |   |       | 
|                                                         |  |            |       |  |                       |   |        |       | 
|Balance at December 31, 2003 and 2002.                   |  | $          | 3,964 |  |                       | $ | 25,033 |       |  | $ | 28,997 | 
|                                                         |  |            |       |  |                       |   |        |       | 

Amortization expense in relation to goodwill in
2001 was $2.3 million. In accordance with SFAS
No. 142, there was no amortization expense recorded in
relation to goodwill in 2003 or 2002.

The following table provides net income
(loss) and related per share amounts as of
December 31, 2003, 2002, and 2001, as reported and adjusted
as if the Company had eliminated the amortization of goodwill
effective January 1, 2001 (in thousands, except per share
data):

|                                                    |                               |      |        |      |      |   |       |      |  |   |        |       |  
|--------------------------------------------------- | ----------------------------- | ---- | ------ | ---- | ---- | - | ----- | ---- |  | - | ------ | ----- | -
|                                                    |                               | 2003 |        |      | 2002 |   |       | 2001 | 
|                                                    |                               |      |        |      |      |   |       |      | 
|Reported net income (loss)                          |                               | $    | 10,099 |      |      | $ | 1,650 |      |  | $ | (6,510 | )    
|Amortization Expense                                |                               |      |       |      |      |   |      |      |  |   | 2,336  |      
|Tax effect of amortization expense                  |                               |      |       |      |      |   |      |      |  |   | (775   | )    
|Pro forma net income (loss), using
    SFAS No. 142 |                               | $    | 10,099 |      |      | $ | 1,650 |      |  | $ | (4,949 | )    
|Earnings (loss) per share, basic                    |                               |      |        |      |      |   |       |      |  |   |        |      
|                                                    | Reported                      |      | $      | 0.35 |      |   | $     | 0.08 |  |   | $      | (0.76 | )
|                                                    | Pro forma, using SFAS No. 142 |      | $      | 0.35 |      |   | $     | 0.08 |  |   | $      | (0.58 | )
|Earnings (loss) per share, diluted:                 |                               |      |        |      |      |   |       |      |  |   |        |      
|                                                    | Reported                      |      | $      | 0.35 |      |   | $     | 0.08 |  |   | $      | (0.76 | )
|                                                    | Pro forma, using SFAS No. 142 |      | $      | 0.35 |      |   | $     | 0.08 |  |   | $      | (0.58 | )

Other
Intangible Assets

At December 31, 2003 and 2002, the Company
had other intangible assets, net of related accumulated
amortization, of $1.4 million and $206,000, respectively,
recorded as part of other assets. The Company did not have any
other intangible assets in 2001.

During the fourth quarter of 2002 and the first
quarter of 2003, the Company purchased three 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 a weighted average amortization period of five years.

Also during the first quarter of 2003, the
Company completed an asset purchase related to the renewal
rights of a book of business. The total purchase price of this
agreement was determined based on a percentage of estimated
gross written premium collected by the Company. The actual
purchase price is contingent upon actual written premium
collected over a three year period. As of December 31,
2003, the total purchase price was estimated at
$2.3 million, consisting of $1.3 million of fixed
assets and $994,000 recognized as an other intangible asset
being amortized over a five year period.

71



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At December 31, 2003 and 2002, the gross
carrying amount of other intangible assets was $1.8 million
and $221,000, respectively, and the accumulated amortization was
$368,000 and $15,000, respectively. Amortization expense related
to other intangible assets was $353,000 for 2003 and $15,000 for
2002.

Amortization expense for the five succeeding
years is as follows (in thousands):

|     |                            |   |     |       | 
|---- | -------------------------- | - | --- | ----- | 
|2004 |                            | $ | 359 |      
|2005 |                            |   | 359 |      
|2006 |                            |   | 359 |      
|2007 |                            |   | 344 |      
|2008 |                            |   | 6   |      
|     |                            |   |    
|     | Total amortization expense |   | $   | 1,427 | 
|     |                            |   |    

13.     Employee
Benefit Plans

Company employees over the age of 20 1/2 who
have completed six months of service are eligible for
participation in The Meadowbrook, Inc. 401(k) 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 2003, 2002, and 2001, the
matching contributions were $512,923, $416,115, and $492,029,
respectively. There were no profit sharing contributions in
2003, 2002, and 2001.

14.     Commitments
and Contingencies

The Company has certain operating lease
agreements for its offices and equipment. At December 31,
2003, future minimum rental payments required under
non-cancelable long-term operating leases are as follows (in
thousands):

|           |                                 |   |       |        | 
|---------- | ------------------------------- | - | ----- | ------ | 
|2004       |                                 | $ | 2,716 |       
|2005       |                                 |   | 1,763 |       
|2006       |                                 |   | 1,325 |       
|2007       |                                 |   | 931   |       
|2008       |                                 |   | 799   |       
|Thereafter |                                 |   | 3,485 |       
|           |                                 |   |      
|           | Total minimum lease commitments |   | $     | 11,019 | 
|           |                                 |   |      

Rent expense for the year ended December 31,
2003, 2002, and 2001, amounted to $3,180,923, $3,074,630, and
$2,820,695, respectively.

On December 3, 2003, the Company entered
into a Development Agreement with an unaffiliated third party
for the construction of an office building on land currently
owned by the Company for a contract price of $11.0 million.
The office building will serve as the new location for the
Companys corporate offices.

On June 6, 2003, the Company entered into a
Guaranty Agreement with a bank. The Company is guaranteeing
payment of a $1.5 million term loan issued by the bank to
an unaffiliated insurance agency. In the event of default on the
term loan by the insurance agency, the Company is obligated to
pay any outstanding principal (up to a maximum of
$1.5 million), as well as any accrued interest on the loan,
and any costs incurred by the bank in the collection process. In
exchange for the Companys guaranty, the president and
member of the insurance agency pledged 100% of the common shares
of two other insurance agencies that he wholly owns. In the
event of default on the term loan by the insurance agency, the
Company has the right to sell any or all of the pledged
insurance agencies common shares and use the proceeds from
the sale to

72



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

recover any amounts paid under the guaranty
agreement. Any excess proceeds would be paid to the shareholder.
As of December 31, 2003, no liability has been recorded
with respect to the Companys obligations under the
guaranty agreement, since no premium exists in excess of the
guaranteed amount.

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 been discharged from bankruptcy
and another has had a Receiver appointed for him. The case
remains stayed before the Nevada Supreme Court. It is not
expected that the outcome of this litigation will have a
material impact on the financial statements of the Company.

The Company is involved in other litigation
arising in the ordinary course of operations. 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.     Letters of
Credit

At December 31, 2003 and 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. The letter of credit
is collateralized by a certificate of deposit for the same
amount.

16.     Related Party
Transactions

At December 31, 2003 and 2002, respectively,
the Company held an $885,794 and $876,161 note receivable,
including $225,005 of accrued interest at December 31,
2003, from an executive officer of the Company. Accrued interest
at December 31, 2002 was $215,372. 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 bears interest equal to the Companys
borrowing 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. As of December 31, 2003, $3,500 has been
paid against this loan.

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

73



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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
the stock pledge agreement.

17.     Segment
Information

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

Specialty Risk Management Operations

The specialty risk management operations segment
focuses on specialty or niche insurance business in which it
provides various services and coverages that are tailored to
meet specific requirements of defined client groups and their
members. This includes, but is not limited to, providing
services, such as risk management consulting, claims
administration and handling, loss control, and reinsurance
brokering, along with various types of property and casualty
insurance coverage, including workers compensation,
commercial multiple peril, general liability, commercial auto
liability, and inland marine. Insurance coverage is provided
primarily to associations or similar groups of members and to
specified classes of business of the Companys
agent-partners. The Company recognizes revenue related to the
services and coverages the specialty risk management operations
provides within seven categories: net earned premiums,
management fees, claims fees, loss control fees, reinsurance
brokerage, investment income, and net realized gain
(loss) on investments.

Agency Operations

The Company earns commissions through the
operation of its retail property and casualty insurance agency,
which was formed in 1955. The agency has grown to be one of the
largest agencies in Michigan and, with acquisitions, has
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.

74



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                       |                                   |                                    |                           |                      |        |         |         |         |       |         |         |         |         |         |         | 
|---------------------- | --------------------------------- | ---------------------------------- | ------------------------- | -------------------- | ------ | ------- | ------- | ------- | ----- | ------- | ------- | ------- | ------- | ------- | ------- | 
|                       |                                   |                                   
|                       |                                   | For the Years Ended December 31,   |                          
|                       |                                   |                                    |                          
|                       |                                   | 2003                               |                           |                      | 2002   |         |         | 2001    |      
|                       |                                   |                                    |                           |                      |        |         |         |         |      
|Revenues               |                                   |                                    |                           |                      |        |         |         |         |       |         |         |        
|                       | Net earned premiums               |                                    | $                         | 151,205              |        |         | $       | 145,383 |       |         | $       | 163,665 |        
|                       | Management fees                   |                                    |                           | 18,751               |        |         |         | 12,761  |       |         |         | 13,318  |        
|                       | Claims fees                       |                                    |                           | 14,756               |        |         |         | 8,076   |       |         |         | 8,594   |        
|                       | Loss control fees                 |                                    |                           | 2,303                |        |         |         | 2,590   |       |         |         | 2,326   |        
|                       | Reinsurance brokerage             |                                    |                           | 308                  |        |         |         | 309     |       |         |         | 1,233   |        
|                       | Investment income                 |                                    |                           | 13,471               |        |         |         | 13,906  |       |         |         | 14,177  |        
|                       | Net realized gains on investments |                                    |                           | 823                  |        |         |         | 666     |       |         |         | 735     |        
|                       |                                   |                                    |                           |                      |        |         |         |         |      
|                       |                                   |                                    | Specialty risk management |                      |        | 201,617 |         |         |       | 183,691 |         |         |         | 204,048 |        
|                       | Agency operations                 |                                    |                           | 14,954               |        |         |         | 14,330  |       |         |         | 15,706  |        
|                       | Reconciling items                 |                                    |                           | 13                   |        |         |         | 52      |       |         |         | 52      |        
|                       | Gain (loss) on sale of subsidiary |                                    |                           |                     |        |         |         | 199     |       |         |         | (1,097  | )      
|                       | Intersegment revenue              |                                    |                           | (5,781               | )      |         |         | (485    | )     |         |         | (503    | )      
|                       |                                   |                                    |                           |                      |        |         |         |         |      
|                       |                                   |                                    |                           | Consolidated revenue |        | $       | 210,803 |         |       | $       | 197,787 |         |         | $       | 218,206 | 
|                       |                                   |                                    |                           |                      |        |         |         |         |      
|Pre-tax income (loss): |                                   |                                    |                           |                      |        |         |         |         |       |         |         |        
|                       | Specialty risk management         |                                    | $                         | 10,755               |        |         | $       | (1,081  | )     |         | $       | (7,624  | )      
|                       | Agency operations*                |                                    |                           | 6,440                |        |         |         | 6,131   |       |         |         | 5,348   |        
|                       | Reconciling items                 |                                    |                           | (2,154               | )      |         |         | (3,168  | )     |         |         | (6,739  | )      
|                       | Gain (loss) on sale of subsidiary |                                    |                           |                     |        |         |         | 199     |       |         |         | (1,097  | )      
|                       |                                   |                                    |                           |                      |        |         |         |         |      
|                       |                                   | Consolidated pre-tax income (loss) |                           | $                    | 15,041 |         |         | $       | 2,081 |         |         | $       | (10,112 | )      
|                       |                                   |                                    |                           |                      |        |         |         |         |      



---



|  |                                                
|- | -----------------------------------------------
|* | 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, |       
|                         |  |                                  |       
|                         |  | 2003                             |        |   | 2002 |   |        | 2001 | 
|                         |  |                                  |        |   |      |   |        |      | 
|Holding company expenses |  | $                                | (824   | ) |      | $ | (491   | )    |  | $ | 140    |  
|Gain on debt reduction   |  |                                  |       |   |      |   | 359    |      |  |   |       |  
|Amortization             |  |                                  | (353   | ) |      |   | (15    | )    |  |   | (2,336 | )
|Interest expense         |  |                                  | (977   | ) |      |   | (3,021 | )    |  |   | (4,543 | )
|                         |  |                                  |        |   |      |   |        |      | 
|                         |  | $                                | (2,154 | ) |      | $ | (3,168 | )    |  | $ | (6,739 | )
|                         |  |                                  |        |   |      |   |        |      | 

18.     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

75



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 value. The junior subordinated debentures
and the lines of credit bear variable rate interest, so their
estimated fair value approximates their carrying value.



|    |                                     
|--- | ------------------------------------
|19. | Quarterly Financial Data (Unaudited)

The following is a summary of unaudited quarterly
results of operations for 2003 and 2002 (in thousands, except
per share and ratio data):

|                                                   |  |         |        |   |         |   |        |         |  |   |         |      |  |   |        |  
|-------------------------------------------------- |  | ------- | ------ | - | ------- | - | ------ | ------- |  | - | ------- | ---- |  | - | ------ | -
|                                                   |  | 1st     |        |   | 2nd     |   |        | 3rd     |  |   | 4th     |     
|                                                   |  | Quarter |        |   | Quarter |   |        | Quarter |  |   | Quarter |     
|                                                   |  |         |        |   |         |   |        |         |  |   |         |     
|2003:                                              |  |         |        |   |         |   |        |         |  |   |         |      |  |   |        |  
|Gross premiums written                             |  | $       | 68,789 |   |         | $ | 56,220 |         |  | $ | 65,839  |      |  | $ | 62,432 |  
|Net premiums written                               |  |         | 51,802 |   |         |   | 40,177 |         |  |   | 50,568  |      |  |   | 47,280 |  
|Net premiums earned                                |  |         | 27,384 |   |         |   | 36,230 |         |  |   | 40,187  |      |  |   | 47,404 |  
|Net commissions and fees                           |  |         | 13,356 |   |         |   | 11,271 |         |  |   | 10,803  |      |  |   | 9,861  |  
|Net investment income and realized gains/losses    |  |         | 3,558  |   |         |   | 3,951  |         |  |   | 3,496   |      |  |   | 3,302  |  
|Net losses and LAE incurred                        |  |         | 17,186 |   |         |   | 24,109 |         |  |   | 26,357  |      |  |   | 30,820 |  
|Policy acquisition and other underwriting expenses |  |         | 3,756  |   |         |   | 5,993  |         |  |   | 5,996   |      |  |   | 7,873  |  
|Other administrative expenses                      |  |         | 7,084  |   |         |   | 5,306  |         |  |   | 5,816   |      |  |   | 6,251  |  
|Salaries and employee benefits                     |  |         | 11,932 |   |         |   | 11,868 |         |  |   | 12,372  |      |  |   | 12,066 |  
|Interest on notes payable                          |  |         | 237    |   |         |   | 212    |         |  |   | 207     |      |  |   | 321    |  
|Net income                                         |  |         | 2,756  |   |         |   | 2,679  |         |  |   | 2,500   |      |  |   | 2,164  |  
|Diluted earnings per share                         |  | $       | 0.09   |   |         | $ | 0.09   |         |  | $ | 0.09    |      |  | $ | 0.07   |  
|GAAP combined ratio(1)                             |  |         | 105.5  | % |         |   | 106.4  | %       |  |   | 103.5   | %    |  |   | 103.1  | %
|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  | )(2) |  |   | 2,509  |  
|Diluted earnings per share                         |  | $       | 0.11   |   |         | $ | 0.01   |         |  | $ | (0.06   | )    |  | $ | 0.08   |  
|GAAP combined ratio(1)                             |  |         | 105.2  | % |         |   | 108.4  | %       |  |   | 119.5   | %    |  |   | 102.2  | %



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | 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.
|   
|(2) | 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.                                                                                                                                                                                                                                                                                                                                                                                

76



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.

Exhibit Index

|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |        |  |     |  
|------- | ----- |  | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------ |  | --- | -
|Exhibit |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Filing | 
|No.     |       |  | Description |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Basis  | 
|        |       |  |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |        | 
|        | 3.1   |  |             | Amended and Restated Articles of Incorporation of
    the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |        |  | (9  | )
|        | 3.2   |  |             | Amended and Restated Bylaws of the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        |  | (1  | )
|        | 4.1   |  |             | Warrant Agreement By and Between Meadowbrook
    Insurance Group, Inc. and Freidman, Billings, Ramsey &
    Co., Inc. dated June 11, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |        |  | (10 | )
|        | 4.2   |  |             | Junior Subordinated Indenture between Meadowbrook
    Insurance Group, Inc., and JP Morgan Chase Bank, dated
    September 30, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        |  | (16 | )
|        | 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  |  |             | Demand Note dated November 9, 1998 among the
    Company and Robert S. Cubbin and Kathleen D. Cubbin and Stock
    Pledge Agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        |  | (4  | )
|        | 10.6  |  |             | Seventh and Eighth Amendments to Lease between
    Meadowbrook and 26600 Development Associates Limited Partnership
    dated February 6, 1998 and September 16, 1999                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |        |  | (5  | )
|        | 10.7  |  |             | Subordinated Promissory Note, Guaranty, and
    Agreement between Meadowbrook Insurance Group, Inc. and Atlantic
    Mutual Insurance Company dated as of July 27, 2000                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |        |  | (6  | )
|        | 10.8  |  |             | Meadowbrook Insurance Group, Inc. 2002 Stock
    Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        |  | (8  | )
|        | 10.9  |  |             | Assignment Agreement between Meadowbrook
    Insurance Group, Inc., Bank One, and Comerica Bank dated
    July 3, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |        |  | (11 | )
|        | 10.10 |  |             | Restated Credit Agreement between Meadowbrook
    Insurance Group, Inc. and Comerica Bank dated as of
    September 25, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        |  | (12 | )
|        | 10.11 |  |             | 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                                                                                                                                                                                                                                                             |        |  | (13 | )
|        | 10.12 |  |             | Management Services Agreement entered into by and
    between Savers Property and Casualty Insurance Company and
    Meadowbrook, Inc. dated January 1, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        |  | (13 | )
|       
|        | 10.13 |  |             | 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 |        |  | (13 | )
|       
|        | 10.14 |  |             | Pledge Agreement between Meadowbrook Insurance
    Group, Inc. and Comerica Bank, dated September 25, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        |  | (14 | )
|       
|        | 10.15 |  |             | Subsidiary Pledge Agreement between Meadowbrook
    Insurance Group, Inc. and Comerica Bank, dated
    September 25, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |        |  | (14 | )
|       
|        | 10.16 |  |             | Subsidiary Pledge Agreement between Crest
    Financial Corporation and Comerica Bank, dated
    September 25, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        |  | (14 | )

77



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


|        |       |  |             |                                                                                                                                                                                                                                        |        |  |     |  
|------- | ----- |  | ----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ |  | --- | -
|Exhibit |       |  |             |                                                                                                                                                                                                                                        | Filing | 
|No.     |       |  | Description |                                                                                                                                                                                                                                        | Basis  | 
|        |       |  |             |                                                                                                                                                                                                                                        |        | 
|       
|        | 10.17 |  |             | First Amendment to and Waiver of Restated Credit
    Agreement between Meadowbrook Insurance Group, Inc. and Comerica
    Bank, dated May 23, 2003                                                                                     |        |  | (15 | )
|       
|        | 10.18 |  |             | Second Amendment to Restated Credit Agreement
    between Meadowbrook Insurance Group, Inc. and Comerica Bank,
    dated June 30, 2003                                                                                                 |        |  | (15 | )
|       
|        | 10.19 |  |             | Third Amendment to Restated Credit Agreement
    between Meadowbrook Insurance Group, Inc. and Comerica Bank,
    dated September 29, 2003                                                                                             |        |  | (16 | )
|       
|        | 10.20 |  |             | Purchase Agreement among Meadowbrook Insurance
    Group, Inc., Meadowbrook Capital Trust I, and Dekania CDO I,
    Ltd., dated September 30, 2003                                                                                     |        |  | (16 | )
|       
|        | 10.21 |  |             | Amended and Restated Trust Agreement among
    Meadowbrook Insurance Group, Inc., JP Morgan Chase Bank, Chase
    Manhattan Bank USA, National Association, and The Administrative
    Trustees Named Herein, dated September 30, 2003 |        |  | (16 | )
|       
|        | 10.22 |  |             | Guarantee Agreement between Meadowbrook Insurance
    Group, Inc., and JP Morgan Chase Bank, dated September 30,
    2003                                                                                                              |        |  | (16 | )
|       
|        | 10.23 |  |             | Guaranty Agreement between Meadowbrook Insurance
    Group, Inc., and Comerica Bank, dated June 6, 2003                                                                                                                                |        |  |     |  
|       
|        | 10.24 |  |             | Development Agreement between Meadowbrook
    Insurance Group, Inc. and Kirco Development LLC, dated
    December 3, 2003                                                                                                              |        |  |     |  
|       
|        | 10.25 |  |             | Employment Agreement between the Company and
    Robert S. Cubbin dated January 1, 2004                                                                                                                                                |        |  |     |  
|       
|        | 10.26 |  |             | Employment Agreement between the Company and
    Merton J. Segal dated January 1, 2004                                                                                                                                                 |        |  |     |  
|       
|        | 10.27 |  |             | Employment Agreement between the Company and
    Michael G. Costello dated January 1, 2004                                                                                                                                             |        |  |     |  
|       
|        | 10.28 |  |             | Ninth Amendment to Lease between Meadowbrook,
    Inc. and 26600 Development Associates Limited Partnership dated
    March 1, 2004                                                                                                    |        |  |     |  
|       
|        | 14    |  |             | Compliance Program/Code of Conduct                                                                                                                                                                                                     |        |  |     |  
|       
|        | 21    |  |             | List of Subsidiaries                                                                                                                                                                                                                   |        |  |     |  
|       
|        | 23    |  |             | Consent of Independent Accountants                                                                                                                                                                                                     |        |  |     |  
|       
|        | 24    |  |             | Power of Attorney                                                                                                                                                                                                                      |        |  |     |  
|       
|        | 28.1  |  |             | Star Insurance Companys 2003 Schedule P                                                                                                                                                                                               |        |  | (2  | )
|       
|        | 28.2  |  |             | Savers Property & Casualty Insurance
    Companys 2003 Schedule P                                                                                                                                                                     |        |  | (2  | )
|       
|        | 28.3  |  |             | Williamsburg National Insurance Companys
    2003 Schedule P                                                                                                                                                                          |        |  | (2  | )
|       
|        | 28.4  |  |             | Ameritrust Insurance Corporations 2003
    Schedule P                                                                                                                                                                                 |        |  | (2  | )
|       
|        | 31.1  |  |             | Certification of Robert S. Cubbin, Chief
    Executive Officer of the Corporation, pursuant to Securities
    Exchange Act Rule 13a-14(a)                                                                                              |        |  |     |  
|       
|        | 31.2  |  |             | Certification of Karen M. Spaun, Chief Financial
    Officer of the Corporation, pursuant to Securities Exchange Act
    Rule 13a-14(a)                                                                                                |        |  |     |  
|       
|        | 32.1  |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Robert S. Cubbin,
    Chief Executive Officer of the Corporation                             |        |  |     |  

78



---



##### Table of Contents



MEADOWBROOK INSURANCE GROUP, INC.


|        |      |  |             |                                                                                                                                                                                                                                                                                                                              |        |  |    |  
|------- | ---- |  | ----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ |  | -- | -
|Exhibit |      |  |             |                                                                                                                                                                                                                                                                                                                              | Filing | 
|No.     |      |  | Description |                                                                                                                                                                                                                                                                                                                              | Basis  | 
|        |      |  |             |                                                                                                                                                                                                                                                                                                                              |        | 
|       
|        | 32.2 |  |             | Certification pursuant to 18 U.S.C.
    Section 1350, as adopted pursuant to Section 906 of
    the Sarbanes-Oxley Act of 2002, signed by Karen M. Spaun,
    Chief Financial Officer of the Corporation                                                                                                                     |        |  |    |  
|        | 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 | )



---



|    |                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.                                                         
|    
|(13) | Filed as Exhibit to Form 10-K for the year
    ending December 31, 2002.                                                             
|    
|(14) | Filed as Exhibit to Form 10-Q for the period
    ending March 31, 2003.                                                              
|    
|(15) | Filed as Exhibit to Form 10-Q for the period
    ending June 30, 2003.                                                               
|    
|(16) | Filed as Exhibit to Form 10-Q for the period
    ending September 30, 2003.                                                          

79



---



##### Table of Contents



Schedule I

MEADOWBROOK INSURANCE GROUP, INC.

SUMMARY OF INVESTMENTS  OTHER
THAN INVESTMENTS IN RELATED PARTIES


As of December 31, 2003

(in thousands)


|                                                          |                         |                   |        |         |         |              |        |         |         |   |        |         |         | 
|--------------------------------------------------------- | ----------------------- | ----------------- | ------ | ------- | ------- | ------------ | ------ | ------- | ------- | - | ------ | ------- | ------- | 
|                                                          |                         |                   |        |         |         | Amount at    |       
|                                                          |                         |                   |        |         |         | which        |       
|                                                          |                         |                   |        |         |         | shown in the |       
|                                                          |                         |                   |        |         |         | balance      |       
|Type of Investment                                        |                         | Cost              |        |         | Value   |              |        | sheet   |        
|                                                          |                         |                   |        |         |         |              |        |         |        
|Fixed Maturities:                                         |                         |                   |        |         |         |              |        |         |         |   |        |        
|US government and government agencies and
    authorities |                         | $                 | 58,616 |         |         | $            | 60,684 |         |         | $ | 60,684 |        
|States and political subdivisions                         |                         |                   | 47,597 |         |         |              | 49,590 |         |         |   | 49,590 |        
|Corporate securities                                      |                         |                   | 93,701 |         |         |              | 99,661 |         |         |   | 99,661 |        
|Mortgage-backed securities                                |                         |                   | 60,416 |         |         |              | 61,282 |         |         |   | 61,282 |        
|                                                          |                         |                   |        |         |         |              |        |         |        
|                                                          | Total Fixed Maturities  |                   |        | 260,330 |         |              |        | 271,217 |         |   |        | 271,217 |        
|Equity Securities:                                        |                         |                   |        |         |         |              |        |         |         |   |        |        
|Preferred stocks                                          |                         |                   | 1,980  |         |         |              | 2,332  |         |         |   | 2,332  |        
|Common stocks                                             |                         |                   |       |         |         |              | 39     |         |         |   | 39     |        
|                                                          |                         |                   |        |         |         |              |        |         |        
|                                                          | Total Equity Securities |                   |        | 1,980   |         |              |        | 2,371   |         |   |        | 2,371   |        
|                                                          |                         |                   |        |         |         |              |        |         |        
|                                                          |                         | Total Investments |        | $       | 262,310 |              |        | $       | 273,588 |   |        | $       | 273,588 | 
|                                                          |                         |                   |        |         |         |              |        |         |        

80



---



##### Table of Contents



SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

MEADOWBROOK INSURANCE GROUP, INC.


PARENT COMPANY ONLY


BALANCE SHEET


|                                                             |                            |                                            |             |             |             |   |             |             |             | 
|------------------------------------------------------------ | -------------------------- | ------------------------------------------ | ----------- | ----------- | ----------- | - | ----------- | ----------- | ----------- | 
|                                                             |                            |                                           
|                                                             |                            | December 31,                               |            
|                                                             |                            |                                            |            
|                                                             |                            | 2003                                       |             |             | 2002        |  
|                                                             |                            |                                            |             |             |             |  
|ASSETS                                                      
|Cash and cash equivalents                                    |                            | $                                          | 647,733     |             |             | $ | 149,878     |            
|Investment in subsidiaries                                   |                            |                                            | 175,798,461 |             |             |   | 158,741,107 |            
|Receivables from subsidiaries                                |                            |                                            |            |             |             |   | 11,459,548  |            
|Goodwill                                                     |                            |                                            | 3,023,828   |             |             |   | 3,023,828   |            
|Other assets                                                 |                            |                                            | 2,930,989   |             |             |   | 1,828,389   |            
|                                                             |                            |                                            |             |             |             |  
|                                                             | Total assets               |                                            | $           | 182,401,011 |             |   | $           | 175,202,750 |            
|                                                             |                            |                                            |             |             |             |  
|LIABILITIES                                                 
|Other liabilities                                            |                            | $                                          | 217,969     |             |             | $ | 257,313     |            
|Payable to subsidiaries                                      |                            |                                            | 2,759,633   |             |             |   |            |            
|Debt                                                         |                            |                                            | 14,000,000  |             |             |   | 27,550,000  |            
|Junior subordinated debentures                               |                            |                                            | 10,310,000  |             |             |   |            |            
|                                                             |                            |                                            |             |             |             |  
|                                                             | Total liabilities          |                                            |             | 27,287,602  |             |   |             | 27,807,313  |            
|                                                             |                            |                                            |             |             |             |  
|SHAREHOLDERS EQUITY                                        
|Common stock                                                 |                            |                                            | 290,224     |             |             |   | 295,915     |            
|Additional paid-in capital                                   |                            |                                            | 125,181,162 |             |             |   | 127,428,850 |            
|Retained earnings                                            |                            |                                            | 23,069,541  |             |             |   | 12,074,216  |            
|Note receivable from officer                                 |                            |                                            | (885,794    | )           |             |   | (876,161    | )          
|Unrealized appreciation on available for sale
    securities |                            |                                            | 7,458,276   |             |             |   | 8,472,617   |            
|                                                             |                            |                                            |             |             |             |  
|                                                             | Total shareholders equity |                                            |             | 155,113,409 |             |   |             | 147,395,437 |            
|                                                             |                            |                                            |             |             |             |  
|                                                             |                            | Total liabilities and shareholders equity |             | $           | 182,401,011 |   |             | $           | 175,202,750 | 
|                                                             |                            |                                            |             |             |             |  

81



---



##### 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, |           
|                                                           |                        |                                  |           
|                                                           |                        | 2003                             |            |           | 2002      |   |            | 2001      |          
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Revenue                                                    |                        | $                                | 216,093    |           |           | $ | 277,599    |           |           | $ | 270,010    |          
|Operating expenses:                                        |                        |                                  |            |           |           |   |            |           |           |   |            |          
|                                                           | Interest expense       |                                  |            | 1,060,810 |           |   |            | 3,102,988 |           |   |            | 3,275,040 |          
|                                                           | Gain on debt reduction |                                  |            |          |           |   |            | (359,029  | )         |   |            |          |          
|                                                           | Other expenses         |                                  |            | 1,039,907 |           |   |            | 768,153   |           |   |            | 324,584   |          
|                                                           |                        |                                  |            |           |           |   |            |           |          
|                                                           |                        | Total operating expenses         |            |           | 2,100,717 |   |            |           | 3,512,112 |   |            |           | 3,599,624 | 
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Loss before federal income taxes and subsidiary
    equity |                        |                                  | (1,884,624 | )         |           |   | (3,234,513 | )         |           |   | (3,329,614 | )        
|Federal income tax benefit                                 |                        |                                  | (493,946   | )         |           |   | (1,054,339 | )         |           |   | (775,424   | )        
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Loss before subsidiary equity earnings                     |                        |                                  | (1,390,678 | )         |           |   | (2,180,174 | )         |           |   | (2,554,190 | )        
|Subsidiary equity earnings                                 |                        |                                  | 11,490,030 |           |           |   | 3,830,268  |           |           |   | (3,955,530 | )        
|                                                           |                        |                                  |            |           |           |   |            |           |          
|Net income (loss)                                          |                        | $                                | 10,099,352 |           |           | $ | 1,650,094  |           |           | $ | (6,509,720 | )        
|                                                           |                        |                                  |            |           |           |   |            |           |          

82



---



##### 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,                                       |           
|                  |                                                |                                                                        |           
|                  |                                                | 2003                                                                   |            |            | 2002     |   |           | 2001      |          
|                  |                                                |                                                                        |            |            |          |   |           |           |          
|Net income (loss) |                                                | $                                                                      | 10,099,352 |            |          | $ | 1,650,094 |           |           | $ | (6,509,720 | )         
|                  | Other comprehensive (loss) income, net of tax: |                                                                        |            |            |          |   |           |           |           |   |            |            |           
|                  |                                                | Unrealized (losses) gains on securities:                               |            |            | (814,673 | ) |           |           | 5,888,375 |   |            |            | 2,979,739  |  
|                  |                                                | Less: reclassification adjustment for gains
    included in net income |            |            | (199,668 | ) |           |           | (489,227  | ) |            |            | (1,331,056 | )
|                  |                                                |                                                                        |            |            |          |   |           |           |          
|                  | Other comprehensive (loss) income              |                                                                        |            | (1,014,341 | )        |   |           | 5,399,148 |           |   |            | 1,648,683  |           
|                  |                                                |                                                                        |            |            |          |   |           |           |          
|                  | Comprehensive income (loss)                    |                                                                        | $          | 9,085,011  |          |   | $         | 7,049,242 |           |   | $          | (4,861,037 | )         
|                  |                                                |                                                                        |            |            |          |   |           |           |          

83



---



##### 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,      |                                                        
|                                                         |                                                                  |                                       |                                                        
|                                                         |                                                                  | 2003                                  |                                                         |             | 2002       |            |          | 2001        |            
|                                                         |                                                                  |                                       |                                                         |             |            |            |          |             |            
|Net cash provided by (used in) operating
    activities: |                                                                  | $                                     | 15,404,217                                              |             |            | $          | (63,694  | )           |             | $          | 1,288,628 |           
|                                                         |                                                                  |                                       |                                                         |             |            |            |          |             |            
|Cash Flow from Investing Activities:                     |                                                                  |                                       |                                                         |             |            |            |          |             |             |            |           |           
|                                                         | Purchase of land                                                 |                                       |                                                         | (3,228,335  | )          |            |          | 0           |             |            |           | 0          |  
|                                                         | Dividend from subsidiary                                         |                                       |                                                         |            |            |            |          |            |             |            |           | 5,633,465  |  
|                                                         | Investment in subsidiaries                                       |                                       |                                                         | (6,271,665  | )          |            |          | (37,500,000 | )           |            |           | (5,633,465 | )
|                                                         |                                                                  |                                       |                                                         |             |            |            |          |             |            
|                                                         |                                                                  | Net cash used in investing activities |                                                         |             | (9,500,000 | )          |          |             | (37,500,000 | )          |           |            |  |           
|                                                         |                                                                  |                                       |                                                         |             |            |            |          |             |            
|Cash Flow from Financing Activities:                     |                                                                  |                                       |                                                         |             |            |            |          |             |             |            |           |           
|                                                         | Proceeds from borrowings                                         |                                       |                                                         | 8,800,000   |            |            |          | 8,300,000   |             |            |           |           |  
|                                                         | Principal payments on borrowings                                 |                                       |                                                         | (22,350,000 | )          |            |          | (30,869,709 | )           |            |           |           |  
|                                                         | Dividends paid on common stock                                   |                                       |                                                         |            |            |            |          |            |             |            |           | (1,021,458 | )
|                                                         | Net proceeds from public offering                                |                                       |                                                         |            |            |            |          | 60,516,184  |             |            |           |           |  
|                                                         | Net proceeds from issuance of junior subordinated
    debentures |                                       |                                                         | 9,700,000   |            |            |          |            |             |            |           |           |  
|                                                         | Retirement of common stock                                       |                                       |                                                         | (1,556,362  | )          |            |          | (486,124    | )           |            |           | (32,142    | )
|                                                         |                                                                  |                                       |                                                         |             |            |            |          |             |            
|                                                         |                                                                  |                                       | Net cash (used in) provided by financing
    activities |             |            | (5,406,362 | )        |             |             | 37,460,351 |           |            |   | (1,053,600 | )
|                                                         |                                                                  |                                       |                                                         |             |            |            |          |             |            
|Increase (decrease) in cash and cash
    equivalents     |                                                                  |                                       | 497,855                                                 |             |            |            | (103,343 | )           |             |            | 235,028   |           
|Cash and cash equivalents, beginning of year             |                                                                  |                                       | 149,878                                                 |             |            |            | 253,221  |             |             |            | 18,193    |           
|                                                         |                                                                  |                                       |                                                         |             |            |            |          |             |            
|Cash and cash equivalents, end of year                   |                                                                  | $                                     | 647,733                                                 |             |            | $          | 149,878  |             |             | $          | 253,221   |           
|                                                         |                                                                  |                                       |                                                         |             |            |            |          |             |            

84



---



##### Table of Contents



SCHEDULE III

MEADOWBROOK INSURANCE GROUP, INC.

SUPPLEMENTARY INSURANCE INFORMATION


December 31, 2003

(in thousands)


|                                      |  |                   |        |                   |               |   |         |          |              |   |                  |  |         |   |   |  |  |   |         | 
|------------------------------------- |  | ----------------- | ------ | ----------------- | ------------- | - | ------- | -------- | ------------ | - | ---------------- |  | ------- | - | - |  |  | - | ------- | 
|                                      |  |                   |        | Future Policy     |               |   |         |          |              |   |                 
|                                      |  |                   |        | Benefits, Losses, |               |   |         |          | Other Policy |   |                 
|                                      |  | Deferred Policy   |        |                   | Claims & Loss |   |         | Unearned |              |   | Claims &         |  | Premium |  
|                                      |  | Acquisition Costs |        |                   | Expenses      |   |         | Premium  |              |   | Benefits Payable |  | Revenue |  
|                                      |  |                   |        |                   |               |   |         |          |              |   |                  |  |         |  
|Speciality Risk Management Operations |  | $                 | 19,564 |                   |               | $ | 339,465 |          |              | $ | 109,677          |  |         | $ |  |  |  | $ | 151,205 | 
|Agency Operations                     |  |                   |       |                   |               |   |        |          |              |   |                 |  |         |   |  |  |  |   |        | 
|Reconciling Items                     |  |                   |       |                   |               |   |        |          |              |   |                 |  |         |   |  |  |  |   |        | 
|                                      |  |                   |        |                   |               |   |         |          |              |   |                  |  |         |   |  
|                                      |  | $                 | 19,564 |                   |               | $ | 339,465 |          |              | $ | 109,677          |  |         | $ |  |  |  | $ | 151,205 | 
|                                      |  |                   |        |                   |               |   |         |          |              |   |                  |  |         |   |  

|                                      |  |            |        |                   |            |   |        |                   |  |   |           |  |  |         |        |   |  |   |         | 
|------------------------------------- |  | ---------- | ------ | ----------------- | ---------- | - | ------ | ----------------- |  | - | --------- |  |  | ------- | ------ | - |  | - | ------- | 
|                                      |  |            |        | Benefits, Claims, |            |   |        |                   |  |   |          
|                                      |  | Net        |        |                   | Losses &   |   |        | Amortization of   |  |   | Other     |  |  |        
|                                      |  | Investment |        |                   | Settlement |   |        | Deferred Policy   |  |   | Operating |  |  | Premium |       
|                                      |  | Income     |        |                   | Expenses   |   |        | Acquisition Costs |  |   | Expenses  |  |  | Written |       
|                                      |  |            |        |                   |            |   |        |                   |  |   |           |  |  |         |       
|Speciality Risk Management Operations |  | $          | 13,471 |                   |            | $ | 98,472 |                   |  | $ | 27,590    |  |  | $       | 64,800 |   |  | $ | 189,827 | 
|Agency Operations                     |  |            |       |                   |            |   |       |                   |  |   |          |  |  |         | 8,514  |   |  |   |        | 
|Reconciling Items                     |  |            | 13     |                   |            |   |       |                   |  |   |          |  |  |         | (3,614 | ) |  |   |        | 
|                                      |  |            |        |                   |            |   |        |                   |  |   |           |  |  |         |       
|                                      |  | $          | 13,484 |                   |            | $ | 98,472 |                   |  | $ | 27,590    |  |  | $       | 69,700 |   |  | $ | 189,827 | 
|                                      |  |            |        |                   |            |   |        |                   |  |   |           |  |  |         |       

85



---



##### 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 & Loss |   |         | Unearned |              |   | Claims &         |  | Premium |  
|                                      |  | Acquisition Costs |        |                   | 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 | 
|                                      |  |            |        |                   |            |   |        |                   |  |   |           |  |  |         |       

86



---



##### Table of Contents



SCHEDULE III

MEADOWBROOK INSURANCE GROUP, INC.

SUPPLEMENTARY INSURANCE INFORMATION


December 31, 2001

(in thousands)


|                                      |  |                   |        |                   |               |   |         |          |              |   |                  |  |         |   |   |  |  |   |         | 
|------------------------------------- |  | ----------------- | ------ | ----------------- | ------------- | - | ------- | -------- | ------------ | - | ---------------- |  | ------- | - | - |  |  | - | ------- | 
|                                      |  |                   |        | Future Policy     |               |   |         |          |              |   |                 
|                                      |  |                   |        | Benefits, Losses, |               |   |         |          | Other Policy |   |                 
|                                      |  | Deferred Policy   |        |                   | Claims & Loss |   |         | Unearned |              |   | Claims &         |  | Premium |  
|                                      |  | Acquisition Costs |        |                   | Expenses      |   |         | Premium  |              |   | Benefits 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, Claims, |            |   |         |                   |  |   |          
|                                      |  | Net        |        |                   | Losses &   |   |         | Amortization of   |  |   | Other     |  |  |        
|                                      |  | Investment |        |                   | Settlement |   |         | Deferred Policy   |  |   | Operating |  |  | Premium |       
|                                      |  | Income     |        |                   | Expenses   |   |         | Acquisition 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 | 
|                                      |  |            |        |                   |            |   |         |                   |  |   |           |  |  |         |       

87



---



##### Table of Contents



SCHEDULE IV

MEADOWBROOK INSURANCE GROUP, INC.

REINSURANCE


For the Years Ended
December 31,

(in thousands)


|                                 |  |        |         |          |           |         |         |           |  |   |            |           |  |         |         |  |  |  |      |  
|-------------------------------- |  | ------ | ------- | -------- | --------- | ------- | ------- | --------- |  | - | ---------- | --------- |  | ------- | ------- |  |  |  | ---- | -
|                                 |  |        |         |          |           | Assumed |         |           |  |   | Percentage |          
|                                 |  |        |         | Ceded to |           |         | from    |           |  |   |            | of amount | 
|                                 |  | Gross  |         |          | other     |         |         | other     |  |   | Net        |           |  | assumed |        
|Property and Liability Insurance |  | amount |         |          | companies |         |         | companies |  |   | amount     |           |  | to net  |        
|                                 |  |        |         |          |           |         |         |           |  |   |            |           |  |         |        
|2003                             |  | $      | 198,991 |          |           | $       | 61,076  |           |  | $ | 13,290     |           |  | $       | 151,205 |  |  |  | 8.79 | %
|2002                             |  | $      | 195,186 |          |           | $       | 63,578  |           |  | $ | 13,775     |           |  | $       | 145,383 |  |  |  | 9.47 | %
|2001                             |  | $      | 277,516 |          |           | $       | 129,985 |           |  | $ | 16,134     |           |  | $       | 163,665 |  |  |  | 9.86 | %

88



---



##### 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     |      
|                                |  |              |       |           |            |  |            |            |  |  |           |  |  |            |      
|2003                            |  |              | 4,747 |           |            |  | 2,724      |            |  |  |          |  |  |            | 2,820 |  |  |  | 4,651 | 
|2002                            |  |              | 4,932 |           |            |  | 1,707      |            |  |  |          |  |  |            | 1,892 |  |  |  | 4,747 | 
|2001                            |  |              | 5,242 |           |            |  | (83        | )          |  |  |          |  |  |            | 227   |  |  |  | 4,932 | 

89



---



##### 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 |  |                                  |        |              |             |   |         |                   |  |             |   |     |          |   |         |            |  |   |         |  |  |   |        | 
|2003                                               |  | $                                | 19,564 |              |             | $ | 339,465 |                   |  | $           |  |     |          | $ | 109,677 |            |  | $ | 151,205 |  |  | $ | 13,471 | 
|2002                                               |  | $                                | 12,140 |              |             | $ | 374,933 |                   |  | $           |  |     |          | $ | 68,678  |            |  | $ | 145,383 |  |  | $ | 13,906 | 
|2001                                               |  | $                                | 13,953 |              |             | $ | 394,596 |                   |  | $           |  |     |          | $ | 94,002  |            |  | $ | 163,665 |  |  | $ | 14,176 | 

|     |  |                    |         |  |                 |   |        |             |  |   |          |  |  |         |         |  |  |   |         | 
|---- |  | ------------------ | ------- |  | --------------- | - | ------ | ----------- |  | - | -------- |  |  | ------- | ------- |  |  | - | ------- | 
|     |  |                    |         |  |                 |   |        |            
|     |  | Losses and loss    |         |  | Amortization of |   |        | Paid losses |  |   |         
|     |  | adjustment expense |         |  | deferred policy |   |        | and loss    |  |   | Net      | 
|     |  |                    |         |  | acquisition     |   |        | adjustment  |  |   | Premiums | 
|     |  | Current Year       |         |  | Prior Years     |   |        | expenses    |  |   | expenses |  |  | Written |        
|     |  |                    |         |  |                 |   |        |             |  |   |          |  |  |         |        
|2003 |  | $                  | 95,565  |  |                 | $ | 2,907  |             |  | $ | 27,590   |  |  | $       | 99,569  |  |  | $ | 189,827 | 
|2002 |  | $                  | 92,644  |  |                 | $ | 6,090  |             |  | $ | 35,378   |  |  | $       | 104,271 |  |  | $ | 139,795 | 
|2001 |  | $                  | 110,797 |  |                 | $ | 14,386 |             |  | $ | 39,150   |  |  | $       | 99,392  |  |  | $ | 186,083 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Company does not employ any discounting
    techniques.                                                                                                                                                                                                                                                                                                                  
|   
|(2) | Reserves for losses and loss adjustment expenses
    are shown gross of $147.4 million, $181.8 million and
    $195.9 million of reinsurance recoverable on unpaid losses
    in 2003, 2002 and 2001, respectively. Unearned premiums are
    shown gross of prepaid premiums of $20.5 million,
    $18.1 million and $37.9 million in 2003, 2002 and
    2001, respectively.

90



---



##### 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    
| | Chief Financial Officer      
| | (Principal Financial Officer)

Dated: March 12, 2004

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 12, 2004
|                                    
|-s- Robert S. CubbinRobert S. Cubbin |  | President, Chief Executive Officer and
    Director (Principal Executive Officer) |  | March 12, 2004
|                                    
|**Joseph S. Dresner                  |  | Director                                                                          |  | March 12, 2004
|                                    
|**Hugh W. Greenberg                  |  | Director                                                                          |  | March 12, 2004
|                                    
|**Florine Mark                       |  | Director                                                                          |  | March 12, 2004
|                                    
|**Ralph Milo                         |  | Director                                                                          |  | March 12, 2004
|                                    
|**Robert H. Naftaly                  |  | Director                                                                          |  | March 12, 2004
|                                    
|**David K. Page                      |  | Director                                                                          |  | March 12, 2004
|                                    
|**Robert W. Sturgis                  |  | Director                                                                          |  | March 12, 2004

91



---



##### Table of Contents



|                                                                |  |          |  |               
|--------------------------------------------------------------- |  | -------- |  | --------------
|Signature                                                       |  | Title    |  | Date          
|                                                                |  |          |  |               
|                                                               
|**Irvin F. Swider, Sr.                                          |  | Director |  | March 12, 2004
|                                                               
|**Bruce E. Thal                                                 |  | Director |  | March 12, 2004
|                                                               
|**Herbert Tyner                                                 |  | Director |  | March 12, 2004
|                                                               
|**By:-s- Robert S. CubbinRobert S. Cubbin,
    Attorney-in-fact |  |          |  |               

92