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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998,

[ ] 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) (I.R.S. 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:

NAME OF EXCHANGE
TITLE OF EACH CLASS 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 X No ____

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.

The aggregate market value of the voting stock (common stock, $.01 par
value) held by non-affiliates of the registrant was $78,720,471 on March 1,
1999, 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, 1999 was 8,663,434.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's proxy statement for the annual meeting
scheduled for May 17, 1999 are incorporated by reference into Part III of this
report and certain portions of the 1998 Annual Report to Shareholders are
incorporated herein by reference into Part II of this report.
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2

MEADOWBROOK INSURANCE GROUP, INC.

PART I

ITEM 1. BUSINESS

THE COMPANY

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

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

Meadowbrook acquired Association Self Insurance Services, Inc. ("ASI") of
Montgomery, Alabama in November of 1996. The acquisition was not material to the
Company's results of operations. 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 the Meadowbrook's existing operations in Montgomery, Alabama.

On July 1, 1997, the Company acquired Crest Financial Corporation
("Crest"), a California based holding company which owns 100% of an insurance
carrier, Williamsburg National Insurance Company ("Williamsburg"), and Crest
Financial Services, a risk management service company. Crest provides these
services primarily to the trucking industry within California.

On April 30, 1998, the Company acquired the business of Villari &
Associates, Inc. and National Support Systems, Inc. (collectively referred to as
"Villari"). Villari is a Florida based insurance agency which offers
professional liability products and programs, group health and disability, and
property/casualty products. The business of these two companies now operates
under the name of Meadowbrook Villari Agency.

On July 31, 1998, the Company acquired Florida Preferred Administrators,
Inc. ("Florida Preferred"), a third party administrator, and Star acquired
Southeastern Holding Corporation, the holding company for an insurance carrier
Ameritrust Insurance Corporation ("Ameritrust"), both of which are located in
Sarasota, Florida. Florida Preferred provides a broad range of risk management
services to purchasers of workers' compensation insurance from Ameritrust.

INDUSTRY SEGMENTS

Since 1976, the Company has been developing and managing alternative market
risk management programs for defined client groups and their members. The
alternative market, which developed as a result of historical volatility in the
cost and availability of traditional commercial insurance coverages, includes a
wide range of approaches to financing and managing risk exposures, such as
captives and rent-a-captives, risk retention and risk purchasing groups,
governmental pools and trusts and self-insurance plans. According to industry
reports, the premiums in the alternative market have grown at a compound average
growth rate of 9% since 1994. This compares to the traditional property and
casualty market which grew at a 6% compound average growth rate and
Meadowbrook's gross written premium which grew at a 20% compound average annual
growth rate since 1994. The Company believes that the alternative market has
become the preferred means of managing property and casualty insurance and that
Meadowbrook is well positioned by focusing on alternative risk solutions for
agents, brokers, and insureds of all sizes. Through Meadowbrook, these clients
now have access to the kind of sophisticated risk management techniques
previously available only to larger corporations.

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MEADOWBROOK INSURANCE GROUP, INC.

GENERAL

The Company provides alternative risk management programs and services
primarily to industry, public entities, and trade/professional groups. Revenues
are generated from four principal sources: fees from program and risk management
services, commissions earned on insurance placed with other carriers, earned
insurance premiums, and investment income. The subsidiaries of the Company that
provide these services are Star, Savers, Ameritrust, Crest and its wholly owned
insurer Williamsburg, American Indemnity, ASI, Villari and Florida Preferred and
Meadowbrook.

Through these subsidiaries the Company develops programs, which are
customized packages of services or coverages marketed to the group's members.
The programs are categorized by the level of risk assumed by the Company either
as managed programs, fronted programs, risk-sharing programs, or fully-insured
programs.

Services provided and insurance lines of business include:

SERVICES LINES OF BUSINESS
-------- -----------------

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

DESCRIPTION OF SERVICES AND CAPABILITIES

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

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

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MEADOWBROOK INSURANCE GROUP, INC.

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

Reinsurance Brokerage. The Company earns fees by placing excess
reinsurance for its programs. The Company's two reinsurance brokerage
subsidiaries, Meadowbrook Intermediaries, Inc. and Meadowbrook International,
Ltd., place reinsurance (as well as insurance coverage with high deductibles)
for insurance companies, captives and self-insured programs managed by the
Company. Reinsurance is also placed for clients that do not have other business
relationships with the Company.

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

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

Sales and Marketing. The Company markets its programs and services to
associations, groups, local, regional and national insurance agents and
insurance consultants. Once a program has been developed for a particular
association or group, the Company generally then markets the program to members
of the association or group. Sales and marketing efforts include personal
contact, direct mail, telemarketing, advertising, internet based marketing
(www.meadowbrookinsgrp.com), and attendance at seminars and trade and industry
conventions.

CUSTOMERS, MARKETING, AND DISTRIBUTION

Fee Based Operations:

Agency. The Company earns commissions through the operation of a retail
property and casualty insurance agency. Formed in 1955 as Meadowbrook's original
business, the insurance agency places principally commercial insurance, as well
as personal property, casualty, life and accident and health insurance, with
more than 50 insurance carriers. The agency has grown to be one of the largest
agencies in Michigan. In addition, with the 1998 and 1997 acquisitions of the
business of Villari, Crest and Meadowbrook of Saginaw, the Company added one
Florida based subsidiary (Villari) and two California based subsidiaries.
Through these newly acquired subsidiaries, the Company added two licensed
property and casualty insurance agencies, as well as the related licensed
general agents and excess and surplus lines brokers.

In total, the Company's agency operations generated commissions of $8.6
million, $7.6 million and $4.8 million for the years ended December 31, 1998,
1997 and 1996, respectively. In addition to its independent retail agency
activities, the Company's insurance agency also earns revenue by serving as the
agent for several of the Company's programs.

Managed Programs. In a managed program, the Company, through Meadowbrook,
earns commission and fee revenue by providing management and other services to a
client's risk-bearing entity, but generally does not share in the operating
results of such programs. The Company believes that its managed programs provide
a stable source of revenue as well as opportunities for revenue growth without a
proportionate increase in expenses. Revenue growth may occur through the sale of
existing managed program products to additional members of the sponsoring client
group, the expansion of coverages and services provided to existing

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MEADOWBROOK INSURANCE GROUP, INC.

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

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

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

In January of 1999, the Company entered into an agreement with Gulf
Insurance ("Gulf"), a member of Traveler's Citigroup, and Kemper Specialty
Holdings, Inc. ("Kemper Specialty"). Under this agreement, Meadowbrook has the
exclusive authority to represent Gulf and Kemper Specialty as a program manager
for public entity business in thirteen states. The products and services under
this program are separate from the Company's existing public entity business and
are not in competition with existing programs.

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

In total, Meadowbrook and its subsidiaries employs 714 associates to
service the Company's clients and provide management services to the Insurance
Operations as defined below.

Insurance Operations:

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

The Insurance Operations are authorized to write business, on either an
admitted or surplus lines basis, in fifty states. Through fronted, risk-sharing
and fully insured programs, the Insurance Operations primarily offer workers'
compensation, commercial multiple peril, inland marine and other liability. The
Insurance Operations also provide fronting services. For the year ended December
31, 1998, the workers' compensation line of business accounted for 43.6% and
51.3% of gross written premiums and net earned premiums, respectively.

Star, Savers, Williamsburg and Ameritrust are domiciled in Michigan,
Missouri, California, and Florida, respectively.

During 1998, A.M. Best affirmed the "A-" (excellent) rating of Star,
Savers, Williamsburg, and Ameritrust. A.M. Best ratings are based upon factors
of concern to policyholders and are not directed toward the protection of
investors. No assurances can be given that in the future A.M. Best will not
reduce or withdraw the ratings of the Company's insurance subsidiaries.

Client Risk-Sharing. In a client risk-sharing program, the Company
participates in the operating results of the program, and the client group also
shares in such results through a captive, a rent-a-captive or a
retrospectively-rated program. In many instances, a captive owned by a client
reinsures a portion of the risk on a quota-share basis. In addition to premium
revenue and investment income from its participation in the operating results of
the program, the Company may also be compensated through the receipt of ceding
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MEADOWBROOK INSURANCE GROUP, INC.

commissions and other fees for policy issuance services and acquisition costs,
captive management services, reinsurance brokerage, loss prevention services and
claims handling and administration 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 control measures and to establish and adhere to
stricter underwriting guidelines. As a result of its experience with
risk-sharing programs, the Insurance Operations have sustained a ten year
average combined ratio of 96.2% and have outperformed the industry by an average
of 12 points.

The Company assists the sponsoring group with the formation of the captive,
which is capitalized by contributions from members of the sponsoring group in
exchange for shares of the captive. The captive is generally managed for a fee
by an offshore subsidiary of the Company. The Company works with the client to
determine the amount of risk exposure that will be assumed by the captive, which
varies depending on the captive's capitalization, the line of business, the
amount to be retained by the Company and the amount to be reinsured by excess
reinsurers. The Company then issues an insurance policy and receives premium
from the insured. Pursuant to the quota-share reinsurance agreement with the
captive, the Company generally transfers (cedes) a portion of the retained risk
to the captive and pays to the captive its share of the net premium (after
deducting ceding commissions, policy issuance fees, the cost of excess
reinsurance, taxes and other fees and expenses). The Company generally seeks to
cede approximately 50% of its loss exposures, but in some cases cedes as little
as 20% or as much as 80% of its loss exposures. The Company secures obligations
due from captives through the use of Funds Withheld Trusts or Letters of Credit.
Through its reinsurance intermediary subsidiaries, 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, and shares in the
underwriting results.

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

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

Agent Risk-Sharing. The Company also writes program business on a
risk-sharing basis with agents or brokers. The Company believes that agent
risk-sharing has grown as a result of market volatility and lack of coverage
availability in the traditional market. Risk-sharing is achieved either through
an agent-owned captive, rent-a-captive or through a contingent commission
structure tied to underwriting results. The Company believes that certain agents
and brokers view risk-sharing as a means to recapture lost profit margins on
commissions that have been reduced due to premium reductions in the soft market
and to establish a long-term relationship with an insurer.

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. The Company
believes that multi-year commission structures motivate the agent to produce
business with better risk characteristics and higher profit potential.

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MEADOWBROOK INSURANCE GROUP, INC.

Fully-Insured Programs. In a fully-insured program, the Company earns
premium revenue by providing insurance coverage without a risk-sharing
mechanism. The Company may provide fully-insured programs when it perceives
opportunities for the development of risk-sharing programs in the future.

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

In December 1996, the Company entered into a five-year joint underwriting
agreement with Connecticut Surety Company. The agreement provides for the
transfer of the underwriting risk on the majority of the Company's existing
surety bond business. In addition, Star will continue to write new surety
business, utilizing its capital and licenses, and Connecticut Surety will manage
the operations and assume the risk. This arrangement substantially reduces the
Company's underwriting risk exposure. This enables the Company to refocus its
efforts on its core business, alternative risk management.

In December of 1998 Connecticut Surety Company entered into an agreement
with Evergreen National Indemnity Company to transfer the Contract Surety
business that it wrote on behalf of Star Insurance Company to Evergreen National
Indemnity Company. The agreement provides for the transfer of the underwriting
risk on this class of bonds from Connecticut Surety to Evergreen National.

DEPENDENCE ON KEY PROGRAMS

The Company provides alternative risk management programs and services to
certain large client groups and associations and then markets them to their
individual members. In 1998, 1997, and 1996 the Company's top four programs,
excluding the surety bond business, accounted for 38%, 46% and 37%,
respectively, of the Company's total net earned premiums. The loss or
cancellation of any of the Company's significant programs by the relevant client
groups, or the general availability of commercial market coverage to members of
such groups on more favorable terms than provided under the Company's programs,
could have an adverse effect on the Company's results of operations. The Company
has multiple year contracts with many of its clients and has maintained
retention rates in the mid to high 90% range.

RESERVES

The information required by this item is incorporated by reference to pages
39 and 40 of the Notes to Consolidated Financial Statements, and pages 18 of
item 7, Management's Discussion and Analysis.

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

Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to the Company, and the Company's
payment of that loss. To recognize liabilities for unpaid losses, the

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MEADOWBROOK INSURANCE GROUP, INC.

Company establishes reserves as balance sheet liabilities representing estimates
of amounts needed to pay reported and unreported losses and loss adjustment
expenses ("LAE").

The following table shows the development of reserves for unpaid losses and
LAE from 1989 through 1998 for the Company's current insurance subsidiaries.

Due to the Company's adoption of SFAS 113, the bottom portion of the table
shows the impact of reinsurance for the years 1992 through 1998, 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,
-------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)

Reserves for losses
and LAE at end of
period............. $6,262 $9,293 $13,964 $23,545 $35,744 $47,149 $64,668 $65,775 $ 60,786 $ 84,254
Cumulative paid as of
1 year later....... 1,737 2,877 4,326 5,420 11,172 15,792 25,659 31,626 31,368
2 years later...... 3,284 4,796 6,309 10,052 19,298 26,227 42,969 49,930
3 years later...... 4,508 5,117 7,652 13,554 23,571 33,227 52,222
4 years later...... 4,195 5,971 8,954 15,598 26,700 36,644
5 years later...... 4,594 6,568 9,564 16,574 27,492
6 years later...... 4,970 6,786 10,360 17,341
7 years later...... 5,154 7,123 11,000
8 years later...... 5,425 7,395
9 years later...... 5,519
Reserves re-estimated
as of end of year:
1 year later....... 8,204 9,939 14,693 22,609 35,354 46,738 65,058 67,010 69,012
2 years later...... 7,488 9,800 14,361 21,661 33,524 45,578 65,312 69,536
3 years later...... 7,296 9,396 12,853 20,909 33,308 45,255 66,692
4 years later...... 6,683 8,758 12,649 20,623 33,685 45,592
5 years later...... 6,299 8,600 12,525 19,639 32,263
6 years later...... 6,293 8,371 12,186 19,658
7 years later...... 6,128 7,970 12,166
8 years later...... 5,866 7,975
9 years later...... 5,822
Cumulative redundancy
(deficiency):
Dollars............ $ 440 $1,318 $ 1,798 $ 3,887 $ 3,481 $ 1,557 $(2,024) $(3,761) $ (8,226)
Percentage......... 7.03% 14.18% 12.88% 16.51% 9.74% 3.30% -3.13% -5.72% -13.53%
Net reserves......... 23,545 35,744 47,149 64,668 65,775 60,786 84,254
Ceded reserves....... 20,399 14,707 17,844 22,318 26,615 38,193 64,590
Gross reserves....... 43,944 50,451 64,993 86,986 92,390 98,979 148,844
------ ------ ------- ------- ------- ------- ------- ------- -------- --------
Net re-estimated..... 19,639 32,263 45,592 66,692 69,536 69,012
Ceded re-estimated... 22,904 17,095 21,362 27,625 26,346 49,228
Gross re-estimated... 42,543 49,358 66,954 94,317 95,882 118,240
------ ------ ------- ------- ------- ------- ------- ------- -------- --------
Gross cumulative
Redundancy
(deficiency)....... $ 1,401 $ 1,093 $(1,961) $(7,331) $(3,492) $(19,261)
====== ====== ======= ======= ======= ======= ======= ======= ======== ========

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MEADOWBROOK INSURANCE GROUP, INC.

Loss and LAE reserves have historically developed redundancies on a net
basis apart from the most recent three years. The unfavorable reserve
development on the 1995 and 1996 calendar years were mostly due to the runoff of
the reserves from the discontinued surety bond programs. The 1997 year-end net
surety reserves were shown to be $1.6 million dollars deficient by year-end
1998. More conservative estimates of non-contract surety recoveries were used in
1998. The Company does not expect this net deficiency to continue in the future
because the number of open surety claims is minimal relative to prior years and
most open contract claims have exceeded Star Insurance Company's net retention
limits. The remaining deficiency on the 1997 reserves was due to certain
isolated programs including professional liability for two distinct professions
and two workers compensation programs.

The gross loss and LAE deficiency on 1997 reserves was mostly due to the
adverse development and IBNR strengthening on the Star fronted business for
Connecticut Surety. Gross surety reserves established at December 31, 1998 are
stronger relative to reserves established in 1997 because higher expected loss
ratios were assumed in 1998. The remaining gross deficiency was related to the
same programs mentioned previously relating to the net deficiency.

INVESTMENTS

Certain information required by this item is incorporated by reference to
pages 34, 37-39 of the Notes to the Consolidated Financial Statements, and pages
17 and 20 of item 7, Management's Discussion and Analysis.

COMPETITION AND PRICING

The Company competes both 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 certain domestic and foreign insurers and
reinsurers and insurance brokers) as well as with self-insurance plans, captives
managed by others, and a variety of other risk-financing vehicles and
mechanisms. These competitive products are offered by other companies that may
have greater financial resources than the Company.

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

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MEADOWBROOK INSURANCE GROUP, INC.

REGULATION

REGULATION IN GENERAL

The Company's insurance subsidiaries are subject to regulation by
government agencies in the states in which they do business. The nature and
extent of such regulation vary from jurisdiction to jurisdiction, but typically
involve prior approval of the acquisition of control of an insurance company or
of any company controlling an insurance company, regulation of certain
transactions entered into by an insurance company with any of its affiliates,
approval of premium rates, forms and policies used for many lines of insurance,
standards of solvency and minimum amounts of capital and surplus which must be
maintained, establishment of reserves required to be maintained for unearned
premium, losses and loss expense or for other purposes, limitations on types and
amounts of investments, restrictions on the size of risks which 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 Company's insurance
subsidiaries, the Company is also subject to regulation under the Michigan,
Missouri, California and Florida Insurance Holding Company System Regulatory
Acts (the "Holding Company Acts"). The Holding Company Acts contain certain
reporting requirements including those requiring the Company, as the ultimate
parent company, to file information relating to its capital structure,
ownership, and financial condition and general business operations of its
insurance subsidiaries. The Holding Company Acts contain 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 redefinitions 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 re-pricing, if permitted by applicable regulations, of
coverages or limitations or cessation of the affected business.

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

INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL

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

10
11
MEADOWBROOK INSURANCE GROUP, INC.

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 which have adopted pre-acquisition notification
provisions and in which the insurers are admitted. Such requirements may deter,
delay or prevent certain transactions that could be advantageous to the
stockholders of the Company.

RESTRICTIONS ON DIVIDENDS AND RISK-BASED CAPITAL

The information required by this item is incorporated by reference to pages
xx-xx and xx of the Notes to the Consolidated Financial Statements.

EFFECT OF FEDERAL LEGISLATION

Although the federal government does not directly regulate the business of
insurance, federal initiatives often affect the insurance business in a variety
of ways. Current and proposed federal measures which may significantly affect
the insurance business include federal government regulation of insurance, sale
of insurance by entities not previously allowed, federal government
participation in asbestos and other product liability claims, pension regulation
(ERISA), examination of the taxation of insurers and reinsurers minimum levels
of liability insurance and automobile safety regulations.

NAIC-IRIS RATIOS

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

In 1998, Star had one ratio, excluding the Ameritrust acquisition, which
varied from the "usual value" range as follows:

STAR RATIO, EXCLUDING IMPACT
RATIO USUAL RANGE STAR VALUE OF ACQUISITION OF AMERITRUST
----- ----------- ---------- ----------------------------

Change in net writings.................. , 33% or . -33% 42% 42%
Investment yield........................ , 10% or . 4.5% 3.8% 5.6%
Liabilities to liquid assets............ Under 105% 109% 104%

Star's growth in net written premiums of 42% in 1998, exceeded the usual
range set forth by the NAIC of 33%. Star writes program business, as opposed to
individual risks, and programs may take longer periods of time to implement, the
growth in any one accounting period may fluctuate from very low rates to very
high rates. Consequently, a more accurate measure of Star's growth is a five
year compound average growth rate which is 11.3% and is within the normal range.

11
12
MEADOWBROOK INSURANCE GROUP, INC.

ITEM 2. PROPERTIES

The Company currently leases its corporate offices in Southfield, Michigan
from 26600 Development Associates Limited Partnership. In 1998, the Company paid
rent in the amount of approximately $1,130,986. 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.

During 1998, the Company purchased land in close proximity to its existing
offices. The cost of the land was $3.2 million.

ITEM 3. LEGAL PROCEEDINGS

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

The Company vigorously defended itself and filed counter-claims against the
Primary 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. Equitable claims of Meadowbrook
and Star and the Individuals Plaintiffs have not yet been resolved by the Court.
It is not expected that the outcome of this litigation will have a material
impact on the financial condition of the Company.

A Final Judgment will be entered with the Court, which is subject to
appeal.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

12
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MEADOWBROOK INSURANCE GROUP, INC.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to page
20 of the Company's 1998 Annual Report to Shareholders.

ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)

INCOME STATEMENT DATA:
Gross written premium..................... $186,332 $146,739 $115,580 $123,119 $ 90,625
Net written premium....................... 93,481 74,965 72,758 93,638 57,555
Net earned premium........................ 92,085 68,493 84,547 82,698 49,855
Net investment income..................... 9,579 8,128 8,002 5,325 3,257
Net realized gain (loss) on investments... 52 134 26 45 (35)
Total revenue............................. 134,114 101,125 109,189 89,974 53,155
Net losses and LAE........................ 56,703 36,143 41,265 43,795 30,956
Policy acquisition and other expenses..... 31,931 19,531 32,079 33,721 16,950
Income before income taxes................ 6,645 17,386 10,868 9,488 4,867
Net income................................ 5,870 13,043 8,706 7,220 3,702
Earnings per share -- diluted............. $ 0.65 $ 1.42 $ 0.95 $ 1.32 $ 0.95
Dividends declared per share.............. $ 0.10 $ 0.08 $ 0.08 $ -- $ --
BALANCE SHEET DATA:
Total investments and cash and cash
equivalents............................. $201,025 $167,292 $156,495 $148,977 $ 88,460
Total assets.............................. 440,075 328,642 265,035 241,764 158,637
Loss and LAE reserves..................... 148,844 98,979 92,390 86,986 64,993
Shareholders' equity...................... 119,567 112,469 100,201 92,216 44,444
OTHER DATA:
GAAP ratios (insurance companies only)
Net loss and LAE ratio.................... 65.0% 55.7% 52.1% 53.2% 62.1%
Expense ratio............................. 30.6% 34.0% 45.0% 41.7% 34.0%
Combined ratio............................ 95.6% 89.7% 97.1% 94.9% 96.1%
Statutory combined ratio.................. 98.7% 90.2% 98.1% 94.2% 96.4%
Industry statutory combined ratio......... 105.0%* 101.6% 105.8% 106.4% 108.5%

- - -------------------------
* Estimated

13
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MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Meadowbrook Insurance Group, Inc. (the "Company") provides alternative risk
management programs and services primarily to industry, public entities, and
trade/professional groups. Revenues are generated from four principal sources:
fees from program management services, commissions earned on insurance placed by
a subsidiary with other carriers, earned insurance premiums, and investment
income. The subsidiaries of the Company that provide these services are Star
Insurance Company ("Star"), Savers Property and Casualty Insurance Company
("Savers"), Florida Preferred Administrators, Inc. ("Florida Preferred"),
Ameritrust Insurance Company ("Ameritrust"), Crest Financial Corporation
("Crest") and its wholly owned insurer Williamsburg National Insurance Company
("Williamsburg"), American Indemnity Insurance Company, Ltd. ("American
Indemnity"), Association Self Insurance Services, Inc. ("ASI"), Meadowbrook of
Saginaw, ("Saginaw") and Meadowbrook, Inc. ("Meadowbrook"), the risk management
company and other subsidiaries.

Through these subsidiaries the Company develops programs, which are
customized packages of services or coverages marketed to the group's members.
The programs are categorized by the level of risk assumed by the Company. In
managed programs, the Company usually assumes no insurance risk and generates
fee revenue through program management services. In fronted programs, the
Company usually assumes less than 10% or less of the underwriting risk and
generates fees which are accounted for as a reduction of underwriting expenses
in accordance with GAAP and statutory accounting practices. In risk-sharing
programs, the Company participates with the client or producing agent in the
operating results of the programs through a captive, retrospectively-rated
program, or a contingent commission. In fully-insured programs, the Company
provides traditional insurance without a risk-sharing mechanism and derives
revenue exclusively from earned premiums and investment income. Fully-insured
programs are developed only in response to a specific market opportunity and
generally when the Company believes there is potential to develop a long-term
risk-sharing partnership in the future.

The Company's major insurance subsidiaries, Star, Savers, Williamsburg and
Ameritrust, issue insurance policies for fronted, risk-sharing and fully-insured
programs. These companies are complimented by American Indemnity, which offers
clients a rent-a-captive vehicle for risk-sharing programs.

Managed programs and agency activities are provided through Meadowbrook,
the Company's risk management subsidiary. Meadowbrook was acquired by the
Company in November, including their subsidiaries, in 1995. Prior to its
acquisition, it was an affiliated company. Fee and commission revenues are
generated through Meadowbrook and Crest Financial Services primarily from the
following sources: retail insurance agency commissions, program management fees,
claims handling and administration fees, loss prevention and control fees, and
reinsurance brokerage commissions. Management fee revenue is also generated from
the following services: program design and implementation, sales and marketing
to members of a client group, captive formation and management,
underwriting/risk selection, accounting and financial statement preparation,
regulatory compliance, actuarial and loss reserve analysis. In addition to
providing services to outside clients, Meadowbrook also provides services to the
Company's insurance subsidiaries, which includes the management of their
insurance operations.

The Company acquired ASI of Montgomery, Alabama in November, 1996. The
acquisition was not material to the Company's results of operations. 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 the Company's existing
operations in Montgomery, Alabama.

In December of 1996, the Company entered into a five-year joint
underwriting agreement with Connecticut Surety Company. The agreement provides
for the transfer of the underwriting risk on the majority of the Company's
existing surety bond business. In addition, Star will continue to write new
surety

14
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MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

business, utilizing its capital and licenses, and Connecticut Surety will manage
the operations and assume the risk. This arrangement substantially reduces the
Company's underwriting risk exposure. This enables the Company to refocus its
efforts on its core business, alternative risk management.

On July 1, 1997, the Company acquired Crest, a California based holding
company which owns 100% of Williamsburg, an insurance carrier, and Crest
Financial Services, a risk management service company. Crest provides risk
management and insurance services primarily to the trucking industry within
California.

On April 30, 1998, the Company acquired the business of two Florida-based
insurance agencies, Villari & Associates, Inc. and National Support Systems,
Inc. (collectively referred to as "Villari"). Villari offers professional
liability products and programs, group health and disability, and
property/casualty products.

On July 31, 1998, the Company acquired Florida Preferred, a third party
administrator, and Star acquired Southeastern Holding Corporation, the holding
company of Ameritrust, both of which are located in Sarasota, Florida. Florida
Preferred provides a broad range of risk management services to purchasers of
workers' compensation insurance from Ameritrust as well as other insurance
carriers.

RESULTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, CHANGE 98 VS. 97 CHANGE 97 VS. 96
--------------------------------- ----------------- -----------------
1998 1997 1996 $ % $ %
---- ---- ---- - - - -
(IN THOUSANDS, EXCEPT PERCENTAGES)

Total revenues................. $134,114 $101,125 $109,189 $32,989 32.6% $ (8,064) (7.4)%
Total expenses................. 127,469 83,739 98,321 43,730 52.2 (14,582) (14.8)
-------- -------- -------- ------- ----- -------- -----
Income before taxes............ 6,645 17,386 10,868 (10,741) (61.8) 6,518 60.0
Income taxes................... 775 4,343 2,162 (3,568) (82.2) 2,181 100.9
-------- -------- -------- ------- ----- -------- -----
Net income..................... $ 5,870 $ 13,043 $ 8,706 $(7,173) (55.0)% $ 4,337 49.8%
======== ======== ======== ======= ===== ======== =====

Net income in 1998 decreased $7.1 million, or 55.0%, from $13.0 million in
1997 to $5.9 million in 1998. The decrease in net income reflects charges made
during the third quarter of 1998 ($8.6 million), and increased expenses for
investments made in personnel and technology for future growth. These items were
somewhat offset by contributions made by our recent acquisitions and growth in
new and existing business in our insurance operations.

Net income in 1997 increased $4.3 million, or 49.8%, from $8.7 million in
1996 to $13.0 million in 1997. The increase in net income primarily reflects
overall growth from our fee-based risk management operations as well as
profitable underwriting results from our core program business. Total revenues
decreased $8.1 million, or 7.4%, while total expenses decreased $14.6 million,
or 14.8%. The decrease in expenses primarily relates to an increase in ceding
commissions of $7.3 million, or 49.3%, a decrease in overall policy acquisition
costs of $5.8 million, or 49.0%, associated with the transfer of the surety bond
program, as well as overall savings in administrative costs.

REVENUE

Net earned premium................ $ 92,085 $ 68,493 $ 84,547 $23,592 34.4% $(16,054) (19.0)%
Net commissions and fees.......... 32,398 24,360 16,566 8,038 33.0 7,794 47.0
Investment and miscellaneous
income.......................... 9,631 8,272 8,076 1,359 16.4 196 2.4
-------- -------- -------- ------- ---- -------- -----
Total revenue..................... $134,114 $101,125 $109,189 $32,989 32.6% $ (8,064) (7.4)%
======== ======== ======== ======= ==== ======== =====

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MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

The Company's written and earned premium were as follows:

FOR THE YEARS ENDED DECEMBER 31, CHANGE 98 VS. 97 CHANGE 97 VS. 96
--------------------------------- ----------------- ------------------
1998 1997 1996 $ % $ %
---- ---- ---- - - - -
(IN THOUSANDS, EXCEPT PERCENTAGES)

Gross written premium............ $186,332 $146,739 $115,580 $39,593 27.0% $ 31,159 27.0%
Net written premium.............. 93,481 74,965 72,758 18,516 24.7 2,207 3.0
Net earned premium............... $ 92,085 $ 68,493 $ 84,547 $23,592 34.4% $(16,054) (19.0)%

Gross written premium increased by $39.6 million, or 27.0%, to $186.3
million in 1998 from $146.7 million in 1997. The increase reflects growth in
existing business of $23.3 million and new programs totaling $29.2 million. This
growth was somewhat offset by a one-time unearned premium transfer in 1997 ($6.5
million) and a reduction in the discontinued surety bond business ($5.4
million). The growth in existing business reflects a full year of premium
writings in programs initiated in 1997, assumed business, and expansion into
additional states. The increase in new business reflects the addition of
twenty-four new programs in 1997, and $6.6 million from premiums produced by
Ameritrust.

Net written premium increased by $18.5 million, or 24.7%, to $93.5 million
in 1998 from $75.0 million in 1997. The increase reflects the acquisition of
Ameritrust which contributed $5.8 million to net premiums written in 1998.
Excluding the impact of Ameritrust, the greater growth in gross compared to net
written premium reflects the addition of three new programs in which the Company
retained limited risk, but generated risk management fees.

Net earned premiums increased by $23.6 million, or 34.4%, to $92.1 million
in 1998 from $68.5 million in 1997. This increase reflects the acquisition of
Ameritrust, which contributed $7.5 million. Excluding the impact of the
Ameritrust acquisition, net earned premium increased 23.5% reflecting growth in
existing business primarily from programs initiated in 1997.

Gross written premium increased by $31.2 million, or 27.0%, to $146.7
million in 1997 from $115.6 million in 1996. The increase reflects growth in
existing business of $13.2 million and new programs totaling $31.1 million. This
growth was somewhat offset by the reduction in surety bond business and other
discontinued programs. The growth in existing business reflects a full year of
premium writings in programs initiated in 1996, assumed business, and expansion
into additional states. The increase in new business reflects the addition of
twelve new programs in 1996, and $3.7 million from premiums produced by
Williamsburg.

Net written premium increased by $2.2 million, or 3.0%, to $75.0 million in
1997 from $72.8 million in 1996. The disproportionate growth between gross
written and net written resulted from higher participation by risk sharing
clients, fronting services, and the transfer of the surety bond program in
December 1996.

Net earned premiums decreased by $16.1 million, or 19.0%, to $68.5 million
in 1997 from $84.5 million in 1996. This decrease reflects the impact of the
discontinuation of the surety bond program in December 1996, offset by growth in
our core program business.

NET COMMISSIONS AND FEES

Net commissions and fees for Meadowbrook increased by $8.0 million, or
33.0%, from $24.4 million in 1997 to $32.4 million in 1998. Net commission and
fees increased by $7.8 million, or 47.0%, to $24.4 million in

16
17
MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

1997 from $16.6 million in 1996. Commissions and fees are derived from managed
programs and the retail insurance agency operations and consist of the following
(in thousands):

FOR YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
---- ---- ----

Management fees.................................... $ 7,690 $ 6,799 $ 5,822
Claims fees........................................ 8,434 8,155 3,720
Loss control fees.................................. 1,032 1,168 1,390
Reinsurance brokerage.............................. 979 560 797
Miscellaneous fees and charges..................... (14) 8 23
------- ------- -------
Total risk management fees......................... 18,121 16,690 11,752
Agency and sales commissions....................... 14,277 7,670 4,814
------- ------- -------
Net commissions and fees........................... $32,398 $24,360 $16,566
======= ======= =======

Net commissions and fees increased $8.0 million, or 33.0%, during 1998. The
increase in Risk Management fees of $1.4 million primarily reflects management
and claims fees from recent acquisitions. The $6.6 million increase in Agency
and Sales Commissions reflects $6.1 million additional commissions from
acquisitions. The remaining $0.5 million increase resulted from growth in
Meadowbrook's existing agency business.

Net commissions and fees increased $7.8 million, or 47.0%, during 1997. The
increase in risk management fees of $4.9 million primarily reflects additional
management fees of $1.3 million and ASI claims fees of $3.2 million. The
remaining increase resulted from Crest management fees of $0.5 million. The
increase in Agency and sales commissions reflect additional commissions from
Crest Financial of $2.1 million. The remaining increase resulted from growth in
Meadowbrook's existing agency business.

NET INVESTMENT INCOME

Net investment income increased $1.3 million in 1998, or 16.4%, to $9.6
million from $8.3 million in 1997 and $0.2 million in 1997, or 2.4%, from $8.0
million in 1996. The increase in investment income in 1998 was primarily the
result of $23.0 million increase in cash and invested assets related to the
acquisition of Ameritrust in July of 1998. The pre-tax weighted average yield on
invested assets was 5.2%, 5.4%, and 5.3% in 1998, 1997, and 1996, respectively.
The Company's investment philosophy is one of maximizing after-tax earnings
through significant investments in tax-exempt bonds. Accordingly, the weighted
average yield on invested assets on an after-tax basis was 4.6% in 1998 and 4.7%
in both 1997 and 1996. Subsequent to year end the Company began to increase its
position in equity securities. The Company plans to invest up to $10.0 million
in equity securities. These investment activities will be provided for by cash
from operations and cash from proceeds for the maturity of debt securities.

17
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MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

EXPENSES

Total expenses increased by $43.8 million, or 52.2%, to $127.5 million in
1998 from $83.7 million in 1997 and decreased by $14.6 million, or 14.8%, to
$83.7 million in 1997 from $98.3 million in 1996. The expenses are as follows
(in thousands):

FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---- ---- ----

Net losses and LAE:
Other than surety........................................... $ 55,022 $31,558 $32,971
Surety business............................................. 1,681 4,585 8,294
Salaries and benefits....................................... 36,856 27,416 24,977
Interest.................................................... 1,979 649 --
Other operating expenses:
Expenses other than surety.................................. 31,951 20,910 21,962
Surety bond expenses........................................ (20) (1,379) 10,117
-------- ------- -------
Total expenses.............................................. $127,469 $83,739 $98,321
======== ======= =======

NET LOSSES AND LOSS ADJUSTMENT EXPENSES (LAE)

Net losses and LAE incurred increased by $20.6 million, or 56.9%, to $56.7
million in 1998 from $36.1 million in 1997 and decreased by $5.1 million, or
12.4%, to $36.1 million in 1997 from $41.3 million in 1996. Analysis of losses
and LAE utilizing insurance ratios, on an overall and non-surety basis, are
reflected below.

The GAAP loss and LAE ratio increased to 65.0% in 1998 from 55.7% in 1997.
This 9.3 point increase reflects a $7.3 million charge for reserve strengthening
which added 7.9 points to the GAAP loss and LAE ratio. This reserve
strengthening was required for three reasons: less favorable than anticipated
development of prior year reserves, unexpected increases in recent claims
activity on several large programs, and an increase in projected ultimate loss
ratios for the most recent accident years due to pricing pressure experienced in
the commercial property & casualty market. The remaining 1.4 point increase
reflects increased expected loss ratios going forward to reflect these
competitive market conditions.

The GAAP loss and LAE ratio was 55.7% and 52.1% in 1997 and 1996,
respectively, a 3.6 point increase. On a pro forma basis, as if the Connecticut
Surety reinsurance ceding arrangement on the surety program had occurred at the
beginning of 1996, the GAAP loss and LAE ratio would have been 56.3% in 1996.
This change reflects favorable claims experience primarily in workers
compensation based programs and residual markets. This favorable experience was
somewhat offset by adverse development relating to the run-off of the surety
bond program which added 3.3 points in 1997.

SALARIES AND EMPLOYEE BENEFITS

Salaries and employee benefits increased by $9.5 million, or 34.4%, to
$36.9 million in 1998 compared to $27.4 million in 1997. This increase reflects
additional 1998 salary and employee expenses of $5.2 million from 1998 and full
year 1997 acquisitions and the remaining increase reflects an increase in staff
to handle information technology initiatives and growth in our existing and new
business.

Salaries and employee benefits increased by $2.4 million, or 9.8%, to $27.4
million in 1997 compared to $25.0 million in 1996. This increase reflects
additional 1997 salary and employee expenses of $3.3 million from Crest and ASI,
which was somewhat offset by a reduction in surety department salaries due to
the Connecticut Surety agreement.

18
19
MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

INTEREST EXPENSE

Interest expense for 1998 and 1997 was $2.0 million and $649,000,
respectively. This interest expense relates to the use of the Company's line of
credit. There was no interest expense recorded during 1996. The proceeds from
the line of credit were used to fund the 1998 and 1997 acquisitions, as well as
the stock repurchases in the fourth quarter of 1998.

OTHER OPERATING EXPENSES

Other operating expenses from the non-surety business increased $11.1
million, or 52.8%, to $32.0 million in 1998 from $20.9 million in 1997. This
increase primarily reflects a $1.3 million write-off of uncollectible agency
loans and premium receivables related to discontinued programs, contract service
fees associated with the 1998 technology initiatives, as well as direct
commissions and contingent commissions on risk bearing insurance programs.

Other operating expenses from the non-surety business decreased $1.1
million, or 4.8%, to $20.9 million in 1997 from $22.0 million in 1996. This
decrease reflects a $3.3 million increase in ceding commission on risk sharing
and fronted programs, reduction in technology costs incurred in 1996 and overall
savings in administrative costs related to management's efforts to increase
operating efficiencies. These reductions were offset by incremental costs of
$3.1 million related to 1997 acquisitions.

Other operating expense from the surety business decreased $11.5 million to
($1.4) million in 1997 from $10.1 million in 1996. This decrease reflects the
run-off of the surety business and the increase in ceding commissions.

TAXES

The provision for income taxes was $0.8 million in 1998, $4.3 million in
1997 and $2.2 million in 1996, representing effective tax rates of 11.7%, 25.0%
and 19.9% in 1998, 1997, 1996, respectively. The tax rates were significantly
lower than the 34% corporate rate due to the Company's heavily tax-exempt
investment portfolio.

The decrease in the effective tax rate in 1998 reflects an unusually low
proportion of underwriting and fee based income in relation to net investment
income. The increase in the effective tax rate in 1997 reflects the higher
proportion of underwriting and risk management service income in relation to net
investment income.

LIQUIDITY AND CAPITAL RESOURCES

The principal sources of funds for the Company 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, and other operating
expenses. In addition, the Company has a high volume of intercompany
transactions due to the payment of management fees by the insurance subsidiaries
to the risk management subsidiaries. Such fees are subject to regulatory
approval by state insurance departments.

Cash flow provided by operations for 1998 and 1996 was $10.3 million and
$11.6 million, respectively. This compares to cash used by operations of $1.7
million in 1997. The unusual reduction in cash from operations during 1997
reflects significant written, but uncollected, premiums in the fourth quarter of
1997, the transfer of the surety bond program to Connecticut Surety and the
payment of claims associated with the run-off of the surety bond program. The
Company held $20.5 million in cash and cash equivalents at December 31, 1998.

19
20
MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

The Company has one unsecured line of credit totaling $50.0 million, of
which $38.1 million was outstanding at December 31, 1998. The line expires on
July 1, 2001. The Company drew on this line of credit to meet cash flow needs,
primarily to consummate the acquisitions made during 1997 and 1998.

In addition, a standby letter credit of $3,564,077 had been issued to an
insurance subsidiary of the Company, under an agreement expiring with extensions
granted on a yearly basis. This letter of credit is being used as security for
the insurance subsidiary's obligations under a reinsurance agreement, and is
added to the outstanding balance under the Company's $50.0 million unsecured
line of credit to determine availability of funds under the line.

In addition, one subsidiary had a secured line of credit with a bank which
permits borrowings up to 80% of the accounts receivable which secure the line.
The line expired February 28, 1999 and is automatically renewable each year.
This line bears interest at 1% under the prime rate (prime was 7.75% at December
31, 1998). At December 31, 1998, $2,869,969 was outstanding under this line.

As of December 31, 1998 and 1997, the recorded values of the Company's
investment portfolio, including cash and cash equivalents, were $200.4 million
and $167.3 million, respectively. The Company's investment portfolio consists
primarily of tax-exempt fixed income securities of varying maturities. The
investment portfolio, at December 31, 1998, was 98.1% invested in investment
grade A or above bonds (as defined by S&P). During 1999, the Company expects to
increase its position in equity securities by approximately $10.0 million.

Shareholders' equity was $119.6 million, or $13.80 per common share, at
December 31, 1998, compared to $115.4 million at December 31, 1997, or $13.33
per common share. The increase in shareholders' equity during 1998 reflects
earnings, dividends, stock repurchases and an increase of $0.9 million in the
fair values of available-for-sale debt and equity securities. Changes in
shareholders' equity related to the unrealized values of underlying portfolio
investments will continue to be volatile as market prices of debt securities
fluctuate with changes in the interest rate environment.

A significant portion of the Company's consolidated assets represents
assets of the Company's insurance subsidiaries that may not be transferable to
the holding company in the form of dividends, loans or advances. The restriction
on the transferability to the holding company from its insurance subsidiaries is
limited by Michigan regulatory guidelines which are as follows: The maximum
discretionary dividend that may be declared, based on data from the preceding
calendar year, is the greater of the insurance company's net income (excluding
realized capital gains) OR ten percent of the insurance company's policyholders'
surplus (excluding unrealized gains). These dividends are further limited by a
clause in the Michigan law which prohibits an insurer from declaring dividends
except out of earned surplus earnings of the company. Since Star is the parent
insurance company, its maximum dividend calculation represents the combined
insurance companies. Based upon the 1998 statutory financial statements of Star
Insurance Company, as of January 1, 1999 Star may not pay any dividend to the
Company, without prior approval of the Michigan Commissioner of Insurance. On
December 23, 1998, the Commissioner approved payment of a $5,000,000 dividend to
the Company, which was used to increase the paid in capital and surplus of
Williamsburg. No dividends were paid or returned in 1997 and 1996.

The insurance subsidiaries are required to maintain certain deposits with
regulatory authorities which totaled $24.1 million at December 31, 1998, and
$17.6 million at December 31, 1997.

REGULATORY 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 has recently changed its objective to maintain a gross written
premium to statutory surplus at or below 3 to 1 to at or below 4 to 1. This
change reflects the impact of both the fronting and risk sharing program
business in comparison to the composition of a traditional
20
21
MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

insurer who does not have significant fronting nor risk sharing business. The
traditional insurers do tend to drive industry standards. The Company's target
for net written premium to statutory surplus remains at or below 2 to 1. For
1998, premium leverage ratios were 2.3 to 1 and 1.2 to 1 on a gross and net
premium written 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 to be used as a
tool to identify weakly capitalized companies. At December 31, 1998 and 1997,
Star Insurance Company, the parent insurance company had a RBC ratio that
exceeded applicable risk-based capital requirements. At December 31, 1998 and
1997, Star's statutory surplus was $70.0 million and $68.7 million,
respectively; the threshold requiring regulatory involvement was $12.6 million
in 1998 and $9.2 million in 1997.

REINSURANCE CONSIDERATIONS

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

Reinsurance does not legally discharge an insurer from its primary
liability for the full amount of risks assumed under insurance policies it
issues, but it does make the assuming reinsurer liable to the insurer to the
extent of the reinsurance ceded. Therefore, the Company is subject to credit
risk with respect to the obligations of its reinsurers. In its selection of
reinsurers, the Company evaluates the financial stability of its prospective
reinsurers. To date, the Company has not experienced any material difficulties
in collecting reinsurance recoverables. No assurance can be given, however,
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, 1998:

REINSURANCE PREMIUM CEDED A.M. BEST
REINSURER DECEMBER 31, 1998 RATING
--------- ------------------------- ---------
(IN THOUSANDS)

Evergreen National Indemnity Company....................... $7,854 A-
Employers Reinsurance Corporation.......................... 7,161 A++
Connecticut Surety Group................................... 5,416 Not rated
Risk Capital Reinsurance Company........................... 4,586 A
Scor Reinsurance Company................................... 2,973 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 insurers on the
portion of risk exposure ceded to such captives. The capitalization and credit
worthiness of prospective captive insurers is one of the factors considered by
the Company in entering into and renewing risk-sharing programs. The Company
secures reinsurance balances due from its non-admitted reinsurers through Funds
Withheld Trusts or Letters of Credit.

DEPENDENCE ON KEY PROGRAMS

21
22
MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

programs by the relevant client groups, or the general availability of
commercial market coverage to members of such groups on more favorable terms
than provided under the Company's programs, could have a material adverse effect
on the Company's results of operations. The Company has multiple year contracts
with many of its clients and has maintained retention rates in the mid to high
90% range.

Year 2000 Computer Systems Compliance:

The "Year 2000" issue has come about as a result of computer programs that
were written using two digits rather than four digits to define the year in a
date record. If the Company's computer systems were not Year 2000 compliant,
they may recognize a date using "00" as the year 1900 instead of 2000. This
mistake could result in a system failure or miscalculations causing disruptions
of operations, including, but not limited to, a temporary inability to process
transactions, send policies or invoices or engage in other, similar business
activity.

Projects and State of Readiness:

The company recognized the issues associated with the Year 2000 problem in
1995, and began a series of system replacements and upgrades to address the
problem. Subsequent to the initial assessment of systems, the Company purchased
a number of new entities, many of which had non-compliant systems. These systems
are included in the Company's Year 2000 efforts.

Many of the system replacements and upgrades, provided the Company with
dual purpose benefits in the form of new business functionality and Year 2000
compliance. The Company and each of its operating subsidiaries are in the
process of implementing a Year 2000 Compliance Plan. The Company also created a
corporate level steering committee to guide and monitor Year 2000 readiness.

The Company follows a 5-Step Compliance Plan which consists of the
following steps: i) Investigate and inventory the assets; ii) Analyze the
problems and prioritize; iii) Repair, replace, or retire the asset; iv) Test the
changes at a unit and system level; and, v) Implement into production. Following
this process, the Company has completed major phases by replacing and upgrading
many of its operational systems and processors.

The Company has identified its significant service providers, vendors,
suppliers, customers and governmental entities, and has ascertained their Year
2000 readiness through questionnaires, interviews and visits. The project
recognizes that date sensitive systems may fail at different points in time
depending on their function. For example, forward looking policy systems may
fail earlier and therefore received corrective action sooner. Substantial
numbers of the Company's operational systems are provided by third parties in
either executable form or modifiable form only, and the third parties have
provided Year 2000 replacement code. The Company feels that 80% of its critical
operational systems have been brought into compliance, with 100% compliance
expected by the 3rd Quarter of 1999.

Substantial portions of the Year 2000 project are staffed with the
company's internal resources. The Company has engaged outside contractors to
assist with some Year 2000 problem identification and remediation. The Company
is also engaging an outside contractor to re-assess the corrected systems,
identify problem areas and assist in final testing for Year 2000 compliance. The
Company is developing Departmental Contingency Plans for all critical business
systems. The Company will continue to assess the need for formal contingency
plans, based upon progress of Year 2000 efforts, and results of the final
testing.

Costs:

The total cost associated with required actions necessary to become Year
2000 compliant is not expected to be material to the Company's financial
position. The total estimated cost, from inception, of the necessary activities
is currently estimated at $5.8 million.
22
23
MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

Amounts expended in 1998 include about $1.7 million to outside vendors to
repair, upgrade or replace software and hardware problems and about $2.1 million
in internal costs for planning, assessment and reprogramming incurred in the
Year 2000 effort.

Amounts expected to be spent in 1999 total about $2.0 million, including
about $1.0 million in outside vendor costs and another $1.0 in internal
reprogramming and assessment costs.

Risks and Contingencies:

The Company works on Year 2000 compliance efforts with a priority based
upon their significance to the operations of the Company. Those systems which
are most critical to the Company are the focus of our current efforts. The Year
2000 Project team is aggressively addressing these issues to ensure that all
critical functions operate after the Year 2000. However, some non-critical
systems or systems beyond the control of the Company may potentially suffer some
Y2K-related failures. The Company's efforts are designed to ensure that all of
our critical business systems, and our ability to operate, will not be
significantly effected by the Year 2000 issue.

The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in the Year 2000 issue, resulting in part from the
uncertainty of the Year 2000 readiness of third-party service providers and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results. The Year 2000 Project is expected to significantly reduce the Company's
level of uncertainty about the Year 2000 issue, as well as the readiness of its
external agents. The Company believes that, with the implementation of new
business systems, the remediation efforts, and completion of the Year 2000
Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities" which is effective for fiscal quarters of
all fiscal years beginning after June 15, 1999. SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. As the
Company does not use derivative instruments, the Management of the Company does
not anticipate that the adoption of SFAS 133 will have an effect on the results
of operations or financial position of the Company.

In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3 provides guidance for determining when an
entity should recognize a liability for guaranty-fund and other
insurance-related assessments, how to measure that liability, and when an asset
may be recognized for the recovery of such assessments through premium tax
offsets or policy surcharges. This SOP is effective for financial statements for
fiscal years beginning after December 15, 1998, and the effect of initial
adoption is to be reported as a cumulative catch-up adjustment. Restatement of
previously issued financial statements is not allowed. The Company has not yet
determined the impact that SOP 97-3 will have on its consolidated financial
statements and expects to implement it in 1999.

23
24
MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.

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. Market risk is directly influenced by the volatility and
liquidity in the markets in which the underlying assets are traded. The
following discussion of the Company's primary risk exposures and how those
exposures are currently managed as of December 31, 1998. The Company's market
risk sensitive instruments are limited to debt securities and equity securities
which are available for sale and not held for trading purposes.

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

The fair value of Company's investment portfolio was $180.5 million, 95.6%
of which is invested in debt securities. 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 through
significant investments in tax-exempt bonds. 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, 1997. 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 in
future reporting periods.

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 time going forward 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 100 basis point change in interest
rates to measure the hypothetical change in fair values. Based upon this
sensitivity model, a 100 basis point change in interest rates produces a loss in
fair value of market sensitive instruments of approximately $20.1 million. This
loss in fair value only reflects the impact of interest rate increases on the
fair value of the Company's debt securities, which constitute 39.2% of total
assets. 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.

24
25
MEADOWBROOK INSURANCE GROUP, INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See list of Financial Statement Schedules on page 27

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

25
26
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 has filed 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 caption
"Directors and Executive Officers" of the Company's Proxy Statement relating to
the Annual Meeting of Shareholders to be held on May 17, 1999, which is hereby
incorporated by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is included under the captions
"Executive Compensation", "Report of Compensation Committee on Executive
Compensation" and "Stock Performance Graph" of the Company's Proxy Statement
relating to the Annual Meeting of Shareholders to be held on May 17, 1999, which
are hereby incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is included under the caption
"Security Ownership of Certain Beneficial Owners and Management" of the
Company's Proxy Statement relating to the Annual Meeting of Shareholders to be
held on May 17, 1999, which is hereby incorporated by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

26
27

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

PAGE
1. List of Financial Statements ----

Report of PricewaterhouseCoopers LLP Independent
Accountants 28
Consolidated Balance Sheet -- December 31, 1998 and 1997 29
Consolidated Statement of Income -- For Years Ended
December 31, 1998, 1997 and 1996 30
Consolidated Statement of Comprehensive Income For Years
Ended December 31, 1998, 1997 and 1996 31
Consolidated Statement of Shareholders' Equity -- For
Years Ended December 31, 1998, 1997 and 1996 32
Consolidated Statement of Cash Flows -- For Years Ended
December 31, 1998, 1997 and 1996 33
Notes to Consolidated Financial Statements 34-48

2. Financial Statement Schedule
Schedule II Condensed Financial Information of Registrant 49-51

Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Consolidated Financial Statements and Notes thereto.

3. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedule are filed as part
of, or incorporated by reference into, this Form 10-K.

(B) Reports on Form 8-K

No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1998

27
28

MEADOWBROOK INSURANCE GROUP, INC.

REPORT OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS

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

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

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

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

/s/ Merton J. Segal /s/ Joseph c. Henry
Merton J. Segal Joseph C. Henry
Chairman and Chief Executive Officer Interim Chief Financial Officer and
Office of the President
March 16, 1999 (through January 25, 1999)

To the Board of Directors and Shareholders
Of Meadowbrook Insurance Group, Inc.:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, shareholders'
equity, and cash flows present fairly, in all material respects, the financial
position of Meadowbrook Insurance Group, Inc. and Subsidiaries at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed under Item 14(A)3 of this Form 10-K, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein. These financial statements and financial statement schedule
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 the opinion expressed
above. PricewaterhouseCoopers Signature

March 16, 1999

28
29

MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED BALANCE SHEET

DECEMBER 31,
-------------------------
1998 1997
---- ----
(IN THOUSANDS, EXCEPT
PER SHARE AND RATIO DATA)

ASSETS
Investments
Debt securities available for sale, at fair value (cost of
$167,163 and $137,614 in 1998 and 1997,
respectively).......................................... $172,617 $141,465
Equity securities available for sale, at fair value (cost
of $7,585 and $4,951 in 1998 and 1997, respectively)... 7,898 5,612
Cash and cash equivalents................................. 20,510 20,215
-------- --------
Total investments and cash and cash equivalents... 201,025 167,292
Accrued investment income................................. 2,359 1,767
Premiums and agent balances receivable.................... 63,487 51,132
Reinsurance recoverable on:
Paid losses............................................ 10,912 9,888
Unpaid losses.......................................... 64,590 38,193
Prepaid reinsurance premiums.............................. 36,336 27,231
Deferred policy acquisition costs......................... 8,900 6,609
Deferred federal income taxes............................. 4,144 2,880
Federal income taxes recoverable.......................... 2,095 --
Intangible assets, (less accumulated amortization of
$1,775 and $736 in 1998 and 1997, respectively)........ 22,055 9,637
Other assets.............................................. 24,172 14,013
-------- --------
Total assets...................................... $440,075 $328,642
-------- --------

LIABILITIES AND SHAREHOLDERS EQUITY
Liabilities
Reserve for losses and loss adjustment expenses........... $148,844 $ 98,979
Unearned premiums......................................... 77,948 59,168
Payable to insurance companies............................ 13,747 10,937
Federal income taxes payable.............................. -- 16
Accounts payable and accrued expenses..................... 12,076 7,910
Reinsurance funds held and balances payable............... 20,352 20,108
Other liabilities......................................... 6,588 4,614
Line of credit............................................ 40,953 11,464
-------- --------
Total liabilities................................. 320,508 213,196
-------- --------
Commitments and contingencies (note 12)
Shareholders' Equity
Common stock, $.01 stated value; authorized 20,000,000
shares; 8,663,434 and 8,660,164 shares issued and
outstanding............................................ 87 87
Additional paid-in capital................................ 71,190 72,650
Retained earnings......................................... 45,105 39,731
Note receivable from officer.............................. (661) --
Accumulated other comprehensive income:
Unrealized appreciation on available for sale
securities, net of deferred tax expense of $1,921 and
$1,534 in 1998 and 1997, respectively................. 3,846 2,978
-------- --------
Total shareholders' equity........................ 119,567 115,446
-------- --------
Total liabilities and shareholders' equity........ $440,075 $328,642
======== ========

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

29
30

MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENT OF INCOME

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)

REVENUES
Premiums earned
Gross.................................................. $176,242 $133,314 $116,925
Ceded.................................................. (84,157) (64,821) (32,378)
-------- -------- --------
Net earned................................................ 92,085 68,493 84,547
Net commissions and fees.................................. 32,398 24,360 16,566
Net investment income..................................... 9,579 8,128 8,002
Net realized gains on disposition of investments.......... 52 134 26
Miscellaneous income...................................... -- 10 48
-------- -------- --------
Total Revenues.................................... 134,114 101,125 109,189
-------- -------- --------
EXPENSES
Losses and loss adjustment expenses....................... 118,676 69,289 64,329
Reinsurance recoveries.................................... (61,973) (33,146) (23,064)
-------- -------- --------
Net losses and loss adjustment expenses................... 56,703 36,143 41,265
Salaries and employee benefits............................ 36,856 27,416 24,977
Other operating expenses.................................. 31,931 19,531 32,016
Interest on notes payable................................. 1,979 649 --
Policyholder dividends.................................... -- -- 63
-------- -------- --------
Total Expenses.................................... 127,469 83,739 98,321
-------- -------- --------
Income before taxes............................... 6,645 17,386 10,868
-------- -------- --------
Federal income taxes...................................... 775 4,343 2,162
-------- -------- --------
Net income........................................ $ 5,870 $ 13,043 $ 8,706
======== ======== ========
Earnings Per Share
Basic..................................................... $0.67 $1.51 $1.01
Diluted................................................... $0.65 $1.42 $0.95
Weighted average number of common shares
Basic..................................................... 8,702,768 8,657,677 8,630,150
Diluted................................................... 9,026,180 9,176,754 9,184,272

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

30
31

MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)

Net Income.................................................. $5,870 $13,043 $8,706
Other comprehensive income, net of tax:
Unrealized gains on securities......................... 920 3,252 (7)
Less: reclassification adjustment for gains included in
net income........................................... (52) (134) (25)
------ ------- ------
Other comprehensive income................................ 868 3,118 (32)
------ ------- ------
Comprehensive income...................................... $6,738 $16,161 $8,674
====== ======= ======

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

31
32

MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
-----------------------------------------------------------------------------
ACCUMULATED
ADDITION NOTE OTHER TOTAL
COMMON PAID-IN RETAINED RECEIVABLE COMPREHENSIVE SHAREHOLDERS'
STOCK CAPITAL EARNINGS FROM OFFICER INCOME EQUITY
------ -------- -------- ------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Balances, January 1, 1996........ $86 $72,869 $19,369 $ -- $ (108) $ 92,216
Unrealized depreciation on
available on available for sale
securities..................... -- -- -- (32) (32)
Dividends declared at $0.08 per
share.......................... -- -- (691) -- (691)
Issuance of 45,608 shares of
common stock................... 1 318 -- -- 319
Retirement of 16,178 shares of
common stock................... -- (467) (3) -- (470)
Tax benefit of stock option
exercises...................... -- 374 -- -- 374
Initial public
offering -- additional
expenses....................... -- (221) -- -- (221)
Net income....................... -- -- 8,706 -- 8,706
--- ------- ------- ----- ------ --------
Balances, December 31, 1996...... 87 72,873 27,381 -- (140) 100,201
Unrealized appreciation on
available for sale
securities..................... -- -- -- 3,118 3,118
Dividends declared at $0.08 per
share.......................... -- -- (693) -- (693)
Issuance of 35,409 shares of
common stock................... -- 241 -- -- 241
Retirement of 24,591 shares of
common stock................... -- (575) -- -- (575)
Tax benefit of stock option
exercises...................... -- 111 -- -- 111
Net income....................... -- -- 13,043 -- 13,043
--- ------- ------- ----- ------ --------
Balances, December 31, 1997...... 87 72,650 39,731 -- 2,978 115,446
Unrealized appreciation on
available for sale
securities..................... -- -- -- 868 868
Dividends declares at $0.10 per
share.......................... -- -- (871) -- (871)
Issuance of 202,266 shares of
common stock................... 2 2,077 -- -- 2,079
Retirement of 198,996 shares of
common stock................... (2) (4,546) 375 -- (4,173)
Tax benefit of stock option
exercises...................... -- 1,009 -- -- 1,009
Note receivable from officer..... (661) (661)
Net income....................... -- -- 5,870 -- 5,870
--- ------- ------- ----- ------ --------
Balances, December 31, 1998...... $87 $71,190 $45,105 $(661) $3,846 $119,567
=== ======= ======= ===== ====== ========

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

32
33

MEADOWBROOK INSURANCE GROUP, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)

Net Income.................................................. $ 5,870 $ 13,043 $ 8,706
-------- -------- --------
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization of intangible assets....................... 1,039 423 153
Depreciation of furniture and equipment................. 2,332 2,391 1,360
Net accretion of discount on bonds...................... (85) (192) (232)
Gain on sale of investments............................. (52) (493) (25)
Deferred income tax (benefit) expense................... (897) 2,229 (1,360)
Changes in operating assets and liabilities:
Decrease (increase) in:
Accrued investment income............................... (593) 44 (428)
Premiums and agent balances receivable.................. (5,204) (22,723) 4,027
Reinsurance recoverable on paid and unpaid losses....... (26,644) (14,793) (7,705)
Prepaid reinsurance premiums............................ (9,105) (6,960) (10,444)
Deferred policy acquisition costs....................... (1,191) (1,866) 4,799
Other assets............................................ (2,265) 1,000 2,773
Increase (decrease) in:
Losses and loss adjustment expenses..................... 36,587 5,036 5,404
Unearned premiums....................................... 10,770 12,956 (302)
Federal income taxes payable............................ (1,029) (1,591) 1,346
Accounts payable and accrued expenses................... 2,980 24 348
Insurance company payable............................... 2,809 2,382 (926)
Reinsurance funds held and balances payable............. 189 17,091 (1,311)
Other liabilities....................................... (5,195) (9,734) 5,403
-------- -------- --------
Total Adjustments..................................... 4,446 (14,776) 2,880
-------- -------- --------
Net cash provided by (used in) operating activities..... 10,316 (1,733) 11,586
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity securities available for sale........ (3,139) (3,866) (64)
Purchase of debt securities available for sale.......... (61,763) (25,927) (17,276)
Purchase of debt securities held to maturity............ -- -- (26,419)
Proceeds from sale of equity securities available for
sale.................................................. 473 461 723
Proceeds from sale of debt securities available for
sale.................................................. 32,382 28,367 1,185
Proceeds from maturity of securities held to maturity... -- 4,611 11,662
Capital expenditures.................................... (8,058) (3,428) (2,524)
Purchase of subsidiary.................................. (18,921) (7,821) (887)
Net cash of acquired subsidiaries....................... 23,019 -- --
-------- -------- --------
Net cash used in investing activities................. (36,007) (7,603) (33,600)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit........................... 51,947 30,410 --
Payment on lines of credit.............................. (22,459) (18,946) --
Use of initial public offering proceeds................. -- -- (221)
Dividends paid on common stock.......................... (782) (692) (518)
Retirement of common stock.............................. (2,720) (223) (470)
Issuance of common stock................................ -- -- 318
-------- -------- --------
Net cash provided by (used in) financing activities... 25,986 10,549 (891)
-------- -------- --------
Increase (decrease) in cash and cash equivalents........ 295 1,213 (22,905)
Cash and cash equivalents, beginning of year............ 20,215 19,002 41,907
Cash and cash equivalents, end of year.................. $ 20,510 $ 20,215 $ 19,002
-------- -------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................... $ 1,979 $ 644 $ 22
Income taxes paid, net of refund........................ $ 2,430 $ 3,705 $ 2,089
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued for net non cash assets of acquired
subsidiary............................................ 1,120
Tax benefit from stock options.......................... $ 1,009 $ 111 $ 375
Note receivable from officer for issuance of stock...... $ 330 -- --

The accompanying notes are an integral part of the Consolidated Financial
Statements.
33
34

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 financial statements consolidate the accounts and operations of the
Company and its subsidiaries all of which are wholly owned, after elimination of
all intercompany accounts and transactions.

BUSINESS

The Company, through its subsidiaries, is engaged primarily in developing
and managing Alternative Market risk management programs for defined client
groups and their members. This includes providing services, such as reinsurance
brokering, risk management consulting, claims handling, administrative services,
along with various types of property and casualty insurance coverage, including
workers' compensation, general liability and commercial multiple peril. The
Company also operates insurance agencies which places principally commercial
insurance as well as personal property, casualty, life and accident and health
insurance with multiple insurance carriers. The Company does not have
significant exposures to environmental/asbestos and catastrophic coverages.
Insurance coverage is primarily provided to associations or similar groups of
members, commonly referred to as programs. Four programs accounted for 37.7%,
46.0%, and 37.1% of the Company's premium revenue in 1998, 1997 and 1996,
respectively. The net earned premium of the largest program in each respective
year represented 12.3%, 14.7% and 11.7% of the Company's premium revenues in
1998, 1997 and 1996, respectively.

USE OF ESTIMATES

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

INVESTMENTS

Trading securities are investments which are purchased with the intent of
selling them in the near future. Trading securities are reported at fair value,
with changes in the fair value included in earnings. The Company does not hold
any trading securities as of December 31, 1998 and 1997. Held to maturity
securities are those securities that the Company has both the intent and ability
to hold to maturity, and are reported at amortized cost. There were no held to
maturity debt securities as of December 31, 1998 and 1997. Available for sale
securities are those securities that do not meet the requirements of the trading
or held to maturity categories. Investments are classified as available for sale
securities in order to be available to be sold in the future in response to the
Company's liquidity needs, changes in market interest rates, and asset-liability
management strategies, among other reasons. Available for sale securities are
reported at fair value, with unrealized gains and losses reported in accumulated
other comprehensive income component of shareholders' equity, net of deferred
taxes. The Company's investment securities at December 31, 1998 and 1997 are
classified as available for sale.
34
35
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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

CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand and highly liquid
short-term investments. The Company considers all short-term investments
purchased with a maturity of three months or less at the time of acquisition to
be cash equivalents.

DEFERRED POLICY ACQUISITION COSTS

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

FURNITURE AND EQUIPMENT

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

INTANGIBLE ASSETS

Goodwill resulting from acquisitions is amortized on a straight-line basis
over 20 years. Other intangibles are amortized on a straight-line basis over 3
to 5 years.

Annually, the Company evaluates the net carrying value of goodwill to
determine if there has been any impairment in value. The methodology used for
this evaluation entails review of annual operating performance along with
anticipated results for the ensuing year based on operating budgets. At December
31, 1998 the Company concluded that there had been no impairment in the net
carrying value of goodwill.

LOSSES AND LOSS ADJUSTMENT EXPENSES

The liability for losses and loss adjustment expenses ("LAE") represents
(1) case basis estimates of reported losses and LAE on direct business, (2)
estimates received from ceding reinsurers on assumed business and (3) actuarial
estimates of incurred but not reported losses and LAE. 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. The methods for making such estimates and for establishing
the resulting reserves are continually reviewed and updated.

REVENUE RECOGNITION

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

35
36
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Commission and fee income is recorded on the later of the effective date or
the billing date of the policies on which it was earned.

The Company occasionally guarantees the financing of policies it writes. No
material premium financing guarantees were in effect at December 31, 1998.

The majority of claims processing fees are recognized as revenue over the
estimated life of the claims. For those contracts that provide services beyond
the contractually defined termination date of the related contracts, fees are
deferred in an amount equal to management's estimate of the Company's obligation
to continue to provide services.

INCOME TAXES

The Company accounts for its income taxes under Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires the asset and liability method of recording income taxes. Under the
asset and liability method, deferred federal income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates to differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities.

STOCK OPTIONS

Compensation expense, if any, resulting from stock options granted by the
Company is determined based on the difference between the exercise price and the
fair market value of the underlying common stock at the date of grant.

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 included the
weighted average number of common shares and potential dilution from shares
issuable pursuant to stock options using the treasury stock method. Shares
issuable pursuant to stock options included in diluted earnings per share are
323,412, 519,077 and 554,122 for the years ended December 31, 1998, 1997, and
1996, respectively. In addition, stock options were outstanding to purchase
60,770 shares of common stock in 1998 and 63,280 shares in 1997 and 1996 at a
weighted average price per share of $30.45. These shares were not included in
the computation of diluted earnings per share as they were anti-dilutive.

RECLASSIFICATIONS

Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform with the 1998 presentation.

36
37
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

2. INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS

The estimated fair value of investments in securities is determined based
on published market quotations. Due to the short-term nature of other financial
instruments such as cash equivalents, accrued investment income, premiums and
agent balances receivable, reinsurance receivables and payables and other
accounts payable. carrying value approximates fair value. Based on the borrowing
rates available to the Company, the carrying value of the line of credit
approximated fair value as of December 31, 1998 and 1997. The cost or amortized
cost and estimated fair values of investments in securities at December 31, 1998
and 1997 are as follows (in thousands):

DECEMBER 31, 1998
--------------------------------------------------------
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE FOR SALE COST GAINS LOSSES VALUE
----------------------------- --------- ---------- ---------- ---------

DEBT SECURITIES:
Debt securities issued by the U.S. government and
agencies....................................... $ 5,572 $ 388 $ (6) $ 5,954
Obligations of states and political
subdivisions................................... 150,989 5,245 (251) 155,983
Corporate securities............................. 5,438 53 (56) 5,435
Mortgage-backed securities....................... 5,164 86 (5) 5,245
-------- ------ ------ --------
Total Debt Securities available for sale.... 167,163 5,772 (318) 172,617
EQUITY SECURITIES:
Preferred Stocks................................. 6,222 269 (1) 6,490
Common Stocks.................................... 1,363 89 (44) 1,408
-------- ------ ------ --------
Total Equity securities available for
sale...................................... 7,585 358 (45) 7,898
-------- ------ ------ --------
Total Securities available for sale.... $174,748 $6,130 $ (363) $180,515
======== ====== ====== ========

DECEMBER 31, 1997
--------------------------------------------------------
COST OR GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
SECURITIES AVAILABLE FOR SALE COST GAINS LOSSES VALUE
----------------------------- --------- ---------- ---------- ---------

DEBT SECURITIES:
Debt securities issued by the U.S. government and
agencies....................................... $ 9,997 $ 226 $ (68) $ 10,155
Obligations of states and political
subdivisions................................... 116,811 3,752 (127) 120,436
Corporate securities............................. 3,587 21 (60) 3,548
Mortgage-backed securities....................... 7,219 138 (31) 7,326
-------- ------ ----- --------
Total Debt Securities available for sale.... 137,614 4,137 (286) 141,465
EQUITY SECURITIES:
Preferred Stocks................................. 3,542 277 -- 3,819
Common Stocks.................................... 1,409 466 (82) 1,793
-------- ------ ----- --------
Total Equity securities available for
sale...................................... 4,951 743 (82) 5,612
-------- ------ ----- --------
Total Securities available for sale.... $142,565 $4,880 $(368) $147,077
======== ====== ===== ========

37
38
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,
-------------------
1998 1997
---- ----

Unrealized appreciation..................................... $6,130 $4,880
Unrealized depreciation..................................... (363) (368)
------ ------
Net unrealized appreciation................................. 5,767 4,512
Deferred federal income taxes............................... (1,921) (1,534)
------ ------
Net unrealized appreciation on investments, net of deferred
federal income taxes...................................... $3,846 $2,978
====== ======

The gross change, before tax (expense)/benefit, in unrealized
appreciation/(depreciation), on available for sale debt securities was
$1,726,947 for 1998, $3,922,161 for 1997, and ($70,323) for 1996. The gross
change in unrealized appreciation/(depreciation) on available for sale equity
securities was ($472,877), $802,712, and $21,288 in 1998, 1997 and 1996,
respectively. The unrecorded change in market value over book value on held to
maturity debt securities was ($172,092) for 1996. There were no held to maturity
debt securities at December 31, 1998 and 1997.

The realized gains (losses) on the sale of available for sale debt
securities and equity securities for the year ended December 31, 1998 were
$103,964 and ($52,356), respectively. The proceeds from these sales were $32.3
million and $3.6 million, respectively.

The realized gains (losses) on the sale of available for sale debt
securities and equity securities for the year ended December 31, 1997 were
$510,659 and ($377,110), respectively. The proceeds from these sales were $19.4
million and $0.5 million, respectively.

The amortized cost and estimated fair value of available for sale debt
securities at December 31, 1998, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because certain
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties (in thousands):

AVAILABLE FOR SALE
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------

Due in one year or less..................................... $ 7,550 $ 7,622
Due after one year through five years....................... 45,251 46,925
Due after five years through ten years...................... 61,133 63,885
Due after ten years......................................... 48,064 48,940
Mortgage-backed securities.................................. 5,165 5,245
-------- --------
$167,163 $172,617
======== ========

38
39
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

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

1998 1997 1996
---- ---- ----

INVESTMENT INCOME ON:
Debt securities............................................. $7,658 $7,154 $6,475
Equity securities........................................... 295 246 121
Cash and cash equivalents................................... 1,998 1,070 1,706
------ ------ ------
Total gross investment income............................... 9,951 8,470 8,302
Less investment expenses.................................... 372 342 300
------ ------ ------
Net investment income....................................... $9,579 $8,128 $8,002
====== ====== ======

United States government obligations, municipal bonds, and bank
certificates of deposit aggregating $24,100,861 and $17,628,773 were on deposit
with state regulatory authorities as required by law at December 31, 1998 and
1997, respectively.

3. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company regularly updates its reserve estimates as new information
becomes available and further events occur which 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,
------------------------------
1998 1997 1996
---- ---- ----

Balance, beginning of year.................................. $ 98,979 $92,390 $86,986
Less reinsurance recoverables............................... 38,193 26,615 22,318
-------- ------- -------
Net balance, beginning of year.............................. 60,786 65,775 64,668
-------- ------- -------
Total acquired reserves..................................... 13,277 1,552 --
Incurred related to:
Current year.............................................. 48,477 34,908 40,875
Prior years............................................... 8,226 1,235 390
-------- ------- -------
Total incurred.............................................. 56,703 36,143 41,265
-------- ------- -------
Paid related to:
Current year.............................................. 15,144 11,058 16,754
Prior years............................................... 31,368 31,626 23,404
-------- ------- -------
Total paid.................................................. 46,512 42,684 40,158
-------- ------- -------
Net balance, end of year.................................... 84,254 60,786 65,775
Plus reinsurance recoverables............................. 64,590 38,193 26,615
-------- ------- -------
Balance, end of year........................................ $148,844 $98,979 $92,390
======== ======= =======

As a result of unfavorable development in estimates of prior accident
years' reserves, the provision for losses and loss adjustment expenses increased
by $8,226,000, $1,235,000 and $390,000 in 1998, 1997 and 1996, respectively.

The 1997 year-end net Surety reserves were shown to be $1.6 million dollars
deficient by year-end 1998. More conservative estimates of non-contract surety
recoveries were used in 1998. The Company does not expect this net deficiency to
continue in the future because the number of open surety claims is minimal

39
40
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

relative to prior years and most open contract claims have exceeded Star
Insurance Company's net retention limits. The remaining deficiency on the 1997
reserves was due to certain isolated programs including professional liability
for two distinct professions, and two workers compensation programs.

The gross loss and LAE deficiency on 1997 and 1996 reserves was mostly due
to the adverse development and IBNR strengthening on the Star fronted business
for Connecticut Surety. Gross surety reserves established at December 31, 1998
are stronger relative to reserves established in 1997 and 1996 because higher
expected loss ratios were assumed in 1998. The remaining gross deficiency was
related to the same programs mentioned previously relating to the net
deficiency.

4. REINSURANCE

The insurance subsidiaries cede insurance to other insurers under pro rata
and excess-of-loss contracts. These reinsurance arrangements diversify the
Company's business and minimize its losses arising from large risks or from
hazards of an unusual nature. The ceding of insurance does not discharge the
original insurer from its primary liability to its policyholder, and in the
event that all or any of the reinsuring companies are unable to meet their
obligations under existing reinsurance agreements, the subsidiaries would be
liable for such defaulted amounts. Therefore the Company is subject to 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 $33,288,731, $22,168,969 and $14,843,140 in 1998, 1997, and
1996, respectively.

Reconciliations of direct to net premiums, on both written and earned
bases, for 1998, 1997, and 1996 are as follows (in thousands):

1998 1997 1996
-------------------- -------------------- --------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
------- ------ ------- ------ ------- ------

Direct............... $168,729 $160,155 $133,477 $118,980 $112,279 $113,875
Assumed.............. 17,603 16,087 13,262 14,334 3,301 3,050
Ceded................ (92,851) (84,157) (71,774) (64,821) (42,822) (32,378)
-------- -------- -------- -------- -------- --------
Net.................. $ 93,481 $ 92,085 $ 74,965 $ 68,493 $ 72,758 $ 84,547
======== ======== ======== ======== ======== ========

One reinsurer accounts for 14.7 % of ceded premiums in 1998.

40
41
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

5. DEFERRED POLICY ACQUISITION COSTS

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

FOR THE YEARS ENDED DECEMBER 31:
---------------------------------
1998 1997 1996
---- ---- ----

Balance, beginning of period.................. $ 6,609 $ 4,265 $ 9,064
Acquisition costs deferred.................... 10,673 8,374 7,036
Amortized to expense during the period........ (8,382) (6,030) (11,835)
------- ------- --------
Balance, end of period........................ 8,900 $ 6,609 $ 4,265
======= ======= ========

6. INCOME TAXES

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

FOR THE YEARS ENDED DECEMBER 31:
-------------------------------------
1998 1997 1996
---- ---- ----

Current tax expense........................... $1,227 $2,114 $ 3,523
Deferred tax expense/(benefit)................ (452) 2,229 (1,361)
------ ------ -------
Total provision for income taxes.............. $ 775 $4,343 $ 2,162
====== ====== =======

A reconciliation of the Company's tax provision on income from operations
to the U.S. federal income tax rate of 34% in 1998, 1997, and 1996 is as follows
(in thousands):

FOR THE YEARS ENDED DECEMBER 31
---------------------------------------
1998 1997 1996
---- ---- ----

Tax provision at statutory rate.............. $ 2,259 $ 5,911 $ 3,695
Tax effect of:
Tax exempt interest........................ (1,814) (1,658) (1,566)
Other, net................................. 330 90 33
------- ------- -------
Federal income tax expense................... $ 775 $ 4,343 $ 2,162
======= ======= =======
Effective tax rate........................... 11.7% 25.0% 19.9%
======= ======= =======

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

41
42
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

The components of deferred tax assets and liabilities as of December 31,
1998 and 1997 are as follows (in thousands):

1998 1997
----------------------- -----------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------

Unpaid losses and loss adjustment expenses.............. $5,532 $ -- $4,263 $ --
Unearned premium reserves............................... 2,628 -- 1,976 --
Unrealized gains on investments......................... -- 1,921 -- 1,534
Deferred policy acquisition expense..................... -- 3,001 -- 2,247
Deferred compensation................................... 422 -- 391 --
Deferred fee recognition................................ 406 -- 385 --
Other................................................... 881 803 150 504
------ ------ ------ ------
Total deferred taxes............................... 9,869 5,725 7,165 4,285
------ ------ ------ ------
Net deferred tax assets............................ $4,144 $2,880
====== ======

Other deferred tax assets include approximately $578,000 in alternative
minimum tax ("AMT") credits available to reduce future regular tax liabilities.

7. LINES OF CREDIT AND LETTERS OF CREDIT

At December 31, 1998, the Company and its subsidiaries had one unsecured
line of credit with a bank which permits borrowings up to $50,000,000 and
expires on and is payable by July 1, 2001. This line bears interest at one
percent under the prime rate (prime was 7.75% at December 31, 1998). The Company
also has the option to elect a eurodollar based rate in place of prime. At
December 31, 1998, $38,082,357 was outstanding under this line.

As of December 31, 1998, a standby letter of credit of $11,650,000 had been
issued by a bank to an insurance subsidiary of the Company, under an agreement
expiring June 30, 1999, with extensions granted on a yearly basis. This letter
of credit is being utilized as security for a surety bond filed with one state.
This bond was filed as a requirement for writing workers compensation business
in that state. The letter of credit is collateralized by specifically identified
marketable securities of the subsidiary, with a total fair market value of 110%
of the $11,650,000 letter of credit.

8. SHAREHOLDERS' EQUITY

42
43
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

declared, based on data from the preceding calendar year, is the greater of the
insurance company's net income (excluding realized capital gains) OR ten percent
of the insurance company's policyholders' surplus (excluding unrealized gains).
These dividends are further limited by a clause in the Michigan law which
prohibits an insurer from declaring dividends except out of earned surplus
earnings of the company. Since Star is the parent insurance company, its maximum
dividend calculation represents the combined insurance companies. Based upon the
1998 statutory financial statements of Star Insurance Company, as of January 1,
1999 Star may not pay any dividend to the Company, without prior approval of the
Michigan Commissioner of Insurance. During 1998, a $5,000,000 dividend was paid
to the Company by Star with the approval of the Michigan Insurance Department.
No dividends were paid or returned in 1997 and 1996.

Summarized 1998 and 1997 statutory basis information for the primary
insurance subsidiaries, which differs from generally accepted accounting
principles, follows (in thousands):

1998 1997
---------------------------------- ------------------
STAR SAVERS WILLIAMSBURG STAR SAVERS
---- ------ ------------ ---- ------

Statutory capital and surplus............... $68,691 $26,175 $10,880 $70,051 $21,778
Minimum statutory capital and surplus....... 5,000 20,000 2,600 5,000 20,000
Statutory net income........................ (2,492) 3,173 2,008 8,274 4,175
Net investment income....................... 4,366 2,986 514 6,760 2,978

The net investment income and statutory net income in 1996 for Star were
$4,810,325 and $7,503,071, respectively, and for Savers were $2,380,230 and
$3,920,747 respectively.

The statutory capital and surplus, at December 31, 1997 and net investment
income and statutory net income since the date of acquisition July 1, 1997 for
Williamsburg were $6,372,522, $257,914 and $400,884, respectively.

The statutory capital and surplus, at December 31, 1997 and net investment
income and statutory net income since the date of acquisition July 31, 1998 for
Ameritrust were $9,984,045, $533,276 and $4,148,418, respectively.

9. STOCK OPTIONS

The Company, through its 1995 Stock Option Plan ("the Plan"), may grant
options to key executives of the Company and its subsidiaries of up to 2,000,000
shares of the Company's common stock. The Plan is administered by a committee
(the "Committee") appointed by the Board of Directors. Option shares may be
exercised subject to the terms of the Plan and the terms prescribed by the
Committee at the time of grant. Currently, the Plan's options have either five
or ten year terms and are exercisable/vest in equal increments over the option
term.

Effective for December 31, 1996 year-end financial statements, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation."
This standard permits the Company to adopt the SFAS No. 123 fair value based
method of accounting for stock based compensation plans or to continue to apply
the valuation provisions of existing accounting standards (APB No. 25). The
Company has elected to continue measuring compensation expense under APB No. 25
and has adopted the disclosure requirements of SFAS No. 123. If compensation
cost for stock option grants had been determined based on the fair value method
prescribed by

43
44
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

SFAS No. 123, net income and earnings per share on a pro forma basis for 1998,
1997 and 1996 would be as follows (in thousands):

1998 1997 1996
---- ---- ----

Reported net income......................................... $5,870 $13,043 $8,706
Pro forma net income, using SFAS No. 123.................... $5,529 $12,785 $8,635
Earnings per share, diluted:
Reported.................................................. $ 0.65 $ 1.42 $ 0.95
Pro forma, using SFAS No. 123............................. $ 0.61 $ 1.39 $ 0.94

The Black-Scholes valuation model utilized the following annualized
assumptions for all applicable years: Risk-free interest rate of 5.25%, 6.25%
and 6.5% for 1998, 1997 and 1996, respectively. The dividend yield of $0.12 per
share in 1998 and $0.08 per share in 1997 and 1996, and volatility factor for
the expected market price of the Company's common stock of 0.323, 0.243 and
0.237 in 1998, 1997 and 1996, respectively. The weighted-average expected life
of options for the 1998, 1997 and 1996 grants are 7.5, 7.5 and 7.61,
respectively.

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

1998 1997 1996
--------------------- --------------------- -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- --------- ------- --------- ------- ---------

Outstanding -- beginning of
year............................ 1,020,144 $13.04 953,799 $11.78 949,434 $10.28
Exchange of existing options...... -- -- -- -- --
Granted........................... 203,800 24.69 101,754 22.71 63,280 30.45
Exercised......................... (168,833) 5.68 (35,409) 6.82 (45,524) 7.00
Forfeited......................... (18,831) 24.70 -- (13,391) 10.25
--------- ------ --------- ------ ------- ------
Outstanding -- end of year........ 1,036,280 $16.38 1,020,144 $13.04 953,799 $11.78
========= ====== ========= ====== ======= ======
Exercisable at end of year........ 396,956 $14.68 442,829 $10.65 326,017 $ 9.03
Weighted-average fair value of
options granted during the
year............................ $ 9.77 -- $ 7.30 -- $ 7.65 --

The following table summarizes information about stock options outstanding
at December 31, 1998:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ -------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
RANGE OF REMAINING EXERCISE EXERCISE
EXERCISE PRICES OPTIONS LIFE (YEARS) PRICE OPTIONS PRICE
--------------- ------- ------------ --------- ------- ---------

$5.10 to $8.11............................. 348,799 3.0 $ 6.73 160,366 $ 6.39
$10.25 to $12.17........................... 133,900 6.1 11.10 49,093 11.65
$21.00 to $30.45........................... 553,581 8.5 23.32 187,497 22.57
--------- --- ------ ------- ------
1,036,280 5.9 $16.38 396,956 $14.68
========= === ====== ======= ======

No compensation cost has been recorded for stock option grants issued
during 1998, 1997 and 1996, as the market value equaled the exercise price at
the date of grant.

10. ACQUISITIONS

The Company has completed several acquisitions all of which have been
accounted for as a purchase.
44
45
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

On April 30, 1998, the Company acquired the business of Villari, at a
purchase price of $5.6 million comprised of $4.5 million in cash and 33,433
shares of common stock, resulting in goodwill of $5.6 million. Villari is a
Florida-based insurance agency which offers professional liability products and
programs, group health and disability, and property -- casualty products.

On July 31, 1998, the Company acquired Florida Preferred and Ameritrust, at
a purchase price of $12.3 million, resulting in goodwill of $7.0 million.
Florida Preferred, a Florida based third party administrator, provides a broad
range of risk management services to purchasers of workers' compensation
insurance from Ameritrust as well as other insurance carriers.

On July 1, 1997, the Company acquired Crest, at a purchase price of $9.4
million, resulting in $3.2 million of goodwill. Crest is a California based
holding company which holds 100% of Williamsburg, an insurance carrier, and
Crest Financial Services, a risk management service company. Crest provides
these services primarily to the trucking industry within California.

The following pro forma financial information reflects the 1997 and 1998
acquisitions as if they had been completed as of January 1, 1997 (unaudited).

FOR YEARS ENDED
DECEMBER 31,
----------------------
1998 1997
---- ----
(IN THOUSANDS EXCEPT
PER SHARE DATA)

Revenues.................................................... $149,282 $125,700
Net income.................................................. 6,460 13,492
Earnings per share, diluted................................. $ 0.72 $ 1.47

On November 5, 1996, the Company acquired ASI of Alabama at a purchase
price of $5.2 million, resulting in $5.2 million of goodwill. The purchase price
was subject to reduction, contingent on a specific contract renewal. The effect
of the acquisition was not material to the Company's results of operations.

11. EMPLOYEE BENEFIT PLANS

Company employees over the age of 21 who have completed 12 months of
service and worked at least 1,000 hours during those 12 months are eligible for
participation in Meadowbrook's 401(K) Profit Sharing Plan. The plan provides for
discretionary matching contributions and/or profit sharing contributions at the
discretion of the Board of Directors. In 1998, 1997 and 1996, the matching
contributions were $381,532, $357,542 and $295,671, respectively. Profit sharing
contributions were $424,459 in 1996. There were no profit sharing contributions
in 1998 and 1997.

12. COMMITMENTS AND CONTINGENCIES

The Company has certain operating lease agreements for its offices and
equipment. At December 31, 1998, future minimum rental payments required under
non-cancelable long-term operating leases are as follows (in thousands):

1999........................................................ $ 2,853
2000........................................................ 2,794
2001........................................................ 2,156
2002........................................................ 1,724
2003........................................................ 1,571
Thereafter.................................................. 1,063
-------
Total minimum lease commitments........................ $12,161
=======

45
46
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

Rent expense for the year ended December 31, 1998, 1997, and 1996 amounted
to $2,536,713, $1,972,044, and $1,480,000, respectively.

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. Equitable claims of Meadowbrook
and Star and the Individual Plaintiffs have not yet been resolved by the Court.
It is not expected that the outcome of this litigation will have a material
impact on the financial condition of the Company.

A Final Judgment will be entered with the Court, which is subject to
appeal.

13. RELATED PARTY TRANSACTIONS:

At December 31, 1998, the Company held a $661,000 note receivable from an
officer/director. This note arose from a transaction in late 1998 whereby the
Company loaned the officer/director funds to exercise 64,718 common stock
options to cover the exercise price and associated tax withholdings. The note
provided for interest at the Company's borrowing rate which was 7.75% at
December 31, 1998. The note is due on demand on or after January 1, 2002. The
loan is collateralized by 64,718 shares of the Company's common stock, pursuant
to a stock pledge Agreement.

14. SEGMENT INFORMATION:

Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information". Upon adoption, the Company defined its operations as
agency operations and program business operations based upon differences in
products and services. The separate financial information of these segments is
consistent with the way results are regularly evaluated by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Intersegment revenue is eliminated in consolidation.

AGENCY OPERATIONS

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

46
47
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

PROGRAM BUSINESS

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

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

FOR THE YEARS ENDED
DECEMBER 31, 1998
---------------------------
1998 1997 1996
---- ---- ----

Revenues
Net earned premiums....................................... 92,085 68,493 84,547
Management fees........................................... 18,121 15,786 11,752
Investment income......................................... 9,620 8,248 7,800
------- ------- -------
Program business.......................................... 119,826 92,527 104,099
Agency operations......................................... 14,713 10,666 6,600
Reconciling items......................................... 11 24 276
Intersegment revenue...................................... (436) (2,092) (1,786)
------- ------- -------
Consolidated revenue...................................... 134,114 101,125 109,189
======= ======= =======
Pre-tax income
Program business.......................................... 5,591 16,068 8,715
Agency operations......................................... 2,475 2,153 2,228
Reconciling items......................................... (1,421) (835) (75)
------- ------- -------
Consolidated pre-tax income............................... 6,645 17,386 10,868
======= ======= =======

The pre-tax income reconciling items represent other expenses relating to
the holding company which are not allocated among the segments.

47
48
MEADOWBROOK INSURANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED

15. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following is a summary of unaudited quarterly results of operations for
1998 and 1997 (in thousands, except per share and ratio data):

1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------

1998:
Gross written premium................................... $41,883 $51,072 $42,528 $50,849
Net written premium..................................... 21,144 20,790 22,690 28,857
Net earned premium...................................... 19,063 20,950 23,785 28,287
Net commissions and fees................................ 7,758 8,521 7,460 8,659
Net investment income and realized gains/losses......... 2,115 2,370 2,531 2,615
Net losses and LAE incurred............................. 10,367 11,133 19,574* 15,629
Policy acquisition and other expenses................... 6,258 6,723 10,306 10,623
Net income.............................................. 3,284 3,862 (3,566) 2,290
Earnings per share...................................... $ 0.36 $ 0.42 $ (0.39) $ 0.26
Dividends declared per share............................ $ 0.02 $ 0.02 $ 0.03 $ 0.03
GAAP combined ratio..................................... 91.7% 90.0% 120.4% 90.0%
1997:
Gross written premium................................... $32,990 $30,558 $33,347 $49,844
Net written premium..................................... 18,256 16,246 16,178 24,285
Net earned premium...................................... 14,791 16,963 17,150 19,589
Net commissions and fees................................ 5,640 5,406 7,166 6,148
Net investment income and realized gains/losses......... 1,947 2,031 2,056 2,228
Net losses and LAE incurred............................. 7,879 11,253 8,400 8,611
Policy acquisition and other expenses................... 4,329 2,189 6,725 6,937
Net income.............................................. 2,973 3,495 3,178 3,397
Earnings per share...................................... $ 0.33 $ 0.38 $ 0.35 $ 0.37
Dividends declared per share............................ $ 0.02 $ 0.02 $ 0.02 $ 0.02
GAAP combined ratio..................................... 88.1% 89.4% 89.9% 91.3%

- - -------------------------
* Includes reserve strengthening of $7.3 million.

48
49

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY

INCOME STATEMENT

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
---- ---- ----

Revenue................................................ $ 11,131 $ 23,970 $ 275,740
Operating expenses:
Interest expense....................................... 745,393 370,875 --
Other expenses......................................... 686,858 488,274 350,849
----------- ----------- ----------
Total Operating Expenses............................... 1,432,251 859,149 350,849
----------- ----------- ----------
Loss before federal income taxes and subsidiary equity
earnings............................................. (1,421,120) (835,179) (75,109)
Federal income tax benefit............................. (405,093) (293,955) (41,940)
----------- ----------- ----------
Net loss before subsidiary equity earnings............. (1,016,027) (541,224) (33,169)
----------- ----------- ----------
Subsidiary equity earnings............................. 6,885,996 13,583,680 8,739,193
----------- ----------- ----------
Net Income............................................. $ 5,869,969 $13,042,456 $8,706,024
=========== =========== ==========

SCHEDULE II

MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY

STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
---- ---- ----
(IN THOUSANDS)

Net Income............................................ $5,869,969 $13,042,456 $8,706,024
Other comprehensive income, net of tax:
Unrealized gains on securities................... 919,075 3,251,964 (7,009)
Less: reclassification adjustment for gains
included in net income......................... (51,608) (133,549) (25,354)
---------- ----------- ----------
Other comprehensive income.......................... 867,467 3,118,415 (32,363)
Comprehensive income................................ $6,737,436 $16,160,871 $8,673,661
========== =========== ==========

49
50

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY

BALANCE SHEET

AS OF DECEMBER 31,
----------------------------
1998 1997
---- ----

ASSETS
Cash and cash equivalents................................... $ 132,545 $ 64,996
Investment in subsidiaries.................................. 119,961,423 114,837,287
Receivables from subsidiaries............................... 7,580,275 6,894,567
Intangible assets........................................... 3,290,316 3,073,693
Other assets................................................ 966,565 521,303
------------ ------------
Total Assets.............................................. $131,931,124 $125,391,846
------------ ------------
LIABILITIES
Other liabilities........................................... $ 1,338,888 $ 305,933
Line of credit.............................................. 11,024,507 9,639,507
------------ ------------
Total Liabilities......................................... 12,363,395 9,945,440
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock................................................ 86,634 86,602
Additional paid in capital.................................. 71,190,583 72,650,671
Retained earnings........................................... 45,105,585 39,730,884
Note receivable from officer................................ (660,789)
Unrealized appreciation on available for sale securities.... 3,845,716 2,978,249
------------ ------------
Total Shareholders' Equity................................ 119,567,729 115,446,406
------------ ------------
Total Liabilities and Shareholders' Equity................ $131,931,124 $125,391,846
============ ============

50
51

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT

MEADOWBROOK INSURANCE GROUP, INC.
PARENT COMPANY ONLY

STATEMENT OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
---- ---- ----

Net cash provided by (used in) operating
activities:......................................... $ 129,569 $ 445,015 $(6,145,849)
----------- ----------- -----------
Cash Flow from Investing Activities:
Dividend from subsidiary............................ 5,000,000
Investment in subsidiaries.......................... (2,944,502) (9,513,711) --
----------- ----------- -----------
Net cash used in investing activities:................ 2,055,498 (9,513,711) --
----------- ----------- -----------
Cash Flows from Financing Activities:
Proceeds from borrowings............................ 5,285,000 11,139,507 --
Principal payments on borrowings.................... (3,900,000) (2,146,940) --
Additional expenses from IPO........................ -- -- (221,018)
Dividends paid on common stock...................... (782,861) (692,683) (517,797)
Issuance/Retirement of common stock................. (2,719,657) (222,616) (151,631)
----------- ----------- -----------
Net cash (used in) provided by financing
activities:.................................... (2,117,518) 8,077,268 (890,446)
----------- ----------- -----------
Increase/(decrease) in cash and cash equivalents...... 67,549 (991,428) (7,036,295)
Cash and cash equivalents, beginning of year.......... 64,996 1,056,424 8,092,719
----------- ----------- -----------
Cash and cash equivalents end of year................. $ 132,545 $ 64,996 $ 1,056,424
=========== =========== ===========

51
52

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, on March 16, 1999.

MEADOWBROOK INSURANCE GROUP, INC.

By: **
------------------------------------
Merton J. Segal
Chairman and Chief Executive Officer
(Principal Executive Officer)

By: /s/ WILLIAM J. LOHMEYER
------------------------------------
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)
(Effective January 25, 1999)
Dated: March 16, 1999

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 capacity and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

** Chairman, Chief Executive Officer and March 16, 1999
- - ------------------------------------------ Director (Principal Executive Officer)
Merton J. Segal

** Vice Chairman and Director March 16, 1999
- - ------------------------------------------
Warren D. Gardner

/s/ ROBERT S. CUBBIN Office of the President, Secretary and March 16, 1999
- - ------------------------------------------ Director
Robert S. Cubbin

** Office of the President, Interim Chief March 16, 1999
- - ------------------------------------------ Financial Officer (through January 25,
Joseph C. Henry 1999), Treasurer and Director

** Office of the President, Chief Marketing March 16, 1999
- - ------------------------------------------ Officer and Director
James R. Parry, Sr.

** Director March 16, 1999
- - ------------------------------------------
Bruce E. Thal

** Director March 16, 1999
- - ------------------------------------------
Hugh W. Greenberg

** Director March 16, 1999
- - ------------------------------------------
Joseph S. Dresner

** Senior Vice President, Chief Financial March 16, 1999
- - ------------------------------------------ Officer (Principal Financial Officer)
William J. Lohmeyer (effective January 25, 1999)

**By: /s/ ROBERT S. CUBBIN
-------------------------------------
Robert S. Cubbin,
Attorney-in-fact

52
53

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION FILING BASIS
- - ------- ----------- ------------

3.1 Articles of Incorporation of the Company, including
Certificate of Amendment to the Articles of Incorporation. *
3.2 Amended and Restated Bylaws of the Company.
10.1 Employment Agreement between the Company and James R. Parry,
Sr. ("Parry") dated January 1, 1993.
10.2 Management Services Agreement among the Company, Star,
Savers and Meadowbrook dated January 1, 1993. *
10.3 Meadowbrook Insurance Group, Inc. 1995 Stock Option Plan. *
10.4 Lease between Meadowbrook and 26600 Development Associates
Limited Partnership, with fourth amendment to lease dated
March 21, 1995. *
10.5 Fifth and sixth Amendments to Lease between Meadowbrook and
26600 Development Associates Limited Partnership dated
August 7, 1995 and May 13, 1996. *
10.6 Meadowbrook, Inc. 401(k) Profit Sharing Plan Trust, amended
and restated December 31, 1994 *
10.7 Employment Agreement, Covenant Not to Compete and Restricted
Stock Agreement dated as of August 1, 1995 between
Meadowbrook and Robert A. Engle. *
10.8 Employment Agreement, Covenant Not to Compete and Restricted
Stock Agreement dated as of August 1, 1995 between
Meadowbrook and Robert A. Engle, Amendment. *
10.9 Stock Purchase Agreement dated August 1, 1995 among the
Company, Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal and
certain other employees of the Company. *
10.10 Stock Purchase Agreement dated August 1, 1995 among the
Company, Robert A. Engle, Trustee of the Robert A. Engle
Revocable Trust dated November 24, 1993, Merton J. Segal and
certain other employees of the Company, Amendment. *
10.11 Revolving Credit Agreement between Meadowbrook Insurance
Group, Inc. and Comerica Bank dated as of July 24, 1998 ***
10.12 Demand Note dated November 9, 1998 among the Company and
Robert S. Cubbin and Kathleen D. Cubbin and Stock Pledge
Agreement.
10.13 Employment Agreement between the Company and William J.
Lohmeyer, III dated January 25, 1999.
11 Statement re computation of per share earnings.
21 List of Subsidiaries.
23 Consent of Independent Accountants
24 Power of attorney.
27 Financial Data Schedule.
28.1 Star Insurance Company's 1998 Schedule P. **
28.2 Savers Property & Casualty Insurance Company's 1998 Schedule
P. **

EXHIBIT
NO. DESCRIPTION FILING BASIS
- - ------- ----------- ------------

28.3 Williamsburg National Insurance Company's 1998 Schedule P. **
28.4 Ameritrust Insurance Company's 1998 Schedule P. **

- - -------------------------
(*) Incorporated by reference to Form S-1 Registration Statement (No.
33-2626206) of Meadowbrook Insurance Group, Inc. declared effective
November 20, 1995.

(**) Submitted in paper format under separate cover; see Form SE filing.

(***) Filed with Form 10Q For the period ending September 30, 1998 (No.
38-2626206)