Our programs are diversified geographically, by class and line of business, type of insured and distribution. Within the workers' compensation line of business, we have a regional focus in New England, Florida, and Nevada. Within the commercial auto and commercial multiple peril line of business, we have a regional focus in the Southeast and California. Within the general liability line of business we have a focus in Texas. Our fee-for-service business is managed on a regional basis with an emphasis in the Midwest, New England, and southeastern regions, as well as the self-insured market in Nevada. Our corporate strategy emphasizes a regional focus and diverse sources of revenue between underwritten premiums, service fee revenue, and commissions. This allows us to leverage fixed costs over a larger revenue base and take advantage of new opportunities.
On July 31, 2008, the merger of Meadowbrook Insurance Group, Inc. and ProCentury Corporation ("ProCentury") was completed ("Merger"). Under the terms of the merger agreement, ProCentury shareholders were entitled to receive, for each ProCentury common share, either $20.00 in cash or Meadowbrook common stock based on a 2.5000 exchange ratio, subject to adjustment as described within the merger agreement. In accordance with the merger agreement, the stock price used in determining the final cash and share consideration portion of the purchase price was based on the volume-weighted average sales price of a share of Meadowbrook common stock for the 30-day trading period ending on the sixth trading day before the completion of the Merger, or $5.7326. Based upon the final proration, the total purchase price was $227.2 million, of which $99.1 million consisted of cash, $122.7 million in newly issued common stock, and approximately $5.4 million in transaction related costs. The total number of common shares issued for purposes of the stock portion of the purchase price was 21.1 million shares.
ProCentury is a specialty insurance company, which primarily underwrites general liability, commercial property, environmental, garage keepers, commercial multi-peril, commercial auto, surety, and marine insurance primarily in the excess and surplus lines, or "non-admitted," market through a select group of general agents. The excess and surplus lines market provides insurance coverage for customers with hard-to-place risks that standard or admitted insurers typically choose not to insure. Critical Accounting Policies
In certain circumstances, we are required to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related footnotes. We evaluate these estimates and assumptions on an on-going basis based on a variety of factors. There can be no assurance, however, that actual results will not be materially different than our estimates and assumptions, and that reported results of operation will not be affected by accounting adjustments needed to reflect changes in these estimates and assumptions. The accounting estimates and related risks described in our Annual Report on Form 10-K as filed with the United States Securities and Exchange Commission on March 16, 2009, are those that we consider to be our critical accounting estimates. For the three months ended March 31, 2009, there have been no material changes in regard to any of our critical accounting estimates.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
Executive Overview
Our results for the first quarter of 2009 include the positive impact from continued selective growth, coupled with our adherence to strict corporate underwriting guidelines, as well as a focus on current accident year price adequacy, and the benefits derived from leveraging of fixed costs. Our first quarter results included a $2.1 million impairment charge on our investment portfolio. These impairments primarily consisted of asset-backed securities with rising default rates, declining prepayment speeds, and increasing loss severity of collateral value. In addition, this impairment charge also consisted of a few corporate securities where the issuer experienced deteriorating business conditions and results, which put pressure on its valuation and, to a lesser extent, further deterioration in preferred stock securities. Our generally accepted accounting principles ("GAAP") combined ratio improved 6.2 percentage points to 87.7% for the first quarter of 2009, from 93.9% in 2008. Net operating income, excluding amortization, increased 106.8% to $17.8 million, compared to $8.6 million in 2008.
Gross written premium increased $69.5 million, or 76.8%, to $160.0 million, compared to $90.5 million in 2008. Included in this increase was $52.1 million in gross written premiums related to our Century Surety Company ("Century") operations. Excluding the gross written premiums related to the Century operations, the remaining 19.3% increase was primarily the result of growth in new business from programs implemented in late 2008 and early 2009. We anticipate further growth throughout the year as the annualized premiums of these programs continue to be realized. The anticipated growth for the balance of the year is emanating from workers' compensation initiatives underway in the Southeast, Midwest and Western states, as well as a full year benefit of our new and expanded transportation program, as well as rate increases in select states and programs. In addition, we continue to experience selective growth within existing programs consistent with our corporate underwriting guidelines and our controls over price adequacy.
As we begin our first full year of operations after the merger with ProCentury, we are beginning to see opportunities emerge as we use Meadowbrook's admitted market capabilities to expand our footprint with Century's wholesale agents in areas including marine, garage, and workers' compensation, and as we roll out surplus lines products through an existing Meadowbrook workers' compensation agents in markets not previously serviced by ProCentury, and as we leverage costs by creating economies of scale for purchasing reinsurance and managing the "back office" operations. By utilizing the capabilities of our combined company, we have also begun underwriting environmental related risks. Century's environmental expertise has now been combined with the Company's workers' compensation and automobile liability platform to provide an integrated program for environmental risks. The standard surety operation for Century is now being marketed as Star Surety to take advantage of the higher treasury listing and broader licensing and filing capabilities of Star. Combined, the expanded agent

relationships are rounding out agency relationship needs and are anticipated to grow both our programs and products.
Results of Operations
Net income for the three months ended March 31, 2009, was $13.5 million, or $0.24 per dilutive share, compared to net income of $7.1 million, or $0.19 per dilutive share, for the comparable period of 2008. Net operating income, a non-GAAP measure, increased $9.2 million, or 130.8%, to $16.3 million, or $0.28 per dilutive share, compared to net operating income of $7.1 million, or $0.19 per dilutive share for the comparable period in 2008, with lower weighted average shares outstanding. Total weighted average shares outstanding for the three months ended March 31, 2009 were 57,410,327, compared to 37,103,270 for the comparable period in 2008. This increase in the weighted average shares is primarily the result of the equity issued in connection with the ProCentury merger.
Net income for the three months ended March 31, 2009, was negatively impacted by after-tax realized losses of $2.8 million, or $0.04 per diluted share, as a result of the other than temporary impairments primarily related to certain asset-backed securities, corporate bonds, and preferred stocks. Our expense ratio improved 1.3 percentage points as a result of a lower level of insurance related assessments. Our expense ratio also improved as a result of our leveraging of fixed costs. In addition, net investment income increased 72.7% to $12.3 million, primarily related to the investments acquired with the ProCentury merger. Overall, we continue to see favorable prior accident year reserve development, as well as selective growth consistent with our corporate underwriting guidelines and our controls over price adequacy.
Revenues for the three months ended March 31, 2009, increased $64.5 million, or 75.7%, to $149.6 million, from $85.2 million for the comparable period in 2008. This increase reflects a $63.0 million increase in net earned premiums, of which $49.7 million related to our Century operations. Excluding the net earned premiums related to our Century operations, the increase of $13.3 million, was primarily the result of overall growth within our existing programs and new business we implemented in 2008 and 2009. Our overall net commission and fees were down 14.9%, or $1.8 million, as further explained below.
In addition, the revenues reflect a $5.2 million increase in investment income, which primarily reflects the increase in invested assets acquired with the ProCentury merger, as well as continued cash flow from operations.
As previously indicated, our results for the three months ended March 31, 2009, included the recognition of other than temporary impairments of $2.1 million. These impairments primarily consisted of asset-backed securities, a few corporate securities and, to a lesser extent, preferred stock securities.

Specialty Insurance Operations
   The following table sets forth the revenues and results from operations for
specialty insurance operations (in thousands):

                                                 For the Three Months
                                                    Ended March 31,
                                                   2009           2008
              Revenue:
              Net earned premiums              $    129,038     $ 66,022
              Management fees                         5,278        6,032
              Claims fees                             1,966        2,180
              Loss control fees                         489          510
              Reinsurance placement                      65          296
              Investment income                      12,212        6,970
              Net realized losses                    (1,992 )        (31 )

              Total revenue                    $    147,056     $ 81,979


              Pre-tax income
              Specialty insurance operations   $     27,411     $ 12,912

Revenues from specialty insurance operations increased $65.1 million, or 79.4%, to $147.1 million for the three months ended March 31, 2009 from $82.0 million for the comparable period in 2008.
Net earned premiums increased $63.0 million, or 95.4%, to $129.0 million for the three months ended March 31, 2009, from $66.0 million in the comparable period in 2008. This increase was the result of $49.7 million in net earned premiums related to our Century operations. The remaining increase of $13.3 million was primarily the result of growth within our existing programs and the new business we began writing in 2008.
Management fees decreased $754,000, or 12.5%, to $5.3 million for the three months ended March 31, 2009, from $6.0 million for the comparable period in 2008. In 2008, we converted a portion of the policies produced by USSU to our Insurance Company Subsidiaries. The decrease in management fees primarily relates to the intercompany management fees associated with the USSU policies that we brought in house. These fees are now eliminated upon consolidation, but do not impact overall consolidated results. In addition, a program we previously managed is now performing its own policy administration services. This decrease was also the result of a decrease in fees related to our New England-based programs, caused by a decrease in premium volume and continued competition.
Claim fees decreased $214,000, or 9.8%, to $2.0 million for the three months ended March 31, 2009, from $2.2 million for the comparable period in 2008. This decrease is primarily the result of lower premium volumes related to self-insured programs, which is the basis for the fee revenue.

Net investment income increased $5.2 million, or 75.2%, to $12.2 million in 2009, from $7.0 million in 2008. This increase is primarily the result of $5.3 million in net investment income related to ProCentury. Overall, invested assets increased due to the inclusion of ProCentury's invested assets from the Merger of approximately $425.1 million at July 31, 2008, coupled with the investing from positive cash flows from operations. The positive cash flows from operations were primarily due to favorable underwriting results. The average investment yield for March 31, 2009 was 4.5%, compared to 4.4% in 2008. The current pre-tax book yield was 4.4%. The current after-tax book yield was 3.3%, compared to 3.3% in 2008. The duration of the investment portfolio is 4.3 years at March 31, 2009, compared to 4.1 years at March 31, 2008.
Specialty insurance operations generated pre-tax income of $27.4 million for the three months ended March 31, 2009, compared to pre-tax income of $12.9 million for the comparable period in 2008. This increase in pre-tax income demonstrates a continued improvement in underwriting results including favorable reserve development on prior accident years, selective growth in premium, adherence to our strict underwriting guidelines, and our overall leveraging of fixed costs. In addition, this improvement was also attributable to an increase in net investment income. Partially offsetting these improvements were the previously mentioned other than temporary impairments we recognized in the first quarter of 2009. The GAAP combined ratio was 87.7% for the three months ended March 31, 2009, compared to 93.9% for the same period in 2008.
Net loss and loss adjustment expenses ("LAE") increased $32.1 million, to $69.8 million for the three months ended March 31, 2009, from $37.7 million for the same period in 2008. Our loss and LAE ratio decreased 3.7 percentage points to 58.0% for the three months ended March 31, 2009, from 61.7% for the same period in 2008. This ratio is the unconsolidated net loss and LAE in relation to net earned premiums. The loss and LAE ratio of 58.0% includes pre-tax favorable development of $8.3 million, or 6.5 percentage points, compared to pre-tax favorable development of $2.9 million, or 4.3 percentage points in 2008. The increase in our favorable development in comparison to 2008 was primarily the result of an increase in favorable development within our workers' compensation, professional liability, and general liability lines of business due to lower frequency and severity and better than expected claims results. Additional discussion of our reserve activity is described below within the Other Items ~ Reserves section.
Our expense ratio decreased 2.5 percentage points to 29.7% for the three months ended March 31, 2009, from 32.2% for the same period in 2008. This ratio is the unconsolidated policy acquisition and other underwriting expenses in relation to net earned premiums. This decrease in the expense ratio in comparison to 2008 is the result of lower insurance related assessments, primarily related to premium tax credits received from 2008 premium tax returns, which lowered the expense ratio by 1.3 percentage points for the quarter, and the impact of lower insurance assessments from the Century operations, offset by slightly higher commission and internal costs associated with Century's book of business.

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

                                            For the Three Months
                                              Ended March 31,
                                             2009           2008
                    Net commission        $   2,794       $ 3,328
                    Pre-tax income (1)    $     338       $   763

(1) Our agency operations include an allocation of corporate overhead, which includes expenses associated with accounting, information services, legal, and other corporate services. The corporate overhead allocation excludes those expenses specific to the holding company. For the three months ended March 31, 2009 and 2008, the allocation of corporate overhead to the agency operations segment was $798,000 and $753,000, respectively.

Revenue from agency operations, which consists primarily of agency commission revenue, decreased $535,000, to $2.8 million for the three months ended March 31, 2009, from $3.3 million for the comparable period in 2008. This decrease primarily reflects regional competition and a softer insurance market within our mid to larger Michigan accounts and isolated competitive pricing pressure in the California automobile market. In addition, this decrease is partially attributable to a $300,000 adjustment to reduce an agency commission accrual.
Agency operations generated pre-tax income, after the allocation of corporate overhead, of $338,000 for the three months ended March 31, 2009, compared to $763,000 for the comparable period in 2008. The decrease in the pre-tax income is primarily attributable to the decrease in agency commission revenue mentioned above.
Other Items
Reserves
At March 31, 2009, our best estimate for the ultimate liability for loss and LAE reserves, net of reinsurance recoverables, was $636.5 million. We established a reasonable range of reserves of approximately $578.9 million to $675.3 million. This range was established primarily by considering the various indications derived from standard actuarial techniques and other appropriate reserve considerations. The following table sets forth this range by line of business (in thousands):

                                                    Minimum       Maximum
                                                    Reserve       Reserve      Selected
  Line of Business                                   Range         Range       Reserves
  Workers' Compensation (1)                       $ 167,921     $ 185,927     $ 179,098
  Commercial Multiple Peril / General Liability     283,807       346,070       320,830
  Commercial Automobile                              90,454       101,572        97,018
  Other                                              36,743        41,727        39,587

  Total Net Reserves                              $ 578,925     $ 675,296     $ 636,533

(1) Includes Residual Markets

Reserves are reviewed by our internal actuaries for adequacy on a quarterly basis. When reviewing reserves, we analyze historical data and estimate the impact of numerous factors such as (1) per claim information; (2) industry and our historical loss experience; (3) legislative enactments, judicial decisions, legal developments in the imposition of damages, and changes in political attitudes; and (4) trends in general economic conditions, including the effects of inflation. This process assumes that past experience, adjusted for the effects of current developments and anticipated trends, is an appropriate basis for predicting future events. There is no precise method for subsequently evaluating the impact of any specific factor on the adequacy of reserves, because the eventual deficiency or redundancy is affected by multiple factors.
The key assumptions used in our selection of ultimate reserves included the underlying actuarial methodologies, a review of current pricing and underwriting initiatives, an evaluation of reinsurance costs and retention levels, and a detailed claims analysis with an emphasis on how aggressive claims handling may be impacting the paid and incurred loss data trends embedded in the traditional actuarial methods. With respect to the ultimate estimates for losses and LAE, the key assumptions remained consistent for the three months ended March 31, 2009 and the year ended December 31, 2008.
For the three months ended March 31, 2009, we reported a decrease in net ultimate loss estimates for accident years 2008 and prior of $8.3 million, or 1.3% of $625.3 million of net loss and LAE reserves at December 31, 2008. The decrease in net ultimate loss estimates reflected revisions in the estimated reserves as a result of actual claims activity in calendar year 2009 that differed from the projected activity. There were no significant changes in the key assumptions utilized in the analysis and calculations of our reserves during 2008 and for the three months ended March 31, 2009. The major components of this change in ultimate loss estimates are as follows (in thousands):

                                                            Incurred Losses                                     Paid Losses
                           Reserves at                                                                                                             Reserves at
                            December          Current                              Total         Current         Prior                              March 31,
Line of Business            31, 2008            Year          Prior Years        Incurred          Year          Years          Total Paid            2009
Workers' Compensation     $     147,813       $ 22,218       $      (1,945 )     $  20,273       $   (658 )     $ 12,633       $     11,975       $     156,111
Residual Markets                 23,984          1,722              (1,704 )            18            146            869              1,015              22,987
Commercial Multiple
Peril / General
Liability                       317,188         26,313              (3,740 )        22,573         (1,334 )       20,265             18,931             320,830
Commercial Automobile            92,788         15,536                 232          15,768          1,305         10,233             11,538              97,018
Other                            43,558         12,346              (1,191 )        11,155            941         14,185             15,126              39,587

Net Reserves                    625,331       $ 78,135       $      (8,348 )     $  69,787       $    400       $ 58,185       $     58,585             636,533

Reinsurance
Recoverable                     260,366                                                                                                                 261,157

Consolidated              $     885,697                                                                                                           $     897,690




                                                                                                     Development
                                                                                Re-estimated             as a
                                                                                Reserves at           Percentage
                                                           Reserves at           March 31,             of Prior
                                                            December           2009 on Prior             Year
Line of Business                                            31, 2008               Years               Reserves
Workers' Compensation                                     $   147,813          $    145,868                -1.3 %
Commercial Multiple Peril / General Liability                 317,188               313,448                -1.2 %
Commercial Automobile                                          92,788                93,020                 0.3 %
Other                                                          43,558                42,367                -2.7 %

Sub-total                                                     601,347               594,703                -1.1 %
Residual Markets                                               23,984                22,280                -7.1 %
. . .