Forward-Looking Statements

This quarterly report may provide information including certain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These include statements regarding the intent, belief, or current expectations of management, including, but not limited to, those statements that use the words "believes," "expects," "anticipates," "estimates," or similar expressions. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties, and results could differ materially from those indicated by such forward-looking statements. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: the frequency and severity of claims; uncertainties inherent in reserve estimates; catastrophic events; a change in the demand for, pricing of, availability or collectability of reinsurance; increased rate pressure on premiums and on underwriting criteria; ability to obtain rate increases in current market conditions; investment rate of return and losses (whether realized or unrealized) in our investment portfolio; changes in and adherence to insurance or other regulation; actions taken by regulators, rating agencies or lenders; attainment of certain processing efficiencies; changing rates of inflation; general economic conditions and other risks identified in our reports and registration statements filed with the Securities and Exchange Commission. For additional information with respect to certain of these and other factors, refer to the "Risk Factors" section contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and subsequent filings. We are not under any obligation to (and expressly disclaim any obligation to) update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

Business Overview

We are a publicly traded specialty niche, focused commercial insurance underwriter and insurance administration services company. We market and underwrite specialty property and casualty insurance programs and products on both an admitted and non-admitted basis through a broad and diverse network of independent retail agents, wholesalers, program administrators and general agents, who value service, specialized knowledge, and focused expertise. Program business refers to an aggregation of individually underwritten risks that have some unique characteristic and are distributed through a select group of agents. We seek to combine profitable underwriting, income from our net commissions and fees, investment returns and efficient capital management to deliver consistent long-term growth in shareholder value.

Through our retail property and casualty agencies, we also generate commission revenue, which represents 1.9% of our total consolidated revenues. Our agencies are located in Michigan, California, Massachusetts, and Florida and produce commercial, personal lines, life and accident and health insurance that is primarily with unaffiliated insurance carriers. These agencies produce a minimal amount of business for our affiliated Insurance Company Subsidiaries.

We recognize revenue related to the services and coverages we provide within the following categories: net earned premiums, management administrative fees, claims fees, commission revenue, net investment income, and net realized gains (losses).

We compete in the specialty insurance market. Our wide range of specialty niche insurance expertise allows us to accommodate a diverse distribution network ranging from specialized program agents to retail agents. In the specialty market, competition tends to place considerable focus on availability, service and other tailored coverages in addition to price. Moreover, our broad geographical footprint enables us to function with a local presence on both a regional and national basis. We also have the capacity to write specialty insurance in both the admitted and non-admitted markets. These unique aspects of our business model enable us to compete on factors other than price.

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 periodically 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 15, 2012, are those that we consider to be our critical accounting estimates. For the three months and six months ended June 30, 2012, there have been no material changes in regard to any of our critical accounting estimates.

Non-GAAP Financial Measures

Net Operating (Loss) Income and Net Operating (Loss) Income Per Share

Net operating (loss) income and net operating (loss) income per share are non-GAAP measures that represent net (loss) income excluding net realized gains or loss, net of tax. The most directly comparable financial GAAP measures to net operating (loss) income and net operating (loss) income per share are net (loss) income and net (loss) income per share. Net operating (loss) income and net operating (loss) income per share are intended as supplemental information and are not meant to replace net (loss) income nor net (loss) income per share. Net operating (loss) income and net operating (loss) income per share should be read in conjunction with the GAAP financial results. The following is a reconciliation of net operating (loss) income to net (loss) income, as well as net operating (loss) income per share to net (loss) income per share:

                                                 For the Three Months                  For the Six Months
                                                    Ended June 30,                       Ended June 30,
                                                2012               2011              2012               2011
                                             (In thousands, except share          (In thousands, except share
                                                 and per share data)                  and per share data)
Net operating (loss) income                $        (8,752 )   $      8,381     $        (1,225 )   $     22,398
Net realized gains, net of tax                       1,020            1,399               1,597            2,031
Net (loss) income                          $        (7,732 )   $      9,780     $           372     $     24,429

Diluted earnings per common share:
Net operating (loss) income                $         (0.17 )   $       0.16     $         (0.02 )   $       0.42
Net (loss) income                          $         (0.15 )   $       0.18     $          0.01     $       0.46
Diluted weighted average common shares
outstanding                                     50,251,591       53,248,573          50,583,368       53,323,802

We use net operating (loss) income and net operating (loss) income per share as components to assess our performance and as measures to evaluate the results of our business. We believe these measures provide investors with valuable information relating to our ongoing performance that may be obscured by the net effect of realized gains and losses as a result of our market risk sensitive instruments, which primarily relate to fixed income securities that are available for sale and not held for trading purposes. Realized gains and losses may vary significantly between periods and are generally driven by external economic developments, such as capital market conditions. Accordingly, net operating (loss) income excludes the effect of items that tend to be highly variable from period to period and highlights the results from our ongoing business operations and the underlying loss or profitability of our business. We believe that it is useful for investors to evaluate net operating (loss) income and net operating (loss) income per share, along with net (loss) income and net
(loss) income per share, when reviewing and evaluating our performance.

Accident Year Loss Ratio

The accident year loss ratio is a non-GAAP measure and represents our net loss and LAE ratio adjusted for any changes in net ultimate loss estimates on prior year loss reserves. The most directly comparable financial GAAP measure to the accident year loss ratio is the net loss and LAE ratio. The accident year loss ratio is intended as supplemental information and is not meant to replace the net loss and LAE ratio. The accident year loss ratio should be read in conjunction with the GAAP financial results. The following is a reconciliation of the accident year loss ratio to the net loss and LAE ratio, which is the most directly comparable GAAP measure:

                                              For the Three Months             For the Six Months
                                                 Ended June 30,                  Ended June 30,
                                              2012             2011           2012             2011
Accident year loss ratio                         65.1 %           66.4 %         64.4 %           65.0 %
Increase (decrease) in net ultimate loss
estimates on prior year loss reserves            13.3 %            0.5 %          9.5 %           -0.6 %
Net loss & LAE ratio                             78.4 %           66.9 %         73.9 %           64.4 %

We use the accident year loss ratio as one component to assess our current year performance and as a measure to evaluate, and if necessary, adjust our pricing and underwriting. Our net loss and LAE ratio is based on calendar year information. Adjusting this ratio to an accident year loss ratio allows us to evaluate information based on the current year activity. We believe this measure provides investors with valuable information for comparison to historical trends and current industry estimates. We also believe that it is useful for investors to evaluate the accident year loss ratio and net loss and LAE ratio separately when reviewing and evaluating our performance.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2012 AND 2011

Executive Overview

Our results for the second quarter of 2012 were impacted by the increase in net ultimate loss estimates for 2011 and prior accident years, which added 13.3 percentage points to the GAAP combined ratio. The second quarter 2012 increase in net ultimate loss estimates for accident years 2011 and prior primarily reflects incurred large loss activity that is higher than historic patterns. In certain segments of the business, this increase is connected to corporate and branch office claims initiatives that were recently implemented. Our GAAP combined ratio was 111.1% for the second quarter of 2012 compared to 101.4% for the comparable quarter in 2011. Our accident year combined ratio was 97.8% for the second quarter of 2012, compared to 100.9% in 2011.

Net operating loss, a non-GAAP measure, for the second quarter ended June 30, 2012 was ($8.8 million), or ($0.17) per diluted share, compared to net operating income of $8.4 million, or $0.16 per diluted share for the second quarter ended June 30, 2011. The second quarter 2012 results include the pre-tax increase in net ultimate loss estimates for 2011 and prior accident years of $28.2 million. By contrast, the second quarter of 2011 results include the pre-tax increase in net ultimate loss estimates for 2010 and prior accident years of $0.9 million.

Gross written premium increased $43.4 million, or 20.4%, to $256.1 million, compared to $212.7 million in 2011. The growth primarily reflects rate increases in combination with the maturation of existing programs and to a lesser extent new business initiatives that were implemented during the past twelve months. This growth was partially offset by reductions in certain programs where pricing and underwriting did not meet our targets.

Results of Operations

Net loss for the three months ended June 30, 2012, was ($7.7 million), or ($0.15) per dilutive share, compared to net income of $9.8 million, or $0.18 per dilutive share, for the comparable period of 2011. Net operating loss, a non-GAAP measure, for the second quarter ended June 30, 2012 was ($8.8 million), or ($0.17) per diluted share, compared to net operating income of $8.4 million, or $0.16 per diluted share for the second quarter ended June 30, 2011. Total diluted weighted average shares outstanding for the three months ended June 30, 2012 were 50,251,591 compared to 53,248,573 for the comparable period in 2011. This decrease reflects the impact of our Share Repurchase Plan, which we have continued to repurchase shares.

Revenues

Revenues for the three months ended June 30, 2012, increased $30.9 million, or
15.1%, to $235.1 million, from $204.2 million for the comparable period in
2011. This increase primarily reflects overall growth within our net earned
premiums.

The following table sets forth the components of revenues (in thousands):

                                   For the Three Months
                                      Ended June 30,
                                    2012           2011
Revenue:
Net earned premiums              $   211,303     $ 181,470
Management administrative fees         2,823         3,041
Claims fees                            1,599         1,606
Commission revenue                     4,130         3,250
Net investment income                 13,683        13,765
Net realized gains                     1,567         1,094
Total revenue                    $   235,105     $ 204,226

Net earned premiums increased $29.8 million, or 16.4%, to $211.3 million for the three months ended June 30, 2012, from $181.5 million in the comparable period in 2011. This growth primarily reflects rate increase in combination with the maturation of existing programs and to a lesser extent new business initiatives that were implemented during the past twelve months. This growth was partially offset by reductions in certain programs where pricing and underwriting did not meet our targets.

Commission revenue increased $0.9 million, or 27.1%, to $4.1 million for the three months ended June 30, 2012, from $3.3 million for the comparable period in 2011. This increase was driven primarily by commission revenues generated from assets of a Michigan agency that was acquired in the fourth quarter of 2011.

Expenses

Expenses increased $52.9 million from $192.3 million for the three months ended
June 30, 2011 to $245.2 million for the three months ended June 30, 2012.

The following table sets forth the components of expenses (in thousands):

                                                       For the Three Months
                                                          Ended June 30,
                                                        2012           2011
Expense:

Net losses and loss adjustment expenses              $   165,758     $ 121,403
Policy acquisition and other underwriting expenses        68,993        62,694
General selling & administrative expenses                  6,327         5,631
General corporate expenses                                   758          (719 )
Amortization expense                                       1,307         1,206
Interest expense                                           2,033         2,082
Total expenses                                       $   245,176     $ 192,297

Net loss and loss adjustment expenses ("LAE") increased $44.4 million, to $165.8 million for the three months ended June 30, 2012, from $121.4 million for the same period in 2011. Our loss and LAE ratio was 78.4% for the three months ended June 30, 2012 and 66.9% for the three months ended June 30, 2011. The loss and LAE ratio for the second quarter of 2012 includes a 13.3 percentage point increase from net ultimate loss estimates for accident years 2011 and prior, whereas the 2011 results include a 0.5 percentage point increase from net ultimate loss estimates for accident years 2010 and prior. The accident year loss and LAE ratio was 65.1% for the three months ended June 30, 2012 down from 66.4% in the comparable period in 2011. Additional discussion of our reserve activity is described below within the Other Items ~ Reserves section.

Policy acquisition and other underwriting expenses increased $6.3 million, to $69.0 million for the three months ended June 30, 2012 from $62.7 million for the same period in 2011. Our expense ratio decreased 1.8 percentage points to 32.7% for the three months ended June 30, 2012, from 34.5% for the same period in 2011. The 2012 expense ratio improvement reflects a reduction in profit sharing commissions and leveraging of fixed costs over a larger premium base. These were partially offset by a reduction in the accrual for variable compensation that reduced policy acquisition expenses in 2011.

General corporate expenses increased $1.5 million, to $0.8 million for the three months ended June 30, 2012, from a benefit of $0.7 million for the same period in 2011. The prior year amount reflects a reduction in the accrual for variable compensation; excluding this item, 2012 general corporate expenses were consistent with 2011.

The GAAP effective tax rate for both the three months ended June 30, 2012 and 2011, was approximately 18%. Income tax expense (benefit) on capital gains and the change in our valuation allowance on deferred tax assets, was $547,000 and ($306,000) for the three months ended June 30, 2012 and 2011, respectively. The annual effective tax rate for 2012 is expected to be approximately 15%.

Other Items

Equity earnings of affiliated, net of tax;

In July 2009, our subsidiary, Star, purchased a 28.5% ownership interest in an affiliate, Midwest Financial Holdings, LLC ("MFH"), for $14.8 million in cash. We are not required to consolidate this investment as we are not the primary beneficiary of the business nor do we control the entity's operations. Our ownership interest is significant, but is less than a majority ownership and, therefore, we are accounting for this investment under the equity method of accounting. Star recognizes 28.5% of the profits and losses as a result of this equity interest ownership. We recognized equity earnings, net of tax, from MFH of $0.6 million, or $0.01 per diluted share, for the three months ended June 30, 2012, compared to $0.2 million, which had no per diluted share impact, for the comparable period of 2011. We received dividends from MFH in the three months ended June 30, 2012 and 2011, of $0.9 million and $1.2 million, respectively.

Reserves

For the three months ended June 30, 2012, we reported an increase in net ultimate loss estimates for accident years 2011 and prior of $28.2 million, or 3.2% of $879.1 million of net loss and LAE reserves at December 31, 2011. There were no significant changes in the key assumptions utilized in the analysis and calculations of our reserves during 2011 and 2012.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2012 AND 2011

Executive Overview

Our results for the six months ended June 30, 2012, were impacted by the increase in net ultimate loss estimates for 2011 and prior accident years, which added 9.5 percentage points to the GAAP combined ratio. The year-to-date 2012 increase in net ultimate loss estimates for accident years 2011 and prior primarily reflects incurred large loss activity that is higher than historic patterns. Our GAAP combined ratio was 106.6% for the six months ended June 30, 2012, compared to 98.7% for the comparable quarter in 2011. Our accident year combined ratio was 97.1% for the six months ended June 30, 2012, compared to 99.3% in 2011.

Net operating loss, a non-GAAP measure, for the six months ended June 30, 2012 was ($1.2 million), or ($0.02) per diluted share, compared to net operating income of $22.4 million, or $0.42 per diluted share for the six months ended June 30, 2011. The six months ended June 30, 2012, results include the pre-tax increase in net ultimate loss estimates for 2011 and prior accident years of $38.4 million. By contrast, the six months ended 2011 results include an after-tax decrease in net ultimate loss estimates for 2010 and prior accident years of $2.4 million.

Gross written premium increased $76.4 million, or 17.5%, to $514.0 million, compared to $437.6 million in 2011. The growth primarily reflects rate increases in combination with the maturation of existing programs and to a lesser extent new business initiatives that were implemented during the past twelve months. This growth was partially offset by reductions in certain programs where pricing and underwriting did not meet our targets.

Results of Operations

Net income for the six months ended June 30, 2012, was $0.4 million, or $0.01 per diluted share, compared to net income of $24.4 million, or $0.46 per diluted share, for the comparable period of 2011. Net operating loss, a non-GAAP measure, for the six months ended June 30, 2012 was ($1.2 million), or ($0.02) per diluted share, compared to net operating income of $22.4 million, or $0.42 per diluted share for the six months ended June 30, 2011. Total diluted weighted average shares outstanding for the six months ended June 30, 2012 were 50,583,368 compared to 53,323,802 for the comparable period in 2011. This decrease reflects the impact of our Share Repurchase Plan, which we have continued to repurchase shares.

Revenues

Revenues for the six months ended June 30, 2012, increased $53.6 million, or
13.5%, to $451.3 million, from $397.7 million for the comparable period in
2011. This increase primarily reflects overall growth within our net earned
premiums.

The following table sets forth the components of revenues (in thousands):

                                   For the Six Months
                                     Ended June 30,
                                   2012          2011
Revenue:
Net earned premiums              $ 404,118     $ 352,128
Management administrative fees       5,751         6,399
Claims fees                          3,261         3,213
Commission revenue                   8,505         6,723
Net investment income               27,415        27,337
Net realized gains                   2,299         1,906
Total revenue                    $ 451,349     $ 397,706

Net earned premiums increased $52.0 million, or 14.8%, to $404.1 million for the six months ended June 30, 2012, from $352.1 million in the comparable period in 2011. This growth primarily reflects rate increases in combination with the maturation of existing programs and to a lesser extent new business initiatives that were implemented during the past twelve months. This growth was partially offset by reductions in certain programs where pricing and underwriting did not meet our targets.

Commission revenue increased $1.8 million, or 26.5%, to $8.5 million for the six months ended June 30, 2012, from $6.7 million for the comparable period in 2011. This increase was driven primarily by commission revenues generated from assets of a Michigan agency that was acquired in the fourth quarter of 2011.

Expenses

Expenses increased $85.4 million from $366.7 million for the six months ended
June 30, 2011 to $452.1 million for the six months ended June 30, 2012.

The following table sets forth the components of expenses (in thousands):

                                                       For the Six Months
                                                         Ended June 30,
                                                       2012          2011
Expense:
Net losses and loss adjustment expenses              $ 298,505     $ 226,665
Policy acquisition and other underwriting expenses     132,106       120,851
General selling & administrative expenses               12,666        11,875
General corporate expenses                               2,131           636
Amortization expense                                     2,723         2,438
Interest expense                                         4,010         4,254
Total expenses                                       $ 452,141     $ 366,719

Net loss and LAE increased $71.8 million, to $298.5 million for the six months ended June 30, 2012, from $226.7 million for the same period in 2011. Our loss and LAE ratio was 73.9% for the six months ended June 30, 2012 and 64.4% for the six months ended June 30, 2011. The loss and LAE ratio for the second quarter of 2012 include a 9.5 percentage point increase from net ultimate loss estimates for accident years 2011 and prior, whereas the 2011 results include a 0.6 percentage point decrease from net ultimate loss estimates for accident years 2010 and prior. The accident year loss and LAE ratio was 64.4% for the six months ended June 30, 2012 down from 65.0% in the comparable period in 2011. Additional discussion of our reserve activity is described below within the Other Items ~ Reserves section.

Policy acquisition and other underwriting expenses increased $11.3 million, to $132.1 million for the six months ended June 30, 2012 from $120.9 million for the same period in 2011. Our expense ratio decreased 1.6 percentage points to 32.7% for the six months ended June 30, 2012, from 34.3% for the same period in 2011. The 2012 expense ratio improvement reflects a reduction in profit sharing commissions and leveraging of fixed costs over a larger premium base.

General corporate expenses increased $1.5 million, to $2.1 million for the six months ended June 30, 2012, from $0.6 million for the same period in 2011. The prior year amount reflects a reduction in the accrual for variable compensation; excluding this item, 2012 general corporate expenses were consistent with 2011.

The GAAP effective tax rate for the six months ended June 30, 2012 was . . .