**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934For
                the quarterly period ended September 30,
                2008





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




For
      the
      transition period from ___________________ to ___________________





Commission
      file no. 001-33143





**AmTrust
      Financial Services, Inc.**


(Exact
      name of registrant as specified in its charter)




Delaware
            04-3106389(State
                or other jurisdiction of
            (IRS
                Employer Identification No.)incorporation
                or organization)59
                Maiden Lane, 6thFloor, New York, New York
            10038(Address
                of principal executive offices)
            (Zip
                Code)





(212)
      220-7120


(Registrant’s
      telephone number, including area code)





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 o





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):





Large
      accelerated filer o Accelerated Filer x Non-accelerated filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Securities Exchange Act). Yes o No x





As
      of
      November 3, 2008, the Registrant had one class of Common Stock ($.01 par value),
      of which 60,031,064 shares were issued and outstanding.
















INDEX


PART
                I
            
            FINANCIAL
                INFORMATION
            
            PageItem
                1.
            
            Unaudited
                Financial Statements:Condensed
                Consolidated Balance Sheets as of September 30, 2008 and December
                31,
                2007
            
            3Condensed
                Consolidated Statements of Income
            
            4—
                Three and nine months ended September 30, 2008 and 2007Condensed
                Consolidated Statements of Cash Flows
            
            5—
                Nine months ended September 30, 2008 and 2007Notes
                to Condensed Consolidated Financial Statements
            
            6Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            29Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            47Item
                4.
            
            Controls
                and Procedures
            
            49PART
                II
            
            OTHER
                INFORMATIONItem
                1.
            
            Legal
                Proceedings
            
            49Item
                6.
            
            Exhibits
            
            50Signatures
            
            51




2







PART
      1 -
      FINANCIAL INFORMATION


Item 1. Financial Statements


**AMTRUST
      FINANCIAL SERVICES, INC. AND SUBSIDIARIES**





**Condensed
      Consolidated Balance Sheets**


**(in
      thousands, except per share data)**





****
            
            **September 30,
                2008**
            
            **December 31,****2007**(Unaudited)**ASSETS**Investments:Fixed
                maturities, held-to-maturity, at amortized cost (fair value $53,432;
                $162,661)
            
            $
            **53,341**
            
            $
            161,901Fixed
                maturities, available-for-sale, at market value (amortized cost $953,313;
                $745,132)
            
            
            **882,057**
            
            
            726,749Equity
                securities, available-for-sale, at market value (cost $92,785;
                $106,956)
            
            
            **43,326**
            
            
            79,037Short-term
                investments
            
            
            **230,926**
            
            
            148,541Other
                investments
            
            
            **16,860**
            
            
            28,035**Total
                investments**
            
            
            **1,226,510**
            
            
            1,144,263Cash
                and cash equivalents
            
            
            **198,096**
            
            
            145,337Assets
                under management
            
            
            **—**
            
            
            18,541Accrued
                interest and dividends
            
            
            **8,279**
            
            
            9,811Premiums
                receivable, net
            
            
            **430,330**
            
            
            257,756Note
                receivable - related party
            
            
            **21,376**
            
            
            20,746Reinsurance
                recoverable
            
            
            **399,773**
            
            
            225,941Reinsurance
                recoverable - related party (Note 13)
            
            
            **187,629**
            
            
            55,973Prepaid
                reinsurance premium
            
            
            **133,748**
            
            
            107,585Prepaid
                reinsurance premium - related party (Note 13)
            
            
            **239,060**
            
            
            137,099Prepaid
                expenses and other assets
            
            
            **30,538**
            
            
            26,131Deferred
                policy acquisition costs
            
            
            **94,067**
            
            
            70,903Deferred
                income taxes
            
            
            **65,213**
            
            
            36,502Federal
                income tax receivable
            
            
            **8,348**
            
            
            —Property
                and equipment, net
            
            
            **13,210**
            
            
            12,974Goodwill
            
            
            **21,159**
            
            
            10,549Intangible
                assets
            
            
            **80,992**
            
            
            42,683$
            **3,158,328**
            ****
            $
            2,322,794**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Liabilities:**Loss
                and loss expense reserves
            
            $
            **1,006,965**
            
            $
            775,392Unearned
                premiums
            
            
            **733,756**
            
            
            527,758Ceded
                reinsurance premiums payable
            
            
            **90,001**
            
            
            39,464Ceded
                reinsurance premium payable - related party
            
            
            **108,475**
            
            
            38,792Reinsurance
                payable on paid losses
            
            
            **—**
            
            
            4,266Federal
                income tax payable
            
            
            **—**
            
            
            4,123Funds
                held under reinsurance treaties
            
            
            **826**
            
            
            4,400Securities
                sold but not yet purchased, at market
            
            
            **13,089**
            
            
            18,426Securities
                sold under agreements to repurchase, at contract value
            
            
            **310,063**
            
            
            146,403Accrued
                expenses and other current liabilities
            
            
            **150,511**
            
            
            113,800Derivatives
                liabilities
            
            
            **1,548**
            
            
            4,101Note
                payable - related party (Note 13)
            
            
            **167,661**
            
            
            113,228Non
                interest bearing note payable - net of unamortized discount of
                $2,748
            
            
            **27,252**
            
            
            —Term
                loan
            
            
            **36,667**
            
            
            —Junior
                subordinated debt
            
            
            **123,714**
            
            
            123,714**Total
                liabilities**
            
            
            **2,770,528**
            
            
            1,913,867**Commitments
                and contingencies****Minority
                Interest**
            
            
            **—**
            
            
            18,541**Stockholders’
                equity:**Common
                stock, $.01 par value; 100,000 shares authorized, 84,093 and 84,047
                issued
                in September 30, 2008 and December 31, 2007, respectively; 59,998
                and
                59,952 outstanding in September 30, 2008 and December 31, 2007,
                respectively
            
            
            **841**
            ****
            
            841Preferred
                stock, $.01 par value; 10,000,000 shares authorized
            
            
            **—**
            
            
            —Additional
                paid-in capital
            
            
            **537,771**
            
            
            535,123Treasury
                stock at cost; 24,094 shares in 2008 and 2007
            
            
            **(294,671**
            )
            
            (294,671
            )Accumulated
                other comprehensive income (loss)
            
            
            **(87,097**
            **)**
            
            (31,688
            )Retained
                earnings
            
            
            **230,956**
            
            
            180,781**Total
                stockholders’ equity**
            
            
            **387,800**
            
            
            390,386$
            **3,158,328**
            
            $
            2,322,794




*See
      accompanying notes to unaudited condensed consolidated
      statements.*





3




**AmTrust
      Financial Services, Inc.**


**Condensed
      Consolidated Statements of Income**


**(Unaudited)**


**(in
      thousands, except per share data)**




**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Revenues:**Premium
                income:Net
                premium written
            
            **$**
            **139,429**
            
            **$**
            (30,717
            )
            **$**
            **388,928**
            
            **$**
            293,424Change
                in unearned premium
            
            
            **(47,096**
            **)**
            
            112,505
            
            
            **(83,237**
            **)**
            
            37,476**Net
                earned premium**
            
            
            **92,333**
            
            
            81,788
            
            
            **305,691**
            
            
            330,900Ceding
                commission - primarily related party (Note 13)
            
            
            **37,116**
            
            
            40,853
            
            
            **92,522**
            
            
            43,045Commission
                and fee income
            
            
            **8,749**
            
            
            7,906
            
            
            **23,411**
            
            
            16,688Net
                investment income
            
            
            **15,391**
            
            
            13,916
            
            
            **43,112**
            
            
            38,326Net
                realized (loss) gain on investments
            
            
            **(45,885**
            **)**
            
            (2,074
            )
            
            **(53,240**
            **)**
            
            8,948Other
                investment (loss) income on managed assets
            
            
            **—**
            
            
            (4,118
            )
            
            **(2,900**
            **)**
            
            (2,217
            )**Total
                revenues**
            
            
            **107,704**
            
            
            138,271
            
            
            **408,596**
            
            
            435,690**Expenses:**Loss
                and loss adjustment expense
            
            
            **37,094**
            
            
            52,141
            
            
            **166,393**
            
            
            211,697Acquisition
                costs and other underwriting expenses
            
            
            **53,549**
            
            
            49,623
            
            
            **149,572**
            
            
            115,356Other
            
            
            **6,062**
            
            
            3,512
            
            
            **13,360**
            
            
            10,052**Total
                expenses**
            
            
            **96,705**
            
            
            105,276
            
            
            **329,325**
            
            
            337,105**Operating
                income from continuing operations**
            
            
            **10,999**
            
            
            32,995
            
            
            **79,271**
            
            
            98,585**Other
                income (expenses):**Foreign
                currency gain (loss)
            
            
            **515**
            
            
            (44
            )
            
            **659**
            
            
            75Interest
                expense
            
            
            **(3,682**
            **)**
            
            (2,650
            )
            
            **(11,852**
            **)**
            
            (6,985
            )**Total
                other expenses**
            
            
            **(3,167**
            **)**
            
            (2,694
            )
            
            **(11,193**
            **)**
            
            (6,910
            )**Income
                from continuing operations before provision for income taxes and
                minority
                interest**
            
            
            **7,832**
            
            
            30,301
            
            
            **68,078**
            
            
            91,675**Provision
                for income taxes**
            
            
            **(1,529**
            **)**
            
            9,985
            
            
            **13,004**
            
            
            26,584**Minority
                interest in net income of subsidiary**
            
            
            —
            
            
            (4,118
            )
            
            **(2,900**
            **)**
            
            (2,217
            )**Net
                income**
            
            
            **9,361**
            
            
            24,434
            
            
            **57,974**
            
            
            67,308**Basic
                earnings per common share**
            
            **$**
            **0.16**
            
            **$**
            0.41
            
            **$**
            **0.97**
            
            **$**
            1.12**Diluted
                earnings per common share**
            
            **$**
            **0.15**
            
            **$**
            0.40
            
            **$**
            **0.95**
            
            **$**
            1.11**Dividends
                declared per common share**
            
            **$**
            **0.05**
            
            
            0.025
            
            **$**
            **0.13**
            
            
            0.07




*See
      accompanying notes unaudited to condensed consolidated financial
      statements.*





4




**AmTrust
      Financial Services, Inc.**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**


**(in
      thousands)**




**Nine
                Months Ended September 30,****2008**
            
            **2007****Cash
                flows from operating activities:**Net
                income from continuing operations
            
            $
            **57,974**
            
            $
            67,308Adjustments
                to reconcile net income from continuing operations to net cash provided
                by
                operating activities of continuing operations:Depreciation
                and amortization
            
            
            **6,387**
            
            
            3,484Realized
                (gain) loss on marketable securities
            
            
            **8,607**
            
            
            (12,301
            )Non-cash
                write-down of marketable securities
            
            
            **44,633**
            
            
            3,353Bad
                debt expense
            
            
            **1,812**
            
            
            817Amortization
                of discount on non-interest bearing note payable
            
            
            **407**
            
            
            —Foreign
                currency (gain) loss
            
            
            **(659**
            **)**
            
            (75
            )Non-cash
                stock compensation expense
            
            
            **2,314**
            
            
            1,237Changes
                in assets - (increase) decrease:Premiums
                receivable
            
            
            **(127,090**
            **)**
            
            (67,627
            )Reinsurance
                recoverable
            
            
            **(173,804**
            **)**
            
            (17,001
            )Reinsurance
                recoverable - related party
            
            
            **(131,656**
            **)**
            
            (24,745
            )Deferred
                policy acquisition costs, net
            
            
            **(23,164**
            **)**
            
            (2,976
            )Prepaid
                reinsurance premiums
            
            
            **(26,163**
            **)**
            
            (152,179
            )Prepaid
                reinsurance premiums - related party
            
            
            **(101,961**
            **)**
            
            —Prepaid
                expenses and other assets
            
            
            **(9,323**
            **)**
            
            911Deferred
                tax asset
            
            
            **(28,711**
            **)**
            ****
            (22,174
            )Changes
                in liabilities - increase (decrease):Ceded
                reinsurance premium payable
            
            
            **74,512**
            
            
            143,284Accrued
                expenses and other current liabilities
            
            
            **27,562**
            
            
            18,679Loss
                and loss expense reserve
            
            
            **231,573**
            
            
            127,253Unearned
                premiums
            
            
            **205,918**
            
            
            115,447Funds
                held under reinsurance treaties - related party
            
            
            **54,433**
            
            
            —Funds
                held under reinsurance treaties
            
            
            **(3,574**
            **)**
            ****
            4,809**Net
                cash provided by operating activities**
            
            
            **90,027**
            
            
            187,504**Cash
                flows from investing activities:**Net
                purchases of securities with fixed maturities
            
            
            **(112,179**
            **)**
            
            (213,519
            )Net
                sales (purchases) of equity securities
            
            
            **17,832**
            
            
            (4,815
            )Net
                sales (purchases) of other investments
            
            
            **11,175**
            
            
            (8,328
            )Net
                sales (purchases) of short term investments
            
            
            **(82,385**
            **)**
            ****
            98,099Note
                receivable - related party
            
            
            **(2,000**
            **)**
            
            (18,000
            )Acquisition
                of a subsidiary, net of cash obtained
            
            
            **(55,883**
            **)**
            
            (35,840
            )Acquisition
                of intangible assets
            
            
            **(2,950**
            **)**
            
            (1,582
            )Purchase
                of property and equipment
            
            
            **(1,719**
            **)**
            
            (797
            )**Net
                cash used in investing activities**
            
            
            **(228,109**
            **)**
            
            (184,782
            )**Cash
                flows from financing activities:**Borrowings
                on term loan
            
            
            **40,000**
            
            
            —Payments
                on term loan
            
            
            **(3,333**
            **)**
            
            —Issuance
                of junior subordinated debentures
            
            
            —
            
            
            40,000Reverse
                repurchase agreements, net
            
            
            **163,660**
            
            
            92,571Debt
                financing fees
            ****
            ****
            **(52**
            **)**
            
            (820
            )Stock
                option exercises
            
            
            **334**
            
            
            —Dividends
                distributed on common stock
            ****
            ****
            **(7,197**
            **)**
            
            (3,897
            )**Net
                cash provided by financing activities**
            
            
            **193,412**
            
            
            127,854**Effect
                of exchange rate changes on cash and cash
                equivalents**
            
            ****
            **(2,571**
            **)**
            
            240**Net
                increase in cash and cash equivalents**
            
            
            **52,759**
            
            
            130,816**Cash
                and cash equivalents, beginning of the period**
            
            
            **145,337**
            
            
            59,916**Cash
                and cash equivalents, end of the period**
            
            $
            **198,096**
            
            $
            190,732**Supplemental
                Cash Flow Information**Income
                tax payments
            
            $
            **21,678**
            
            $
            28,996Interest
                payments on debt
            
            
            **10,250**
            
            
            6,710




*See
      accompanying notes to unaudited condensed consolidated financial
      statements*




5





**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**(Unaudited)**


**(dollars
      in thousands, except share data)**




**1.**
            **Basis
                of Reporting**





The
      accompanying unaudited interim consolidated financial statements have been
      prepared in accordance with U.S. generally accepted accounting principles
      (“GAAP”) for interim financial statements and with the instructions to Form 10-Q
      and Article 10 of Regulation S-X and, therefore, do not include all of the
      information and footnotes required by GAAP for complete financial statements.
      These interim statements should be read in conjunction with the financial
      statements and notes thereto included in the AmTrust Financial Services, Inc.
      (“AmTrust” or the “Company”) Annual Report on Form 10-K for the year ended
      December 31, 2007, previously filed with the Securities and Exchange Commission
      (“SEC”) on March 14, 2008. The balance sheet at December 31, 2007 has been
      derived from the audited consolidated financial statements at that date but
      does
      not include all of the information and footnotes required by GAAP for complete
      financial statements.




These
      interim consolidated financial statements reflect all adjustments that are,
      in
      the opinion of management, necessary for a fair presentation of the results
      for
      the interim period and all such adjustments are of a normal recurring nature.
      The results of operations for the interim period are not necessarily indicative,
      if annualized, of those to be expected for the full year.   The preparation
      of financial statements in conformity with GAAP requires management to make
      estimates and assumptions that affect the amounts reported in the financial
      statements and accompanying notes. Actual results could differ from those
      estimates.





A
      detailed description of the Company’s significant accounting policies and
      management judgments is located in the audited consolidated financial statements
      for the year ended December 31, 2007, included in the Company’s Form 10-K filed
      with the SEC.





All
      significant inter-company transactions and accounts have been eliminated in
      the
      consolidated financial statements.   To facilitate period-to-period
      comparisons, certain reclassifications have been made to prior period
      consolidated financial statement amounts to conform to current period
      presentation. There was no effect on net income from the change in
      presentation.





**2.**
            **Recent
                Accounting Pronouncements**




With
      the
      exception of those discussed below, there have been no recent accounting
      pronouncements or changes in accounting pronouncements during the three months
      ended September 30, 2008, as compared to the recent accounting pronouncements
      described in our Annual Report on Form 10-K for the fiscal year ended
      December 31, 2007, that are of significance, or potential significance, to
      us.





In
      October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
      Staff Position (“FSP”) No. 157-3, “Determining the Fair Value of a Financial
      Asset When the Market for That Asset Is Not Active” (“FSP 157-3”). FSP 157-3
      clarifies the application of FASB Statement No. 157, Fair Value Measurements,
      in
      a market that is not active and provides considerations in determining the
      fair
      value of a financial asset when the market for that financial asset is not
      active. The FSP was effective upon issuance, including prior periods for which
      financial statements have not been issued. Revisions resulting from a change
      in
      the valuation technique or its application shall be accounted for as a change
      in
      accounting estimate. The disclosure provisions of Statement 154 for a change
      in
      accounting estimate are not required for revisions resulting from a change
      in
      valuation technique or its application. The adoption of the FSP did not have
      a
      material impact on the Company's financial condition or results of
      operations.





In
      June
      2008, the FASB issued FSP No. 03-6-1, “ *Determining
      Whether Instruments Granted in Share-Based Payment Transactions are
      Participating Securities* ”
(“FSP
      03-6-1”). FSP 03-6-1 clarifies that unvested share-based payment awards that
      contain nonforfeitable rights to dividends or dividend equivalents (whether
      paid
      or unpaid) are participating securities and are to be included in the
      computation of earnings per share under the two-class method described in
      Statement of Financial Accounting Standards No. 128 (“SFAS No. 128”),
“ *Earnings
      Per Share* .”
This
      FSP is effective for financial statements issued for fiscal years beginning
      after December 15, 2008 and requires all presented prior-period earnings per
      share data to be adjusted retrospectively. The Company does not believe the
      adoption will have a material impact on its financial condition or results
      of
      operations.




6




(dollars
      in thousands)





In
      May
      2008, the FASB issued FASB Statement No. 163 (“SFAS 163”), “Accounting
      for Financial Guarantee Insurance Contracts”, an interpretation of SFAS
      Statement No. 60. SFAS 163 requires that an insurance enterprise recognize
      a claim liability prior to an event of default (insured event) when there is
      evidence that credit deterioration has occurred in an insured financial
      obligation. SFAS 163 also clarifies how Statement 60 applies to financial
      guarantee insurance contracts, including the recognition and measurement to
      be
      used to account for premium revenue and claim liabilities. Those clarifications
      will increase comparability in financial reporting of financial guarantee
      insurance contracts by insurance enterprises. SFAS 163 also requires
      expanded disclosures about financial guarantee insurance contracts.
      SFAS 163 is effective for financial statements issued for fiscal years and
      interim periods beginning after December 15, 2008. We are currently
      evaluating the impact, if any, that SFAS 163 will have on our consolidated
      financial statements.





In
      May
      2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Principles”
(“SFAS No. 162”). This statement supersedes the existing hierarchy contained in
      the U.S. auditing standards. The existing hierarchy was carried over to
      Statement No. 162 essentially unchanged. The statement becomes effective 60
      days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to the auditing literature. The new hierarchy is not expected to
      change current accounting practice in any area.





In
      April
      2008, the FASB issued FSP No. 142-3, “ *Determination
      of the Useful Life of Intangible Assets* ”
(“FSP
      142-3”). FSP 142-3 amends the factors that should be considered in developing
      assumptions about renewal or extension used in estimating the useful life of
      a
      recognized intangible asset under Statement No. 142, “ *Goodwill
      and Other intangible Assets* ”
(“SFAS
      No. 142”). This standard is intended to improve the consistency between the
      useful life of a recognized intangible asset under Statement 142 and the period
      of expected cash flows used to measure the fair value of the asset under
      Statement No. 141R and other GAAP. FSP 142-3 is effective for financial
      statements issued for fiscal years beginning after December 15, 2008. The
      measurement provisions of this standard will apply only to intangible assets
      of
      the Company acquired after the effective date.





In
      March
      2008, the FASB issued SFAS 161, “ *Disclosures
      about Derivative Instruments and Hedging Activities* ”
(“SFAS
      No. 161”). Statement 161 requires companies with derivative instruments to
      disclose information that should enable financial-statement users to understand
      how and why a company uses derivative instruments, how derivative instruments
      and related hedged items are accounted for under FASB Statement No. 133
“ *Accounting
      for Derivative Instruments and Hedging Activities* ”
and
      how
      derivative instruments and related hedged items affect a company's financial
      position, financial performance and cash flows. Statement 161 is effective
      for financial statements issued for fiscal years and interim periods beginning
      after November 15, 2008. We are currently evaluating the impact, if any,
      that Statement 161 will have on our consolidated financial
      statements.




In
      December 2007, the FASB issued SFAS No. 160, “ *Noncontrolling
      Interests in Consolidated Financial Statements, an amendment of ARB No.
      51* ”.
      SFAS
      No. 160 establishes accounting and reporting standards that require that the
      ownership interests in subsidiaries held by parties other than the parent be
      clearly identified, labeled, and presented in the consolidated statement of
      financial position within equity, but separate from the parent’s equity; the
      amount of consolidated net income attributable to the parent and to the
      noncontrolling interest be clearly identified and presented on the face of
      the
      consolidated statement of income; and changes in a parent’s ownership interest
      while the parent retains its controlling financial interest in its subsidiary
      be
      accounted for consistently. SFAS No. 160 also requires that any retained
      noncontrolling equity investment in the former subsidiary be initially measured
      at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets forth
      the disclosure requirements to identify and distinguish between the interests
      of
      the parent and the interests of the noncontrolling owners. SFAS No. 160 applies
      to all entities that prepare consolidated financial statements, except
      not-for-profit organizations, but will affect only those entities that have
      an
      outstanding noncontrolling interest in one or more subsidiaries or that
      deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and
      interim periods within those fiscal years, beginning on or after December 15,
      2008. Earlier adoption is prohibited. SFAS No. 160 must be applied prospectively
      as of the beginning of the fiscal year in which SFAS No. 160 is initially
      applied, except for the presentation and disclosure requirements. The
      presentation and disclosure requirements are applied retrospectively for all
      periods presented. The Company does not have a noncontrolling interest in one
      or
      more subsidiaries. The Company does not believe the adoption will have a
      material impact on its financial condition or results of
      operations.




7





(dollars
      in thousands)





In
      December 2007, the FASB issued SFAS No. 141(R), “ *Business
      Combinations* ”.
      SFAS
      No. 141(R) establishes principles and requirements for how an acquirer
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, and any noncontrolling interest in the
      acquiree and recognizes and measures the goodwill acquired in the business
      combination or a gain from a bargain purchase. SFAS No. 141(R) also sets forth
      the disclosures required to be made in the financial statements to evaluate
      the
      nature and financial effects of the business combination. SFAS No. 141(R)
      applies prospectively to business combinations for which the acquisition date
      is
      on or after the beginning of the first annual reporting period beginning on
      or
      after December 15, 2008. Accordingly, SFAS No. 141(R) will be applied by the
      Company to business combinations occurring on or after January 1,
      2009.





In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ”.
      Under
      SFAS 159, companies may elect to measure certain financial instruments and
      certain other items at fair value. The standard requires that unrealized gains
      and losses on items for which the fair value option has been elected be reported
      in earnings. SFAS 159 was effective for us beginning in the first quarter
      of fiscal 2008. We chose not to elect the fair value option. Therefore, the
      adoption of SFAS 159 in the first quarter of fiscal 2008 did not impact our
      consolidated financial position, results of operations or cash
      flows.





In
      September 2006, the FASB issued SFAS No. 157, “ *Fair
      Value Measurements* ,”
which
      defines fair value, establishes guidelines for measuring fair value and expands
      disclosures regarding fair value measurements. SFAS 157 does not require
      any new fair value measurements but rather eliminates inconsistencies in
      guidance found in various prior accounting pronouncements and is effective
      for
      fiscal years beginning after November 15, 2007. In February 2008, the FASB
      issued FASB FSP 157-2 which delays the effective date of SFAS 157 for all
      nonfinancial assets and nonfinancial liabilities, except those that are
      recognized or disclosed at fair value in the financial statements on a recurring
      basis (at least annually), until fiscal years beginning after November 15,
      2008, and interim periods within those fiscal years. These nonfinancial items
      include assets and liabilities such as reporting units measured at fair value
      in
      a goodwill impairment test and nonfinancial assets acquired and liabilities
      assumed in a business combination. Effective January 1, 2008, we adopted
      SFAS 157 for financial assets and liabilities recognized at fair value on a
      recurring basis. The partial adoption of SFAS 157 for financial assets and
      liabilities did not have a material impact on our consolidated financial
      position, results of operations or cash flows. See Note 5. “Fair Value of
      Financial Instruments” for information and related disclosures regarding our
      fair value measurements.





8





(dollars
      in thousands)





**3.**
            **Investments**





*(a)
      Available-for-Sale Securities*





The
      original cost, estimated market value and gross unrealized appreciation and
      depreciation of available-for-sale securities as of September 30, 2008, are
      presented in the table below:





**Original or**
              **amortized**
              **cost**
            
            **Gross**
              **unrealized**
              **gains**
            
            **Gross**
              **unrealized**
              **losses**
            
            **Market**
              **value**Preferred stock
            
            $
            5,751
            
            $
            —
            
            $
            (958
            )
            $
            4,793Common
                stock
            
            
            87,034
            
            
            16
            
            
            (48,517
            )
            
            38,533U.S.
                treasury securities
            
            
            16,759
            
            
            443
            
            
            —
            
            
            17,202U.S.
                government agencies
            
            
            19,983
            
            
            361
            
            
            (14
            )
            
            20,329U.S.
                agency - collateralized mortgage obligations
            
            
            325,008
            
            
            1,975
            
            
            (4,218
            )
            
            322,765U.S.
                agency - mortgage backed securities
            
            
            105,177
            
            
            1,266
            
            
            (755
            )
            
            105,688Other
                mortgage backed securities
            
            
            30,186
            
            
            118
            
            
            (130
            )
            
            30,174Municipal
                bonds
            
            
            28,792
            
            
            349
            
            
            (1,217
            )
            
            27,925Asset
                backed securities
            
            
            5,947
            
            
            3
            
            
            (153
            )
            
            5,797Corporate
                bonds
            
            
            421,461
            
            
            1,084
            
            
            (70,368
            )
            
            352,177$
            1,046,098
            
            $
            5,615
            
            $
            (126,330
            )
            $
            925,383




*(b)
      Held-to-Maturity Securities*




The
      amortized cost, estimated market value and gross unrealized appreciation and
      depreciation of held to maturity securities as of September 30, 2008 are
      presented in the table below:


**Amortized**
              **cost**
            
            **Unrealized**
              **gains**
            
            **Unrealized**
              **losses**
            
            **Fair**
              **value**U.S. treasury
                securities
            
            $
            5,288
            
            $
            80
            
            $
            (1
            )
            $
            5,367U.S.
                government agencies
            
            
            3,139
            
            
            100
            
            
            —
            
            
            3,239U.S.
                agency - collateralized mortgage obligations
            
            
            167
            
            
            1
            
            
            —
            
            
            168U.S.
                agency - mortgage backed securities
            
            
            44,747
            
            
            237
            
            
            (326
            )
            
            44,658$
            53,341
            
            $
            418
            
            $
            (327
            )
            $
            53,432





9





(dollars
      in thousands)





*(c)
      Investment Income*




Net
      investment income for the three and nine months ended September 30, 2008 and
      2007 were derived from the following sources:





Three Months Ended September 30,
            
            Nine Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Fixed
                maturities
            
            $
            10,513
            
            $
            11,242
            
            **$**
            33,579
            
            $
            27,408Equity
                securities
            
            
            811
            
            
            243
            
            
            1,616
            
            
            1,683Cash
                and cash equivalents
            
            
            5,777
            
            
            4,075
            
            
            12,646
            
            
            8,730Loss
                on other investments
            
            
            -
            
            
            (2,045
            )
            
            -
            
            
            (525
            )Loss
                on equity investment in Warrantech
            
            
            (177
            )
            
            (217
            )
            
            (738
            )
            
            (432
            )Note
                receivable - related party
            
            
            796
            
            
            765
            
            
            2,365
            
            
            2,02317,720
            
            
            14,063
            
            
            49,468
            
            
            38,887Less:
                Investment expenses and interest expense on securities sold under
                agreement to repurchase
            
            
            2,329
            
            
            147
            
            
            6,356
            
            
            561$
            15,391
            
            $
            13,916
            
            **$**
            43,112
            
            $
            38,326




*(d)
      Other-Than-Temporary Impairment*




We
      review
      our investment portfolio for impairment on a quarterly basis. Impairment of
      investment securities result in a charge to operations when a market decline
      below cost is deemed to be other-than-temporary. As of September 30, 2008,
      we
      reviewed our fixed-maturity and equity securities portfolios to evaluate the
      necessity of recording impairment losses for other-than-temporary declines
      in
      the fair value of investments.




Other-than-temporary
      impairment charges of our fixed-maturities and equity securities for the three
      months and nine months ended September 30 2008 and 2007 are presented in the
      table below:








Three Months Ended September 30,
            
            Nine Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Equity
                securities
            
            $
            5,343
            
            $
            3,353
            
            **$**
            13,314
            
            $
            3,353Fixed
                maturities
            
            
            31,319
            
            
            -
            
            
            31,319
            
            
            -$
            36,662
            
            $
            3,353
            
            **$**
            44,633
            
            $
            3,353





10





(dollars
      in thousands)





The
      tables below summarize the gross unrealized losses of our fixed maturity and
      equity securities as of September 30, 2008:





Less than 12 months
            
            12 months or more
            
            TotalFair market
              value
            
            Unrealized
              losses
            
            Fair market
              value
            
            Unrealized
              losses
            
            Fair market
              value
            
            Unrealized
              lossesAvailable-for-sale
                securities:Common
                and preferred stock
            
            $
            15,982
            
            $
            (5,409
            )
            $
            27,119
            
            $
            (44,066
            )
            $
            43,101
            
            $
            (49,475
            )U.
                S. treasury securities
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —U.
                S. government agencies
            
            
            1,582
            
            
            (14
            )
            
            —
            
            
            —
            
            
            1,582
            
            
            (14
            )U.
                S. agency - collateralized mortgage obligations
            
            
            220,738
            
            
            (4,016
            )
            
            8,191
            
            
            (202
            )
            
            228,929
            
            
            (4,218
            )U.S.
                agency - mortgage backed securities
            
            
            46,244
            
            
            (755
            )
            
            
            
            
            —
            
            
            46,244
            
            
            (755
            )Other
                mortgage backed securities
            
            
            3,923
            
            
            (120
            )
            
            191
            
            
            (10
            )
            
            4,114
            
            
            (130
            )Municipal
                bonds
            
            
            17,611
            
            
            (1,217
            )
            
            —
            
            
            —
            
            
            17,611
            
            
            (1,217
            )Asset
                backed securities
            
            
            4,165
            
            
            (95
            )
            
            875
            
            
            (58
            )
            
            5,040
            
            
            (153
            )Corporate
                bonds
            
            
            214,685
            
            
            (42,346
            )
            
            110,051
            
            
            (28,022
            )
            
            324,736
            
            
            (70,368
            )Total
                temporarily impaired -available-for-sale securities
            
            $
            524,930
            
            $
            (53,972
            )
            $
            146,427
            
            $
            (72,358
            )
            $
            671,357
            
            $
            (126,330
            )Number
                of positions held
            
            
            
            
            
            391
            
            
            
            
            
            258
            
            
            
            
            
            649




Less than 12 months
            
            12 months or more
            
            TotalFair market
              value
            
            Unrealized
              losses
            
            Fair market
              value
            
            Unrealized
              losses
            
            Fair market
                value
            
            Unrealized
              lossesHeld-to-maturity
                securities:U.S.
                treasury securities
            
            $
            249
            
            $
            (1
            )
            $
            —
            
            $
            —
            
            $
            249
            
            $
            (1
            )Obligations
                of U.S. government agencies
            
            
            503
            
            
            —
            
            
            —
            
            
            —
            
            
            503
            
            
            —U.S.
                agency - mortgage backed securities
            
            
            —
            
            
            —
            
            
            16,885
            
            
            (326
            )
            
            16,885
            
            
            (326
            )Total
                temporarily impaired - held-to-maturity securities
            
            $
            752
            
            $
            (1
            )
            $
            16,885
            
            $
            (326
            )
            $
            17,637
            
            $
            (327
            )Number
                of positions held
            
            
            
            
            
            3
            
            
            
            
            
            37
            
            
            
            
            
            40





*(e)
      Derivatives*




The
      following table presents the notional amounts by remaining maturity of the
      Company’s Total Credit Default Swaps, Interest Rate Swaps and Contracts for
      Differences as of September 30, 2008:





**Remaining Life of Notional Amount****(1)****One Year**
            
            **Two Through**
              **Five Years**
            
            **Nine Through**
              **Ten Years**
            
            **After Ten**
              **Years**
            
            **Total**Credit
                default swaps
            
            $
            2,621
            
            $
            383
            
            $
            —
            
            $
            —
            
            $
            3,004Interest
                rate swaps
            
            
            —
            
            
            36,667
            
            
            —
            
            
            —
            
            
            36,667Contracts
                for differences
            
            
            —
            
            
            —
            
            
            2,066
            
            
            —
            
            
            2,066$
            2,621
            
            $
            37,050
            
            $
            2,066
            
            $
            —
            
            $
            41,737




(1)
            Notional
                amount is not representative of either market risk or credit risk
                and is
                not recorded in the consolidated balance
                sheet.




11





(dollars
      in thousands)





*(f)
      Other*




Securities
      sold but not yet purchased represent obligations of the Company to deliver
      the
      specified security at the contracted price and thereby, create a liability
      to
      purchase the security in the market at prevailing prices. The Company’s
      liability for securities to be delivered is measured at their fair value and
      as
      of September 30, 2008 and was $10,560 for corporate bonds and $2,529 and for
      equity securities. These transactions result in off-balance sheet risk, as
      the
      Company’s ultimate cost to satisfy the delivery of securities sold, not yet
      purchased, may exceed the amount reflected at September 30, 2008. Substantially
      all securities owned are pledged to the clearing broker to sell or repledge
      the
      securities to others subject to certain limitations.





The
      Company enters into repurchase agreements. The agreements are accounted for
      as
      collateralized borrowing transactions and are recorded at contract amounts.
      The
      Company receives cash or securities that it invests or hold in short term or
      fixed income securities. As of September 30, 2008, there were $310,063 principal
      amount outstanding at interest rates between 2.42% and 3.75%. Interest expense
      associated with these repurchase agreements for the three and nine months ended
      September 30, 2008 was $2,300 and $6,300, respectively, of which $4,000 was
      accrued as of September 30, 2008. The Company had approximately $310,000 of
      collateral pledged in support of these agreements as of  September 30,
      2008. As of September 30, 2007, there were $92,571 principal amount outstanding
      at interest rates between 5.21% and 5.29%. Interest expense associated with
      these repurchase agreements for the three and nine months ended September 30,
      2007 was $1,522, of which $943 was accrued as of September 30, 2007. The Company
      had approximately $95,600 of collateral pledged in support of these agreements
      as of September 30, 2007.





**4.**
            **Fair
                Value of Financial
                Instruments**





The
      Company’s estimates of fair value for financial assets and financial liabilities
      are based on the framework established in SFAS 157. The framework is based
      on
      the inputs used in valuation and gives the highest priority to quoted prices
      in
      active markets and requires that observable inputs be used in the valuations
      when available. The disclosure of fair value estimates in the SFAS 157 hierarchy
      is based on whether the significant inputs into the valuation are observable.
      In
      determining the level of the hierarchy in which the estimate is disclosed,
      the
      highest priority is given to unadjusted quoted prices in active markets and
      the
      lowest priority to unobservable inputs that reflect the Company’s significant
      market assumptions. The three levels of the hierarchy are as
      follows:





·
            Level
                1***-***Unadjusted quoted market prices for identical assets or liabilities
                in
                active markets that the Company has the ability to
                access.·
            Level
                2***-***Quoted prices for similar assets or liabilities in active markets;
                quoted
                prices for identical or similar assets or liabilities in inactive
                markets;
                or valuations based on models where the significant inputs are observable
                (e.g., interest rates, yield curves, prepayment speeds, default rates,
                loss severities, etc.) or can be corroborated by observable market
                data.·
            Level
                3***-***Valuations based on models where significant inputs are not observable.
                The unobservable inputs reflect the Company’s own assumptions about the
                assumptions that market participants would
                use.





For
      investments that have quoted market prices in active markets, the Company uses
      the quoted market prices as fair value and includes these prices in the amounts
      disclosed in the Level 1 hierarchy (approximately 6.6% of total investment
      portfolio). The Company receives the quoted market prices from a third party
      nationally recognized pricing services (“pricing service”). When quoted market
      prices are unavailable, the Company utilizes a pricing service to determine
      an
      estimate of fair value. The fair value estimates are included in the Level
      2
      hierarchy (approximately 91.3% of total investment portfolio). The Company
      will
      challenge any prices for its investments which are considered to not represent
      fair value. If quoted market prices and an estimate from pricing services are
      unavailable, the Company produces an estimate of fair value based on dealer
      quotations for recent activity in positions with the same or similar
      characteristics to that being valued or through consensus pricing of a pricing
      service. Depending on the level of observable inputs, the Company will then
      determine if the estimate is Level 2 or Level 3 hierarchy. The Company bases
      its
      estimates of fair values for assets on the bid price as it represents what
      a
      third party market participant would be willing to pay in an arm’s length
      transaction.





12




(dollars
      in thousands)





*Fixed
      Maturities (Held to Maturity and Available for Sale).* The
      Company utilized one pricing service to estimate fair value measurements for
      approximately 91% of its fixed maturities. The pricing service utilizes market
      quotations for fixed maturity securities that have quoted market prices in
      active markets. Since fixed maturities other than U.S. treasury securities
      generally do not trade on a daily basis, the pricing service prepares estimates
      of fair value measurements using relevant market data, benchmark curves, sector
      groupings and matrix pricing. The pricing service utilized by the Company has
      indicated they will only produce an estimate of fair value if there is
      verifiable information to produce a valuation. As the fair value estimates
      of
      most fixed maturity investments are based on observable market information
      rather than market quotes, the estimates of fair value other than U.S. Treasury
      securities are included in Level 2 of the hierarchy. U.S. Treasury securities
      are included in the amount disclosed in Level 1 as the estimates are based
      on
      unadjusted prices. The Company’s Level 2 investments include obligations of U.S.
      government agencies, municipal bonds, corporate debt securities and other
      mortgage backed securities. Additionally, for approximately 9% of the Company’s
      fixed maturities the Company utilized dealer quotes based on recent activity,
      consensus pricing through a pricing services’ proprietary methodology or a
      methodology using yield spreads of comparable fixed maturities with similar
      yield spreads of comparable bonds of the same issuer. The Company included
      the
      fair value estimates of these fixed maturities in Level 2 since all significant
      inputs are market observable.





*Equity
      Securities* .
      For
      public common and preferred stocks, the Company receives estimates from a
      pricing service that are based on observable market transactions and includes
      these estimates in Level 1 hierarchy.





*Other
      investments.* The
      Company has $16,860, or approximately 2.1% of its investment portfolio, in
      limited partnerships or hedge funds where the fair value estimate is determined
      by a fund a manager based on recent filings, operating results, balance sheet
      stability, growth and other business and market sector fundamentals. Due to
      the
      significant unobservable inputs in these valuations, the Company includes the
      estimate in the amount disclosed in Level 3 hierarchy. The Company has
      determined that its investments in Level 3 securities are not material to its
      financial position or results of operations.





*Derivatives.* The
      Company from time to time invests in a limited amount of derivatives and other
      financial instruments as part of its investment portfolio. Derivatives, as
      defined in SFAS 133, are financial arrangements among two or more parties with
      returns linked to an underlying equity, debt, commodity, asset, liability,
      foreign exchange rate or other index. Unless subject to a scope exclusion,
      the
      Company carries all derivatives on the consolidated balance sheet at fair value.
      The changes in fair value of the derivative are presented as a component of
      operating income. The Company primarily utilizes the following types of
      derivatives:





·
            Credit
                default swap contracts (“CDS”), which, are valued in accordance with the
                terms of each contract based on the current interest rate spreads
                and
                credit risk of the referenced obligation of the underlying issuer
                and
                interest accrual through valuation date. Fair values are based on
                valuations provided by a counterparty. The Company may be required
                to
                deposit collateral with the counterparty if the market values of
                the
                contract fall below a stipulated amount in the contract. Such amounts
                are
                limited to the total equity of the
                account;





·
            Interest
                rate swaps (“IS”), which are valued in terms of the contract between the
                Company and the issuer of the swaps, are based on the difference
                between
                the stated floating rate of the underlying indebtedness, in this
                case
                LIBOR, and a predetermined fixed rate for such indebtedness with
                the
                result that the indebtedness carries a net fixed interest rate;
                and




·
            Contracts
                for difference contracts (“CFD”), which, are valued based on the market
                price of the underlying stock. The Company may be required to deposit
                collateral with the counterparty if the market values of the contract
                fall
                below a stipulated amount in the
                contract.





The
      Company estimates fair value using information provided by the portfolio manager
      for IS and CDS and the counterparty for CFD and classifies derivative as Level
      3
      hierarchy.





13








(dollars
      in thousands)





Notwithstanding
      the current economic conditions and the liquidity concerns in the credit
      markets, the Company determined that it should not re-classify any of its
      investments from Level 1 or Level 2 to Level 3.




*Fair
      Value Hierarchy*





The
      following table presents the level within the fair value hierarchy at which
      the
      Company’s financial assets and financial liabilities are measured on a recurring
      basis as of September 30, 2008:





**Total**
            
            **Level
                1**
            
            **Level
                2**
            
            **Level
                3**Assets:Held-to-maturity
                securities
            
            $
            53,432
            
            $
            5,367
            
            $
            48,065
            
            $
            —Available-for-sale
                fixed securities
            
            
            882,057
            
            
            17,202
            
            
            864,855
            
            
            —Equity
                securities
            
            
            43,326
            
            
            43,326
            
            
            —
            
            
            —Other
                investments
            
            
            16,860
            
            
            —
            
            
            —
            
            
            16,860$
            995,675
            
            $
            65,895
            
            $
            912,920
            
            $
            16,860Liabilities:Securities
                sold but not yet purchased, market
            
            $
            13,089
            
            $
            2,529
            
            $
            10,560
            
            $
            —Securities
                sold under agreements to repurchase, at contract value
            
            
            310,063
            
            
            *—*
            
            
            310,063
            
            
            —Derivatives
            
            
            1,548
            
            
            —
            
            
            —
            
            
            1,548$
            324,700
            
            $
            2,529
            
            $
            320,623
            
            $
            1,548




The
      following table provides a summary of changes in fair value of the Company’s
      Level 3 financial assets as of September 30, 2008:




Three
                Months Ended September 30, 2008:
            
            **Other**
              **investments**
            
            **Derivatives**
            
            **Total**Beginning
                balance as of July 1, 2008
            
            $
            15,355
            
            $
            (3,747
            )
            $
            11,608Total
                net losses for the quarter included in:Net
                income
            
            
            —
            
            
            2,199
            
            
            2,199Other
                comprehensive loss
            
            
            (1,625
            )
            
            —
            
            
            (1,625
            )Purchases,
                sales, issuances and settlements, net
            
            
            3,130
            
            
            —
            
            
            3,130Net
                transfers into (out of) Level 3
            
            
            —
            
            
            —
            
            
            —Ending
                balance as of September 30, 2008
            
            $
            16,860
            
            $
            (1,548
            )
            $
            15,312




Nine Months Ended September 30, 2008:
            
            **Other**
              **investments**
            
            **Derivatives**
            
            **Total**Beginning
                balance as of January 1, 2008
            
            $
            28,035
            
            $
            (4,101
            )
            $
            23,934Total
                net losses for the nine months ended included in:Net
                income
            
            
            44
            
            
            2,553
            
            
            2,597Other
                comprehensive loss
            
            
            (4,331
            )
            
            —
            
            
            (4,331
            )Purchases,
                sales, issuances and settlements, net
            
            
            (6,888
            )
            
            —
            
            
            (6,888
            )Net
                transfers into (out of) Level 3
            
            
            —
            
            
            —
            
            
            —Ending
                balance as of September 30, 2008
            
            $
            16,860
            
            $
            (1,548
            )
            $
            15,312




14





(dollars
      in thousands)





**5.**
            **Debt**





*Junior
      Subordinated Debt*





The
      Company established four special purpose trusts for the purpose of issuing
      trust
      preferred securities. The proceeds from such issuances, together with the
      proceeds of the related issuances of common securities of the trusts, were
      invested by the trusts in junior subordinated debentures issued by the Company.
      As a result of FIN 46, the Company does not consolidate such special purpose
      trusts, as the Company is not considered to be the primary beneficiary under
      this accounting standard. The equity investment, totaling $3,714 as of September
      30, 2008 on the Company’s consolidated balance sheet, represents the Company’s
      ownership of common securities issued by the trusts. The debentures require
      interest-only payments to be made on a quarterly basis, with principal due
      at
      maturity. The Company incurred $2,605 of placement fees in connection with
      these
      issuances which is being amortized over thirty years.





The
      table
      below summarizes the Company’s trust preferred securities as of September 30,
      2008:





**Name
                of Trust**
            
            **Aggregate**
              **Liquidation**
              **Amount
                of**
              **Trust**
              **Preferred**
              **Securities**
            
            **Aggregate**
              **Liquidation**
              **Amount
                of**
              **Common**
              **Securities**
            
            **Aggregate**
              **Principal**
              **Amount**
              **of
                Notes**
            
            **Stated**
              **Maturity**
              **of
                Notes**
            
            **Per**
              **Annum**
              **Interest**
              **Rate
                of**
              **Notes**AmTrust
                Capital Financing Trust I
            
            $
            25,000
            
            $
            774
            
            $
            25,774
            
            
            3/17/2035
            
            
            8.275
            
            
            %(1
            )AmTrust
                Capital Financing Trust II
            
            
            25,000
            
            
            774
            
            
            25,774
            
            
            6/15/2035
            
            
            7.710
            
            
            (1
            )AmTrust
                Capital Financing Trust III
            
            
            30,000
            
            
            928
            
            
            30,928
            
            
            9/15/2036
            
            
            8.830
            
            
            (2
            )AmTrust
                Capital Financing Trust IV
            
            
            40,000
            
            
            1,238
            
            
            41,238
            
            
            3/15/2037
            
            
            7.930
            
            
            (3
            )Total
                trust preferred securities
            
            $
            120,000
            
            $
            3,714
            
            $
            123,714




(1)
            The
                interest rate will change to three-month LIBOR plus 3.40% after the
                tenth
                anniversary.(2)
            The
                interest rate will change to LIBOR plus 3.30% after the fifth
                anniversary.(3)
            The
                interest rate will change to LIBOR plus 3.00% after the fifth
                anniversary.




*Term
      Loan*





On
      June
      3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A.
      in
      the aggregate amount of $40,000. The term of loan is for a period of three
      years
      and requires quarterly principal payments of $3,333 beginning on September
      3,
      2008 and ending on June 3, 2011. The loan carries a variable rate and is based
      on a Eurodollar rate plus an applicable margin. The Eurodollar rate is a
      periodic fixed rate equal to the London Interbank Offered Rate “LIBOR” plus a
      margin rate, which was 185 basis points. As of September 30, 2008 the interest
      rate was 4.67%. The Company can prepay any amount after the first anniversary
      date without penalty upon prior notice. The term loan contains affirmative
      and
      negative covenants, including limitations on additional debt, limitations on
      investments and acquisitions outside the Company’s normal course of business.
      The loan requires the Company to maintain debt to equity ratio of 0.35 to 1
      or
      less. The Company incurred financing fees of $52 related to the
      agreement.





On
      June
      4, 2008, the Company entered into a fixed rate interest swap agreement totaling
      $40,000 to convert the term loan from variable to fixed rates. Under this
      agreement, the Company will pay a fixed rate of and receive a variable rate
      based on LIBOR plus a margin of 267 basis points. The variable rate is reset
      every three months, at which time the interest will be settled and will be
      recognized as adjustments to interest expense. The Company recorded interest
      expense of $76 during the third quarter related to this agreement.




15




(dollars
      in thousands)





*Promissory
      Note*





In
      connection with the stock and asset purchase agreement with a subsidiary of
      Unitrin, Inc. (See Note 12. “Acquisitions”), the Company entered into a
      promissory note with Unitrin in the amount of $30,000. The note is non interest
      bearing and requires four annual principal payments of $7,500 beginning on
      June
      1, 2009 through June 1, 2012. The Company calculated imputed interest of $3,155
      based on current interest rates available to the Company which was 5.4%.
      Accordingly, the note’s carrying balance was adjusted to $26,845 at the
      acquisition. The note is required to be paid in full, immediately, under certain
      circumstances involving default of payment or change of control of the Company.
      The Company included $306 and $407 of amortized discount on the note in its
      results of operations for the three and nine months ended September 30, 2008,
      respectively. The note’s carrying value at September 30, 2007 was
      $27,252.




*Line
      of Credit*





On
      June
      3, 2008, the Company entered into an agreement for an unsecured line of credit
      with JP Morgan Chase Bank, N.A. in the aggregate amount of $25,000. The line
      will be used for collateral for letters of credit. The line will expire on
      June
      30, 2009.   Interest payments are required to be paid monthly on any
      unpaid principal and bears interest at a rate of LIBOR plus 150 basis
      points.  As of September 30, 2008 there was no outstanding balance on the
      line of credit. The Company has an outstanding letters of credit in place at
      September 30, 2008 for $22,409 that reduced the availability on the line of
      credit to $2,591 as of September 30, 2008. The Company incurred financing fees
      of $25 related to the agreement.





**6.**
            **Earnings
                Per Share**





The
      following, is a summary of the elements used in calculating basic and diluted
      earnings per share:





**Three Months Ended September 30,**
            
            **Nine Months Ended September 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007**Net
                income available to common shareholders
            
            **$**
            9,361
            
            $
            24,434
            
            $
            57,974
            
            $
            67,308Weighted
                average number of common shares outstanding - basic
            
            
            59,995
            
            
            59,959
            
            
            59,985
            
            
            59,959Potentially
                dilutive shares:Dilutive
                shares from stock-based compensation
            
            
            821
            
            
            1,020
            
            
            921
            
            
            676Weighted
                average number of common shares outstanding - dilutive
            
            
            60,816
            
            
            60,979
            
            
            60,906
            
            
            60,635Basic
                earnings per common share
            
            **$**
            0.16
            
            $
            0.41
            
            $
            0.97
            
            $
            1.12Diluted
                earnings per common share
            
            **$**
            0.15
            
            $
            0.40
            
            $
            0.95
            
            $
            1.11




As
      of
      September 30, 2008, there were less than 500 anti-dilutive securities excluded
      from diluted earnings per share.





16





(dollars
      in thousands)





**7.**
            **Share
                Based Compensation**





The
      Company’s 2005 Equity and Incentive Plan (“2005 Plan”) permits the Company to
      grant to officers, employees and non-employee directors of the Company incentive
      compensation directly linked to the price of the Company’s stock. The Company
      grants options at prices equal to the closing stock price of the Company’s stock
      on the dates the options are granted. The Company recognizes compensation
      expense under SFAS No. 123(R) “Share-Based Payment” for its share-based payments
      based on the fair value of the awards. The fair value of each option grant
      is
      separately estimated for each vesting date. The fair value of each option is
      amortized into compensation expense on a straight-line basis between the grant
      date for the award and each vesting date. The Company has estimated the fair
      value of all stock option awards as of the date of the grant by applying the
      Black-Scholes-Merton multiple-option pricing valuation model. The application
      of
      this valuation model involves assumptions that are judgmental and highly
      sensitive in the determination of compensation expense. SFAS 123(R)’s fair value
      valuation method resulted in share-based expense (a component of salaries and
      benefits) in the amount of approximately $819 and $2,314 for the three and
      nine
      months ended September 30, 2008, respectively compared to $457 and $1,237 for
      the three and nine months ended September 30, 2007, respectively.





The
      following schedule shows all options granted, exercised, expired and exchanged
      under the 2005 Plan for the nine months ended September 30, 2008 and
      2007:





**2008**
            
            **2007***Amounts in thousands except per share*
            
            **Number of**
              **Shares**
            
            **Amount per**
              **Share**
            
            **Number of**
              **Shares**
            
            **Amount per**
              **Share**Outstanding
                beginning of period
            
            
            3,126
            
            $
            7.00-14.55
            
            
            2,390
            
            $
            7.00-7.50Granted
            
            
            733
            
            
            12.73-15.02
            
            
            160
            
            
            10.56-10.77Exercised
            
            
            (45
            )
            
            7.50
            
            
            —
            
            
            —Cancelled
                or terminated
            
            
            (31
            )
            
            7.50-14.55
            
            
            (55
            )
            
            7.50Outstanding
                end of period
            
            
            3,783
            
            $
            7.00-15.02
            
            
            2,495
            
            $
            7.00-10.77




The
      weighted average grant date fair value of options granted during the first
      nine
      months of 2008 was $4.46. As of September 30, 2008 there was approximately
      $7,685 of total unrecognized compensation cost related to non-vested share-based
      compensation arrangements.





**8.**
            **Acquisition
                Costs and Other Underwriting
                Expenses**





The
      following table summarizes the components of acquisition costs and other
      underwriting expenses:





Three Months Ended September 30,
            
            Nine Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Policy
                acquisition expenses
            
            $
            32,216
            
            $
            28,418
            
            $
            73,215
            
            $
            62,640Salaries
                and benefits
            
            
            17,902
            
            
            12,913
            
            
            47,548
            
            
            31,846Other
                insurance general and administrative expense
            
            
            3,431
            
            
            8,292
            
            
            28,809
            
            
            20,870$
            53,549
            
            $
            49,623
            
            $
            149,572
            
            
            115,356





17





(dollars
      in thousands)





**9.**
            **Comprehensive
                Income**





The
      following table summarizes the components of comprehensive income:





Three Months Ended September 30,
            
            Nine Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Net
                income
            
            $
            9,361
            
            $
            24,434
            
            $
            57,974
            
            $
            67,308Unrealized
                holding gain (loss)
            
            
            (30,310
            )
            
            (18,098
            )
            
            (60,726
            )
            
            (23,418
            )Reclassification
                adjustment
            
            
            1,841
            
            
            (2,089
            )
            
            10,073
            
            
            2,405Foreign
                currency translation
            
            
            (5,376
            )
            
            899
            
            
            (4,756
            )
            
            (534
            )Comprehensive
                income (loss)
            
            $
            (24,484
            )
            $
            5,146
            
            $
            2,565
            
            
            45,761




**10.**
            **Income
                Taxes**





Income
      tax expense (benefit) for the three and nine months ended September 30, 2008
      was
      $(1,529) and $13,004, respectively, compared to $9,985 and $26,584 for the
      three
      and nine months ended September 30, 2007. The following table reconciles the
      Company’s statutory federal income tax rate to its effective tax
      rate.





Three Months Ended September 30,
            
            Nine Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Income
                from continuing operations before provision for income taxes and
                minority
                interest
            
            $
            7,832
            
            $
            30,301
            
            $
            68,078
            
            $
            91,675Less:
                minority interest
            
            
            —
            
            
            (4,118
            )
            
            (2,900
            )
            
            (2,217
            )Income
                from continuing operations after minority interest before provision
                for
                income taxes
            
            $
            7,832
            
            $
            34,419
            
            $
            70,978
            
            $
            93,892Income
                taxes at statutory rates
            
            $
            2,741
            
            $
            12,047
            
            $
            24,842
            
            $
            32,863Effect
                of income not subject to US taxation
            
            
            (4,438
            )
            
            (2,982
            )
            
            (12,306
            )
            
            (5,972
            )Other,
                net
            
            
            168
            
            
            920
            
            
            468
            
            
            (307
            )Provision
                for income taxes as shown on the consolidated statements of
                earnings
            
            $
            (1,529
            )
            $
            9,985
            
            $
            13,004
            
            $
            26,584GAAP
                effective tax rate
            
            
            (19.5
            )%
            
            29.0
            %
            
            18.3
            %
            
            28.3
            %




The
      Company’s major taxing jurisdictions include the U.S. (federal and state), the
      United Kingdom and Ireland. The years subject to potential audit vary depending
      on the tax jurisdiction.  Generally, the Company’s statute of limitation is
      open for tax years ended December 31, 2004 and forward. At September 30, 2008,
      the Company has approximately $1,500 of accrued interest and penalties related
      to FIN 48 unrecognized tax benefits.





18





(dollars
      in thousands)





During
      2006, the Internal Revenue Service (“IRS”) completed an audit of the Company’s
      subsidiaries, Associated Industries Insurance Services, Inc. (“AIIS”) and
      Associated Industries Insurance Company’s (“AIIC”) (collectively “Associated”)
      which the Company acquired in 2007. For the IRS’ 2002 and 2003 consolidated
      federal income tax returns, the field examiner indicated Associated underpaid
      their liability by approximately $3,200. In addition, interest and penalties
      of
      $600 were assessed. During 2006, management of Associated accrued a liability
      for its best estimate of a settlement with the IRS. Although Associated’s
      management disagrees with the majority of the positions taken by the examiner
      and has appealed the assessment, the Company has estimated the potential
      liability related to the audit to be $4,300 (including $1,400 for penalties
      and
      interest) and has reflected this position, per FIN 48 guidelines, in the
      consolidated financial statements. The IRS recently held an appeals conference
      and found in favor with the taxpayer related to the majority of the outstanding
      issues. A
      settlement based on the conference is pending.





During
      the second quarter, AIIS also received formal notification from the IRS
      indicating the 2006 consolidated federal income tax return has been selected
      for
      audit. The initial audit meeting has been held and related correspondence with
      the field examiner exchanged. The audit is in the preliminary stage of field
      work and the initial information document requests have been received. All
      items
      requested by the agent have been delivered.





During
      2007, the Company, while performing a review of the most recently filed income
      tax return with the IRS for calendar year ending December 31, 2006, determined
      an issue exists per FIN 48 guidelines concerning its position related to accrued
      market discount. The Company reverses accrued market discount income recognized
      for book purposes when calculating taxable income. The reversal results from
      the
      accrued market discount income recognized by the insurance subsidiaries for
      bonds and other investments. The Company inadvertently reversed the amount
      related to commercial paper investments on the 2006 income tax return. The
      Company has estimated the potential liability to be approximately $900
      (including $100 for penalties and interest) and has reflected this position,
      per
      FIN 48 guidelines, in the consolidated financial statements.




**11.**
            **Other
                Investments**





In
      February 2007, the Company participated with H.I.G. Capital, a Miami-based
      private equity firm, in financing H.I.G. Capital’s acquisition of Warrantech
      Corporation (“Warrantech”) in a cash merger. The Company contributed $3,850 for
      a 27% equity interest in Warrantech. Warrantech is an independent developer,
      marketer and third party administrator of service contracts and after-market
      warranties primarily for the motor vehicle and consumer products industries.
      The
      Company currently provides insurance coverage for Warrantech's consumer product
      programs and on certain nationwide warranty programs, which produced gross
      premium written of approximately $20,800 and $13,000 during the three months
      ended September 30, 2008 and 2007, respectively, and gross premium written
      of
      $71,400 and $24,000 for the nine months ended September 30, 2008 and 2007,
      respectively. As the Company does not control Warrantech, the Company accounts
      for this investment under the equity method. The Company recorded investment
      loss of approximately $177 and $217 from its equity investment for the three
      months ended September 30, 2008 and 2007, respectively and $738 and $432 for
      the
      nine months ended September 30, 2008 and 2007, respectively. As of September
      30,
      2008 the Company’s equity interest was approximately $2,354. Additionally, the
      Company provided Warrantech with a $20,000 senior secured note due January
      30,
      2012 (note receivable - related party). Interest on the note is payable monthly
      at a rate of 15% per annum and consists of a cash component at 11% per annum
      and
      4% per annum for the issuance of additional notes (“PIK Notes”) in a principal
      amount equal to the interest not paid in cash on such date. The Company provided
      the funding for the senior secured note in two tranches, which included an
      initial funding of $18,000 during the three months ended March 31, 2007 and
      the
      remaining $2,000 during the three months ended March 31, 2008. As of September
      30, 2008 the carrying value of the note receivable was $21,376 (note receivable
      - related party).




19




(dollars
      in thousands)





**12.**
            **Acquisitions**





In
      June
      2008, the Company completed a stock and asset purchase agreement with a
      subsidiary of Unitrin, Inc. whereby the Company acquired Unitrin, Inc.’s
      commercial package business (“UBI”) including its distribution networks, renewal
      rights and four insurance companies through which Unitrin wrote its UBI
      business. The acquired insurance companies are located in Kansas, Texas and
      Wisconsin and are collectively licensed in 33 states. Consideration paid for
      the
      transaction was approximately $88,500 and consisted of cash of $61,200, a note
      payable of $26,800, assumed liabilities of $300 and direct transaction costs
      of
      $200. The Company preliminarily recorded $8,800 of goodwill and $41,000 of
      intangible assets related to distribution networks, trademarks, licenses and
      non-compete agreements. The note is required to be paid in full immediately,
      under certain circumstances including default of a payment or change of control
      of the Company. The results of operations have been included in the
      Company’s consolidated financial statements since the acquisition date.
      Additionally, at the close of the acquisition, the Company assumed approximately
      $82,000 of unearned premium from Unitrin affiliates in connection with the
      acquisition and then ceded the entire amount to Maiden Insurance pursuant to
      the
      Maiden Reinsurance Agreement (see Note 13. “Related Party
      Transaction”).





In
      accordance with SFAS No. 141, the cost of the acquisition was preliminarily
      allocated to the assets acquired and liabilities assumed based on the fair
      values as of the close of acquisition, with the amounts exceeding the fair
      value
      recorded as goodwill. As the value of certain assets and liabilities are
      preliminary in nature, they are subject to adjustment as additional information
      is obtained, including, but not limited to goodwill, intangible assets and
      other
      assets and liabilities. The Company expects to finalize the valuations by the
      end of 2008. The preliminary purchase price allocation as of the date of
      acquisition is as follows:





AssetsInvestments
            
            $
            30,673Cash
                and cash equivalents
            
            
            5,263Premium
                receivable
            
            
            45,296Prepaid
                reinsurance premium
            
            
            62,829Reinsurance
                recoverable
            
            
            28Property
                and equipment
            
            
            1,120Goodwill
            
            
            8,800Intangible
                assets
            
            
            41,000Other
                assets
            
            
            2,431Total
                assets
            
            $
            197,440LiabilitiesReinsurance
                payable on paid losses
            
            $
            45,708Unearned
                premiums
            
            
            62,910Accrued
                expenses and other current liabilities
            
            
            364Total
                liabilities
            
            $
            108,982Total
                purchase price
            
            $
            88,458




In
      September 2007, the Company acquired all the issued and outstanding stock of
      AIIS a Florida-based workers' compensation managing general agency, and its
      wholly-owned subsidiary, AIIC, a Florida workers' compensation insurer, also
      licensed in Alabama, Georgia and Mississippi for consideration of approximately
      $38,854. The $38,854 consisted of approximately $33,930 of cash, $599 of direct
      acquisition costs and $4,325 for a contingent liability related to income taxes
      (see Note 10. “Income Taxes”). Upon resolution of the contingency, the Company
      will distribute the $4,325 to either the IRS or the sellers of Associated
      or partially to both. The IRS recently held an appeals hearing and found in
      favor with the taxpayer related to the majority of the outstanding
      issues.  Additionally,
      the Company recorded $3,720 of goodwill and $10,210 of intangible assets related
      to trademarks, licenses, distribution networks and non-compete agreements.
      The
      Company determined that the trademarks and licenses have indefinite lives and
      the remaining intangible assets are being amortized over a period of one to
      15
      years.





20




(dollars
      in thousands)





**13.**
            **Related
                Party Transactions**




*Reinsurance
      Agreement*





Maiden
      Holdings, Inc. (“Maiden”) is a Bermuda insurance holding company formed by
      Michael Karfunkel, George Karfunkel and Barry Zyskind, the principal
      shareholders, and, respectively, the Chairman of the Board of Directors, a
      Director, and the Chief Executive Officer and Director of the Company. Messrs.
      Karfunkel and Mr. Zyskind contributed $50,000 to Maiden Insurance. In July
      2007,
      Maiden raised approximately $480,600 in a private placement. Maiden Insurance
      Company, Ltd. (“Maiden Insurance”), a wholly-owned subsidiary of Maiden, is a
      class 3 Bermuda insurance company.





During
      the third quarter of 2007, the Company and Maiden entered into master agreement,
      as amended, by which they caused the Company’s Bermuda affiliate, AmTrust
      International Insurance, Ltd. (“AII”) and Maiden Insurance to enter into a quota
      share reinsurance agreement (the “Reinsurance Agreement”) by which (a) AII
      retrocedes to Maiden Insurance an amount equal to 40% of the premium written
      by
      AmTrust’s U.S., Irish and U.K. insurance companies (the “AmTrust Ceding
      Insurers”), net of the cost of unaffiliated inuring reinsurance (and in the case
      of AmTrust’s U.K. insurance subsidiary IGI, net of commissions) and 40% of
      losses and (b) AII transferred to Maiden Insurance 40% of the AmTrust Ceding
      Insurer’s unearned premium reserves, effective as of July 1, 2007, with respect
      to current lines of business, excluding risks for which the AmTrust Ceding
      Insurers’ net retention exceeds $5,000 (“Covered Business”). AmTrust also has
      agreed to cause AII, subject to regulatory requirements, to reinsure any
      insurance company which writes Covered Business in which AmTrust acquires a
      majority interest to the extent required to enable AII to cede to Maiden
      Insurance 40% of the premiums and losses related to such Covered Business.
      The
      Agreement further provides that AII receives a ceding commission of 31% of
      ceded
      written premiums. The Reinsurance Agreement has an initial term of three years
      and will automatically renew for successive three year terms thereafter, unless
      either AII or Maiden Insurance notifies the other of its election not to renew
      not less than nine months prior to the end of any such three year term. In
      addition, either party is entitled to terminate on thirty day’s notice or less
      upon the occurrence of certain early termination events, which include a default
      in payment, insolvency, change in control of AII or Maiden Insurance, run-off,
      or a reduction of 50% or more of the shareholders’ equity of Maiden Insurance or
      the combined shareholders’ equity of AII and the AmTrust Ceding Insurers.
      Effective June 1, 2008 the master agreement was amended such that AII agreed
      to
      cede and Maiden Insurance agreed to accept and reinsure Retail Commercial
      Package Business, which the Company, through Affiliates, commenced writing
      effective June 1, 2008, in connection with its acquisition of UBI. AII is ceding
      100% of the unearned premium related to in-force Retail Commercial Package
      Business and losses related thereto assumed by the Company as a result of this
      acquisition and 40% the Company’s net written premium and losses on Retail
      Commercial Package Business written or renewed on or after the effective date.
      The $2,000 maximum liability for a single loss provided in the Quota Share
      Reinsurance Agreement shall not be applicable to Retail Commercial Package
      Business.  AmTrust receives a ceding commission of 34.375% for Retail
      Commercial Package Business. The Company recorded approximately $33,493 and
      $88,899 of ceding commission income during the three and nine months ended
      September 30, 2008, respectively, as a result of this agreement. The Company
      recorded approximately $40,054 of ceding commission income during the three
      and
      nine months ended September 30, 2007.




21




(dollars
      in thousands)





The
      following is the effect on the Company’s balance sheet as of September 30, 2008
      and the results of operations for the three and nine months ended September
      30,
      2008 related to the Reinsurance Agreement:





As of September 30, 2008
            
            As of December 31, 2007Assets
                and liabilities:Reinsurance
                recoverable
            
            
            
            
            $
            187,629
            
            
            
            
            $
            55,973Prepaid
                reinsurance premium
            
            
            
            
            
            239,060
            
            
            
            
            
            137,099Ceded
                reinsurance premiums payable
            
            
            
            
            
            (108,475
            )
            
            
            
            
            (38,792
            )Note
                payable
            
            
            
            
            
            (167,661
            )
            
            
            
            
            (113,228
            )




Three Months Ended September 30,
            
            Nine Months Ended September 30,2008
            
            2007
            
            2008
            
            2007Results
                of operations:Premium
                written - ceded
            
            $
            (102,680
            )
            $
            (190,801
            )
            $
            (353,697
            )
            $
            (190,801
            )Change
                in unearned premium - ceded
            
            
            (9,022
            )
            
            127,835
            
            
            101,960
            
            
            127,835Earned
                premium - ceded
            
            $
            (111,702
            )
            $
            (62,966
            )
            $
            (251,737
            )
            $
            (62,966
            )Ceding
                commission on premium written
            
            $
            32,289
            
            $
            59,148
            
            $
            113,034
            
            $
            59,148Ceding
                commission - deferred
            
            
            1,654
            
            
            (19,094
            )
            
            (24,135
            )
            
            (19,094
            )Ceding
                commission - earned
            
            $
            33,943
            
            $
            40,054
            
            $
            88,899
            
            $
            40,054Incurred
                loss and loss adjustment expense - ceded
            
            $
            87,984
            
            $
            40,898
            
            $
            177,991
            
            $
            40,898Interest
                expense on note payable
            
            
            1,238
            
            
            -
            
            
            3,933
            
            
            -








The
      Reinsurance Agreement requires that Maiden Insurance provide to AII sufficient
      collateral to secure its proportional share of AII’s obligations to the U.S.
      AmTrust Ceding Insurers. AII is required to return to Maiden Insurance any
      assets of Maiden Insurance in excess of the amount required to secure its
      proportional share of AII’s collateral requirements, subject to certain
      deductions.





*Reinsurance
      Brokerage Agreement*





Effective
      July 1, 2007, AmTrust, through a subsidiary, entered into a reinsurance
      brokerage agreement with Maiden. Pursuant to the brokerage agreement, AmTrust
      provides brokerage services relating to the Reinsurance Agreement for a fee
      equal to 1.25% of reinsured premium. The brokerage fee is payable in
      consideration of AII Reinsurance Broker Ltd.’s brokerage services. The Company
      recorded $1,320 and $2,400 of brokerage commission during the three months
      ended
      September 30, 2008 and 2007, respectively. The Company recorded $4,458 and
      $2,400 of brokerage commission during the nine months ended September 30, 2008
      and 2007, respectively.





*Asset
      Management Agreement*





Effective
      July 1, 2007, AmTrust, through a subsidiary, entered into an asset management
      agreement with Maiden, pursuant to which it provides investment management
      services to Maiden. Pursuant to the asset management agreement, AmTrust earns
      an
      annual fee equal to 0.35% per annum of average invested assets plus all costs
      incurred. Effective April 1, 2008, the investment management services fee has
      been reduced to 0.20% per annum and is further reduced to 0.15% per annum if
      the
      average invested assets exceeds $1,000,000. As a result of this agreement,
      the
      Company recorded approximately $500 and $400 of investment management fees
      for the three months ended September 30, 2008 and 2007. Additionally, the
      Company recorded approximately $1,459 and $400 of investment management
      fees for the nine months ended September 30, 2008, respectively, as a
      result of this agreement.




22





(dollars
      in thousands)





*Services
      Agreement*





AmTrust,
      through its subsidiaries, entered into services agreements in 2008, pursuant
      to
      which it provides certain marketing and back office services to Maiden. Pursuant
      to the services agreements, AmTrust earns a fee equal to reimburse AmTrust
      for
      its costs plus 8%. The Company recorded approximately $338 and $836 for the
      three and nine months ended September 30, 2008 as a result of this
      agreement.




*Note
      Payable — Collateral for Proportionate Share of Reinsurance
      Obligation*




In
      conjunction with the Reinsurance Agreement, AII entered into a loan agreement
      with Maiden Insurance during the fourth quarter of 2007, whereby, Maiden
      Insurance will lend to AII from time to time for the amount of obligation of
      the
      AmTrust Ceding Insurers that AII is obligated to secure, not to exceed an amount
      equal to Maiden Insurance’s proportionate share of such obligations to such
      AmTrust Ceding Insurers in accordance with the reinsurance agreement. The
      Company is required to deposit all proceeds from the advances into a sub-account
      of each trust account that has been established for each AmTrust Ceding Insurer.
      To the extent of the loan, Maiden Insurance shall be discharged from providing
      security for its proportionate share of the obligations as contemplated by
      the
      reinsurance agreement. If an AmTrust Ceding Insurer withdraws loan proceeds
      from
      the trust account for the purpose of reimbursing such AmTrust Ceding Insurer,
      for an ultimate net loss, the outstanding principal balance of the loan shall
      be
      reduced by the amount of such withdrawal. The loan agreement was amended in
      February 2008 to provide for interest at a rate of LIBOR plus 90 basis points
      and is payable on a quarterly basis. Each advance under the loan is secured
      by a
      promissory note. Advances totaled $167,661 as of September 30, 2008. The Company
      recorded $1,238 and $3,933 of interest expense during the three and nine months
      ended September 30, 2008, respectively.





*Other
      Reinsurance Agreement*





Effective
      January 1, 2008, Maiden became a participating reinsurer in the first layer
      of
      the Company’s workers’ compensation excess of loss program, which provides
      coverage in the amount of $9 million per occurrence in excess of $1 million,
       subject to an annual aggregate deductible of $1.25 million.  Maiden,
      which is one of two participating reinsurers in the layer, has a 45%
      participation.  Maiden participates in the first layer of the excess of
      loss program on the same market terms and conditions as the other
      participant.





*AmTrust
      Capital Management*





AmTrust
      Capital Management, Inc. (“ACMI”), our wholly owned subsidiary, currently
      manages approximately $38,000 of our assets. ACMI also serves as the Investment
      Manager of Leap Tide Partners, L.P., a domestic partnership, (see Note 14
“Assets under Management”) and Leap Tide Offshore, Ltd., a Cayman exempted
      company, both of which were formed for the purpose of providing qualified
      third-party investors the opportunity to invest funds in a vehicle managed
      by
      ACMI (the “Hedge Funds”).  As
      of
      September 30, 2008 the current value of the invested funds was approximately
      $13,600 in the Hedge Funds.  Approximately 88% of these funds were
      contributed by Michael Karfunkel, George Karfunkel and Barry D. Zyskind. 
Our Audit Committee has reviewed the Leap Tide transactions and determined
      that
      they were entered into at arm’s-length and did not violate our Code of Business
      Conduct and Ethics. The management companies earned approximately $43 and $88
      of
      fees under the agreement during the three months ended September 30, 2008 and
      2007, respectively and $160 and $231 of fees during the nine months ended
      September 30, 2008 and 2007, respectively.





23





(dollars
      in thousands)








*Warrantech*





In
      February of 2007, the Company participated with H.I.G. Capital, a Miami-based
      private equity firm, in financing H.I.G. Capital’s acquisition of Warrantech
      (see Note 11 “Other Investments”) in a cash merger. The Company contributed
      $3,850 for a 27% equity interest Warrantech. Warrantech is an independent
      developer, marketer and third party administrator of service contracts and
      after-market warranty primarily for the motor vehicle and consumer product
      industries. The Company currently provides insurance coverage for Warrantech’s
      consumer product programs and on certain nationwide warranty programs, which
      produced gross premium written of approximately $20,800 and $13,000 during
      the
      three months ended September 30, 2008 and 2007, respectively, and gross premium
      written of $71,400 and $24,000 for the nine months ended September 30, 2008
      and
      2007, respectively. The Company recorded investment loss of approximately $177
      and $217 from its equity investment for the three months ended September 30,
      2008 and 2007, respectively and $738 and 432 for the nine months ended September
      30, 2008 and 2007, respectively. As of September 30, 2008 the Company’s equity
      interest was approximately $2,354. Additionally in 2007, the Company provided
      Warrantech with a $20,000 senior secured note due January 31, 2012 (note
      receivable - related party). Interest on the notes is payable monthly at a
      rate
      of 15% per annum and consisted of a cash component at 11% per annum and 4%
      per
      annum for the issuance of additional notes (“PIK Notes”) in a principle amount
      equal to the interest not paid in cash on such date. As of September 30, 2008
      the carrying value of the note receivable was $21,376 (note receivable - related
      party).




*Lease
      Agreements*





In
      June
      2002, we entered into a lease for approximately 9,000 square feet of office
      space at 59 Maiden Lane in downtown Manhattan from 59 Maiden Lane Associates,
      LLC, an entity which is wholly owned by Michael Karfunkel and George Karfunkel.
      Effective January 1, 2008, we entered into an amended lease whereby we increased
      our leased space to 14,807 square feet and extended the lease through December
      31, 2017. The Audit Committee reviewed and approved the amended lease agreement.
      The Company paid approximately $163 and $100 for the lease for the three months
      ended September 30, 2008 and 2007, respectively and $380 and $300 for the nine
      months ended September 30, 2008 and 2007, respectively.





In
      2008,
      we entered into a lease for approximately 5,000 square feet of office space
      in
      Chicago, Illinois from 33 West Monroe Associates, LLC, an entity which is wholly
      owned by Michael Karfunkel and George Karfunkel. The audit committee reviewed
      and approved the lease agreement. The Company paid approximately $30 and $92
      for
      the lease for the three and nine months ended September 30, 2008,
      respectively.





*Employment
      Relationship*





Barry
      Karfunkel, an analyst with a Company subsidiary, earned approximately $63 for
      the three months ended September 30, 2008 and 2007. Additionally, for the nine
      months ended September 30, 2008 and 2007, respectively, he earned $213 and
      $179.
      Barry Karfunkel is the son of Michael Karfunkel and the brother-in-law of Barry
      Zyskind.







24





(dollars
      in thousands)








**14.**
            **Assets
                Under Management**





In
      December 2006, the Company formed two, wholly-owned subsidiaries, AmTrust
      Capital Management, Inc. (ACMI) and AmTrust Capital Management GP, LLC (ACM).
      Concurrently with these formations, the Company also formed Leap Tide Partners,
      LP (LTP), a hedge fund limited partnership, for the purpose of managing the
      assets of its limited partners. ACM has a 1% ownership in LTP. ACMI earns a
      management fee equal to 1% of the LTP’s assets. ACM also earns an incentive fee
      of 20% of the cumulative profits of the LTP. Through March 31, 2008 ACM, the
      general partner of LTP, consolidated LTP in accordance with EITF 04-05
“Determining Whether a General Partner, or the General Partners as a Group
      Controls a Limited Partnership or Similar Entity When the Limited Partners
      Have
      Certain Rights,” as the rights of the limited partners did not overcome the
      rights of the general partner. Effective April 1, 2008, the limited partnership
      agreement was amended such that a majority of the limited partners had the
      right
      to liquidate the limited partnership. In addition the Company ceased being
      the
      managing member of ACM. Due to this amendment, in accordance with EITF 04-05,
      the Company ceased to consolidate LTP as of April 1, 2008.




Through
      March 31, 2008, we allocated an equivalent portion of the limited partners’
income or loss to minority interest. For the three months ended September 30,
      2008 and 2007, LTP had an investment (loss) gain of $0 and $2,191, respectively
      and resulted in an allocation to minority interest of $0 and $2,191. For the
      nine months ended September 30, 2008 and 2007, LTP had an investment (loss)
      gain
      of $(2,900) and $(2,217), respectively and resulted in an allocation to minority
      interest of $(2,900) and $(2,217). The management companies earned approximately
      $30 and $62 of fees under the agreement during the three months ended September
      30, 2008 and 2007, respectively and $111 and $171 of fees during the nine months
      ended September 30, 2008 and 2007, respectively.





Net
      investment income for the three and nine months ended September 30, 2008 and
      2007 was derived from the following sources:






**Three Months Ended September 30,**
            
            
            **Nine Months Ended September 30,****2008**
            
            
            **2007**
            
            
            **2008**
            
            
            **2007**Equity
                securities:Dividends
            
            $
            —
            
            $
            27
            
            $
            8
            
            $
            132Realized
                gain (loss)
            
            
            —
            
            
            356
            
            
            431
            
            
            1,480Unrealized
                gain (loss)
            
            
            —
            
            
            (4,496
            )
            
            (3,297
            )
            
            (3,908
            )Cash
                and cash equivalents
            
            
            —
            
            
            57
            
            
            6
            
            
            250—
            
            
            (4,056
            )
            
            (2,852
            )
            
            (2,046
            )Less:
                Investment expenses
            
            
            —
            
            
            (62
            )
            
            (48
            )
            
            (171
            )$
            —
            
            $
            (4,118
            )
            $
            (2,900
            )
            $
            (2,217
            )





**15.**
            **Contingent
                Liabilities**




The
      Company’s insurance subsidiaries are named as defendants in various legal
      actions arising principally from claims made under insurance policies and
      contracts. Those actions are considered by the Company in estimating the loss
      and LAE reserves. The Company’s management believes the resolution of those
      actions should not have a material adverse effect on the Company’s financial
      position or results of operations.




25





(dollars
      in thousands)





**16.**
            **Segments**




The
      Company currently operates three business segments, Small Commercial Business
      (formerly known as Small Business Workers’ Compensation Insurance);
      Specialty Risk and Extended Warranty Insurance; and Specialty Middle-Market
      Property and Casualty Insurance. During the three months ended June 30, 2008,
      the Company completed a stock and asset purchase agreement with a subsidiary
      of
      Unitrin, Inc. whereby the Company acquired its retail commercial package
      business (“UBI”) including its distribution networks, renewal rights and four
      insurance companies through which Unitrin wrote its UBI business. This business
      was combined into the Company’s worker’s compensation segment and renamed the
      small commercial business segment. The “Corporate & Other” segment
      represents the activities of the holding company as well as a portion of fee
      revenue. In determining total assets (excluding cash and invested assets) by
      segment the Company identifies those assets that are attributable to a
      particular segment such as premium receivable, deferred acquisition cost,
      reinsurance recoverable and prepaid reinsurance while the remaining assets
      are
      allocated based on net written premium by segment. In determining cash and
      invested assets by segment, the Company matches certain identifiable liabilities
      such as unearned premium and loss and loss adjustment expense reserves by
      segment. The remaining cash and invested assets are then allocated based on
      net
      written premium by segment. Investment income and realized gains (losses) are
      determined by calculating an overall annual return on cash and invested assets
      and applying that overall return to the cash and invested assets by
      segment. Interest expense and income taxes are allocated based on net
      written premium by segment. Additionally, management reviews the performance
      of
      underwriting income in assessing the performance of and making decisions
      regarding the allocation of resources to the segments. Underwriting income
      excludes, primarily, commission and fee revenue, investment income and other
      revenues, other underwriting expenses, interest expense and income taxes.
      Management believes that providing this information in this manner is essential
      to providing Company’s shareholders with an understanding of the Company’s
      business and operating performance.




The
      following tables summarize business segments as follows:




Small
                commercial business
            
            Specialty
                risk and extended warranty
            
            Specialty
                middle-market property and casualty insurance
            
            Corporate
                and other
            
            TotalThree
                months ended September 30, 2008:Gross
                premium written
            
            $
            103,568
            
            $
            130,316
            
            $
            47,322
            
            $
            —
            
            $
            281,206Net
                premium written
            
            
            53,637
            
            
            63,774
            
            
            22,018
            
            
            —
            
            
            139,429Change
                in unearned premium
            
            
            (22,186
            )
            
            (29,296
            )
            
            4,386
            
            
            —
            
            
            (47,096
            )Net
                earned premium
            
            
            31,451
            
            
            34,478
            
            
            26,404
            
            
            —
            
            
            92,333Ceding
                commission - primarily related party
            
            
            19,513
            
            
            8,162
            
            
            9,441
            
            
            —
            
            
            37,116Loss
                and loss adjustment expense
            
            
            (13,215
            )
            
            (8,535
            )
            
            (15,344
            )
            
            —
            
            
            (37,094
            )Acquisition
                costs and other underwriting expenses
            
            
            (25,472
            )
            
            (12,895
            )
            
            (15,182
            )
            
            —
            
            
            (53,549
            )(38,687
            )
            
            (21,430
            )
            
            (30,526
            )
            
            —
            
            
            (90,643
            )Underwriting
                income
            
            
            12,277
            
            
            21,210
            
            
            5,319
            
            
            —
            
            
            38,806Commission
                and fee income
            
            
            2,205
            
            
            4,727
            
            
            —
            
            
            1,817
            
            
            8,749Investment
                income, realized gain (loss) and income (loss) on managed
                assets
            
            
            (14,306
            )
            
            (10,439
            )
            
            (5,749
            )
            
            —
            
            
            (30,494
            )Other
                expenses
            
            
            (2,362
            )
            
            (2,651
            )
            
            (1,049
            )
            
            —
            
            
            (6,062
            )Interest
                expense
            
            
            (1,382
            )
            
            (1,772
            )
            
            (528
            )
            
            —
            
            
            (3,682
            )Foreign
                currency gain (loss)
            
            
            —
            
            
            515
            
            
            —
            
            
            —
            
            
            515Provision
                for income taxes
            
            
            2,100
            
            
            (1,115
            )
            
            653
            
            
            (109
            )
            
            1,529Minority
                interest in net income of subsidiary
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                income
            
            $
            (1,468
            )
            $
            10,475
            
            $
            (1,354
            )
            $
            1,708
            
            $
            9,361




26




(dollars
      in thousands)





Small
                commercial business
            
            Specialty
                risk and extended warranty
            
            Specialty
                middle-market property and casualty insurance
            
            Corporate
                and other
            
            TotalThree
                months ended September 30, 2007:Gross
                premium written
            
            $
            67,377
            
            $
            76,186
            
            $
            49,698
            
            $
            —
            
            $
            193,261Net
                premium written
            
            
            65
            
            
            (19,266
            )
            
            (11,516
            )
            
            —
            
            
            (30,717
            )Change
                in unearned premium
            
            
            52,319
            
            
            37,566
            
            
            22,620
            
            
            —
            
            
            112,505Net
                earned premium
            
            
            52,384
            
            
            18,300
            
            
            11,104
            
            
            —
            
            
            81,788Ceding
                commission - primarily related party
            
            
            18,167
            
            
            8,576
            
            
            14,110
            
            
            —
            
            
            40,853Loss
                and loss adjustment expense
            
            
            (31,516
            )
            
            (13,630
            )
            
            (7,083
            )
            
            —
            
            
            (52,229
            )Acquisition
                costs and other underwriting expenses
            
            
            (25,595
            )
            
            (8,477
            )
            
            (15,551
            )
            
            —
            
            
            (49,623
            )(57,111
            )
            
            (22,107
            )
            
            (22,634
            )
            
            —
            
            
            (101,852
            )Underwriting
                income
            
            
            13,440
            
            
            4,769
            
            
            2,580
            
            
            —
            
            
            20,789Commission
                and fee income
            
            
            2,250
            
            
            3,131
            
            
            —
            
            
            2,525
            
            
            7,906Investment
                income, realized gain (loss) and income (loss) on managed
                assets
            
            
            5,763
            
            
            3,191
            
            
            2,888
            
            
            (4,118
            )
            
            7,724Other
                expenses
            
            
            (1,197
            )
            
            (1,384
            )
            
            (843
            )
            
            —
            
            
            (3,424
            )Interest
                expense
            
            
            (1,003
            )
            
            (1,038
            )
            
            (609
            )
            
            —
            
            
            (2,650
            )Foreign
                currency gain (loss)
            
            
            —
            
            
            (44
            )
            
            —
            
            
            —
            
            
            (44
            )Provision
                for income taxes
            
            
            (5,656
            )
            
            (2,418
            )
            
            (1,169
            )
            
            (742
            )
            
            (9,985
            )Minority
                interest in net income of subsidiary
            
            
            —
            
            
            —
            
            
            —
            
            
            4,118
            
            
            4,118Net
                income
            
            $
            13,597
            
            $
            6,207
            
            $
            2,847
            
            $
            1,783
            
            $
            24,434







Small
                commercial business
            
            Specialty
                risk and extended warranty
            
            Specialty
                middle-market property and casualty insurance
            
            Corporate
                and other
            
            TotalNine
                months ended September 30, 2008:Gross
                premium written
            
            $
            304,925
            
            $
            345,393
            
            $
            166,706
            
            $
            —
            
            $
            817,024Net
                premium written
            
            
            145,383
            
            
            163,853
            
            
            79,692
            
            
            —
            
            
            388,928Change
                in unearned premium
            
            
            (24,995
            )
            
            (56,693
            )
            
            (1,549
            )
            
            —
            
            
            (83,237
            )Net
                earned premium
            
            
            120,388
            
            
            107,160
            
            
            78,143
            
            
            —
            
            
            305,691Ceding
                commission - primarily related party
            
            
            49,690
            
            
            19,644
            
            
            23,188
            
            
            —
            
            
            92,522Loss
                and loss adjustment expense
            
            
            (62,554
            )
            
            (56,325
            )
            
            (47,514
            )
            
            —
            
            
            (166,393
            )Acquisition
                costs and other underwriting expenses
            
            
            (74,305
            )
            
            (32,794
            )
            
            (42,473
            )
            
            
            
            
            (149,572
            )136,859
            
            
            89,119
            
            
            89,987
            
            
            —
            
            
            315,965Underwriting
                income
            
            
            33,219
            
            
            37,685
            
            
            11,344
            
            
            —
            
            
            82,248Commission
                and fee income
            
            
            9,542
            
            
            7,292
            
            
            —
            
            
            6,577
            
            
            23,411Investment
                income, realized gain (loss) and income (loss) on managed
                assets
            
            
            (4,795
            )
            
            (3,541
            )
            
            (1,792
            )
            
            (2,900
            )
            
            (13,028
            )Other
            
            
            (5,159
            )
            
            (5,569
            )
            
            (2,632
            )
            
            —
            
            
            (13,360
            )Interest
                expense
            
            
            (4,576
            )
            
            (4,941
            )
            
            (2,335
            )
            
            —
            
            
            (11,852
            )Foreign
                currency gain (loss)
            
            
            —
            
            
            659
            
            
            
            
            
            —
            
            
            659Provision
                for income taxes
            
            
            (5,218
            )
            
            (5,717
            )
            
            (864
            )
            
            (1,205
            )
            
            (13,004
            )Minority
                interest in net income of subsidiary
            
            
            —
            
            
            —
            
            
            —
            
            
            2,900
            
            
            2,900Net
                income
            
            $
            23,013
            
            $
            25,868
            
            $
            3,721
            
            $
            5,372
            
            $
            57,974





27





(dollars
      in thousands)




Small
                commercial business
            
            Specialty
                risk and extended warranty
            
            Specialty
                middle-market property and casualty insurance
            
            Corporate
                and other
            
            TotalNine
                months ended September 30, 2007:Gross
                premium written
            
            $
            235,479
            
            $
            193,457
            
            $
            164,018
            
            $
            —
            
            $
            592,954Net
                premium written
            
            
            152,991
            
            
            71,536
            
            
            68,897
            
            
            —
            
            
            293,424Change
                in unearned premium
            
            
            30,513
            
            
            4,791
            
            
            2,172
            
            
            —
            
            
            37,476Net
                earned premium
            
            
            183,504
            
            
            76,327
            
            
            71,069
            
            
            —
            
            
            330,900Ceding
                commission - related party
            
            
            20,359
            
            
            8,576
            
            
            14,110
            
            
            —
            
            
            43,045Loss
                and loss adjustment expense
            
            
            (111,809
            )
            
            (55,642
            )
            
            (44,246
            )
            
            —
            
            
            (211,697
            )Acquisition
                costs and other underwriting expense
            
            
            (63,612
            )
            
            (16,937
            )
            
            (34,807
            )
            
            —
            
            
            (115,356
            )(175,421
            )
            
            (72,579
            )
            
            (79,053
            )
            
            —
            
            
            (327,053
            )Underwriting
                income
            
            
            28,442
            
            
            12,324
            
            
            6,126
            
            
            —
            
            
            46,892Commission
                and fee income
            
            
            7,290
            
            
            6,626
            
            
            —
            
            
            2,772
            
            
            16,688Investment
                income, realized gain (loss) and income (loss) on managed
                assets
            
            
            23,352
            
            
            10,207
            
            
            13,715
            
            
            (2,217
            )
            
            45,057Other
                underwriting expenses
            
            
            (5,456
            )
            
            (4,535
            )
            
            (137
            )
            
            76
            
            
            (10,052
            )Interest
                expense
            
            
            (3,078
            )
            
            (2,253
            )
            
            (1,654
            )
            
            —
            
            
            (6,985
            )Foreign
                currency gain (loss)
            
            
            —
            
            
            75
            
            
            —
            
            
            —-
            
            
            75Provision
                for income taxes
            
            
            (14,306
            )
            
            (6,369
            )
            
            (5,122
            )
            
            (787
            )
            
            (26,584
            )Minority
                interest in net income of subsidiary
            
            
            —
            
            
            -
            
            
            —
            
            
            2,217
            
            
            2,217Net
                income
            
            $
            36,244
            
            $
            16,075
            
            $
            12,928
            
            $
            2,061
            
            $
            67,308


As
                of September 30, 2008Fixed
                assets
            
            $
            5,100
            
            $
            5,507
            
            $
            2,603
            
            $
            —
            
            $
            13,210Goodwill
                and intangible assets
            
            
            78,359
            
            
            11,309
            
            
            12,483
            
            
            —
            
            
            102,151Total
                assets
            
            
            1,719,732
            
            
            1,001,709
            
            
            437,887
            
            
            —
            
            
            3,158,328As
                of December 31, 2007Fixed
                assets
            
            $
            5,445
            
            $
            4,641
            
            $
            2,888
            
            $
            —
            
            $
            12,974Goodwill
                and intangible assets
            
            
            28,608
            
            
            12,799
            
            
            11,825
            
            
            —
            
            
            53,232Total
                assets
            
            
            1,207,453
            
            
            719,463
            
            
            377,337
            
            
            18,541
            
            
            2,322,794




28





(dollars
      in millions unless noted otherwise)





**Item
      2. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**





The
      Company is a multinational specialty property and casualty insurer focused
      on
      generating consistent underwriting profits. We provide insurance coverage for
      small businesses and products with high volumes of insureds and loss profiles
      which we believe are predictable. We target lines of insurance that we believe
      generally are underserved by larger insurance carriers. The Company has grown
      by
      hiring teams of underwriters with expertise in our specialty lines and through
      stock and asset acquisitions of companies and access to distribution networks
      and renewal rights to established books of specialty insurance business. We
      have
      operations in three business segments:




·
            Small
                commerical business insurance, which includes workers’ compensation,
                commercial package and other commercial lines produced by retail
                agents
                and brokers in the United States;




·
            Specialty
                risk and extended warranty coverage for consumer and commercial goods
                and
                custom designed coverages, such as accidental damage plans and payment
                protection plans offered in connection with the sale of consumer
                and
                commercial goods, in the United States, United Kingdom and certain
                other
                European Union countries; and




·
            Specialty
                middle-market property and casualty insurance. We write commercial
                insurance for homogeneous, narrowly defined classes of insureds,
                requiring
                an in-depth knowledge of the insured’s industry segment, through general
                and other wholesale agents.




During
        the
        third quarter the Company entered into a Managing General Agency agreement
        with
        CardinalComp, LLC (“CardinalComp”) for the purpose of producing workers
        compensation premium. The
        agency writes premiums in the states of New
        York,
        Massachusetts and Texas.


In
      June
      2008, the Company completed a stock and asset purchase agreement with a
      subsidiary of Unitrin, Inc. whereby the Company acquired its commercial package
      business (“UBI”) including its distribution networks, renewal rights and four
      insurance companies through which Unitrin wrote its UBI business. The acquired
      insurance companies are located in Kansas, Texas and Wisconsin and are
      collectively licensed in 33 states. Consideration paid for the transaction
      was
      approximately $88.5 million and consisted of cash of $61.2 million, a note
      payable of $26.8 million, assumed liabilities of $0.3 million and direct
      transaction costs of $0.2 million. The Company preliminarily recorded $8.8
      million of goodwill and $41.0 million of intangible assets related to
      distribution networks, trademarks, licenses and non-compete agreements. The
      results of operations have been included in the Company’s consolidated financial
      statements since the acquisition date. In connection with this transaction,
      the
      Company amended the Reinsurance Agreement with Maiden Insurance to provide
      for
      the cession of the UBI retail commercial package business. In addition to
      cessions to Maiden for UBI business written in the second quarter of 2008,
      the
      Company ceded to Maiden $82.2 million of unearned premium from UBI at the
      acquisition date that is not included in AmTrust’s written premium for the three
      and nine months ended September 30, 2008.





The
      Company transacts business through eleven insurance company
      subsidiaries:


Name
            
            Location
                of Domicile·
            Technology
                Insurance Company, Inc. (“TIC”)
            
            New
                Hampshire·
            Rochdale
                Insurance Company (“RIC”)
            
            New
                York·
            Wesco
                Insurance Company (“WIC”)
            
            Delaware·
            Associated
                Industries Insurance Company, Inc. (“AIIC”)
            
            Florida·
            Milwaukee
                Casualty Insurance Co. (“MCIC”)
            
            Wisconsin·
            Security
                National Insurance Company (“SNIC”)
            
            Texas·
            Trinity
                Universal Insurance Company of Kansas, Inc. (“TK”)
            
            Kansas·
            Trinity
                Lloyd’s Insurance Company (“TLIC”)
            
            Texas·
            AmTrust
                International Insurance Ltd. (“AII”)
            
            Bermuda·
            AmTrust
                International Underwriters Limited (“AIU”)
            
            Ireland·
            IGI
                Insurance Company, Ltd. (“IGI”)
            
            England





Insurance,
      particularly workers’ compensation, is, generally, affected by seasonality. The
      first quarter generally produces greater premiums than subsequent quarters.
      Nevertheless, the impact of seasonality on our small commercial business and
      specialty middle market segments has not been significant. We believe that
      this
      is because we serve many small commercial businesses in different geographic
      locations. In addition, seasonality may have been muted by our acquisition
      activity.





29





(dollars
      in millions unless noted otherwise)




We
      evaluate our operations by monitoring key measures of growth and profitability.
      We measure our growth by examining our net income, return on average equity,
      and
      our loss, expense and combined ratios. The following provides further
      explanation of the key measures that we use to evaluate our
      results:




*Gross
      Premium Written.* Gross
      premium written represents estimated premiums from each insurance policy that
      we
      write, including as part of an assigned risk pool, during a reporting period,
      based on the effective date of the individual policy. Certain policies that
      are
      underwritten by the Company are subject to premium audit at that policy’s
      cancellation or expiration. The final actual gross premiums written may vary
      from the original estimate based on changes to the final rating parameters
      or
      classifications of the policy.




*Net
      Premium Written.* Net
      premium written are gross premiums written less that portion of premium that
      is
      ceded to third party reinsurers under reinsurance agreements. The amount ceded
      under these reinsurance agreements is based on a contractual formula contained
      in the individual reinsurance agreement.




*Net
      Premium Earned.* Net
      premium earned is the earned portion of our net premiums written. Insurance
      premiums are earned on a pro rata basis over the term of the policy. At the
      end
      of each reporting period, premiums written that are not earned are classified
      as
      unearned premiums and are earned in subsequent periods over the remaining term
      of the policy. Our commercial lines insurance policies typically have a term
      of
      one year. Thus, for a one-year policy written on July 1, 2007 for an employer
      with a constant payroll during the term of the policy, we would earn half of
      the
      premiums in 2007 and the other half in 2008. Our specialty risk and extended
      warranty coverages are earned over the estimated exposure time period. The
      terms
      vary depending on the risk and have an average duration of approximately 31
      months, but range in duration from one month to 84 months.




*Net
      Loss Ratio* .
      The net
      loss ratio is a measure of the underwriting profitability of an insurance
      company's business. Expressed as a percentage, this is the ratio of net losses
      and LAE incurred to net premiums earned.





*Net
      Expense Ratio* .
      The net
      expense ratio is a measure of an insurance company's operational efficiency
      in
      administering its business. Expressed as a percentage, this is the ratio of
      the
      sum of acquisition costs and other underwriting expenses less ceding commission
      to net premiums earned.




*Net
      Combined Ratio* .
      The net
      combined ratio is a measure of an insurance company's overall underwriting
      profit. This is the sum of the net loss and net expense ratios. If the net
      combined ratio is at or above 100%, an insurance company cannot be profitable
      without investment income, and may not be profitable if investment income is
      insufficient.





*Annualized*  *Return
      on Equity.* Return
      on equity is calculated by dividing net income (net income excludes results
      of
      discontinued operations as well as any currency gain or loss associated with
      discontinued operations on an after tax basis) by the average of shareholders’
equity.





One
      of
      the key financial measures that we use to evaluate our operating performance
      is
      return on average equity. Our return on average equity was 9.3% and 25.6% for
      the three months ended September 30, 2008 and 2007, respectively and 21.3%
      and
      24.8% for the nine months ended September 30, 2008 and 2007, respectively.
      In
      addition, we target a net combined ratio of 95.0% or lower over the long term,
      while seeking to maintain optimal operating leverage in our insurance
      subsidiaries commensurate with our A.M. Best rating objectives. Our net combined
      ratio was 58.0% and 74.5% for the three months ended September 30, 2008 and
      2007, respectively and 73.1% and 85.9% for the nine months ended September
      30,
      2008 and 2007, respectively. The decline in the combined ratio period over
      period resulted primarily from improvements in the overall loss ratio as well
      the reduction of loss reserves of $15 million related to prior accident years.
      We plan to write additional premiums without a proportional increase in expenses
      and further reduce the expense component of our net combined ratio over
      time.





30




(dollars
      in millions unless noted otherwise)




**Critical
      Accounting Policies**




The
      Company’s discussion and analysis of its results of operations, financial
      condition and liquidity are based upon the Company’s consolidated financial
      statements, which have been prepared in accordance with U.S. generally accepted
      accounting principles. The preparation of these financial statements requires
      the Company to make estimates and judgments that affect the amounts of assets
      and liabilities, revenues and expenses and disclosure of contingent assets
      and
      liabilities as of the date of the financial statements. As more information
      becomes known, these estimates and assumptions could change, which would have
      an
      impact on actual results that may differ materially from these estimates and
      judgments under different assumptions. The Company has not made any changes
      in
      estimates or judgments that have had a significant effect on the reported
      amounts as previously disclosed in our Annual Report on Form 10-K for the fiscal
      period ended December 31, 2007.





**Results
      of Operations**





**Consolidated
      Results of Operations (Unaudited)**





Three Months Ended September 30,
            
            Nine Months Ended September 30,($ amounts in thousands)
            
            2008
            
            2007
            
            2008
            
            2007Gross
                premium written
            
            $
            281,206
            
            $
            193,262
            
            $
            817,024
            
            $
            592,954Net
                premium written
            
            $
            139,429
            
            $
            (30,717
            )
            $
            388,928
            
            $
            293,424Change
                in unearned premium
            
            
            (47,096
            )
            
            112,505
            
            
            (83,237
            )
            
            (37,476
            )Net
                earned premium
            
            
            92,333
            
            
            81,788
            
            
            305,691
            
            
            330,900Ceding
                commission - primarily related party
            
            
            37,116
            
            
            40,853
            
            
            92,522
            
            
            43,045Commission
                and fee income
            
            
            8,749
            
            
            7,906
            
            
            23,411
            
            
            16,688Net
                investment income
            
            
            15,391
            
            
            13,916
            
            
            43,112
            
            
            38,326Net
                realized gains on investments
            
            
            (45,885
            )
            
            (2,074
            )
            
            (53,240
            )
            
            8,948Other
                investment income on managed assets
            
            
            -
            
            
            (4,118
            )
            
            (2,900
            )
            
            (2,217
            )Total
                revenue
            
            
            107,704
            
            
            138,271
            
            
            408,596
            
            
            435,690Loss
                and loss adjustment expense
            
            
            37,094
            
            
            52,141
            
            
            166,393
            
            
            211,697Acquisition
                costs and other underwriting expense
            
            
            53,549
            
            
            49,623
            
            
            149,572
            
            
            115,356Other
                underwriting expenses
            
            
            6,062
            
            
            3,512
            
            
            13,360
            
            
            10,05296,705
            
            
            105,276
            
            
            329,325
            
            
            337,105Operating
                income from continuing operations
            
            
            10,999
            
            
            32,995
            
            
            79,271
            
            
            98,585Other
                income (expense):Foreign
                currency gain (loss)
            
            
            515
            
            
            (44
            )
            
            659
            
            
            75Interest
                expense
            
            
            (3,682
            )
            
            (2,650
            )
            
            (11,852
            )
            
            (6,985
            )Total
                other expense
            
            
            (3,167
            )
            
            (2,694
            )
            
            (11,193
            )
            
            (6,910
            )Income
                from continuing operations before provision for income taxes and
                minority
                interest
            
            
            7,832
            
            
            30,301
            
            
            68,078
            
            
            91,675Provision
                for income taxes
            
            
            (1,529
            )
            
            9,985
            
            
            13,004
            
            
            26,584Minority
                interest in net loss of subsidiary
            
            
            -
            
            
            (4,118
            )
            
            (2,900
            )
            
            (2,217
            )Net
                income
            
            $
            9,361
            
            $
            24,434
            
            $
            57,974
            
            $
            67,308Key
                Measures:Net
                loss ratio
            
            
            40.2
            %
            
            63.9
            %
            
            54.4
            %
            
            64.0
            %Net
                expense ratio
            
            
            17.8
            %
            
            10.7
            %
            
            18.7
            %
            
            21.9
            %Net
                combined ratio
            
            
            58.0
            %
            
            74.6
            %
            
            73.1
            %
            
            85.9
            %Reconciliation
                of net expense ratio:Acquisition
                costs and other underwriting expense
            
            
            53,549
            
            
            49,623
            
            
            149,572
            
            
            115,356Less:
                ceding commission - primarily related party
            
            
            37,116
            
            
            40,054
            
            
            92,522
            
            
            43,04516,433
            
            
            9,569
            
            
            57,050
            
            
            72,311Net
                earned premium
            
            
            92,333
            
            
            81,788
            
            
            305,691
            
            
            330,900Net
                expense ratio
            
            
            17.8
            %
            
            10.7
            %
            
            18.7
            %
            
            21.9
            %


31





(dollars
      in millions unless noted otherwise)





***Consolidated
      Result of Operations for the Three Months Ended September 30, 2008
      and***  ***2007***




*Gross
      Premium Written* .
      Gross
      premium written increased $87.9 million or 45.5% from $193.3 million to $281.2
      million for the three months ended September 30, 2007 and 2008, respectively.
      The increase of $87.9 million was attributable to a $36.2 million increase
      in
      our small commercial business, a $54.1 million increase in our specialty risk
      and extended warranty business and a $2.4 million decrease in our specialty
      middle-market property and casualty business. The increase in specialty risk
      and
      extended warranty business resulted primarily from the underwriting of new
      coverage plans in the United States. The increase in the small commercial
      business resulted, primarily, from $45.5 million of gross premium written
      related to acquisitions of AIIC and UBI offset by declines attributable to
      mandated rate reductions in New York and Florida.




*Net
      Premium Written.* Net
      written premium increased $170.1 million from $(30.7) million to 139.4 for
      the
      three months ended September 30, 2007 and 2008, respectively. Net written
      premium reflected cessions of $102.7 million and $190.8 million to Maiden
      Insurance for the three months ended September 30, 2008 and 2007, respectively,
      under the terms of the Reinsurance Agreement, which was entered into during
      the
      third quarter of 2007. Before the cessions to Maiden Insurance, net written
      premium increased by $82.0 million in the third quarter of 2008 compared to
      the
      third quarter of 2007. The increase before cession, by segment, was: small
      commercial business - $31.4 million, specialty risk and extended warranty -
      $48.2 million and specialty middle market - $2.4 million.





*Net
      Premium Earned.* Net
      premium earned increased $10.5 million or 12.8% from $81.8 million to $92.3
      million for the three months ended September 30, 2007 and 2008. Net earned
      premium for the third quarter of 2007 and 2008, respectively,
      reflected cessions of $62.2 and $84.1 million, to Maiden Insurance under
      the terms of the Reinsurance Agreement, which was entered into during the third
      quarter of 2007. Before the cessions to Maiden Insurance, net earned premium
      increased by $32.4 million in the third quarter of 2008 compared to the third
      quarter of 2007. The increase (decrease) before cessions, by segment, was:
      small
      commercial business - $(0.6) million; specialty risk and extended warranty
      -
      $19.4 million; and specialty middle market - $13.6 million.




*Commission
      and*  *Fee
      Income.* Commission and fee income increased $0.8 million or 10.7% from $7.9 million
      to
      $8.7 million for the three months ended September 30, 2007 and 2008,
      respectively. The increase resulted from fees the Company earned as a
      servicing carrier for workers’ compensation assigned risk plans in three
      additional states.





*Net
      Investment Income.* Net
      investment income increased $1.5 million or 10.6% from $13.9 million to $15.4
      million for the three months ended September 30, 2007 and 2008, respectively.
      The increase resulted primarily from greater average invested assets in 2008
      compared to 2007. The average invested assets for the three months ended
      September 30, 2008 and 2007 were approximately $1.4 billion and $1.1 billion,
      respectively. The increase was offset overall by lower yields on the Company’s
      fixed maturity portfolio.




*Net
      Realized Gains (Losses) on Investments.* Net
      realized losses on investments for the three months ended September 30, 2008
      were $45.9 million, compared to net realized losses of $2.1 million for the
      same
      period in 2007. Net realized losses in 2008 related primarily to realized losses
      on fixed income securities of Lehman Brothers Holdings and Washington Mutual
      totaling $37.1 million, which included $31.3 million of non-cash write-downs.
      The Company also determined that two equity securities were
      other-than-temporarily impaired and recorded a non-cash write-down of $5.3
      million from the impairment. The Company took these write-downs due to the
      deteriorated financial position of the issuers. Additionally, the Company had
      $3.5 million of net realized losses for miscellaneous investments. Net realized
      losses in 2007 of $2.1 million included write-downs of $3.3 million related
      to
      equity securities that were determined to be other than temporarily
      impaired.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $15.1 million or 28.9% from $52.2 million
      for
      the three months ended September 30, 2007 to $37.1 million for the three months
      ended September 30, 2008. The Company’s loss ratio for the three months ended
      September 30, 2008 decreased to 40.2% from 63.9% for the three months ended
      September 30, 2007. The improvement of the loss and loss adjustment ratio
      resulted from a reduction of prior year’s loss reserves of approximately $15.0
      million as well as the continued improvement in the Company’s actual loss
      experience, which has continued to develop more favorably than
      projected.




32





(dollars
      in millions unless noted otherwise)





*Acquisition
      Costs and Other Underwriting Expenses.* Acquisition
      costs and other underwriting expenses increased $3.9 million or 7.9% from $49.6
      million for the three months ended September 30, 2007 to $53.5 million for
      the
      three months ended September 30, 2008. The increase related primarily to higher
      salaries and benefits as a result of the acquisitions of UBI and AIIC as well
      as
      higher policy acquisition expenses. The expense ratio was 10.7% compared to
      17.8% for the three months ended September 30, 2007 and 2008, respectively.




*Operating
      Income from Continuing Operations.* Income
      from continuing operations decreased $22.0 million or 66.7% from $33.0 million
      to $11.0 million for the three months ended September 30, 2007 and 2008,
      respectively. The decrease in income from continuing operations from 2007 to
      2008 resulted primarily from net realized losses offset by higher
      earned premium andlower loss and loss adjustment
      expense *.*





*Interest
      Expense.*Interest
      expense for the three months ended September 30, 2008 was $3.7 million, compared
      to $2.7 million for the same period in 2007. The increase was attributable
      primarily to additional interest expense on collateral loans with Maiden as
      part
      of the Reinsurance Agreement entered into the third quarter of 2007.
      Additionally, the Company incurred interest expense in the third quarter of
      2008
      on its $40 million term loan and $30 million promissory note entered into during
      the second quarter of 2008.





*Income
      Tax Expense (Benefit).* Income
      tax expense (benefit) for three months ended September 30, 2008 was $(1.5)
      million which resulted in an effective tax rate of (19.5)%. Income tax expense
      for three months ended September 30, 2007 was $10.0 million which resulted
      in an
      effective tax rate of 29.0%. The decrease in our effective rate resulted
      primarily from Company subsidiaries, domiciled in the United States, recognizing
      net realized losses on investments resulting in a higher percentage of income
      earned by Company subsidiaries not subject to U.S. taxation.





***Consolidated
      Result of Operations for the Nine Months Ended September 30, 2008
      and***  ***2007***





*Gross
      Premium Written* .
      Gross
      premium written increased $224.1 million or 37.8% from $593.0 million for the
      nine months ended September 30, 2007 to $817.0 million for the nine months
      ended
      September 30, 2008. The increase was attributable to a $69.5 million increase
      in
      our small commercial business segment, a $151.9 million increase in our
      specialty risk and extended warranty business and a $2.7 million increase in
      our
      specialty middle-market property and casualty business. The increase in the
      small commercial business segment resulted primarily from the acquisitions
      of
      AIIC and UBI which increased premium by $18.2 million and $67.3 million,
      respectively, partially offset by declines attributable to mandated rate
      reductions in New York and Florida. The increase in premiums for the specialty
      risk and extended warranty segment resulted, primarily, from the underwriting
      of
      new coverage plans in the United States and the acquisition of IGI in the second
      quarter of 2007, which contributed an incremental $29.4 million of premium
      year
      over year.




*Net
      Premium Written.* Net
      premium written increased $95.5 million or 32.5% from $293.4 million to $388.9
      million for the nine months ended September 30, 2007 and 2008, respectively.
      Net
      written premium written was net of $190.8 million and $290.9 million of written
      premium ceded to Maiden Insurance during the nine months ended September 30,
      2007 and 2008, respectively, under the terms of the Reinsurance Agreement,
      which
      was entered into during the third quarter of 2007. Before cessions to Maiden
      Insurance, net premium written increased $195.6 million for the nine months
      ended September 30, 2008 compared to the nine months ended September 30, 2007.
      The increase before cessions, by segment, was: small commercial business -
      $49.6
      million; specialty risk and extended warranty - $127.2 million; and specialty
      middle market property and casualty - $18.8 million.





*Net
      Premium Earned* .
      Net
      premium earned decreased $25.2 million or 7.6% from $330.9 million for the
      nine
      months ended September 30, 2007 to $305.7 million for the nine months ended
      September 30, 2008. Net earned premium reflected cessions of $216.8 million
      and
      $63.0 million for the nine months ended September 30, 2008 and 2007,
      respectively, to Maiden Insurance under the terms of the Reinsurance Agreement,
      which was entered into during the third quarter of 2007. Before the cessions
      to
      Maiden Insurance, net earned premium increased by $128.6 million in the third
      quarter of 2008 as compared to the third quarter of 2007. The increase before
      cession, by segment, was: small commercial business - $10.3 million, specialty
      risk and extended warranty - $77.5 million and specialty middle market - $40.8
      million.





33





(dollars
      in millions unless noted otherwise)







*Commission
      and Fee Income.* Commission and fee income increased $6.7 million or 40.1% from $16.7 million
      to
      $23.4 million for the nine months ended September 30, 2007 and 2008,
      respectively. The increase resulted from the Company entering into a Reinsurance
      Agreement and asset management agreement with Maiden Insurance during the third
      quarter of 2007, whereby the Company earned reinsurance brokerage fees and
      administration fees. Additionally, the Company earned fees as a servicing
      carrier for workers’ compensation assigned risk plans in three additional states
      in 2008.





*Net
      Investment Income.* Net
      investment income increased $4.8 million or 12.5% from $38.3 million to $43.1
      million for the nine months ended September 30, 2007 and 2008, respectively.
      The
      increase resulted primarily from greater average invested assets in 2008
      compared to 2007. Average invested assets for the nine months ended September
      30, 2008 and 2007 were approximately $1.4 billion and $1.0 billion,
      respectively. The increase was offset overall by lower yields on the Company’s
      fixed maturity portfolio.





*Net
      Realized Gains (Losses) on Investments* . ** Net
      realized losses on investments for the nine months ended September 30, 2008
      were
      $53.2 million, compared to net realized gains of $8.9 million for the same
      period in 2007. Net realized losses in 2008 related primarily to realized losses
      on fixed income securities of Lehman Brothers Holdings and Washington Mutual
      totaling $37.1 million, which included $31.3 million of non-cash write-downs.
      The Company also determined that six equity securities were
      other-than-temporarily impaired and recorded a non-cash write-down of $13.2
      million from the impairment. The Company took these write-downs due to the
      deteriorated financial position of the issuers. Additionally, the Company had
      $2.9 million of net miscellaneous realized losses. The Company recorded non-cash
      write-downs of $3.3 million during the nine months ended September 30, 2007.
      related to equity securities that were determined to be other than temporarily
      impaired.




*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $45.4 million or 21.4% from $211.7 million
      for the nine months ended September 30, 2007 to $166.4 million for the nine
      months ended September 30, 2008. The Company’s loss ratio for the nine months
      ended September 30, 2008 decreased to 54.4% from 64.0% for the nine months
      ended
      September 30, 2007. The improvement of the loss and loss adjustment ratio
      resulted from the effect of the Company’s actual loss experience on the
      Company’s actuarially projected ultimate losses which has continued to develop
      more favorably than projected as well as a reduction in reserves related to
      prior accident years of approximately $15 million.





*Acquisition
      Costs and Other Underwriting Expenses.* Acquisition
      costs and other underwriting expenses increased $34.2 million or 29.6% from
      $115.4 million for the nine months ended September 30, 2007 to $149.6 million
      for the nine months ended September 30, 2008. The increase related primarily
      to
      higher salaries and benefits as a result of the acquisitions of UBI and AIIC
      as
      well as higher policy acquisition expenses. Nevertheless, the expense ratio
      decreased from 21.9% for the nine months ended September 30, 2007 to 18.7%
      for
      the nine months ended September 30, 2008.





*Operating
      Income from Continuing Operations.* Income
      from continuing operations decreased to $79.3 million for the nine months ended
      September 30, 2008, from $98.6 million for the nine months ended September
      30,
      2007, a decrease of $19.3 million or 19.6%. This decrease related primarily
      to
      net realized losses on the Company’s investment portfolio offset by increased
      gross written premium and lower overall loss and loss adjustment
      expense.





*Interest
      Expense.* Interest
      expense for the nine months ended September 30, 2008 was $12.0 million, compared
      to $7.0 million for the same period in 2007. The increase was attributable
      primarily to interest expense on collateral loans made by Maiden Insurance
      pursuant to the Reinsurance Agreement. Additionally, the Company incurred
      interest expense in 2008 on its $40 million term loan and $30 million promissory
      note entered into during the second quarter of 2008.





*Income
      Tax Expense.* Income
      tax expense for nine months ended September 30, 2008 was $13.0 million resulting
      in an effective tax rate of 18.3%. Income tax expense for nine months ended
      September 30, 2007 was $26.6 million resulting in an effective tax rate of
      28.3%. The decrease in our effective rate resulted primarily from Company
      subsidiaries, domiciled in the United States, recognizing net realized losses
      on
      investments resulting in a higher percentage of income earned by Company
      subsidiaries not subject to U.S. taxation. Additionally, the Company earned
      federal tax-exempt investment income during the nine months ended September
      30,
      2008.





34





(dollars
      in millions unless noted otherwise)





**Small
      Commercial Business Segment (Unaudited)**




Three Months Ended September 30,
            
            Nine Months Ended September 30,($ amounts in thousands)
            
            2008
            
            2007
            
            2008
            
            2007Gross
                premium written
            
            $
            103,568
            
            $
            67,377
            
            $
            304,925
            
            $
            235,479Net
                premium written
            
            
            53,637
            
            
            65
            
            
            145,383
            
            
            152,991Change
                in unearned premium
            
            
            (22,186
            )
            
            52,319
            
            
            (24,995
            )
            
            30,513Net
                premium earned
            
            
            31,451
            
            
            52,384
            
            
            120,388
            
            
            183,504Ceding
                commission revenue - primarily related party
            
            
            19,513
            
            
            18,167
            
            
            49,690
            
            
            20,359Loss
                and loss adjustment expense
            
            
            (13,215
            )
            
            (31,516
            )
            
            (62,554
            )
            
            (111,809
            )Acquisition
                costs and other underwriting expenses
            
            
            (25,472
            )
            
            (25,595
            )
            
            (74,305
            )
            
            (63,612
            )(38,687
            )
            
            (57,111
            )
            
            (136,859
            )
            
            (175,421
            )Net
                premiums earned less expenses included in combined ratio (Underwriting
                income)
            
            $
            12,277
            
            $
            13,440
            
            $
            33,219
            
            $
            28,442Key
                Measures:Net
                loss ratio
            
            
            42.0
            %
            
            60.2
            %
            
            52.0
            %
            
            61.0
            %Net
                expense ratio
            
            
            19.0
            %
            
            14.2
            %
            
            20.4
            %
            
            23.6
            %Net
                combined ratio
            
            
            61.0
            %
            
            74.3
            %
            
            72.4
            %
            
            84.5
            %Reconciliation
                of net expense ratio:Acquisition
                costs and other underwriting expenses
            
            
            25,472
            
            
            25,595
            
            
            74,305
            
            
            63,612Less:
                ceding commission revenue - primarily related party
            
            
            19,513
            
            
            18,167
            
            
            49,690
            
            
            20,3595,959
            
            
            7,428
            
            
            24,615
            
            
            43,253Net
                premium earned
            
            
            31,451
            
            
            52,387
            
            
            120,388
            
            
            183,507Net
                expense ratio
            
            
            19.0
            %
            
            14.2
            %
            
            20.4
            %
            
            23.6
            %




***Small
      Commercial Business Segment Results of Operations for the Three Months Ended
      September 30, 2008 and 2007***





*Gross
      Premium Written* .
      Gross
      premium written increased $36.2 million or 53.7% from $67.4 million for the
      three months ended September 30, 2007 to $103.6 million for the three months
      ended September 30, 2008. Gross premium written increased primarily as a result
      of $35.8 million of gross written premium related to the acquisition of UBI
      in
      the second quarter of 2008.





*Net
      Premium Written* .
      Net
      premium written increased $53.6 million from $0.1 million to $53.7 million
      for
      the three months ended September 30, 2007 and 2008, respectively. Before the
      cessions to Maiden Insurance of $60.3 million and $38.2 million for the three
      months ended September 30, 2007 and 2008, respectively, net premium written
      increased $31.5 million *.* The
      increase resulted primarily from a gross premium written increase of $35.8
      million from the UBI acquisition.





35




(dollars
      in millions unless noted otherwise)





*Net
      Premium Earned* .
      Net
      premium earned decreased $21.0 million or 40.0% from $52.4 million for the
      three
      months ended September 30, 2007 to $31.5 million for the three months ended
      September 30, 2008. Net earned premium for the third quarters of 2008 and 2007
      reflected cessions of $36.9 million and $16.5 million, respectively, to Maiden
      Insurance under the terms of the Reinsurance Agreement, which was entered into
      during the third quarter of 2007. Before the cessions to Maiden Insurance,
      net
      earned premium decreased by $0.6 million in the third quarter of 2008 compared
      to the third quarter of 2007.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $18.2 million or 58.0% from $31.5 million
      for
      the three months ended September 30, 2007 to $13.2 million for the three months
      ended September 30, 2008. The Company’s loss ratio for the segment for the three
      months ended September 30, 2008 decreased to 42.0% from 60.2% for the three
      months ended September 30, 2007. The improvement of the loss and loss adjustment
      ratio resulted from the effect of the Company’s actual loss experience, which
      has continued to develop more favorably than projected, on the Company’s
      actuarially projected ultimate losses as well as a reduction in reserves related
      to the prior accident years of $8 million.





*Acquisition
      Costs and Other Underwriting Expenses.* Acquisition
      costs and other underwriting expenses decreased $0.1 million or 0.4% from $25.6
      million for the three months ended September 30, 2007 to $25.5 million for
      the
      three months ended September 30, 2008. The decrease related to a decline in
      other underwriting expenses.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio decreased $1.2
      million or 8.9% from $13.5 million for the three months ended September 30,
      2007
      to $12.3 million for the three months ended September 30, 2008 which resulted
      primarily from a decrease in earned premium.





***Small
      Commercial Business Segment Results of Operations for the Nine Months Ended
      September 30, 2008 and***  ***2007***





*Gross
      Premium Written.* Gross
      premium written increased $69.5 million or 29.5% from $235.4 million for the
      nine months ended September 30, 2007 to $304.9 million for the nine months
      ended
      September 30, 2008. The increase primarily was
      the
      result of acquisitions
      of AIIC in the third quarter of 2007 and UBI in the second quarter of 2008,
      which generated additional gross written premium of $18.2 million and $67.3
      million, respectively, offset by declines attributable to mandated rate
      reductions in New York and Florida.





*Net
      Premium Written* .
      Net
      premium written decreased $7.6 million or 5.0% from $153.0 million for the
      nine
      months ended September 30, 2007 to $145.4 million for the nine months ended
      September 30, 2008. Before the cessions to Maiden Insurance for the nine months
      ended September 30, 2007 and 2008 of $60.3 million and $117.5 million,
      respectively, the net written premium increased $49.6 million *.* The
      increase resulted primarily from a gross premium written increase from the
      acquisition of UBI in the second quarter of 2008 partially offset by mandated
      rate reductions in the state of New York and Florida.




*Net
      Premium Earned* .
      Net
      premium earned decreased $63.1 million or 34.4% from $183.5 million for the
      nine
      months ended September 30, 2007 to $120.4 million for the nine months ended
      September 30, 2008. Before the cessions to Maiden Insurance for the nine months
      ended September 30, 2007 and 2008 of $20.3 million and $93.7 million,
      respectively, net earned premium increased $10.3 million.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $49.2 million or 44.0% from $111.8 million
      for the nine months ended September 30, 2007 to $62.6 million for the nine
      months ended September 30, 2008. The Company’s loss ratio for the segment for
      the nine months ended September 30, 2008 decreased to 52.0% from 61.0% for
      the
      nine months ended September 30, 2007. The improvement of the loss and loss
      adjustment ratio resulted from the effect of the Company’s actual loss
      experience, which has continued to develop more favorably than the
      Company’s actuarially projected ultimate losses as well as a reduction in loss
      reserves related to the prior accident years of approximately $8 million.





36




(dollars
      in millions unless noted otherwise)





*Acquisition
      Costs and Other Underwriting Expenses* .
      Acquisition costs and other underwriting expenses increased $10.7 million or
      16.8% from $63.6 million for the three months ended September 30, 2007 to $74.3
      million for the nine months ended September 30, 2008. The increase related
      to
      higher salary expense associated with the acquisitions of UBI and
      AIIC.




*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $4.8
      million or 16.9% from $28.4 million for the nine months ended September 30,
      2007
      to $33.2 million for the nine months ended September 30, 2008. This increase
      is
      attributable to improvements in the expense ratio and loss ratio.




**Specialty
      Risk and Extended Warranty Segment (Unaudited)**




**Three Months Ended**
              **September 30,**
            
            **Nine Months Ended**
              **September 30,**($ amounts in thousands)
            
            **2008**
            
            **2007**
            
            **2008**
            
            **2007**Gross
                premium written
            
            $
            130,316
            
            $
            76,186
            
            $
            345,393
            
            $
            193,457Net
                premium written
            
            
            63,774
            
            
            (19,266
            )
            
            163,853
            
            
            71,536Change
                in unearned premium
            
            
            (29,296
            )
            
            37,566
            
            
            (56,693
            )
            
            4,791Net
                premium earned
            
            
            34,478
            
            
            18,300
            
            
            107,160
            
            
            76,327Ceding
                commission revenue - primarily related party
            
            
            8,162
            
            
            8,576
            
            
            19,644
            
            
            8,576Loss
                and loss adjustment expense
            
            
            (8,535
            )
            
            (13,630
            )
            
            (56,325
            )
            
            (55,642
            )Acquisition
                costs and other underwriting expenses
            
            
            (12,895
            )
            
            (8,477
            )
            
            (32,794
            )
            
            (16,937
            )(21,430
            )
            
            (22,107
            )
            
            (89,119
            )
            
            (72,579
            )Net
                premiums earned less expenses included in combined ratio (Underwriting
                income)
            
            $
            21,210
            
            $
            4,769
            
            $
            37,685
            
            $
            12,324Key
                Measures:Net
                loss ratio
            
            
            24.8
            %
            
            74.5
            %
            
            52.6
            %
            
            72.9
            %Net
                expense ratio
            
            
            13.7
            %
            
            (0.5
            )%
            
            12.3
            %
            
            11.0
            %Net
                combined ratio
            
            
            38.5
            %
            
            73.9
            %
            
            64.6
            %
            
            83.9
            %




Reconciliation
                of net expense ratio:Acquisition
                costs and other underwriting expenses
            
            
            12,895
            
            
            8,477
            
            
            32,794
            
            
            16,937Less:
                ceding commission revenue - primarily related party
            
            
            8,162
            
            
            8,576
            
            
            19,644
            
            
            8,5764,733
            
            
            (99
            )
            
            13,150
            
            
            8,361Net
                premium earned
            
            
            34,478
            
            
            18,300
            
            
            107,160
            
            
            76,327Net
                expense ratio
            
            
            13.7
            %
            
            (0.5
            )%
            
            12.3
            %
            
            11.0
            %





***Specialty
      Risk and Extended Warranty Segment Results of Operations for the Three Months
      Ended September 30, 2008 and***  ***2007***





*Gross
      Premium Written* .
      Gross
      premium written increased $54.1 million or 71.1% from $76.2 million for the
      three months ended September 30, 2007 to $130.3 million for the three months
      ended September 30, 2007. The increase in premium resulted, primarily, from
      the
      underwriting of new coverage plans.





37





(dollars
      in millions unless noted otherwise)





*Net
      Premium Written* .
      Net
      premium written increased $83.1 million from $(19.3) million to $63.8 million
      for the three months ended September 30, 2007 and 2008, respectively. Before
      the
      cessions to Maiden Insurance of $84.7 million and $49.8 million for the
      three months ended September 30, 2007 and 2008, respectively, the net written
      premium increase was $48.2 million. Net premium written increased as a result
      of
      increases in gross premium written.




*Net
      Premium Earned* .
      Net
      premiums earned increased $16.2 million or 88.5% from $18.3 million for the
      three months ended September 30, 2007 to $34.5 million for the three months
      ended September 30, 2008. ** Before
      the cessions to Maiden Insurance for the three months ended September 30, 2007
      and 2008 of $26.4 million and $29.6 million, respectively, net premium earned
      increased $19.4 million. The increase was a result of an increase in gross
      premium written in the twelve months preceding September 30, 2008 compared
      to
      the twelve months preceding September 30, 2007.





*Loss
      and Loss Adjustment Expenses.* Loss
      and
      loss adjustment expenses decreased $5.1 million or 37.4% from $13.6 million
      for
      the three months ended September 30, 2007 to $8.5 million for the three months
      ended September 30, 2008. The loss ratio for the segment for the three months
      ended September 30, 2008 decreased to 24.8% from 74.5% for the three months
      ended September 30, 2007. The improvement of the loss and loss adjustment ratio
      resulted from the effect of the Company’s actual loss experience on the
      Company’s actuarially projected ultimate losses which has continued to develop
      more favorably than projected loss experience, as well as a reduction of loss
      reserves related to prior accident year of approximately $7 million.




*Acquisition
      Costs and Other Underwriting Expenses.* Acquisition
      costs and other underwriting expenses increased $4.4 million or 51.8% from
      $8.5
      million for the three months ended September 30, 2007 to $12.9 million for
      the
      three months ended September 30, 2008. The increase related primarily to higher
      policy acquisition costs during the three months ended September 30, 2008
      compared to the three months ended September 30, 2007.




*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $16.4
      million from $4.8 million for the three months ended September 30, 2007 to
      $21.2
      million for the three months ended September 30, 2008. This increase is
      attributable to growth in revenue and an improvement in the loss
      ratio.





***Specialty
      Risk and Extended Warranty Segment Results of Operations for the Nine Months
      Ended September 30, 2008 and***  ***2007***





*Gross
      Premium Written.* Gross
      premium written increased $151.9 million or 78.5% from $193.5 million for the
      nine months ended September 30, 2007 to $345.4 million for the nine months
      ended
      September 30, 2008. The increase in premium resulted, primarily, from the
      underwriting of new coverage plans as well as the acquisition of IGI in the
      second quarter of 2007, which contributed an additional $29.4 million of
      premiums in 2008.





*Net
      Premium Written* .
      Net
      premium written increased $92.4 million or 129.2% from $71.5 million to $163.9
      million for the nine months ended September 30, 2007 and 2008, respectively.
      Before the cessions to Maiden Insurance for the nine months ended September
      30,
      2007 and 2008 of $84.7 million and $119.5 million, respectively, the net written
      premium increase was $127.2 million. Net premium written increased as a result
      of increases in gross premium written.





*Net
      Premiums Earned* .
      Net
      premium earned increased $30.9 million or 40.5% from $76.3 million for the
      nine
      months ended September 30, 2007 to $107.2 million for the nine months ended
      September 30, 2008. Before the cessions to Maiden Insurance for the nine months
      ended September 30, 2007 and 2008 of $26.0 million and $72.6 million,
      respectively, net earned premium increased $77.5 million. The increase was
      a result of an increase in gross premium written in the preceding twelve
      months September 30, 2008 compared to the preceding twelve months September
      30,
      2007.




38





(dollars
      in millions unless noted otherwise)





*Loss
      and Loss Adjustment Expenses.* Loss
      and
      loss adjustment expenses increased $0.7 million or 1.2% from $55.6 million
      for
      the nine months ended September 30, 2007 to $56.3 million for the nine months
      ended September 30, 2008. The loss ratio for the segment for the nine months
      ended September 30, 2007 decreased to 52.6% from 72.9% for the nine months
      ended
      September 30, 2007. The improvement of the loss and loss adjustment ratio
      resulted from the effect of the Company’s actual loss experience, which has
      continued to develop more favorably, on the Company’s actuarially projected
      ultimate losses as well as a reduction of loss reserves related to prior
      accident years of approximately $7 million.





*Acquisition
      Costs and Other Underwriting Expenses.* Acquisition
      costs and other underwriting expenses increased $15.9 million or 94.1% from
      $16.9 million for the nine months ended September 30, 2007 to $32.8 million
      for
      the nine months ended September 30, 2008. The increase related, primarily,
      to
      higher policy acquisition costs and salaries and benefits primarily attributable
      to the acquisition of IGI during the nine months ended September 30, 2008
      compared to the nine months ended September 30, 2007.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net
      premiums earned less expenses included in combined ratio increased $25.4 million
      from $12.3 million for the nine months ended September 30, 2007 to $37.7 million
      for the nine months ended September 30, 2008. This increase is attributable
      to
      growth in revenue and an improvement in the loss ratio.





**Specialty
      Middle Market Property and Casualty Segment Results of Operations (Unaudited)**





Three Months Ended September 30,
            
            Nine Months Ended September 30,($ amounts in thousands)
            
            2008
            
            2007
            
            2008
            
            2007Gross
                premium written
            
            $
            47,322
            
            $
            49,698
            
            $
            166,706
            
            $
            164,018Net
                premium written
            
            
            22,018
            
            
            (11,516
            )
            
            79,692
            
            
            68,897Change
                in unearned premium
            
            
            4,386
            
            
            22,620
            
            
            (1,549
            )
            
            2,172Net
                premiums earned
            
            
            26,404
            
            
            11,104
            
            
            78,143
            
            
            71,069Ceding
                commission revenue - primarily related party
            
            
            9,441
            
            
            14,110
            
            
            23,188
            
            
            14,110Loss
                and loss adjustment expense
            
            
            (15,344
            )
            
            (7,083
            )
            
            (47,514
            )
            
            (44,246
            )Acquisition
                costs and other underwriting expenses
            
            
            (15,182
            )
            
            (15,551
            )
            
            (42,473
            )
            
            (34,807
            )(30,526
            )
            
            (22,634
            )
            
            (89,987
            )
            
            (79,053
            )Net
                premiums earned less expenses included in combined ratio (Underwriting
                income)
            
            $
            5,319
            
            $
            2,580
            
            $
            11,344
            
            $
            6,126Key
                Measures:Net
                loss ratio
            
            
            58.1
            %
            
            63.8
            %
            
            60.8
            %
            
            62.3
            %Net
                expense ratio
            
            
            21.7
            %
            
            13.0
            %
            
            24.7
            %
            
            29.1
            %Net
                combined ratio
            
            
            79.9
            %
            
            76.8
            %
            
            85.5
            %
            
            91.4
            %Reconciliation
                of net expense ratio:Acquisition
                costs and other underwriting expenses
            
            
            15,182
            
            
            15,551
            
            
            42,473
            
            
            34,807Less:
                ceding commission revenue - primarily related party
            
            
            9,441
            
            
            14,110
            
            
            23,188
            
            
            14,1105,741
            
            
            1,441
            
            
            19,285
            
            
            20,697Net
                premium earned
            
            
            26,404
            
            
            11,104
            
            
            78,143
            
            
            71,069Net
                expense ratio
            
            
            21.7
            %
            
            13.0
            %
            
            24.7
            %
            
            29.1
            %





39





(dollars
      in millions unless noted otherwise)





***Specialty
      Middle Market Segment Result of Operations for the Three Months Ended September
      30, 2008 and***  ***2007***





*Gross
      Premium Written* .
      Gross
      premium written decreased $2.4 million or 4.8% from $49.7 million for the three
      months ended September 30, 2007 to $47.3 million for the three months ended
      September 30, 2008. Gross premium written essentially was flat period over
      period.





*Net
      Premium Written* .
      Net
      premium written increased $33.5 million from $(11.5) million for the three
      months ended September 30, 2007 to $22.0 million for the three months ended
      September 30, 2008. Before the cessions to Maiden Insurance of $45.8 million
      and
      $14.4 million for the three months ended September 30, 2007 and 2008,
      respectively, the net written premium increase was $2.4 million.





*Net
      Premium Earned* .
      Net
      premium earned increased $15.3 million or 137.8 % from $11.1 million for the
      three months ended September 30, 2007 to $26.4 million for the three months
      ended September 30, 2008. Before the cessions to Maiden Insurance of $19.2
      and
      $17.5 for the three months ended September 30, 2007 and 2008, respectively,
      earned premium increased $13.6 million. The increase was a result of an increase
      in gross premium written in the twelve months ended September 30, 2008 compared
      to the twelve months ended September 30, 2007. **





*Loss
      and Loss Adjustment Expenses.* Loss
      and
      loss adjustment expenses increased $8.2 million or 115.5% from $7.1 million
      for
      the three months ended September 30, 2007 compared to $15.3 million for the
      three months ended September 30, 2008. The loss ratio for the segment decreased
      for the three months ended September 30, 2008 to 58.1% from 63.8% for the three
      months ended September 30, 2008. The decrease of the loss and loss adjustment
      ratio resulted from the effect of the Company’s actual loss experience on the
      Company’s actuarially projected ultimate losses which developed
      more favorably than projected.




*Acquisition
      Costs and Other Underwriting Expenses.* Acquisition
      costs and other underwriting expenses decreased $0.4 million or 2.6% from $15.6
      million for the three months ended September 30, 2007 to $15.2 million for
      the
      three months ended September 30, 2008. The expenses were essentially flat for
      the three months ended September 30, 2008 compared to the three months ended
      September 30, 2007.




*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio were $5.3 million
      and $2.6 million for the three months ended September 30, 2008 and 2007,
      respectively. The increase of $2.7 million resulted from improvements in the
      loss ratio.





***Specialty
      Middle Market Segment Result of Operations for the Nine Months Ended September
      30, 2008 and***  ***2007***





*Gross
      Premium Written* .
      Gross
      premium written increased $2.7 million or 1.6% from $164.0 million for the
      nine
      months ended September 30, 2007 to $166.7 million for the nine months ended
      September 30, 2008. Gross premium written essentially was flat period over
      period.




*Net
      Premium Written* .
      Net
      premium written increased $10.8 million or 15.7 % from $68.9 million for the
      nine months ended September 30, 2007 to $79.7 million for the nine months ended
      September 30, 2008. Before the cessions to Maiden Insurance of $45.8 million
      and
      $53.8 million for the nine months ended September 30, 2007 and 2008,
      respectively, the net premium written increased $18.8 million.





*Net
      Premiums Earned* .
      Net
      premium earned increased $7.0 million or 9.8% from $71.1 million for the nine
      months ended September 30, 2007 to $78.1 million for the nine months ended
      September 30, 2008. Before the cessions to Maiden Insurance of $16.7
      million and $50.5 million for the nine months ended September 30, 2007 and
      2008,
      respectively, net premium earned increased $40.8 million. The increase
      was a result of an increase in gross premium written in the twelve months
      ended September 30, 2008 compared to the twelve months ended September 30,
      2007.





40





(dollars
      in millions unless noted otherwise)





*Loss
      and Loss Adjustment* Expenses.
      Loss and loss adjustment expenses increased $3.3 million or 7.4% from $44.2
      million for the nine months ended September 30, 2007 compared to $47.5 million
      for the three months ended September 30, 2008. The loss ratio for the segment
      decreased for the nine months ended September 30, 2008 to 60.8% from 62.3%
      for
      the nine months ended September 30, 2007. The Company’s actuarially projected
      ultimate losses remained consistent period over period.





*Acquisition
      Costs and Other Underwriting Expenses.* Acquisition
      costs and other underwriting expenses increased $7.7 million or 21.8% from
      $34.8
      million for the nine months ended September 30, 2007 to $42.5 million for the
      nine months ended September 30, 2008. The increase related, primarily, to higher
      salaries and benefits during the nine months ended September 30, 2008 compared
      to the nine months ended September 30, 2007.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $5.2
      million or 85.3% from $6.1 million to $11.3 million for the nine months ended
      September 30, 2007 and 2008, respectively. This increase is attributable to
      growth in ceding commissions offset by higher salary costs.





**Liquidity**  **and
      Capital Resources**





Our
      principal sources of operating funds are premiums, investment income and
      proceeds from sales and maturities of investments. Our primary uses of operating
      funds include payments of claims and operating expenses. Currently, we pay
      claims using cash flow from operations and invest our excess cash primarily
      in
      fixed maturity and equity securities. We forecast claim payments based on our
      historical trends. We seek to manage the funding of claim payments by actively
      managing available cash and forecasting cash flows on short-term and long-term
      bases. Cash payments for claims were $192.3 million and $126.8 million in the
      nine months ended September 30, 2008 and 2007, respectively. We expect cash
      flow
      from operations should be sufficient to meet our anticipated claim obligations.
      We further expect that projected cash flow from operations should provide us
      sufficient liquidity to fund our current operations and service our debt
      instruments and anticipated growth for at least the next twelve
      months.




However,
      if our growth attributable to acquisitions, internally generated growth or
      a
      combination of these exceeds our projections, we may have to raise additional
      capital sooner to support our growth. The following table is summary of our
      statement of cash flows:





**Nine Months Ended****September 30,**($ amounts in thousands)
            
            **2008**
            
            **2007**Cash
                and cash equivalents provided by (used in):Operating
                activities
            
            $
            90,027
            
            $
            187,504Investing
                activities
            
            
            (228,109
            )
            
            (184,782
            )Financing
                activities
            
            
            193,412
            
            
            127,854




Net
      cash
      provided by operating activities was positive for the nine months ended
      September 30, 2008 but lower than net cash provided by operating activities
      in
      the nine months ended September 30, 2008, primarily because of the increase
      in
      claims paid during the nine months ended September 30, 2008.





Cash
      used
      in investing activities during the period represents, primarily, the net
      purchases (purchases less sales) of investments. For the nine months ended
      September 30, 2008, the Company’s net purchases of fixed income securities
      totaled approximately $195 million, net sales of equity securities totaled
      $18
      million and net sales of other investments totaled $11 million. Additionally,
      the Company had acquisition costs of approximately $59 million. For the nine
      months ended September 30, 2007, the Company’s net purchases of fixed income
      securities totaled approximately $115 million, net purchases of equity
      securities totaled approximately $5 million and net purchases of other
      investments totaled approximately $8 million. During 2007, the Company had
      acquisition costs of approximately $37 million and additionally the Company
      provided approximately $18 million related to a secured note in connection
      with
      the Warrantech transaction.




41




(dollars
      in millions unless noted otherwise)





** Cash
      provided by financing activities for the nine months ended September 30, 2008
      consisted primarily of $40 million from entering into a term loan, $164 million
      received from entering into repurchase agreements offset by dividend payments
      of
      $7 million and $3 million of payments on the aforementioned term loan. Cash
      provided by financing activities for the nine months ended September 30, 2007
      consisted primarily of cash proceeds of $93 million from entering into a reverse
      purchase agreement, $40 million generated by the issuance of additional junior
      subordinated debt in connection with the issuance of trust preferred securities
      offset by dividend payments of approximately $4 million.





**Term
      Loan**





On
      June
      3, 2008, the Company entered into a term loan with JP Morgan Chase Bank, N.A.
      in
      the aggregate amount of $40 million. The term of the loan is for a period of
      three years and requires quarterly principal payments beginning on September
      3,
      2008 of $3.3 million and ending on June 3, 2011. The loan carries a variable
      rate and is based on a Eurodollar rate plus an applicable margin. The Eurodollar
      rate is a periodic fixed rate equal to the London Inter bank Offered Rate
“LIBOR” and had a margin rate of 185 basis points and was 4.67% as
      of September 30, 2008. The Company can prepay any amount of the loan after
      the first anniversary date without penalty upon prior notice. The term loan
      contains affirmative and negative covenants, including limitations on additional
      debt, limitations on investments and acquisitions outside the Company’s normal
      course of business. The loan requires the Company to maintain debt to equity
      ratio of 0.35 to 1 or less. The Company incurred financing fees of $0.1 million
      related to the agreement.





**Promissory
      Note**





In
      connection with the stock and asset purchase agreement with a subsidiary of
      Unitrin, Inc., the Company entered into a promissory note with Unitrin in the
      amount of $30 million. The note bears no interest rate and requires four annual
      principal payments of $7.5 million beginning on June 1, 2009 through June 1,
      2012. The Company calculated imputed interest of $3.2 million based on current
      interest rates available to the Company. Accordingly, the note’s carrying
      balance was adjusted to $26.8 million at inception. The note is required to
      be
      paid in full immediately, under certain circumstances involving default of
      payment or change of control of the Company. The Company recorded $0.3 million
      and $0.4 million of interest expense during the three months and nine months
      ended September 30, 2008 and the note’s carrying value at September 30, 2008 was
      $27.2 million.





**Line
      of Credit**





The
      Company entered into an agreement for an unsecured line of credit on June 3,
      2008 with JP Morgan Chase Bank, N.A. in the aggregate amount of $25 million.
      The
      line will be used for collateral for letters of credit. The agreement matures
      on
      June 30, 2009.   Interest payments are required to be paid monthly on
      any unpaid principal and bears interest at LIBOR plus 150 basis points.  As
      of September 30, 2008 there was no outstanding balance on the line of credit.
      The Company has an outstanding letter of credit in place at September 30, 2008
      for $22.4 million that reduced the availability on the line of credit to $2.6
      million as of September 30, 2008.





**Securities
      Sold Under Agreements to Repurchase, at Contract Value**




The
      Company enters into repurchase agreements. The agreements are accounted for
      as
      collateralized borrowing transactions and are recorded at contract amounts.
      The
      Company receives cash or securities that it invests or holds in short-term
      or
      fixed-income securities. As of September 30, 2008, there were approximately
      $310
      million principal amount outstanding at interest rates between 2.42% and 3.75%.
      Interest expense associated with these repurchase agreements for the three
      months ended September 30, 2008 was $2.3 million of which $4.0 million was
      accrued as of September 30, 2008. The Company has approximately $3 1 0
      million
      of collateral pledged in support of these agreements.




42





(dollars
      in millions unless noted otherwise)





**Note
      Payable — Collateral for Proportionate Share of Reinsurance
      Obligation**




In
      conjunction with the Reinsurance Agreement between AII and Maiden Insurance,
      AII
      entered into a loan agreement with Maiden Insurance during the fourth quarter
      of
      2007, whereby, Maiden Insurance will lend to AII from time to time for the
      amount of obligation of the AmTrust Ceding Insurers that AII is obligated to
      secure, not to exceed an amount equal to the Maiden Insurance’s proportionate
      share of such obligations to such AmTrust Ceding Insurers in accordance with
      the
      Reinsurance Agreement. The Company is required to deposit all proceeds from
      the
      advances into a sub-account of each trust account that has been established
      for
      each AmTrust Ceding Insurer. To the extent of the loan, Maiden Insurance is
      discharged from providing   security for its proportionate share of the
      obligations as contemplated by the Reinsurance Agreement. If an AmTrust Ceding
      Insurer withdraws loan proceeds from the trust account for the purpose of
      reimbursing such AmTrust Ceding Insurer, for an ultimate net loss, the
      outstanding principal balance of the loan shall be reduced by the amount of
      such
      withdrawal. The loan agreement was amended in February 2008 to provide for
      interest at a rate of LIBOR plus 90 basis points and is payable on a quarterly
      basis. Each advance under the loan is secured by a promissory note. Advances
      totaled $167.7 million as of September 30, 2008.





**Reinsurance**




The
      Company utilizes reinsurance agreements to reduce its exposure to large claims
      and catastrophic loss occurrences. These agreements provide for recovery from
      reinsurers of a portion of losses and LAE under certain circumstances without
      relieving the insurer of its obligation to the policyholder. Losses and LAE
      incurred and premiums earned are reflected after deduction for reinsurance.
      In
      the event reinsurers are unable to meet their obligations under reinsurance
      agreements, the Company would not be able to realize the full value of the
      reinsurance recoverable balances. The Company periodically evaluates the
      financial condition of its reinsurers in order to minimize its exposure to
      significant losses from reinsurer insolvencies. Reinsurance does not discharge
      or diminish the primary liability of the Company; however, it does permit
      recovery of losses on such risks from the reinsurers.





The
      Company has coverage for its workers’ compensation line of business under excess
      of loss reinsurance agreements. The agreements cover losses in excess of $0.5
      million through December 31, 2004, $600 effective January 1, 2005 and $1.0
      million effective July 1, 2006, per occurrence up to a maximum $130 million
      ($80
      million prior to 2004). We have obtained reinsurance for this line of
      business with higher limits as our exposures have increased. As the scale of
      our
      workers’ compensation business has increased, we have also increased the amount
      of risk we retain. Our reinsurance for worker’s compensation losses caused by
      acts of terrorism is more limited than our reinsurance for other types of
      workers’ compensation losses.





In
      addition to the coverage that the Company purchases for its workers compensation
      line of business the Company also purchases property per risk excess of loss
      coverage that has a limit of $13 million in excess of a retention of $2 million;
      property catastrophe coverage with a limit of $61 million in excess of a
      retention of $4 million and a casualty excess of loss coverage with a limit
      of
      $12 million in excess of a retention of $2 million. The casualty excess of
      loss
      reinsurance treaty also provides $20 million in excess of $12 million in clash
      coverage.





During
      2007, TIC acted as servicing carrier on behalf of both the Georgia and Virginia
      Workers’ Compensation Assigned Risk Plans. In its role as a serving carrier TIC
      issues and services certain workers compensation policies to Georgia and
      Virginia insureds. Those policies are subject to a 100% quota-share reinsurance
      agreement provided by the National Workers Compensation Reinsurance Pool or
      a
      state-based equivalent, which is administered by the National Council on
      Compensation Insurance, Inc. (“NCCI”). In 2008, the Company began acting as a
      servicing carrier for the workers’ compensation assigned risk plans in Indiana,
      Illinois and Arkansas.




As
      part
      of the agreement to purchase Wesco Insurance Company from Household Insurance
      Group Holding Company (“Household”), the Company agreed to write certain
      business on behalf Household for a three year period. The premium written under
      this arrangement is 100% reinsured by HSBC Insurance Company of Delaware, a
      subsidiary of Household. The reinsurance recoverable associated with this
      business is guaranteed by Household.




43





(dollars
      in millions unless noted otherwise)





During
      the third quarter of 2007, the Company and Maiden entered into a master
      agreement, as amended, by which they caused the Company’s Bermuda affiliate,
      AII, and Maiden Insurance to enter into a the Reinsurance Agreement by which
      (a)
      AII retrocedes to Maiden Insurance an amount equal to 40% of the premium written
      by AmTrust’s U.S., Irish and U.K. insurance companies (the “AmTrust Ceding
      Insurers”), net of the cost of unaffiliated insuring reinsurance (and in the
      case of AmTrust’s U.K. insurance subsidiary IGI, net of commissions) and 40% of
      losses and (b) AII transferred to Maiden Insurance 40% of the AmTrust Ceding
      Insurer’s unearned premium reserves, effective as of July 1, 2007, with respect
      to then current lines of business, excluding risks for which the AmTrust Ceding
      Insurers’ net retention exceeds $5 million (“Covered Business”). AmTrust also
      agreed to cause AII, subject to regulatory requirements, to reinsure any
      insurance company which writes Covered Business in which AmTrust acquires a
      majority interest to the extent required to enable AII to cede to Maiden
      Insurance 40% of the premiums and losses related to such Covered Business.
      The
      Agreement further provides that the AII receives a ceding commission of 31%
      of
      ceded written premiums for the lines of business written by AmTrust on the
      effective date. The Reinsurance Agreement has an initial term of three years
      and
      will automatically renew for successive three year terms thereafter, unless
      either AII or Maiden Insurance notifies the other of its election not to renew
      not less than nine months prior to the end of any such three year term. In
      addition, either party is entitled to terminate on thirty day’s notice or less
      upon the occurrence of certain early termination events, which include a default
      in payment, insolvency, change in control of AII or Maiden Insurance, run-off,
      or a reduction of 50% or more of the shareholders’ equity of Maiden Insurance or
      the combined shareholders’ equity of AII and the AmTrust Ceding Insurers.
      Effective June 1, 2008 the master agreement was amended such that AII agreed
      to
      cede and Maiden Insurance agreed to accept and reinsure Retail Commercial
      Package Business, which the Company, through Affiliates, commenced writing
      effective June 1, 2008, in connection with its acquisition from TUIC, a
      subsidiary of Unitrin, Inc., of its Unitrin Business Insurance unit (“UBI”). AII
      ceded 100% of the unearned premium related to in-force Retail Commercial Package
      Business and losses related thereto assumed by the Company as a result of this
      acquisition and 40% the Company’s net written premium and losses on Retail
      Commercial Package Business written or renewed on or after June 1, 2008. The
      $2
      million maximum liability for a single loss provided in the Quota Share
      Reinsurance Agreement shall not be applicable to Retail Commercial Package
      Business.  AmTrust receives a ceding commission of 34.375% for Retail
      Commercial Package Business subject to the amendment.





Effective
      January 1, 2008, Maiden became a participating reinsurer in the first layer
      of
      the Company’s workers’ compensation excess of loss program, which provides
      coverage in the amount of $9 million per occurrence in excess of $1 million,
       subject to an annual aggregate deductible of $1.25 million.  Maiden,
      which is one of two participating reinsurers in the layer, has a 45%
      participation.  Maiden participates in the first layer of the excess of
      loss program on the same market terms and conditions as the other
      participant.





As
      part
      of the acquisition of AIIC, the Company acquired reinsurance recoverables as
      of
      the date of closing. The most significant reinsurance recoverable is from
      American Home Assurance Co. (“American Home”). AIIC’s reinsurance relationship
      with American Home incepted January 1, 1998 on a loss occurring basis. From
      January 1, 1998 through March 31, 1999 the American Home reinsurance covered
      losses in excess of $0.25 million per occurrence up to statutory coverage
      limits. Effective April 1, 1999, American Home provided coverage in the amount
      of $0.15 million in excess of $0.1 million. This additional coverage terminated
      on December 31, 2001 on a run-off basis. Therefore, for losses occurring in
      2002
      that attached to a 2001 policy, the retention was $0.1 million per occurrence.
      Effective January 1, 2002 American Home increased its attachment to $0.25
      million per occurrence. The XOL treaty that had an attachment of $0.25 million
      was terminated on a run-off basis on December 31, 2002. Therefore, losses
      occurring in 2003 that attached to a 2002 policy were ceded to American Home
      at
      an attachment point of $0.25 million per occurrence.




Since
      January 1, 2003, the Company has had variable quota share reinsurance with
      Munich Reinsurance Company (“Munich Re”) for our specialty risk and extended
      warranty insurance. The scope of this reinsurance arrangement is broad enough
      to
      cover all of our specialty risk and extended warranty insurance worldwide.
      However, we do not cede to Munich Re the majority of our U.S. specialty risks
      and extended warranty business, although we may cede more of this U.S. business
      to Munich Re in the future.




44





(dollars
      in millions unless noted otherwise)





Under
      the
      variable quota share reinsurance arrangements with Munich Re, we may elect
      to
      cede from 15% to 50% of each covered risk, but Munich Re shall not reinsure
      more
      than £0.5 million for each ceded risk which we at acceptance regard as one
      individual risk. This means that regardless of the amount of insured losses
      generated by any ceded risk, the maximum coverage for that ceded risk under
      this
      reinsurance arrangement is £0.5 million. For the majority of the business ceded
      under this reinsurance arrangement, we cede 15% of the risk to Munich Re, but
      for some newer or larger risks, we cede a larger share to Munich Re. This
      reinsurance is subject to a limit of £2.5 million per occurrence of certain
      natural perils such as windstorms, earthquakes, floods and storm surge. Coverage
      for losses arising out of acts of terrorism is excluded from the scope of this
      reinsurance.




In
      October 2006, the Company entered into a quota-share reinsurance agreement
      with
      5 syndicate members of Lloyd’s of London who collectively reinsure 70% of a
      particular specialty risk and extended warranty program.





**Investment
      Portfolio**





Our
      investment portfolio, including cash and cash equivalents, increased $146.2
      million, or 11.6% to $1,407.7 million at September 30, 2008 from $1,261.6
      million as of December 31, 2007 (excluding $16.9 million and $28.1 million
      of
      other investments, respectively). As of September 30, 2008, 94% of our fixed
      maturities are classified as available for sale, as defined by SFAS No. 115,
      “Accounting for Certain Investments in Debt and Equity Securities.” As such, the
      reported value of those securities is equal to their fair value. Our fixed
      maturities classified as held to maturity are not impacted by changing interest
      rates. Our fixed maturity securities, gross, as of this date had a fair value
      of
      $935.4 million and an amortized cost of $1,006.6 million. Our equity securities
      are classified as available-for-sale, as defined by SFAS 115. These securities
      are reported at fair value. The equity securities, gross, carried at fair value
      were $43.3 million with a cost of $92.8 million as of September 30, 2008.
      Securities sold but not yet purchased, represent obligations of the Company
      to
      deliver the specified security at the contracted price and thereby, create
      a liability to purchase the security in the market at prevailing rates. 
Sales of securities under repurchase agreements are accounted for as
      collateralized borrowing transactions and are recorded at their contracted
      amounts. Our investment portfolio is summarized in the table below by type
      of
      investment:





**September
                  30, 2008**
            
            **December
                31, 2007**($
                amounts in thousands)
            
            **Carrying**
              **Value**
            
            **Percentage of**
                **Portfolio**
            
            **Carrying**
              **Value**
            
            **Percentage of**
              **Portfolio**Cash
                and cash equivalents
            
            $
            198,096
            
            
            14.1
            %
            $
            145,337
            
            
            11.5
            %Time
                and short-term deposits
            
            
            230,926
            
            
            16.4
            
            
            148,541
            
            
            11.8U.S.
                treasury securities
            
            
            22,490
            
            
            1.6
            
            
            19,074
            
            
            1.5U.S.
                government agencies
            
            
            23,468
            
            
            1.7
            
            
            144,173
            
            
            11.4U.S.
                agency - collateralized mortgage obligations
            
            
            353,106
            
            
            25.1
            
            
            239,200
            
            
            19.0U.S.
                agency - mortgage backed securities
            
            
            150,435
            
            
            10.7
            
            
            91,663
            
            
            7.3Other
                mortgage backed securities
            
            
            -
            
            
            -
            
            
            4,153
            
            
            0.3Municipal
                bonds
            
            
            27,925
            
            
            2.0
            
            
            10,428
            
            
            0.8Asset
                backed securities
            
            
            5,796
            
            
            0.4
            
            
            10,226
            
            
            0.8Corporate
                bonds
            
            
            352,178
            
            
            25.0
            
            
            369,733
            
            
            29.3Common
                stock
            
            
            38,533
            
            
            2.7
            
            
            78,533
            
            
            6.3Preferred
                stock
            
            
            4,793
            
            
            0.3
            
            
            504
            
            
            —$
            1,407,746
            
            
            100.0
            %
            $
            1,261,565
            
            
            100.0
            %




As
      of
      September 30, 2008, the weighted average duration of our fixed income securities
      was 5.4 years.




45





(dollars
      in millions unless noted otherwise)





Quarterly,
      the Company’s Investment Committee (“Committee”) evaluates each security which
      has an unrealized loss as of the end of the subject reporting period for
      other-than-temporary-impairment. The Committee uses a set of quantitative and
      qualitative criteria to review our investment portfolio to evaluate the
      necessity of recording impairment losses for other-than-temporary declines
      in
      the fair value of our investments. Some of the criteria we consider
      include:




·
            how
                long and by how much the fair value of the security has been below
                its
                amortized cost;




·
            the
                financial condition and near-term prospects of the issuer of the
                security,
                including any specific events that may affect its operations or
                earnings;




·
            our
                intent and ability to keep the security for a sufficient time period
                for
                it to recover its value;




·
            any
                reduction or elimination of dividends, or nonpayment of scheduled
                interest
                payments; and




·
            The
                occurrence of discrete credit event resulting in (i) the issuer defaulting
                on material outstanding obligation (ii) the issuer seeking protection
                under bankruptcy law.




During
      the nine months ended September 30, 2008, based on the criteria above, we
      determined that six equity securities and two fixed income securities were
      other-than-temporarily-impaired and accordingly wrote them down resulting in
      a
      $44.6 million realized loss.




In
      addition to non-cash write-downs of $13.3 million the Company took for the
      impaired equity securities during the nine months ended September 30, 2008,
      at
      September 30, 2008, the Company had $49.5 million of gross unrealized losses
      related to marketable equity securities. The Company’s investment in marketable
      equity securities consist of investments in common stock across a wide range
      of
      sectors. The Company evaluated the near-term prospects for recovery of fair
      value in relation to the severity and duration of the impairment and has
      determined in each case that the probability of recovery is reasonable. Within
      the Company’s portfolio of common stocks, 35 equity securities comprised $46
      million, or 92% of the unrealized loss. 14 securities in the consumer products
      sector represent approximately 35% and $28.5 million, of the total fair value
      and 27% of the Company’s unrealized loss. 4 securities in the financial sector
      represent approximately 9% of the total fair value and 12% of the Company’s
      total unrealized losses and 11 common stocks in the health care, industrial
      and
      technology sectors which have fair values of approximately 13%, 5% and 6%,
      respectively, and approximately 16%, 18% and 5%, respectively, of the
      Company’s unrealized losses. Additionally, the Company owns 5 stocks in other
      sectors which accounts for 14% of the Company’s unrealized losses. The
      duration of these impairments range from 1 to 25 months. The remaining
      securities in a loss position are not considered individually significant and
      accounted for 8% of the Company’s unrealized losses. The Company believes these
      securities will recover and that we have the ability and intent to hold them
      until recovery.




In
      addition to non-cash write-downs of $31.3 million the Company took for impaired
      fixed income securities during the nine months ended September 30, 2008, At
      September 30, 2008 the Company had 180 corporate bonds represent 37.7% of the
      fair value of our fixed maturities and 91.2% of the total unrealized losses
      of
      our fixed maturities. The Company owns 214 corporate bonds in the industrial,
      bank & financial and other sectors, which have a fair value of approximately
      7.4%, 29.4% and 0.9%, respectively, and 9.3%, 81.1% and 0.8% of total unrealized
      losses, respectively, of our fixed maturities. The Company believes that the
      unrealized losses in these securities are the result, primarily, of general
      economic conditions and not the condition of the issuers, which we believe
      are
      solvent and have the ability to meet their obligations.  Therefore, the
      Company expects that the market price for these securities should recover within
      a reasonable time.





46





(dollars
      in millions unless noted otherwise)





**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





Market
      risk is the risk of potential economic loss principally arising from adverse
      changes in the fair value of financial instruments. The major components of
      market risk affecting us are liquidity risk, credit risk, interest rate risk,
      foreign currency risk and equity price risk.




*Liquidity
      Ris* k.
      Liquidity risk represents the potential inability of the Company to meet all
      payment obligations when they become due. The Company maintains sufficient
      cash
      and marketable securities to fund claim payments and operations. We purchase
      reinsurance coverage to mitigate the risk of an unexpected rise in claims
      severity or frequency from catastrophic events or a single large loss. The
      availability, amount and cost of reinsurance depend on market conditions and
      may
      vary significantly.





*Credit
      Risk.* Credit
      risk is the potential loss arising principally from adverse changes in the
      financial condition of the issuers of our fixed maturity securities and the
      financial condition of our third party reinsurers. We address the credit risk
      related to the issuers of our fixed maturity securities by investing primarily
      in fixed maturity securities that are rated “BBB-” or higher by Standard &
Poor’s. We also independently monitor the financial condition of all issuers of
      our fixed maturity securities. To limit our risk exposure, we employ
      diversification policies that limit the credit exposure to any single issuer
      or
      business sector.





We
      are
      subject to credit risk with respect to our third party reinsurers. Although
      our
      third party reinsurers are obligated to reimburse us to the extent we cede
      risk
      to them, we are ultimately liable to our policyholders on all risks we have
      ceded. As a result, reinsurance contracts do not limit our ultimate obligations
      to pay claims covered under the insurance policies we issue and we might not
      collect amounts recoverable from our reinsurers. We address this credit risk
      by
      selecting reinsurers which have an A.M. Best rating of “A” (Excellent) or better
      at the time we enter into the agreement and by performing, along with our
      reinsurance broker, periodic credit reviews of our reinsurers. If one of our
      reinsurers suffers a credit downgrade, we may consider various options to lessen
      the risk of asset impairment, including commutation, novation and letters of
      credit. See “—Reinsurance.”




*Interest
      Rate Risk.* We had
      fixed maturity securities (excluding $230.9 million of time and short-term
      deposits) with a fair value of $935.5 million and a carrying value of $935.4
      million as of September 30, 2008 that are subject to interest rate risk.
      Interest rate risk is the risk that we may incur losses due to adverse changes
      in interest rates. Fluctuations in interest rates have a direct impact on the
      market valuation of our fixed maturity securities. We manage our exposure to
      interest rate risk through a disciplined asset and liability matching and
      capital management process. In the management of this risk, the characteristics
      of duration, credit and variability of cash flows are critical elements. These
      risks are assessed regularly and balanced within the context of our liability
      and capital position.





The
      table
      below summarizes the interest rate risk associated with our fixed maturity
      securities by illustrating the sensitivity of the fair value and carrying value
      of our fixed maturity securities as of September 30, 2008 to selected
      hypothetical changes in interest rates, and the associated impact on our
      stockholders’ equity. Because we anticipate that the Company will continue to
      meet its obligations out of income, we classify our fixed maturity securities,
      other than redeemable preferred stock, mortgage backed and corporate
      obligations, as held-to-maturity and carry them on our balance sheet at cost
      or
      amortized cost, as applicable. Any redeemable preferred stock we hold from
      time
      to time is classified as available-for-sale and carried on our balance sheet
      at
      fair value. Temporary changes in the fair value of our fixed maturity securities
      that are held-to-maturity, such as those resulting from interest rate
      fluctuations, do not impact the carrying value of these securities and,
      therefore, do not affect our shareholders’ equity. However, temporary changes in
      the fair value of our fixed maturity securities that are held as
      available-for-sale do impact the carrying value of these securities and are
      reported in our shareholders’ equity as a component of other comprehensive
      income, net of deferred taxes. The selected scenarios in the table below are
      not
      predictions of future events, but rather are intended to illustrate the effect
      such events may have on the fair value and carrying value of our fixed maturity
      securities and on our shareholders’ equity, each as of September 30,
      2008.





47





(dollars
      in millions unless noted otherwise)








**Hypothetical Change in Interest Rates**
            
            **Fair**
              **Value**
            
            **Estimated**
              **Change****in**
              **Fair**
              **Value**
            
            **Carrying**
              **Value**
            
            **Estimated**
              **Change****in**
              **Carrying**
              **Value**
            
            **Hypothetical**
              **Percentage**
              **(Increase)**
              **Decrease****in**
              **Shareholders’**
              **Equity**($
                amounts in thousands)200
                basis point increase
            
            $
            867,360
            
            $
            (68,127
            )
            $
            —
            
            $
            (68,127
            )
            
            (17.5
            )%100
                basis point increase
            
            
            899,713
            
            
            (35,774
            )
            
            —
            
            
            (35,774
            )
            
            (9.2
            )No
                change
            
            
            935,489
            
            
            —
            
            
            935,397
            
            
            —
            
            
            —100
                basis point decrease
            
            
            970,450
            
            
            34,963
            
            
            —
            
            
            34,963
            
            
            9.0200
                basis point decrease
            
            
            1,006,533
            
            
            71,046
            
            
            —
            
            
            71,046
            
            
            18.3




Changes
      in interest rates would affect the fair market value of our fixed rate debt
      instruments but would not have an impact on our earnings or cash flow. We
      currently have $355.3 million of debt instruments of which $151.0 million are
      fixed rate debt instruments. A fluctuation of 100 basis points in interest
      on
      our variable rate debt instruments, which are tied to LIBOR, would affect our
      earnings and cash flows by $2.0 million before income tax, on an annual basis,
      but would not affect the fair market value of the variable rate
      debt.




*Foreign
      Currency Risk.* We write
      insurance in the United Kingdom and certain other European Union member
      countries through AIU. While the functional currency of AIU is the Euro, we
      write coverages that are settled in local currencies, including the British
      Pound. We attempt to maintain sufficient local currency assets on deposit to
      minimize our exposure to realized currency losses. Assuming a 5% increase in
      the
      exchange rate of the local currency in which the claims will be paid and that
      we
      do not hold that local currency, we would recognize a $2.0 million after tax
      realized currency loss based on our outstanding foreign denominated reserves
      of
      $60.4 million at September 30, 2008.





*Equity
      Price Risk.* Equity
      price risk is the risk that we may incur losses due to adverse changes in the
      market prices of the equity securities we hold in our investment portfolio,
      which include common stocks, non-redeemable preferred stocks and master limited
      partnerships. We classify our portfolio of equity securities as
      available-for-sale and carry these securities on our balance sheet at fair
      value. Accordingly, adverse changes in the market prices of our equity
      securities result in a decrease in the value of our total assets and a decrease
      in our shareholders’ equity. As of September 30, 2008, the equity securities in
      our investment portfolio had a fair value of $43.3 million, representing
      approximately four percent of our total invested assets on that date. We are
      fundamental long buyers and short sellers, with a focus on value oriented
      stocks. The table below illustrates the impact on our equity portfolio and
      financial position given a hypothetical movement in the broader equity markets.
      The selected scenarios in the table below are not predictions of future events,
      but rather are intended to illustrate the effect such events may have on the
      carrying value of our equity portfolio and on shareholders’ equity as of
      September 30, 2008. The hypothetical scenarios below assume that the Company’s
      Beta is 1 when compared to the S&P 500 index.


**Hypothetical Change in S&P 500 Index**
            
            **Fair Value**
            
            **Estimated**
              **Change in**
              **Fair Value**
            
            **Carrying**
              **Value**
            
            **Estimated**
              **Change in**
              **Carrying**
              **Value**
            
            **Hypothetical**
              **Percentage**
              **Increase**
              **(Decrease) in**
              **Shareholders**
              **Equity**($ amounts in thousands)5%
                increase
            
            $
            45,491
            
            $
            2,166
            
            
            
            
            $
            2,166
            
            
            0.6
            %No
                change
            
            
            43,326
            
            
            
            
            $
            43,3255%
                decrease
            
            
            41,159
            
            
            (2,166
            )
            
            
            
            
            (2,166
            )
            
            (0.6
            )%




*Off
      Balance Sheet Risk* .
      The
      Company has exposure or risk related to securities sold but not yet
      purchased.





48




***Risks
      Associated with Forward-Looking Statements Included in this Form
      10-Q***





This
      Form
      10-Q contains certain forward-looking statements within the meaning of Section
      27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
      Act
      of 1934, which are intended to be covered by the safe harbors created thereby.
      These statements include the plans and objectives of management for future
      operations, including plans and objectives relating to future growth of the
      Company’s business activities and availability of funds. The forward-looking
      statements included herein are based on current expectations that involve
      numerous risks and uncertainties. Assumptions relating to the foregoing involve
      judgments with respect to, among other things, future economic, competitive
      and
      market conditions, regulatory framework, weather-related events and future
      business decisions, all of which are difficult or impossible to predict
      accurately and many of which are beyond the control of the Company. Although
      the
      Company believes that the assumptions underlying the forward-looking statements
      are reasonable, any of the assumptions could be inaccurate and, therefore,
      there
      can be no assurance that the forward-looking statements included in this Form
      10-Q will prove to be accurate. In light of the significant uncertainties
      inherent in the forward-looking statements included herein, the inclusion of
      such information should not be regarded as a representation by the Company
      or
      any other person that the objectives and plans of the Company will be
      achieved.





**Item
      4. Controls and Procedures**





The
      principal executive officer and principal financial officer of the Company
      have
      evaluated the Company’s disclosure controls and procedures and have concluded
      that, as of the end of the period covered by this report, such disclosure
      controls and procedures were effective in ensuring that information required
      to
      be disclosed by the Company in the reports that it files or submits under the
      Securities Exchange Act of 1934 is timely recorded, processed, summarized and
      reported. The principal executive officer and principal financial officer also
      concluded that such disclosure controls and procedures were effective in
      ensuring that information required to be disclosed by the Company in the reports
      that it files or submits under such Act is accumulated and communicated to
      the
      Company’s management, including its principal executive officer and principal
      financial officer, as appropriate, to allow timely decisions regarding required
      disclosure. During the most recent fiscal quarter, there have been no changes
      in
      the Company’s internal controls over financial reporting that have materially
      affected, or are reasonably likely to materially affect, the Company’s internal
      control over financial reporting.








PART
      II -
      OTHER INFORMATION





**Item
      1. Legal Proceedings.**





On
      June
      16, 2008, a derivative action against the Company’s directors, certain officers
      and Maiden Holdings, Ltd. and Maiden Insurance Company, Ltd. was filed in the
      Supreme Court of the State of New York, County of New York entitled “Erk
      Erginer, Derivatively on Behalf of Nominal Defendant AmTrust Financial Services,
      Inc., Plaintiff, v **.** Michael
      Karfunkel, George Karfunkel, Barry D. Zyskind, Donald T. DeCarlo, Abraham
      Gulkowitz, Isaac M. Neuberger, Jay J. Miller, Max G. Caviet, Ronald E. Pipoly,
      Jr., Maiden Holdings, Ltd., Maiden Insurance Company, Ltd., Defendants and
      AmTrust Financial Services, Inc., Nominal Defendant.”





This
      complaint alleges that the Company’s transactions with Maiden Holdings, Ltd and
      Maiden Insurance Company, Inc. (collectively, “Maiden”) unduly benefit Michael
      Karfunkel, George Karfunkel and Barry D. Zyskind, who are minority shareholders
      of Maiden Holdings, Ltd., at the expense of the Company and that the Company’s
      directors breached their fiduciary duty to the Company by approving them. 
The plaintiff further alleges claims for breach of their duty of loyalty to
      and
      employment agreements with the Company against Messrs. Zyskind, Caviet and
      Pipoly for accepting positions at Maiden. The complaint seeks damages from
      the
      individual defendants and Maiden and judgment declaring the Maiden transactions
      void.





The
      Company and the individual defendants have moved to dismiss the complaint.
      The
      motion is pending. The Company and each of the defendants believe the Complaint
      is without merit and intend to vigorously defend the action.




49




**Item
      6.**  **Exhibits**





**Exhibit**
              **Number**
            
            **Description**31.1
            
            Certification
                of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
                for the quarter ended September 30, 2008.31.2
            
            Certification
                of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
                for the quarter ended September 30, 2008.32.1
            
            Certification
                of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
                for
                the quarter ended September 30, 2008.32.2
            
            Certification
                of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
                for
                the quarter ended September 30,
                2008.




50




SIGNATURES





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned hereunto
      duly authorized.




AmTrust
                Financial Services, Inc.(Registrant)/s/
                Barry D. ZyskindBarry
                D. ZyskindPresident
                and Chief Executive OfficerDate:
                November 10, 2008
            
            
            /s/
                Ronald E. Pipoly, Jr.Ronald
                E. Pipoly, Jr.Chief
                Financial Officer


51