**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 June 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
      FilerxNon-accelerated filero





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
      July 28, 2008, the Registrant had one class of Common Stock ($.01 par value),
      of
      which 59,999,164 shares were issued and outstanding.
















INDEX





PART
                I
            
            FINANCIAL
                INFORMATION
            
            PageItem
                1.
            
            Unaudited
                Financial Statements:Condensed
                Consolidated Balance Sheets as of June 30, 2008 and December 31,
                2007
            
            3Condensed
                Consolidated Statements of Income
            
            4—
                Three and six months ended June 30, 2008 and 2007Condensed
                Consolidated Statements of Cash Flows
            
            5—
                Six months ended June 30, 2008 and 2007Notes
                to Condensed Consolidated Financial Statements
            
            6Item
                2.
            
            Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            24Item
                3.
            
            Quantitative
                and Qualitative Disclosures About Market Risk
            
            39Item
                4.
            
            Controls
                and Procedures
            
            41PART
                II
            
            OTHER
                INFORMATIONItem
                1.
            
            Legal
                Proceedings
            
            42Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            42Item
                6.
            
            Exhibits
            
            43Signatures
            
            44






-
          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)**





****
            
            **June 30,**
              **2008**
            
            **December 31,**
              **2007**(Unaudited)**ASSETS**Investments:Fixed
                maturities, held-to-maturity, at amortized cost (fair value $105,694;
                $162,661)
            
            $
            105,657
            
            $
            161,901Fixed
                maturities, available-for-sale, at market value (amortized cost $959,386;
                $745,132)
            
            
            919,775
            
            
            726,749Equity
                securities, available-for-sale, at market value (cost $101,093;
                $106,956)
            
            
            57,563
            
            
            79,037Short-term
                investments
            
            
            258,322
            
            
            148,541Other
                investments
            
            
            15,355
            
            
            28,035**Total
                investments**
            
            
            1,356,672
            
            
            1,144,263Cash
                and cash equivalents
            
            
            191,086
            
            
            145,337Assets
                under management
            
            
            —
            
            
            18,541Accrued
                interest and dividends
            
            
            10,254
            
            
            9,811Premiums
                receivable, net
            
            
            394,952
            
            
            257,756Note
                receivable – related party
            
            
            21,164
            
            
            20,746Reinsurance
                recoverable
            
            
            232,838
            
            
            225,941Reinsurance
                recoverable – related party
            
            
            120,862
            
            
            55,973Prepaid
                reinsurance premium
            
            
            142,087
            
            
            107,585Prepaid
                reinsurance premium – related party
            
            
            248,682
            
            
            137,099Prepaid
                expenses and other assets
            
            
            32,391
            
            
            26,131Deferred
                policy acquisition costs
            
            
            80,853
            
            
            70,903Deferred
                income taxes
            
            
            48,240
            
            
            36,502Property
                and equipment, net
            
            
            13,688
            
            
            12,974Goodwill
            
            
            20,199
            
            
            10,549Intangible
                assets
            
            
            81,633
            
            
            42,683$
            2,995,601
            
            $
            2,322,794**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Liabilities:**Loss
                and loss expense reserves
            
            $
            823,023
            
            $
            775,392Unearned
                premiums
            
            
            712,391
            
            
            527,758Ceded
                reinsurance premiums payable
            
            
            95,019
            
            
            39,464Ceded
                reinsurance premium payable – related party
            
            
            112,936
            
            
            38,792Reinsurance
                payable on paid losses
            
            
            —
            
            
            4,266Federal
                income tax payable
            
            
            616
            
            
            4,123Funds
                held under reinsurance treaties
            
            
            771
            
            
            4,400Securities
                sold but not yet purchased, at market
            
            
            3,450
            
            
            18,426Securities
                sold under agreements to repurchase, at contract value
            
            
            347,288
            
            
            146,403Accrued
                expenses and other current liabilities
            
            
            123,691
            
            
            113,800Derivatives
                liabilities
            
            
            3,747
            
            
            4,101Note
                payable – related party
            
            
            167,661
            
            
            113,228Note
                payable
            
            
            26,845
            
            
            —Term
                loan
            
            
            40,000
            
            
            —Junior
                subordinated debt
            
            
            123,714
            
            
            123,714**Total
                liabilities**
            
            
            2,581,152
            
            
            1,913,867**Commitments
                and contingencies****Minority
                Interest**
            
            
            —
            
            
            18,541**Stockholders’
                equity:**Common
                stock, $.01 par value; 100,000 shares authorized, 84,088 and 84,047
                issued
                in June 30, 2008 and December 31, 2007, respectively; 59,994 and
                59,952
                outstanding in June 30, 2008 and December 31, 2007,
                respectively
            
            
            841
            
            
            841Preferred
                stock, $.01 par value; 10,000,000 shares authorized
            
            
            —
            
            
            —Additional
                paid-in capital
            
            
            536,925
            
            
            535,123Treasury
                stock at cost; 24,094 shares in 2008 and 2007
            
            
            (294,671
            )
            
            (294,671
            )Accumulated
                other comprehensive income (loss)
            
            
            (53,238
            )
            
            (31,688
            )Retained
                earnings
            
            
            224,592
            
            
            180,781**Total
                stockholders’ equity**
            
            
            414,449
            
            
            390,386$
            2,995,601
            
            $
            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 June 30,**
            
            **Six Months Ended June 30,****2008**
            
            **2007**
            
            **2008**
            
            **2007****Revenues:**Premium
                income:Net
                premium written
            
            **$**
            132,057
            
            **$**
            163,522
            
            **$**
            249,499
            
            **$**
            324,141Change
                in unearned premium
            
            
            (16,112
            )
            
            (33,102
            )
            
            (36,141
            )
            
            (75,029
            )**Net
                earned premium**
            
            
            115,945
            
            
            130,420
            
            
            213,358
            
            
            249,112Ceding
                commission – related party
            
            
            35,222
            
            
            —
            
            
            55,406
            
            
            —Commission
                and fee income
            
            
            8,375
            
            
            4,292
            
            
            14,662
            
            
            8,782Net
                investment income
            
            
            14,190
            
            
            13,019
            
            
            27,721
            
            
            24,410Net
                realized (loss) gain on investments
            
            
            (2,135
            )
            
            4,962
            
            
            (7,355
            )
            
            11,022Other
                investment (loss) income on managed assets
            
            
            —
            
            
            2,191
            
            
            (2,900
            )
            
            1,901**Total
                revenues**
            
            
            171,597
            
            
            154,884
            
            
            300,892
            
            
            295,227**Expenses:**Loss
                and loss adjustment expense
            
            
            74,134
            
            
            84,999
            
            
            129,299
            
            
            159,556Policy
                acquisition expenses
            
            
            22,691
            
            
            17,447
            
            
            40,999
            
            
            32,030Salaries
                and benefits
            
            
            17,602
            
            
            9,921
            
            
            29,646
            
            
            18,933Other
                insurance general and administrative expense
            
            
            15,544
            
            
            5,004
            
            
            25,378
            
            
            12,578Other
                underwriting expenses
            
            
            2,504
            
            
            3,427
            
            
            7,298
            
            
            6,540**Total
                expenses**
            
            
            132,475
            
            
            120,798
            
            
            232,620
            
            
            229,637**Operating
                income from continuing operations**
            
            
            39,122
            
            
            34,086
            
            
            68,272
            
            
            65,590**Other
                income (expenses):**Foreign
                currency gain (loss)
            
            
            (15
            )
            
            629
            
            
            144
            
            
            119Interest
                expense
            
            
            (5,541
            )
            
            (2,531
            )
            
            (8,170
            )
            
            (4,335
            )**Total
                other expenses**
            
            
            (5,556
            )
            
            (1,902
            )
            
            (8,026
            )
            
            (4,216
            )**Income
                from continuing operations before provision for income taxes and
                minority
                interest**
            
            
            33,566
            
            
            32,184
            
            
            60,246
            
            
            61,374**Provision
                for income taxes**
            
            
            7,216
            
            
            8,597
            
            
            14,533
            
            
            16,599**Minority
                interest in net income of subsidiary**
            
            
            —
            
            
            2,191
            
            
            (2,900
            )
            
            1,901**Net
                income**
            
            
            26,350
            
            
            21,396
            
            
            48,613
            
            
            42,874**Basic
                earnings per common share**
            
            **$**
            0.44
            
            **$**
            0.36
            
            **$**
            0.81
            
            **$**
            0.72**Diluted
                earnings per common share**
            
            **$**
            0.43
            
            **$**
            0.35
            
            **$**
            0.80
            
            **$**
            0.71**Dividends
                declared per common share**
            
            **$**
            0.04
            
            
            0.025
            
            **$**
            0.08
            
            
            0.045




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


-
          4
          -





**AmTrust
      Financial Services, Inc.**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**


**(in
      thousands)**




**Six
                Months Ended June 30,****2008**
            
            **2007****Cash
                flows from operating activities:**Net
                income from continuing operations
            
            $
            48,613
            
            $
            42,874Adjustments
                to reconcile net income from continuing operations to net cash provided
                by
                operating activities of continuing operations:Depreciation
                and amortization
            
            
            3,736
            
            
            1,986Realized
                gain on marketable securities
            
            
            (616
            )
            
            (11,022
            )Non-cash
                write-down of marketable securities
            
            
            7,971
            
            
            —Bad
                debt expense
            
            
            1,237
            
            
            569Accretion
                of imputed interest
            
            
            101
            
            
            —Foreign
                currency (gain) loss
            
            
            (144
            )
            
            (119
            )Non-cash
                stock compensation expense
            
            
            1,495
            
            
            785Changes
                in assets - (increase) decrease:Premiums
                receivable
            
            
            (91,137
            )
            
            (72,087
            )Reinsurance
                recoverable
            
            
            (6,869
            )
            
            (8,076
            )Reinsurance
                recoverable – related party
            
            
            (64,889
            )
            
            —Deferred
                policy acquisition costs, net
            
            
            (9,950
            )
            
            (20,969
            )Prepaid
                reinsurance premiums
            
            
            (34,502
            )
            
            (20,811
            )Prepaid
                reinsurance premiums – related party
            
            
            (111,583
            )
            
            —Prepaid
                expenses and other assets
            
            
            (4,591
            )
            
            (8,541
            )Deferred
                tax asset
            
            
            (11,738
            )
            
            (2,532
            )Changes
                in liabilities - increase (decrease):Ceded
                reinsurance premium payable
            
            
            83,991
            
            
            21,116Accrued
                expenses and other current liabilities
            
            
            (3,981
            )
            
            13,399Loss
                and loss expense reserve
            
            
            47,631
            
            
            80,146Unearned
                premiums
            
            
            184,553
            
            
            97,428Funds
                held under reinsurance treaties – related party
            
            
            54,433
            
            
            —Funds
                held under reinsurance treaties
            
            
            (3,629
            )
            
            (95
            )**Net
                cash provided by operating activities**
            
            
            90,132
            
            
            114,051**Cash
                flows from investing activities:**Net
                (purchases) of securities with fixed maturities
            
            
            (237,556
            )
            
            (112,475
            )Net
                sales (purchases) of equity securities
            
            
            14,234
            
            
            (12,858
            )Net
                sales (purchases) of other investments
            
            
            12,680
            
            
            (10,401
            )Note
                receivable - related party
            
            
            (2,000
            )
            
            (18,000
            )Acquisition
                of a subsidiary, net of cash obtained
            
            
            (55,883
            )
            
            (11,436
            )Acquisition
                of renewal rights and goodwill
            
            
            (963
            )
            
            (1,055
            )Purchase
                of property and equipment
            
            
            (1,214
            )
            
            (646
            )**Net
                cash used in investing activities**
            
            
            (270,702
            )
            
            (166,871
            )**Cash
                flows from financing activities:**Term
                loan
            
            
            40,000
            
            
            —Issuance
                of junior subordinated debentures
            
            
            —
            
            
            40,000Reverse
                repurchase agreements
            
            
            185,909
            
            
            86,075Debt
                financing fees
            
            
            (52
            )
            
            (820
            )Stock
                option exercises
            
            
            307
            
            
            —Dividends
                distributed on common stock
            
            
            (4,800
            )
            
            (2,398
            )**Net
                cash provided by financing activities**
            
            
            221,364
            
            
            122,857**Effect
                of exchange rate changes on cash and cash
                equivalents**
            
            
            4,955
            
            
            52**Net
                increase in cash and cash equivalents**
            
            
            45,749
            
            
            70,089**Cash
                and cash equivalents, beginning of the period**
            
            
            145,337
            
            
            59,916**Cash
                and cash equivalents, end of the period**
            
            $
            191,086
            
            $
            130,005**Supplemental
                Cash Flow Information**Income
                tax payments
            
            $
            18,125
            
            $
            22,790Interest
                payments on debt
            
            
            7,125
            
            
            4,179




*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 June 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
      June
      2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
      Position (“FSP”) Emerging Issues Task Force (“EITF”) 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.




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.


-
          6
          -


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.




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 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.


-
          7
          -




(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 June 30, 2008, are presented
      in the table below:




**Original or**
              **amortized**
              **cost**
            
            **Gross**
              **unrealized**
              **gains**
            
            **Gross**
              **unrealized**
              **losses**
            
            **Market**
              **value**Preferred stock
            
            $
            5,750
            
            $
            —
            
            $
            (532
            )
            $
            5,218Common
                stock
            
            
            95,343
            
            
            365
            
            
            (43,363
            )
            
            52,345U.S.
                treasury securities
            
            
            15,265
            
            
            277
            
            
            (1
            )
            
            15,541U.S.
                government agencies
            
            
            22,985
            
            
            419
            
            
            (4
            )
            
            23,400U.S.
                agency - collateralized mortgage obligations
            
            
            323,949
            
            
            942
            
            
            (2,070
            )
            
            322,821U.S.
                agency - mortgage backed securities
            
            
            120,286
            
            
            780
            
            
            (805
            )
            
            120,261Other
                mortgage backed securities
            
            
            4,239
            
            
            12
            
            
            (24
            )
            
            4,227Municipal
                bonds
            
            
            28,303
            
            
            301
            
            
            (256
            )
            
            28,348Asset
                backed securities
            
            
            6,417
            
            
            44
            
            
            (133
            )
            
            6,328Corporate
                bonds
            
            
            437,942
            
            
            1,013
            
            
            (40,106
            )
            
            398,849$
            1,060,479
            
            $
            4,153
            
            $
            (87,294
            )
            $
            977,338




*(b)
      Held-to-Maturity Securities*




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





**Amortized**
              **cost**
            
            **Unrealized**
              **gains**
            
            **Unrealized**
              **losses**
            
            **Fair**
              **value**U.S. treasury
                securities
            
            $
            6,289
            
            $
            85
            
            $
            (1
            )
            $
            6,373U.S.
                government agencies
            
            
            52,634
            
            
            223
            
            
            —
            
            
            52,857U.S.
                agency - collateralized mortgage obligations
            
            
            1,553
            
            
            15
            
            
            (12
            )
            
            1,556U.S.
                agency - mortgage backed securities
            
            
            45,181
            
            
            135
            
            
            (408
            )
            
            44,908$
            105,657
            
            $
            458
            
            $
            (421
            )
            $
            105,694





*(c)
      Investment Income*




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





Three Months Ended June 30,
            
            Six Months Ended June 30,2008
            
            2007
            
            2008
            
            2007Fixed
                maturities
            
            $
            12,183
            
            $
            8,236
            
            **$**
            23,066
            
            $
            16,166Equity
                securities
            
            
            274
            
            
            952
            
            
            805
            
            
            1,440Cash
                and cash equivalents
            
            
            3,534
            
            
            3,691
            
            
            6,869
            
            
            6,175Loss
                on equity investment in Warrantech
            
            
            (561
            )
            
            (215
            )
            
            (561
            )
            
            (215
            )Note
                receivable - related party
            
            
            980
            
            
            505
            
            
            1,569
            
            
            1,25816,410
            
            
            13,169
            
            
            31,748
            
            
            24,824Less:
                Investment expenses and interest expense on securities sold under
                agreement to repurchase
            
            
            2,220
            
            
            150
            
            
            4,027
            
            
            414$
            14,190
            
            $
            13,019
            
            **$**
            27,721
            
            $
            24,410




-
          8
          -




(dollars
      in thousands)


*(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 June 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. The Company determined that four equity
      investments were other-than-temporarily impaired and accordingly wrote down
      the
      investments and recorded a $7,230 and $7,972 realized loss during the three
      and
      six months ended June 30, 2008, respectively. There were no write-downs recorded
      during the six months ended June 30, 2007.




The
      tables below summarize the gross unrealized losses of our fixed maturity and
      equity securities as of June 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
            
            $
            23,459
            
            $
            (18,116
            )
            $
            23,386
            
            $
            (25,779
            )
            $
            46,845
            
            $
            (43,895
            )U.
                S. treasury securities
            
            
            2,100
            
            
            (1
            )
            
            —
            
            
            —
            
            
            2,100
            
            
            (1
            )U.
                S. government agencies
            
            
            1,599
            
            
            (4
            )
            
            —
            
            
            —
            
            
            1,599
            
            
            (4
            )U.
                S. agency - collateralized mortgage obligations
            
            
            234,910
            
            
            (2,070
            )
            
            —
            
            
            —
            
            
            234,910
            
            
            (2,070
            )U.S.
                agency - mortgage backed securities
            
            
            60,179
            
            
            (805
            )
            
            —
            
            
            —
            
            
            60,179
            
            
            (805
            )Other
                mortgage backed securities
            
            
            1,433
            
            
            (21
            )
            
            197
            
            
            (3
            )
            
            1,630
            
            
            (24
            )Municipal
                bonds
            
            
            17,586
            
            
            (256
            )
            
            —
            
            
            —
            
            
            17,586
            
            
            (256
            )Asset
                backed securities
            
            
            3,265
            
            
            (133
            )
            
            —
            
            
            —
            
            
            3,265
            
            
            (133
            )Corporate
                bonds
            
            
            238,982
            
            
            (25,605
            )
            
            116,691
            
            
            (14,501
            )
            
            355,673
            
            
            (40,106
            )Total
                temporarily impaired -available-for-sale securities
            
            $
            583,513
            
            $
            (47,011
            )
            $
            140,274
            
            $
            (40,283
            )
            $
            723,787
            
            $
            (87,294
            )




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
            )U.S.
                agency - collateralized mortgage obligations
            
            
            —
            
            
            —
            
            
            858
            
            
            (12
            )
            
            858
            
            
            (12
            )U.S.
                agency - mortgage backed securities
            
            
            —
            
            
            —
            
            
            23,850
            
            
            (408
            )
            
            23,850
            
            
            (408
            )Total
                temporarily impaired - held-to-maturity securities
            
            $
            249
            
            $
            (1
            )
            $
            24,708
            
            $
            (420
            )
            $
            24,957
            
            $
            (421
            )





*(e)
      Derivatives*




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




**Remaining Life of Notional Amount****(1)****One Year**
              
              **Two Through**
                **Five Years**
              
              **Six Through**
                **Ten Years**
              
              **After Ten**
                **Years**
              
              **Total**Total
                  return swaps
              
              $
              —
              
              $
              13,775
              
              $
              —
              
              $
              —
              
              $
              13,775Credit
                  default swaps
              
              
              5,261
              
              
              1,988
              
              
              —
              
              
              —
              
              
              7,249Interest
                  rate swaps
              
              
              —
              
              
              40,000
              
              
              —
              
              
              —
              
              
              40,000Contracts
                  for differences
              
              
              —
              
              
              —
              
              
              2,066
              
              
              —
              
              
              2,066$
              5,261
              
              $
              55,763
              
              $
              2,066
              
              $
              —
              
              $
              63,090


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




-
          9
          -




(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 June 30, 2008 and was $1,160 for corporate bonds and $2,290 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 June 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 June 30, 2008, there were $347,288 principal
      amount outstanding at interest rates between 2.23% and 2.52%. Interest expense
      associated with these repurchase agreements for the three and six months ended
      June 30, 2008 was $2,219 and $4,004, respectively, of which $290 was accrued
      as
      of June 30, 2008. The Company has approximately $350,288 of collateral pledged
      in support of these agreements.





**4.**
            **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 June 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 six
      months ended June 30, 2008 and 2007, LTP had an investment (loss) gain of
      $(2,900) and $1,901, respectively and resulted in an allocation to minority
      interest of $(2,900) and $1,901. The management companies earned approximately
      $37 and $54 of fees under the agreement during the three months ended June
      30,
      2008 and 2007, respectively and $80 and $109 of fees during the six months
      ended
      June 30, 2008 and 2007, respectively.





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


**Three Months Ended June 30,**
              
              **Six Months Ended June 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Equity
                  securities:
              
              $
              
              
              $
              
              
              $
              
              
              $Dividends
              
              
              —
              
              
              31
              
              
              8
              
              
              105Realized
                  gain (loss)
              
              
              —
              
              
              559
              
              
              431
              
              
              1,124Unrealized
                  gain (loss)
              
              
              —
              
              
              1,599
              
              
              (3,297
              )
              
              588Cash
                  and cash equivalents
              
              
              —
              
              
              57
              
              
              6
              
              
              193—
              
              
              2,246
              
              
              (2,852
              )
              
              2,010Less:
                  Investment expenses
              
              
              —
              
              
              (55
              )
              
              (48
              )
              
              (109
              )$
              —
              
              $
              2,191
              
              $
              (2,900
              )
              $
              1,901
 -
              10
              -
 (dollars
          in thousands)


**5.**
            **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.





In
      accordance with SFAS 157, the Company determines fair value based on the price
      that would be received to sell an asset or paid to transfer a liability in
      an
      orderly transaction between market participants at the measurement date. The
      following section describes the valuation methodologies used by the Company
      to
      measure assets and liabilities at fair value, including an indication of the
      level within the fair value hierarchy in which each asset or liability is
      generally classified.


*Investments
        held to maturity* .
        Investments held to maturity are recorded at cost on a recurring basis and
        include fixed maturities. Fair value of investments held to maturity is measured
        based upon quoted prices in active markets, if available. If quoted prices
        in
        active markets are not available, the Company estimates
        the fair value of fixed maturities not traded in active markets, by referring
        to
        traded securities with similar attributes, using dealer quotations, a matrix
        pricing methodology, discounted cash flow analyses or internal valuation
        models.
        This methodology considers such factors as the issuer’s industry, the security’s
        rating and tenor, its coupon rate, its position in the capital structure
        of the
        issuer, yield curves, credit curves, prepayment rates and other relevant
        factors. Level 1
        investments include those traded on an active exchange, such as the NASDAQ.
        Since fixed maturities other than U.S. treasury securities generally do not
        trade on a daily basis, the Company’s fixed maturities, other than U.S. treasury
        securities, are classified as Level 2 investments and include obligations
        of
        U.S. government agencies, municipal bonds, corporate debt securities and
        other
        mortgage backed securities.
  *Investments
        available for sale* .
        Investments available for sale are recorded at fair value on a recurring
        basis
        and include fixed maturities, equity securities, securities sold not yet
        purchased and securities sold under agreements to repurchase. Fair value
        of
        investments is measured based upon quoted prices in active markets, if
        available. If quoted prices in active markets are not available, the Company estimates
        the fair value of the investments not traded in active markets, including
        securities purchased (sold) under agreements to resell (repurchase), by
        referring to traded securities with similar attributes, using dealer quotations,
        a matrix pricing methodology, discounted cash flow analyses or internal
        valuation models. This methodology considers such factors as the issuer’s
        industry, the security’s rating and tenor, its coupon rate, its position in the
        capital structure of the issuer, yield curves, credit curves, prepayment
        rates
        and other relevant factors. Level 1
        investments include those traded on an active exchange, such as the NASDAQ.
        Since fixed maturities other than U.S. treasury are classified as Level 2
        investments and include obligations of U.S. government agencies, municipal
        bonds, corporate debt securities and other mortgage backed
        securities.


*Other
      investments.* Other
      investments consist primarily of limited partnerships or hedge funds where
      the
      fair value estimate is determined by an external fund 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.




-
          11
          -




(dollars
      in thousands)


*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:





·
            Total
                return swap contracts (“TRS”), which, are valued based upon market maker
                quoted prices. Fair values are based on valuations provided by the
                counterparty based on prices provided by an independent pricing service
                or
                dealer runs;





·
            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;
                and


·
              Interest
                  rate swaps (“IRS”), 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 TRS and CDS and the counterparty for CFD.





*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 June 30, 2008:





**Total**
            
            **Level
                1**
            
            **Level
                2**
            
            **Level
                3**Assets:Held-to-maturity
                securities
            
            $
            105,694
            
            $
            6,373
            
            $
            99,321
            
            $
            —Available-for-sale
                fixed securities
            
            
            919,775
            
            
            15,541
            
            
            904,234
            
            
            —Equity
                securities
            
            
            57,563
            
            
            57,131
            
            
            432
            
            
            —Other
                investments
            
            
            15,355
            
            
            —
            
            
            —
            
            
            15,355$
            1,098,387
            
            $
            79,045
            
            $
            1,003,987
            
            $
            15,355Liabilities:Securities
                sold but not yet purchased, market
            
            $
            3,450
            
            $
            2,290
            
            $
            1,160
            
            $
            —Securities
                sold under agreements to repurchase, at contract value
            
            
            347,288
            
            
            *—*
            
            
            347,288
            
            
            —Derivatives
            
            
            3,747
            
            
            —
            
            
            —
            
            
            3,747$
            354,485
            
            $
            2,290
            
            $
            348,448
            
            $
            3,747




-
          12
          -


(dollars
        in thousands)


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


Three
                Months Ended June 30, 2008:
              
              **Other**
                **investments**
              
              **Derivatives**
              
              **Total**Beginning
                  balance as of April 1, 2008
              
              $
              22,739
              
              $
              (5,932
              )
              $
              16,807Total
                  net losses for the quarter include in:Net
                  income
              
              
              —
              
              
              2,185
              
              
              2,185Other
                  comprehensive loss
              
              
              (2,706
              )
              
              —
              
              
              (2,706
              )Purchases,
                  sales, issuances and settlements, net
              
              
              (4,678
              )
              
              —
              
              
              (4,678
              )Net
                  transfers into (out of) Level 3
              
              
              —
              
              
              —
              
              
              —Ending
                  balance as of June 30, 2008
              
              $
              15,355
              
              $
              (3,747
              )
              $
              11,608




Six Months Ended June 30, 2008:
              
              **Other**
                **investments**
              
              **Derivatives**
              
              **Total**Beginning
                  balance as of January 1, 2008
              
              $
              28,035
              
              $
              (4,101
              )
              $
              23,934Total
                  net losses for the six months ended include in:Net
                  income
              
              
              44
              
              
              354
              
              
              398Other
                  comprehensive loss
              
              
              (2,706
              )
              
              —
              
              
              (2,706
              )Purchases,
                  sales, issuances and settlements, net
              
              
              (10,018
              )
              
              —
              
              
              (10,018
              )Net
                  transfers into (out of) Level 3
              
              
              —
              
              
              —
              
              
              —Ending
                  balance as of June 30, 2008
              
              $
              15,355
              
              $
              (3,747
              )
              $
              11,608


**6.**
            **Debt**





*Junior
      Subordinated Debt*





The
      Company established four special purpose trusts between 2005 and 2007 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 June 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.




-
            13
            -
  (dollars
        in thousands)


The
      table
      below summarizes the Company’s trust preferred securities as of June 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 Inter bank Offered Rate “LIBOR” plus a
      margin rate, which was 185 basis points. As of June 30, 2008 the interest rate
      was 4.52%. 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.




*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 was 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. The note is
          required to be paid in full immediately, under certain circumstances involving
          default of payment or change of control of the Company.


*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 June 30, 2008 there was no outstanding balance on the line
      of credit. The Company has an outstanding letters of credit in place at June
      30,
      2008 for $22,409 that reduced the availability on the line of credit to $2,591
      as of June 30, 2008. The Company incurred financing fees of $25 related to
      the
      agreement.


-
          14
          -




(dollars
      in thousands)


**7.**
            **Earnings
                Per Share**





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


**Three Months Ended June 30,**
              
              **Six Months Ended June 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Net
                  income available to common shareholders
              
              **$**
              26,350
              
              $
              21,396
              
              $
              48,613
              
              $
              42,874Weighted
                  average number of common shares outstanding - basic
              
              
              59,989
              
              
              59,959
              
              
              59,979
              
              
              59,959Potentially
                  dilutive shares:Dilutive
                  shares from stock-based compensation
              
              
              1,012
              
              
              576
              
              
              981
              
              
              338Weighted
                  average number of common shares outstanding - dilutive
              
              
              61,001
              
              
              60,535
              
              
              60,960
              
              
              60,297Basic
                  earnings per common share
              
              **$**
              0.44
              
              $
              0.36
              
              $
              0.81
              
              $
              0.72Diluted
                  earnings per common share
              
              **$**
              0.43
              
              $
              0.35
              
              $
              0.80
              
              $
              0.71


As
      of
      June 30, 2008, there were approximately less than 200 anti-dilutive securities
      excluded from diluted earnings per share.





**8.**
            **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 were 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 $737 and $1,495 for the three and
      six
      months ended June 30, 2008, respectively compared to $424 and $785 for the
      three
      and six months ended June 30, 2007, respectively.





The
      following schedule shows all options granted, exercised, expired and exchanged
      under the 2005 Plan for the six months ended June 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
              
              
              50
              
              
              15.02
              
              
              160
              
              
              10.56-10.77Exercised
              
              
              (41
              )
              
              7.50
              
              
              —
              
              
              —Cancelled
                  or terminated
              
              
              (15
              )
              
              7.50
              
              
              (34
              )
              
              7.50Outstanding
                  end of period
              
              
              3,120
              
              $
              7.00-15.02
              
              
              2,516
              
              $
              7.00-10.77


The
      weighted average grant date fair value of options granted during the first
      six
      months of 2008 was $4.89. As of June 30, 2008 there was approximately $6,200
      of
      total unrecognized compensation cost related to non-vested share-based
      compensation arrangements.


-
          15
          -




(dollars
      in thousands)


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





The
      following table summarizes the components of comprehensive income:


Three Months Ended June 30,
              
              Six Months Ended June 30,2008
              
              2007
              
              2008
              
              2007Net
                  income
              
              $
              26,350
              
              $
              21,396
              
              $
              48,613
              
              $
              42,874Unrealized
                  holding gain (loss)
              
              
              (13,329
              )
              
              (1,489
              )
              
              (30,416
              )
              
              (5,320
              )Reclassification
                  adjustment
              
              
              8,367
              
              
              1,826
              
              
              8,232
              
              
              4,494Foreign
                  currency translation
              
              
              (268
              )
              
              (1,943
              
              
              620
              
              
              (1,433
              )Comprehensive
                  income
              
              $
              21,120
              
              $
              19,790
              
              $
              27,049
              
              
              40,615




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





Income
      tax expense for the three and six months ended June 30, 2008 was $7,216 and
      $14,533, respectively, compared to $8,597 and $16,599 for the three and six
      months ended June 30, 2007. The following table reconciles the Company’s
      statutory federal income tax rate to its effective tax rate.




Three Months Ended June 30,
              
              Six Months Ended June 30,2008
              
              2007
              
              2008
              
              2007Income
                  from continuing operations before provision for income taxes and
                  minority
                  interest
              
              $
              33,566
              
              $
              32,184
              
              $
              60,246
              
              $
              61,374Less:
                  minority interest
              
              
              —
              
              
              2,191
              
              
              (2,900
              )
              
              1,901Income
                  from continuing operations after minority interest before provision
                  for
                  income taxes
              
              $
              33,566
              
              $
              29,993
              
              $
              63,146
              
              $
              59,473Income
                  taxes at statutory rates
              
              $
              11,714
              
              $
              10,498
              
              $
              22,101
              
              $
              20,816Effect
                  of income not subject to US taxation
              
              
              (4,876
              )
              
              (1,501
              )
              
              (7,868
              )
              
              (2,990
              )Other,
                  net
              
              
              378
              
              
              (400
              )
              
              300
              
              
              (1,227
              )Provision
                  for income taxes as shown on the consolidated statements of
                  earnings
              
              $
              7,216
              
              $
              8,597
              
              $
              14,533
              
              $
              16,599GAAP
                  effective tax rate
              
              
              21.5
              %
              
              28.7
              %
              
              23.0
              %
              
              27.9
              %




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 June 30, 2008, the
      Company has approximately $1,500 of accrued interest and penalties related
      to
      FIN 48 unrecognized tax benefits.





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 has recently scheduled an appeals
      hearing in September 2008 related to the outstanding issues.





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.


-
          16
          -




(dollars
      in thousands)


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 $32,900 and $6,000 during the three months
        ended June 30, 2008 and 2007, respectively, and gross premium written of
        $50,600
        and $11,000 for the six months ended June 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 $561 and $215 from its equity investment for the three and
        six
        months ended June 30, 2008 and 2007, respectively. 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 June
        30,
        2008 the carrying value of the note receivable was $21,164 (note receivable
        -
        related party).




**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. 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 the UBI
        transaction and then ceded the entire amount to Maiden Insurance pursuant
        to the
        Maiden Reinsurance Agreement (see Note 13. “Related Party
        Transaction”).


-
          17
          -




(dollars
      in thousands)


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 will
      distribute the $4,325 to either the IRS or the sellers of Associated.
      Additionally, the Company preliminarily 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.





The
      results of operations of Associated have been included in the Company’s
      consolidated financial statements since the acquisition date. Selected unaudited
      pro forma results of operations assuming acquisition had occurred as of January
      1, 2007, are set forth below:


Three Months Ended
                June
                  30, 2007
              
              Six Months Ended
                June
                  30, 2007Net premium
                  written
              
              $
              177,568
              
              $
              363,972Income
                  from continuing operations
              
              $
              23,597
              
              $
              46,198Income
                  from continuing operations:per
                  common share - basic
              
              $
              0.39
              
              $
              0.77per
                  common share - diluted
              
              $
              0.39
              
              $
              0.77




-
          18
          -


(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 the 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 from Trinity
      Universal Insurance Company, a subsidiary of Unitrin, Inc., of its Unitrin
      Business Insurance unit (“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 subject
      to
      the amendment. The Company recorded approximately $35,222 and $55,406 of ceding
      commission income during the three and six months ended June 30, 2008,
      respectively, as a result of this agreement.




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


As of June 30, 2008
              
              As of December 31, 2007Assets
                  and liabilities:Reinsurance
                  recoverable
              
              $
              120,862
              
              $
              55,973Prepaid
                  reinsurance premium
              
              
              248,682
              
              
              137,099Ceded
                  reinsurance premiums payable
              
              
              112,936
              
              
              38,792Note
                  payable
              
              
              167,661
              
              
              113,228
  Three Months Ended
                June 30, 2008
              
              Six Months Ended
                June30, 2008Results
                  of operations:Premium
                  written - ceded
              
              $
              (168,069
              )
              $
              (251,017
              )Change
                  in unearned premium - ceded
              
              
              91,824
              
              
              110,983Earned
                  premium - ceded
              
              $
              (76,245
              )
              $
              (140,034
              )Ceding
                  commission on premium written
              
              $
              54,753
              
              $
              80,745Ceding
                  commission – deferred
              
              
              (19,531
              )
              
              (25,339
              )Ceding
                  commission - earned
              
              $
              35,222
              
              $
              55,406Incurred
                  loss and loss adjustment expense - ceded
              
              $
              48,528
              
              $
              90,000




-
          19
          -




(dollars
      in thousands)


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 $2,101 and $3,138 of brokerage commission during the three and six
      months ended June 30, 2008, 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% of average invested assets plus all costs incurred.
      Effective April 1, 2008, the investment management services fee has been reduced
      to 0.20%. The Company recorded approximately $460 and $960 of investment
      management fees for the three and six months ended June 30, 2008, respectively, as
      a result of this agreement.




*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 $382 and $498 for the
        three and six months ended June 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 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 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 June 30, 2008. The Company
      recorded $2,695 of interest expense during the six months ended June 30,
      2008.





*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 $50,400 of our assets. ACMI
      also
      serves as the Investment Manager of Leap Tide Partners, L.P., a domestic
      partnership, (see Note 4 “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”).  To date, approximately
      $18,700 have been invested 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.


-
              20
              -


(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 $32,900 and $6,000 during
        the
        three months ended June 30, 2008 and 2007, respectively, and gross premium
        written of $50,600 and $11,000 for the six months ended June 30, 2008 and
        2007,
        respectively. The Company recorded an investment loss of $561 and $215 for
        the
        three and six months ended June 30, 2008 and 2007, respectively. As of June
        30,
        2008 the Company’s equity interest was approximately $2,531. 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 June 30, 2008 the carrying value of the note receivable was $21,164
        (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 $134 and $84 for the lease for the three months
      ended June 30, 2008 and 2007, respectively and $217 and $176 for the six months
      ended June 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
        owned
        by Michael Karfunkel and George Karfunkel. The audit committee reviewed and
        approved the lease agreement. The Company paid approximately $31 and $62
        for the
        lease for the three and six months ended June 30, 2008, respectively.





*Employment
      Relationship*





Barry
      Karfunkel, an analyst with a Company subsidiary, earned approximately $87 and
      $61 for the three months ended June 30, 2008 and 2007, respectively.
      Additionally, for the six months ended June 30, 2008 and 2007, respectively,
      he
      earned $150 and $117. Barry Karfunkel is the son of Michael Karfunkel and the
      brother-in-law of Barry Zyskind.




**14.**
            **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.




**15.**
            **Segments**




The
      Company currently operates three business segments, Small Commercial Business
      (formerly known as 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 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.




-
          21
          -




(dollars
      in thousands)


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 June 30, 2008:Gross
                    premium written
                
                $
                112,096
                
                $
                127,308
                
                $
                61,658
                
                $
                —
                
                $
                301,062Net
                    premium written
                
                
                40,414
                
                
                61,994
                
                
                29,649
                
                
                —
                
                
                132,057Change
                    in unearned premium
                
                
                2,218
                
                
                (18,908
                )
                
                578
                
                
                —
                
                
                (16,112
                )Net
                    earned premium
                
                
                42,632
                
                
                43,086
                
                
                30,227
                
                
                —
                
                
                115,945Ceding
                    commission – related party
                
                
                18,268
                
                
                8,051
                
                
                8,903
                
                
                —
                
                
                35,222Loss
                    and loss adjustment expense
                
                
                24,772
                
                
                29,876
                
                
                19,486
                
                
                —
                
                
                74,134Policy
                    acquisition expenses
                
                
                10,854
                
                
                2,021
                
                
                9,816
                
                
                —
                
                
                22,691Salaries
                    and benefits
                
                
                9,214
                
                
                4,178
                
                
                4,210
                
                
                —
                
                
                17,602Other
                    insurance general and administrative expense
                
                
                6,104
                
                
                6,915
                
                
                2,525
                
                
                —
                
                
                15,54450,944
                
                
                42,990
                
                
                36,037
                
                
                —
                
                
                129,971Underwriting
                    income
                
                
                9,956
                
                
                8,147
                
                
                3,093
                
                
                —
                
                
                21,196Commission
                    and fee income
                
                
                4,578
                
                
                769
                
                
                —
                
                
                3,028
                
                
                8,375Investment
                    income, realized gain (loss) and income (loss) on managed
                    assets
                
                
                5,208
                
                
                4,315
                
                
                2,532
                
                
                —
                
                
                12,055Other
                    underwriting expenses
                
                
                (857
                )
                
                207
                
                
                (1,854
                )
                
                —
                
                
                (2,504
                )Interest
                    expense
                
                
                (2,094
                )
                
                (2,244
                )
                
                (1,203
                )
                
                —
                
                
                (5,541
                )Foreign
                    currency gain (loss)
                
                
                —
                
                
                (15
                )
                
                —
                
                
                —
                
                
                (15
                )Provision
                    for income taxes
                
                
                (3,605
                )
                
                (3,426
                )
                
                483
                
                
                (668
                )
                
                (7,216
                )Minority
                    interest in net income of subsidiary
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    income
                
                $
                13,186
                
                $
                7,753
                
                $
                3,051
                
                $
                2,360
                
                $
                26,350Three
                    months ended June 30, 2007:Gross
                    premium written
                
                $
                78,306
                
                $
                69,329
                
                $
                62,385
                
                $
                —
                
                $
                210,020Net
                    premium written
                
                
                67,462
                
                
                52,491
                
                
                43,570
                
                
                —
                
                
                163,523Change
                    in unearned premium
                
                
                (1,551
                )
                
                (19,164
                )
                
                (12,388
                )
                
                —
                
                
                (33,103
                )Net
                    earned premium
                
                
                65,911
                
                
                33,327
                
                
                31,182
                
                
                —
                
                
                130,420Ceding
                    commission – related party
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Loss
                    and loss adjustment expense
                
                
                41,557
                
                
                24,102
                
                
                19,340
                
                
                —
                
                
                84,999Policy
                    acquisition expenses
                
                
                9,444
                
                
                2,394
                
                
                5,609
                
                
                —
                
                
                17,447Salaries
                    and benefits
                
                
                5,384
                
                
                1,855
                
                
                2,682
                
                
                —
                
                
                9,921Other
                    insurance general and administrative expense
                
                
                2,637
                
                
                605
                
                
                1,762
                
                
                —
                
                
                5,00459,022
                
                
                28,956
                
                
                29,393
                
                
                —
                
                
                117,371Underwriting
                    income
                
                
                6,889
                
                
                4,371
                
                
                1,789
                
                
                —
                
                
                13,049Commission
                    and fee income
                
                
                2,398
                
                
                1,794
                
                
                —
                
                
                100
                
                
                4,292Investment
                    income, realized gain (loss) and income (loss) on managed
                    assets
                
                
                7,642
                
                
                2,866
                
                
                7,473
                
                
                2,191
                
                
                20,172Other
                    underwriting expenses
                
                
                (3,017
                )
                
                (2,280
                )
                
                1,870
                
                
                —
                
                
                (3,427
                )Interest
                    expense
                
                
                (1,085
                )
                
                (784
                )
                
                (662
                )
                
                —
                
                
                (2,531
                )Foreign
                    currency gain (loss)
                
                
                —
                
                
                629
                
                
                —
                
                
                —
                
                
                629Provision
                    for income taxes
                
                
                (3,662
                )
                
                (2,058
                )
                
                (2,848
                )
                
                (29
                )
                
                (8,597
                )Minority
                    interest in net income of subsidiary
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,191
                )
                
                (2,191
                )Net
                    income
                
                $
                9,165
                
                $
                4,538
                
                $
                7,622
                
                $
                71
                
                $
                21,396
  -
              22
              -
   (dollars
          in thousands)
  Small
                          commercial business
                      
                      Specialty
                          risk and extended warranty
                      
                      Specialty
                          middle-market property and casualty insurance
                      
                      Corporate
                          and other
                      
                      TotalSix
                          months ended June 30, 2008:Gross
                          premium written
                      
                      $
                      201,357
                      
                      $
                      215,077
                      
                      $
                      119,384
                      
                      $
                      —
                      
                      $
                      535,818Net
                          premium written
                      
                      
                      91,746
                      
                      
                      100,079
                      
                      
                      57,674
                      
                      
                      —
                      
                      
                      249,499Change
                          in unearned premium
                      
                      
                      (2,809
                      )
                      
                      (27,397
                      )
                      
                      (5,935
                      )
                      
                      —
                      
                      
                      (36,141
                      )Net
                          earned premium
                      
                      
                      88,937
                      
                      
                      72,682
                      
                      
                      51,739
                      
                      
                      —
                      
                      
                      213,358Ceding
                          commission – related party
                      
                      
                      30,177
                      
                      
                      11,482
                      
                      
                      13,747
                      
                      
                      —
                      
                      
                      55,406Loss
                          and loss adjustment expense
                      
                      
                      49,339
                      
                      
                      47,790
                      
                      
                      32,170
                      
                      
                      —
                      
                      
                      129,299Policy
                          acquisition expenses
                      
                      
                      21,348
                      
                      
                      3,023
                      
                      
                      16,628
                      
                      
                      —
                      
                      
                      40,999Salaries
                          and benefits
                      
                      
                      16,629
                      
                      
                      6,825
                      
                      
                      6,192
                      
                      
                      —
                      
                      
                      29,646Other
                          insurance general and administrative expense
                      
                      
                      10,856
                      
                      
                      10,051
                      
                      
                      4,471
                      
                      
                      —
                      
                      
                      25,37898,172
                      
                      
                      67,689
                      
                      
                      59,461
                      
                      
                      —
                      
                      
                      225,322Underwriting
                          income
                      
                      
                      20,942
                      
                      
                      16,475
                      
                      
                      6,025
                      
                      
                      —
                      
                      
                      43,442Commission
                          and fee income
                      
                      
                      7,337
                      
                      
                      2,565
                      
                      
                      —
                      
                      
                      4,760
                      
                      
                      14,662Investment
                          income, realized gain (loss) and income (loss) on managed
                          assets
                      
                      
                      9,511
                      
                      
                      6,898
                      
                      
                      3,957
                      
                      
                      (2,900
                      )
                      
                      17,466Other
                          underwriting expenses
                      
                      
                      (2,797
                      )
                      
                      (2,918
                      )
                      
                      (1,583
                      )
                      
                      —
                      
                      
                      (7,298
                      )Interest
                          expense
                      
                      
                      (3,194
                      )
                      
                      (3,169
                      )
                      
                      (1,807
                      )
                      
                      —
                      
                      
                      (8,170
                      )Foreign
                          currency gain (loss)
                      
                      
                      —
                      
                      
                      144
                      
                      
                      
                      
                      
                      —
                      
                      
                      144Provision
                          for income taxes
                      
                      
                      (7,318
                      )
                      
                      (4,602
                      )
                      
                      (1,517
                      )
                      
                      (1,096
                      )
                      
                      (14,533
                      )Minority
                          interest in net income of subsidiary
                      
                      
                      —
                      
                      
                      —
                      
                      
                      —
                      
                      
                      2,900
                      
                      
                      2,900Net
                          income
                      
                      $
                      24,481
                      
                      $
                      15,393
                      
                      $
                      5,075
                      
                      $
                      3,664
                      
                      $
                      48,613
  Six
                          months ended June 30, 2007:Gross
                          premium written
                      
                      $
                      168,102
                      
                      $
                      117,271
                      
                      $
                      114,320
                      
                      $
                      -
                      
                      $
                      399,693Net
                          premium written
                      
                      
                      152,926
                      
                      
                      90,802
                      
                      
                      80,413
                      
                      
                      -
                      
                      
                      324,141Change
                          in unearned premium
                      
                      
                      (21,806
                      )
                      
                      (32,775
                      )
                      
                      (20,448
                      )
                      
                      -
                      
                      
                      (75,029
                      )Net
                          earned premium
                      
                      
                      131,120
                      
                      
                      58,027
                      
                      
                      59,965
                      
                      
                      -
                      
                      
                      249,112Ceding
                          commission - related party
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -Loss
                          and loss adjustment expense
                      
                      
                      80,381
                      
                      
                      42,012
                      
                      
                      37,163
                      
                      
                      -
                      
                      
                      159,556Policy
                          acquisition expenses
                      
                      
                      18,684
                      
                      
                      2,394
                      
                      
                      10,952
                      
                      
                      -
                      
                      
                      32,030Salaries
                          and benefits
                      
                      
                      10,233
                      
                      
                      4,086
                      
                      
                      4,614
                      
                      
                      -
                      
                      
                      18,933Other
                          insurance general and administrative expense
                      
                      
                      6,908
                      
                      
                      1,980
                      
                      
                      3,690
                      
                      
                      -
                      
                      
                      12,578116,206
                      
                      
                      50,472
                      
                      
                      56,419
                      
                      
                      -
                      
                      
                      223,097Underwriting
                          income
                      
                      
                      14,914
                      
                      
                      7,555
                      
                      
                      3,546
                      
                      
                      -
                      
                      
                      26,015Commission
                          and fee income
                      
                      
                      5,040
                      
                      
                      3,495
                      
                      
                      0
                      
                      
                      247
                      
                      
                      8,782Investment
                          income, realized gain (loss) and income (loss) on managed
                          assets
                      
                      
                      17,696
                      
                      
                      6,951
                      
                      
                      10,785
                      
                      
                      1,901
                      
                      
                      37,333Other
                          underwriting expenses
                      
                      
                      (4,396
                      )
                      
                      (3,013
                      )
                      
                      869
                      
                      
                      -
                      
                      
                      (6,540
                      )Interest
                          expense
                      
                      
                      (2,046
                      )
                      
                      (1,214
                      )
                      
                      (1,075
                      )
                      
                      -
                      
                      
                      (4,335
                      )Foreign
                          currency gain (loss)
                      
                      
                      0
                      
                      
                      119
                      
                      
                      
                      
                      
                      
                      
                      
                      119Provision
                          for income taxes
                      
                      
                      (8,632
                      )
                      
                      (3,957
                      )
                      
                      (3,941
                      )
                      
                      (69
                      )
                      
                      (16,599
                      )Minority
                          interest in net income of subsidiary
                      
                      
                      -
                      
                      
                      -
                      
                      
                      -
                      
                      
                      (1,901
                      )
                      
                      (1,901
                      )Net
                          income
                      
                      $
                      22,576
                      
                      $
                      9,936
                      
                      $
                      10,184
                      
                      $
                      178
                      
                      $
                      42,874
 As
                  of June 30, 2008Fixed
                  assets
              
              $
              5,351
              
              $
              5,309
              
              $
              3,028
              
              $
              —
              
              $
              13,688Goodwill
                  and intangible assets
              
              
              78,208
              
              
              12,329
              
              
              11,295
              
              
              —
              
              
              101,832Total
                  assets
              
              
              1,355,414
              
              
              1,137,702
              
              
              502,485
              
              
              —
              
              
              2,995,601As
                  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


-
          23
          -


(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
                companies
                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 Kingdom, certain other European Union
                countries and the United States;
                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.





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 allow for
      the
      cession of commercial 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 six months ended June
      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.


-
          24
          -


(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 policy acquisition expenses, salaries and benefits, and other insurance
      general and administrative 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 26.0% and 23.1%
        for
        the three months ended June 30, 2008 and 2007, respectively and 24.2% and
        23.8%
        for the six months ended June 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
        81.7% and 90.0% for the three months ended June 30, 2008 and 2007, respectively.
        The decline in the combined ratio period over period resulted primarily from
        ceding commission income from the Maiden Reinsurance Agreement that the Company
        entered into the third quarter of 2007. 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.
 -
              25
              -
 (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 June 30,
              
              Six Months Ended June 30,($ amounts in thousands)
              
              2008
              
              2007
              
              2008
              
              2007Gross
                    premium written
              
              $
              301,062
              
              $
              210,020
              
              $
              535,818
              
              $
              399,693Net
                  premium written
              
              $
              132,057
              
              $
              163,522
              
              $
              249,499
              
              $
              324,141Change
                  in unearned premium
              
              
              (16,112
              )
              
              (33,102
              )
              
              (36,141
              )
              
              (75,029
              )Net
                  earned premium
              
              
              115,945
              
              
              130,420
              
              
              213,358
              
              
              249,112Ceding
                  commission – related party
              
              
              35,222
              
              
              —
              
              
              55,406
              
              
              —Commission
                  and fee income
              
              
              8,375
              
              
              4,292
              
              
              14,662
              
              
              8,782Net
                  investment income
              
              
              14,190
              
              
              13,019
              
              
              27,721
              
              
              24,410Net
                  realized gains on investments
              
              
              (2,135
              )
              
              4,962
              
              
              (7,355
              )
              
              11,022Other
                  investment income on managed assets
              
              
              —
              
              
              2,191
              
              
              (2,900
              )
              
              1,901Total
                  revenue
              
              
              171,597
              
              
              154,884
              
              
              300,892
              
              
              295,227Loss
                  and loss adjustment expense
              
              
              74,134
              
              
              84,999
              
              
              129,299
              
              
              159,556Policy
                  acquisition expenses
              
              
              22,691
              
              
              17,447
              
              
              40,999
              
              
              32,030Salaries
                  and benefits
              
              
              17,602
              
              
              9,921
              
              
              29,646
              
              
              18,933Other
                  insurance general and administrative expense
              
              
              15,544
              
              
              5,004
              
              
              25,378
              
              
              12,578Other
                  underwriting expenses
              
              
              2,504
              
              
              3,427
              
              
              7,298
              
              
              6,540132,475
              
              
              120,798
              
              
              232,620
              
              
              229,637Operating
                  income from continuing operations
              
              
              39,122
              
              
              34,086
              
              
              68,272
              
              
              65,590Other
                  income (expense):Foreign
                  currency gain (loss)
              
              
              (15
              )
              
              629
              
              
              144
              
              
              119Interest
                  expense
              
              
              (5,541
              )
              
              (2,531
              )
              
              (8,170
              )
              
              (4,335
              )Total
                  other expense
              
              
              (5,556
              )
              
              (1,902
              )
              
              (8,026
              )
              
              (4,216
              )Income
                  from continuing operations before provision for income taxes and
                  minority
                  interest
              
              
              33,566
              
              
              32,184
              
              
              60,246
              
              
              61,374Provision
                  for income taxes
              
              
              7,216
              
              
              8,597
              
              
              14,533
              
              
              16,599Minority
                  interest in net loss of subsidiary
              
              
              —
              
              
              2,191
              
              
              (2,900
              )
              
              1,901Net
                  income
              
              $
              26,350
              
              $
              21,396
              
              $
              48,613
              
              $
              42,874Key
                  Measures:Net
                  loss ratio
              
              
              63.9
              %
              
              65.2
              %
              
              60.6
              %
              
              64.0
              %Net
                  expense ratio
              
              
              17.8
              %
              
              24.8
              %
              
              19.0
              %
              
              25.5
              %Net
                  combined ratio
              
              
              81.7
              %
              
              90.0
              %
              
              79.6
              %
              
              89.6
              %




-
          26
          -


(dollars
      in millions unless noted otherwise)


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




*Gross
        Premium Written* .
        Gross
        premium written increased $91.1 million or 43.3% from $210.0 million to $301.1
        million for the three months ended June 30, 2007 and 2008, respectively.
        The
        increase of $91.1 million was attributable to a $33.8 million increase in
        our
        small commercial business, a $58.0 million increase in our specialty risk
        and
        extended warranty business and a $0.7 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 as well as the acquisition of IGI in
        the
        second quarter of 2007, which contributed approximately $12.4 million of
        additional gross premium written in the second quarter of 2008 compared to
        2007.
        The increase in the small commercial business gross premium written resulted,
        primarily, from $38.2 million of gross premium written related to the
        acquisition of AIIC and UBI offset by declines attributable to mandated rate
        reduction in New York and Florida.
  *Net
        Premium Written* .
        Net
        premium written decreased $31.4 million or 19.2% from $163.5 million to $132.1
        million for the three months ended June 30, 2007 and 2008, respectively.
        The
        decrease of $31.4 million resulted from the cession of $105.1 million of
        net
        premium to Maiden Insurance during the second quarter of 2008 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
        $73.7
        million in the second quarter of 2008 compared to the second quarter of 2007.
        The increase before cessions by segment was: small commercial business -
        $19.8
        million; specialty risk and extended warranty - $46.8 million; and specialty
        middle market property and casualty - $7.2 million.
 
 *Net
        Premium Earned* .
        Net
        premium earned decreased $14.5 million or 11.1% from $130.4 million to $115.9
        million for the three months ended June 30, 2007 and 2008. The decrease of
        $14.5
        million resulted from the cession of earned premium to Maiden Insurance during
        the second quarter of 2008 under the terms of the Reinsurance Agreement.
        Before
        cessions to Maiden Insurance, net premium earned increased $52.4 million
        in the
        second quarter of 2008 compared to the second quarter of 2007. The increase
        by
        segment before cessions was: small commercial business - $3.3 million; specialty
        risk and extended warranty - $31.2 million; and specialty middle market property
        and casualty - $18.0 million.




*Commission
      and*  *Fee
      Income.* Commission and fee income increased $4.1 million or 95.3% from $4.3 million
      to
      $8.4 million for the three months ended June 30, 2007 and 2008, respectively.
      The increase resulted from the Reinsurance Agreement and asset management
      agreement which the Company and Maiden entered during the third quarter of
      2007
      whereby the Company earned reinsurance brokerage fees and management fees as
      well as the Company earned fees as a servicing carrier for workers’
compensation assigned risk plans in three additional states.





*Net
      Investment Income.* Net
      investment income increased $1.2 million or 9.0% from $13.0 million to $14.2
      million for the three months ended June 30, 2007 and 2008, respectively. The
      increase resulted primarily from increased invested assets over the two periods.
      Average invested assets (excluding equity securities) was approximately $1.4
      billion for the three months ended June 30, 2008 compared to approximately
      $0.9
      billion for the three months ended June 30, 2007, an increase of $0.5 billion.
      The increase was offset by overall lower yields on the Company’s fixed
      maturities.




*Net
      Realized Gains (Losses) on Investments.* Net
      realized losses on investments for the three months ended June 30, 2008 were
      $2.1 million, compared to net realized gains of $5.0 million for the same period
      in 2007. The decrease related to the timing of certain sales of underperforming
      investments of the Company’s equity portfolio and the non-cash write-down of
      three equity securities of $7.2 million that were determined to be other than
      temporarily impaired during the second quarter of 2008.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $10.9 million or 12.8% from $85.0 million
      for
      the three months ended June 30, 2007 to $74.1 million for the three months
      ended
      June 30, 2008. The Company’s loss ratio for the three months ended June 30, 2008
      decreased to 63.9% from 65.2% for the three months ended June 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.




*Policy
      Acquisition Expense, Salaries and Benefits Expense and Other Insurance General
      and Administrative Expense less Ceding*  *Commission* .
      Policy
      acquisition expense, salaries and benefits expense and other insurance general
      and administrative expense less ceding commission decreased $11.8 million or
      36.4% from $32.4 million for the three months ended June 30, 2007 to $20.6
      million for the three months ended June 30, 2008. The expense ratio for the
      same
      periods decreased from 24.8% to 17.8%, respectively. The decrease in expense
      ratio resulted primarily from ceding commission of $35.2 million earned through
      the Maiden Reinsurance Agreement during the period.




-
          27
          -


(dollars
      in millions unless noted otherwise)


*Operating
      Income from Continuing Operations.* Income
      from continuing operations increased $5.0 million or 14.7% from $34.1 million
      to
      $39.1 million for the three months ended June 30, 2007 and 2008, respectively.
      The increase in income from continuing operations from 2007 to 2008 resulted
      primarily from earned ceding commission, higher commission and fee income and
      improvements in loss ratios offset by lower net earned premiums.





*Interest
      Expense.*Interest
      expense for the three months ended June 30, 2008 was $5.5 million, compared
      to
      $2.5 million for the same period in 2007. The increase was attributable
      primarily to interest expense on collateral loans with Maiden as part of the
      Reinsurance Agreement entered into the third quarter of 2007.





*Income
      Tax Expense.* Income
      tax expense for three months ended June 30, 2008 was $7.2 million which resulted
      in an effective tax rate of 21.5%. Income tax expense for three months ended
      June 30, 2007 was $8.6 million which resulted in an effective tax rate of 28.7%.
      The decrease in our effective rate was due primarily to federal tax-exempt
      investment income earned during the period ending June 30, 2008 as well as
      a
      higher percentage of revenue earned in geographic locations from foreigh
      operations.





***Consolidated
      Result of Operations for the Six Months Ended June 30, 2008
      and***  ***2007***





*Gross
      Premium Written* .
      Gross
      premium written increased $136.1 million or 34.1% from $399.7 million for the
      six months ended June 30, 2007 to $535.8 million for the six months ended June
      30, 2008. The increase was attributable to a $33.2 million increase in our
      small
      commercial business segment, a $97.8 million increase in our specialty risk
      and
      extended warranty business and a $5.1 million increase in our specialty
      middle-market property and casualty business. The increase in the small
      commercial business segment resulted primarily from the acquisition of AIIC
      and
      UBI offset by declines attributable to mandated rate reduction 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. The increase
      in the specialty middle-market gross premiums written resulted from, primarily,
      from the underwriting of new programs and the growth of existing
      programs.


*Net
        Premium Written.* Net
        premium written decreased $74.6 million or 23.0% from $324.1 million to $249.5
        million for the six months ended June 30, 2007 and 2008, respectively. The
        decrease of $74.6 million was net of $188.1 million of net premium written
        ceded
        to Maiden Insurance during the first half of 2008 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 $113.5
        million for the six months ended June 30, 2008 compared to the six months
        ended
        June 30, 2007. The increase before cessions by segment was: small commercial
        business - $18.2 million; specialty risk and extended warranty - $79.0 million;
        and specialty middle market property and casualty - $16.3 million.
 
 *Net
        Premium Earned* .
        Net
        premium earned decreased $35.7 million or 14.4% from $249.1 million for the
        six
        months ended June 30, 2007 to $213.4 million for the six months ended June
        30,
        2008. The decrease of $35.7 million was net of earned premium ceded to Maiden
        Insurance during the first half of 2008 under the terms of the Reinsurance
        Agreement. Before cessions to Maiden Insurance, net premium increased $94.9
        million for the six months ended June 30, 2008 compared to the six months
        ended
        June 30, 2008. The increase by segment before cessions was: small commercial
        business - $12.7 million; specialty risk and extended warranty - $57.7 million;
        and specialty middle market property and casualty - $24.5 million.


*Commission
      and*  *Fee
      Income.* Commission
      and fee income increased $5.9 million or 67% from $8.8 million to $14.7 million
      for the six months ended June 30, 2007 and 2008, respectively. The increase
      resulted from the Reinsurance Agreement and asset management agreement with
      Maiden Insurance which the Company entered into during the third quarter of
      2007
      whereby the Company earned reinsurance brokerage fees and administration fees
      as
      well as, the Company earned fees as a servicing carrier for workers’
compensation assigned risk plans in three additional states.





*Net
      Investment Income.* Net
      investment income increased $3.3 million or 13.6% from $24.4 million to $27.7
      million for the six months ended June 30, 2007 and 2008, respectively. The
      increase resulted from an increase of average invested assets. Average invested
      assets (excluding equity securities) were approximately $1.4 billion for the
      six
      months ended June 30, 2008 compared to approximately $0.8 billion for the six
      months ended June 30, 2007, an increase of $0.6 billion or 75%. Additionally,
      yields on the Company’s fixed maturities declined on a overall
      basis.





*Net
      Realized Gains on Investments.* Net
      realized losses on investments for the six months ended June 30, 2008 were
      $7.4
      million, compared to net realized gains of $11.0 million for the same period
      in
      2007. The decrease relates to the Company’s write-down of $8.0 million of
      investments during 2008 and the deterioration of the equity markets in
      2008.


-
          28
          -


(dollars
      in millions unless noted otherwise)


*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $30.3 million or 19.0% from $159.6 million
      for the six months ended June 30, 2007 to $129.3 million for the six months
      ended June 30, 2008. The Company’s loss ratio for the six months ended June 30,
      2008 decreased to 60.6% from 64.0% for the six months ended June 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.





*Policy
      Acquisition Expense, Salaries and Benefits Expense and Other Insurance General
      and Administrative Expense less Ceding Commission.* Policy
      acquisition expense, salaries and benefits expense and other insurance general
      and administrative expense less ceding commission decreased $22.9 million or
      36.1% from $63.5 million for the six months ended June 30, 2007 to $40.6 million
      for the six months ended June 30, 2008. The expense ratio for the same periods
      decreased from 25.5% to 19.0%, respectively. The decrease in expense ratio
      resulted primarily from ceding commissions of $55.4 million earned through
      the
      Maiden Reinsurance Agreement, which the Company entered during the third quarter
      of 2007.


*Operating
        Income from Continuing Operations.* Income
        from continuing operations increased to $68.3 million for the six months
        ended
        June 30, 2008, from $65.6 million for the six months ended June 30, 2007,
        an
        increase of $2.7 million or 4.1%. This increase is attributable to growth
        in
        gross premium written combined with improvements in both the loss ratio and
        expense ratio.
 
 *Interest
        Expense.* Interest
        expense for the six months ended June 30, 2008 was $8.2 million, compared
        to
        $4.3 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 as well as a full six months of interest
        expense on $40 million of trust preferred securities issued in March
        2007.


*Income
      Tax Expense.* Income
      tax expense for six months ended June 30, 2008 was $14.5 million resulting
      in an
      effective tax rate of 23.0%. Income tax expense for six months ended June 30,
      2007 was $16.6 million which resulting in an effective tax rate of 27.9%. The
      decrease in our effective rate was due primarily to federal tax-exempt
      investment income earned during the period ending June 30, 2008 as well as
      a
      higher percentage of revenue earned in geographic locations from foreign
      operations.





**Small
      Commercial Business Segment (Unaudited)**




Three Months Ended June 30,
              
              Six Months Ended June 30,($ amounts in thousands)
              
              2008
              
              2007
              
              2008
              
              2007Gross
                  premium written
              
              $
              112,096
              
              $
              78,306
              
              $
              201,357
              
              $
              168,102Net
                  premium written
              
              
              40,414
              
              
              67,462
              
              
              91,746
              
              
              152,926Change
                  in unearned premium
              
              
              2,218
              
              
              (1,551
              )
              
              (2,809
              )
              
              (21,806
              )Net
                  premium earned
              
              
              42,632
              
              
              65,911
              
              
              88,937
              
              
              131,120Ceding
                  commission revenue
              
              
              18,268
              
              
              —
              
              
              30,177
              
              
              —Loss
                  and loss adjustment expense
              
              
              24,772
              
              
              41,557
              
              
              49,339
              
              
              80,381Policy
                  acquisition expenses
              
              
              10,854
              
              
              9,444
              
              
              21,348
              
              
              18,684Salaries
                  and benefits
              
              
              9,214
              
              
              5,384
              
              
              16,629
              
              
              10,233Other
                  insurance general and administrative expense
              
              
              6,104
              
              
              2,637
              
              
              10,856
              
              
              6,90850,944
              
              
              59,022
              
              
              98,172
              
              
              116,206Net
                  premiums earned less expenses included in combined ratio (Underwriting
                  income)
              
              $
              9,956
              
              $
              6,889
              
              $
              20,942
              
              $
              14,914Key
                  Measures:Net
                  loss ratio
              
              
              58.1
              %
              
              63.0
              %
              
              55.5
              %
              
              61.3
              %Net
                  expense ratio
              
              
              18.5
              %
              
              26.5
              %
              
              21.0
              %
              
              27.3
              %Net
                  combined ratio
              
              
              76.6
              %
              
              89.5
              %
              
              76.5
              %
              
              88.6
              %





-
          29
          -


(dollars
      in millions unless noted otherwise)


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





*Gross
      Premium Written* .
      Gross
      premium written increased $33.8 million or 43.2% from $78.3 million for the
      three months ended June 30, 2007 to $112.1 million for the three months ended
      June 30, 2008. Gross premium written increased primarily as a result of the
      acquisitions of AIIC in the third quarter of 2007 and UBI in the second quarter
      of 2008 totaling $38.2 million, offset by mandated rate reductions in the states
      of New York and Florida.


*Net
        Premium Written* .
        Net
        premium written decreased $27.1 million or 40.1% from $67.5 million to $40.4
        million for the three months ended June 30, 2007 and 2008, respectively.
        The
        decrease of $27.1 million resulted from the cession of $46.7 million of net
        premium written to Maiden Insurance during the second quarter of 2008 under
        the
        Reinsurance Agreement, which the Company entered into during the third quarter
        of 2007. Before cessions to Maiden Insurance, net premium written increased
        $19.6 million in the second quarter of 2008 compared to the second quarter
        of
        2007. The increase of $19.6 million resulted primarily from a gross premium
        written increase of $33.8 million period over period partially offset by
        mandated rate reductions in the state of New York and Florida.
 
 *Net
        Premium Earned* .
        Net
        premium earned decreased $23.3 million or 35.3% from $65.9 million for the
        three
        months ended June 30, 2007 to $42.6 million for the three months ended June
        30,
        2008. The decrease of $23.3 million resulted from the cession of net premium
        earned of $26.5 million to Maiden Insurance during the second quarter of
        2008.
        Before cessions to Maiden Insurance, net premium earned increased $3.2 million
        in the second quarter of 2008 compared to the second quarter of 2007. This
        increase was a result of the gross premium written in the preceding twelve
        months being greater than the twelve months ended June 30,
        2007.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $16.8 million or 40.4% from $41.6 million
      for
      the three months ended June 30, 2007 to $24.8 million for the three months
      ended
      June 30, 2008. The Company’s loss ratio for the segment for the three months
      ended June 30, 2008 decreased to 58.1% from 63.0% for the three months ended
      June 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.





*Policy
      Acquisition Expense, Salaries and Benefits Expense and Other Insurance General
      and Administrative Expense less Ceding Commission.* Policy
      acquisition expense, salaries and benefits expense and other insurance general
      and administrative expense less ceding commission decreased $9.6 million or
      54.7% from $17.5 million for the three months ended June 30, 2007 to $7.9
      million for the three months ended June 30, 2008. The expense ratio decreased
      from 26.5% for the three months ended June 30, 2007 to 18.5% for the three
      months ended June 30, 2008. The decrease in expense ratio resulted primarily
      from ceding commissions of $18.3 million earned through the Maiden Reinsurance
      Agreement, which the Company entered into during the third quarter of 2007
      offset by increased salary expense and other general and administrative expense
      of $3.8 million and $3.5 million, respectively.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $3.1
      million or 44.5% from $6.9 million for the three months ended June 30, 2007
      to
      $10.0 million for the three months ended June 30, 2008. This increase is
      attributable to improvements in both the loss ratio and expense ratio as well
      as
      the ceding commission from Maiden Insurance during the second quarter of
      2008.





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





*Gross
      Premium Written.* Gross
      premium written increased $33.3 million or 19.8% from $168.1 million for the
      six
      months ended June 30, 2007 to $201.4 million for the six months ended June
      30,
      2008. Gross premium written increased $33.3 million primarily as a result of
      the
      acquisitions of AIIC in the third quarter of 2007 and UBI in the second quarter
      of 2008.





*Net
      Premium Written* .
      Net
      premium written decreased $61.2 million or 40.0% from $152.9 million to $91.7
      million for the six months ended June 30, 2007 and 2008, respectively. The
      decrease of $61.2 million resulted from the cession of $79.2 million of net
      premium written to Maiden Insurance during the first half of 2008 pursuant
      to
      the Reinsurance Agreement entered into during the third quarter of 2007. Before
      cessions to Maiden Insurance, net premium written increased $18.0 million in
      the
      first half of 2008 compared to the first half of 2007. The increase of $18.0
      million resulted primarily from a gross premium written increase of $33.3
      million period over period.




*Net
      Premium Earned* .
      Net
      premium earned decreased $42.2 million or 32.2% from $131.1 million for the
      six
      months ended June 30, 2007 to $88.9 million for the six months ended June 30,
      2008. The decrease of $42.2 million resulted from the cession of net premium
      earned of $54.9 million to Maiden Insurance during the first half of 2008.
      Before cessions to Maiden Insurance, net premium earned increased $12.7 million
      in the first six months of 2008 compared to the first six months of 2007. This
      increase was a result of the gross premium written in the preceding twelve
      months being greater than the twelve months ended June 30,
      2007.


-
          30
          -


(dollars
      in millions unless noted otherwise)


*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $31.1 million or 38.6% from $80.4 million
      for
      the six months ended June 30, 2007 to $49.3 million for the six months ended
      June 30, 2008. The Company’s loss ratio for the segment for the six months ended
      June 30, 2008 decreased to 55.5% from 61.3% for the six months ended June 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
      favorably from the Company’s actuarially projected ultimate losses.




*Policy
      Acquisition Expense, Salaries and Benefits Expense and Other Insurance General
      and Administrative Expense less Ceding Commission.* Policy
      acquisition expense, salaries and benefits expense and other insurance general
      and administrative expense less ceding commission decreased $17.1 million or
      47.9% from $35.8 million for the six months ended June 30, 2007 to $18.7 million
      for the six months ended June 30, 2008. The expense ratio decreased from 27.3%
      for the three months ended June 30, 2007 to 21.0% for the three months ended
      June 30, 2008. The decrease in expense ratio resulted primarily from ceding
      commissions of $30.2 million earned through the Maiden Reinsurance Agreement
      during the third quarter of 2007 offset by increased salary expense and other
      general and administrative expense of $6.4 million and $3.9 million,
      respectively, which resulted from acquisitions.




*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $6.0
      or
      40.4% from $14.9 million for the six months ended June 30, 2007 to $20.9 million
      for the six months ended June 30, 2008. This increase is attributable to strong
      growth in revenue combined with improvements in the expense ratio.





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


**Three Months Ended****June 30,**
              
              **Six Months Ended****June 30,**($ amounts in thousands)
              
              **2008**
              
              **2007**
              
              **2008**
              
              **2007**Gross
                  premium written
              
              $
              127,308
              
              $
              69,329
              
              $
              215,077
              
              $
              117,271Net
                  premium written
              
              
              61,994
              
              
              52,491
              
              
              100,079
              
              
              90,802Change
                  in unearned premium
              
              
              (18,908
              )
              
              (19,164
              )
              
              (27,397
              )
              
              (32,775
              )Net
                  premium earned
              
              
              43,086
              
              
              33,327
              
              
              72,682
              
              
              58,027Ceding
                  commission revenue
              
              
              8,051
              
              
              —
              
              
              11,482
              
              
              —Loss
                  and loss adjustment expense
              
              
              29,876
              
              
              24,102
              
              
              47,790
              
              
              42,012Policy
                  acquisition expenses
              
              
              2,021
              
              
              2,394
              
              
              3,023
              
              
              2,394Salaries
                  and benefits
              
              
              4,178
              
              
              1,855
              
              
              6,825
              
              
              4,086Other
                  insurance general and administrative expense
              
              
              6,915
              
              
              605
              
              
              10,051
              
              
              1,98042,990
              
              
              28,956
              
              
              67,689
              
              
              50,472Net
                  premiums earned less expenses included in combined ratio (Underwriting
                  income)
              
              $
              8,147
              
              $
              4,371
              
              $
              16,475
              
              $
              7,555Key
                  Measures:Net
                  loss ratio
              
              
              69.3
              %
              
              72.3
              %
              
              65.8
              %
              
              72.4
              %Net
                  expense ratio
              
              
              11.8
              %
              
              14.6
              %
              
              11.6
              %
              
              14.6
              %Net
                  combined ratio
              
              
              81.1
              %
              
              86.9
              %
              
              77.4
              %
              
              87.0
              %





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





*Gross
      Premium Written* .
      Gross
      premium written increased $58.0 million or 83.6% from $69.3 million for the
      three months ended June 30, 2007 to $127.3 million for the three months ended
      June 30, 2007. The increase in premium resulted, primarily, from the
      underwriting of new coverage plans and the acquisition of IGI in the second
      quarter of 2007, which contributed $12.4 million of additional
      premiums.




-
          31
          -


(dollars
      in millions unless noted otherwise)


*Net
      Premium Written* .
      Net
      premium written increased $9.5 million or 18.1% from $52.5 million to $62.0
      million for the three months ended June 30, 2007 and 2008, respectively. The
      increase of $9.5 million was net of the cession of $37.2 million of net premium
      written to Maiden Insurance during the second quarter of 2008 pursuant to the
      Reinsurance Agreement, which the Company entered into during the third quarter
      of 2007. Before cessions to Maiden Insurance, net premium written increased
      $46.7 million in the second quarter of 2008 compared to the second quarter
      of
      2007. The increase of $46.7 million resulted from an increase in gross premium
      written in 2008.




*Net
      Premium Earned* .
      Net
      premiums earned increased $9.8 million or 29.3% from $33.3 million for the
      three
      months ended June 30, 2007 to $43.1 million for the three months ended June
      30,
      2008. The increase of $9.8 million was net of the cession of earned premium
      of
      $21.4 million to Maiden Insurance during the second quarter of 2008. Before
      cessions to Maiden Insurance, earned premium increased $31.2 million in the
      second quarter of 2008 compared to the second quarter of 2007. The increase
      was
      a result of an increase in gross premium written in the twelve months June
      30,
      2008 compared to the twelve months June 30, 2007.





*Loss
      and Loss Adjustment Expenses.* Loss
      and
      loss adjustment expenses increased $5.8 million or 24.0% from $24.1 million
      for
      the three months ended June 30, 2007 to $29.9 million for the three months
      ended
      June 30, 2008. Despite the increase, the loss ratio for the segment for the
      three months ended June 30, 2007 decreased to 69.3% from 72.3% for the three
      months ended June 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.




*Policy
      Acquisition Expense, Salaries and Benefits Expense and Other Insurance General
      and Administrative Expense less Ceding Commission.* Policy
      acquisition expense, salaries and benefits expense and other insurance general
      and administrative expense less ceding commission increased $0.2 million or
      4.3%
      from $4.9 million for the three months ended June 30, 2007 to $5.1 million
      for
      the three months ended June 30, 2008. The expense ratio decreased from 14.6%
      for
      the three months ended June 30, 2007 to 11.8% for the three months ended June
      30, 2008. The decrease in expense ratio resulted primarily from ceding
      commissions of $8.1 million earned in 2008 from the Maiden Reinsurance Agreement
      entered during the third quarter of 2007, offset by increases in general and
      administrative expense of $6.3 million due to acquisitions.




*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $3.7
      million from $4.4 million for the three months ended June 30, 2007 to $8.1
      million for the three months ended June 30, 2008. This increase is attributable
      to growth in revenue and an improvement in both the loss ratio and expense
      ratio.





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





*Gross
      Premium Written* .
      Gross
      premium written increased $97.8 million or 83.4% from $117.3 million for the
      six
      months ended June 30, 2007 to $215.1 million for the six months ended June
      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 $9.3 million or 10.2% from $90.8 million to $100.1
        million for the six months ended June 30, 2007 and 2008, respectively. The
        increase of $9.3 million was net of the cession of $69.7 million of premium
        written to Maiden Insurance during the first half of 2008 pursuant to the
        Reinsurance Agreement, which the Company entered into during the third quarter
        of 2007. Before cessions to Maiden Insurance, net premium written increased
        $79.0 million in the first half of 2008 compared to the first half of 2007.
        The
        increase of $79.0 million resulted from an increase in gross premium written
        in
        2008.
 
 *Net
        Premiums Earned* .
        Net
        premium earned increased $14.7 million or 25.3% from $58.0 million for the
        six
        months ended June 30, 2007 to $72.7 million for the six months ended June
        30,
        2008. The increase of $14.7 million was net of the cession of net premium
        earned
        of $43.0 million to Maiden Insurance during the first half of 2008. Before
        cessions to Maiden Insurance, net premium earned increased $57.7 million
        in the
        first half of 2008 compared to the first half of 2007. The increase was a
        result
        of an increase in gross premium written in the twelve months June 30, 2008
        compared to the twelve months June 30, 2007.





*Loss
      and Loss Adjustment Expenses.* Loss
      and
      loss adjustment expenses increased $5.8 million or 13.8% from $42.0 million
      for
      the six months ended June 30, 2007 to $47.8 million for the six months ended
      June 30, 2008. The loss ratio for the segment for the six months ended June
      30,
      2007 decreased to 65.8% from 74.2% for the six months ended June 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.


-
          32
          -


(dollars
      in millions unless noted otherwise)


*Policy
      Acquisition Expense, Salaries and Benefits Expense and Other Insurance General
      and Administrative Expense less Ceding Commission.* Policy
      acquisition expense, salaries and benefits expense and other insurance general
      and administrative expense less ceding commission decreased $0.1 million or
      0.5%
      from $8.5 million for the six months ended June 30, 2007 to $8.4 million for
      the
      six months ended June 30, 2008. The expense ratio decreased from 14.6% for
      the
      six months ended June 30, 2007 to 11.6% for the six months ended June 30, 2008.
      The decrease in expense ratio resulted primarily from ceding commissions of
      $11.5 million earned through the Maiden Reinsurance Agreement during the third
      quarter of 2007 offset by increases in general and administrative expense of
      $8.1 million in the six months ended June 30, 2008.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $9.0
      million from $7.5 million for the six months ended June 30, 2007 to $16.5
      million for the six months ended June 30, 2008. This increase is attributable
      to
      growth in revenue and an improvement in the loss ratio and expense
      ratio.




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


Three Months Ended June 30,
              
              Six Months Ended June 30,($ amounts in thousands)
              
              2008
              
              2007
              
              2008
              
              2007Gross
                  premium written
              
              $
              61,658
              
              $
              62,385
              
              $
              119,384
              
              $
              114,320Net
                  premium written
              
              
              29,649
              
              
              43,570
              
              
              57,674
              
              
              80,413Change
                  in unearned premium
              
              
              578
              
              
              (12,388
              )
              
              (5,935
              )
              
              (20,448
              )Net
                  premiums earned
              
              
              30,227
              
              
              31,182
              
              
              51,739
              
              
              59,965Ceding
                  commission revenue
              
              
              8,903
              
              
              —
              
              
              13,747
              
              
              —Loss
                  and loss adjustment expense
              
              
              19,486
              
              
              19,340
              
              
              32,170
              
              
              37,163Policy
                  acquisition expenses
              
              
              9,816
              
              
              5,609
              
              
              16,628
              
              
              10,952Salaries
                  and benefits
              
              
              4,210
              
              
              2,682
              
              
              6,192
              
              
              4,614Other
                  insurance general and administrative expense
              
              
              2,525
              
              
              1,762
              
              
              4,471
              
              
              3,69036,037
              
              
              29,393
              
              
              59,461
              
              
              56,419Net
                  premiums earned less expenses included in combined ratio (Underwriting
                  income)
              
              $
              3,093
              
              $
              1,789
              
              $
              6,025
              
              $
              3,546Key
                  Measures:Net
                  loss ratio
              
              
              64.5
              %
              
              62.0
              %
              
              62.2
              %
              
              62.0
              %Net
                  expense ratio
              
              
              25.3
              %
              
              32.2
              %
              
              26.2
              %
              
              32.1
              %Net
                  combined ratio
              
              
              89.8
              %
              
              94.3
              %
              
              88.4
              %
              
              94.1
              %





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





*Gross
      Premium Written* .
      Gross
      premium written decreased $0.7 million or 1.2% from $62.4 million for the three
      months ended June 30, 2007 to $61.7 million for the three months ended June
      30,
      2008. Gross premium written was flat period over period.





*Net
      Premium Written* .
      Net
      premium written decreased $14.0 million or 32.0% from $43.6 million for the
      three months ended June 30, 2007 to $29.6 million for the three months ended
      June 30, 2008. The decrease of $14.0 million resulted from the cession of $21.2
      million of net premium written to Maiden Insurance during the second quarter
      of
      2008 pursuant to the Reinsurance Agreement, which the Company entered into
      during the third quarter of 2007. Before cessions to Maiden Insurance, net
      premium written increased $7.2 million for the three months ended June 30,
      2008
      compared to the three months ended June 30, 2007. The increase of $7.2 million
      resulted primarily from the gross premium written being consistent period over
      period.


*Net
        Premium Earned* .
        Net
        premium earned decreased $1.0 million or 3.1% from $31.2 million for the
        three
        months ended June 30, 2007 to $30.2 million for the three months ended June
        30,
        2008. The decrease of $1.0 million resulted from the cession of net premium
        earned of $19.0 million to Maiden Insurance during the first quarter of 2008.
        Before cessions to Maiden Insurance, net premium earned increased $18.0 million
        in the second quarter of 2008 compared to the second quarter of 2007. The
        increase was a result of an increase in gross premium written in the twelve
        months preceding June 30, 2008 compared to the twelve months preceding June
        30,
        2007.




-
          33
          -


(dollars
      in millions unless noted otherwise)


*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses increased $0.1 million or 0.8% from $19.3 million
      for
      the three months ended June 30, 2007 compared to $19.4 million for the three
      months ended June 30, 2008. The loss ratio for the segment increased for the
      three months ended June 30, 2008 to 64.5% from 62.0% for the three months ended
      June 30, 2008. The increase 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 unfavorably with the projected loss
      experience.




*Policy
      Acquisition Expense, Salaries and Benefits Expense and Other Insurance General
      and Administrative Expense less Ceding Commission.* Policy
      acquisition expense, salaries and benefits expense and other insurance general
      and administrative expense less ceding commission decreased $2.4 million or
      23.9% from $10.1 million for the three months ended June 30, 2007 to $7.6
      million for the three months ended June 30, 2008. The expense ratio decreased
      from 32.2% for the three months ended June 30, 2007 to 25.3% for the three
      months ended June 30, 2008. The decrease in expense ratio resulted primarily
      from ceding commission of $8.9 million earned through the Maiden Reinsurance
      Agreement during the second quarter of 2008 offset by increased policy
      acquisition expense of $4.2 million.




*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio were $3.1 million
      and $1.8 million for the three months ended June 30, 2008 and 2007,
      respectively. The increase of $1.3 million resulted from improvements in the
      expense ratio.





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


*Gross
        Premium Written* .
        Gross
        premium written increased $5.1 million or 4.4% from $114.3 million for the
        six
        months ended June 30, 2007 to $119.4 million for the six months ended June
        30,
        2008. The increase was related to growth in existing program and the
        underwriting of new programs.
 
 *Net
        Premium Written* .
        Net
        premium written decreased $22.7 million or 28.3% from $80.4 million for the
        six
        months ended June 30, 2007 to $57.7 million for the six months ended June
        30,
        2008. The decrease of $22.7 million resulted from the cession of $39.2 million
        of net premium written to Maiden Insurance during the first quarter of 2008
        pursuant to the Reinsurance Agreement, which the Company entered into during
        the
        third quarter of 2007. Before cessions to Maiden Insurance, net premium written
        increased $16.5 million for the six months ended June 30, 2008 compared to
        the
        six months ended June 30, 2007. The increase of $16.5 million was reflective
        of
        the increase in gross premium written offset by a reduction in fronted gross
        premium written.
 
 *Net
        Premiums Earned* .
        Net
        premium earned decreased $8.3 million or 13.7% from $60.0 million for the
        six
        months ended June 30, 2007 to $51.7 million for the three months ended June
        30,
        2008. The decrease of $8.2 million resulted from the cession of $32.8 million
        of
        earned premium to Maiden Insurance during the first half of 2008. Before
        cessions to Maiden Insurance, earned premium increased $24.6 million in the
        first half of 2008 compared to the first half of 2007. The increase was a
        result
        of an increase in gross premium written in the twelve months preceding June
        30,
        2008 compared to the preceding twelve months June 30, 2007.


*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $5.0 million or 13.4% from $37.2 million
      for
      the six months ended June 30, 2007 compared to $32.2 million for the three
      months ended June 30, 2008. The loss ratio for the segment increased for the
      six
      months ended June 30, 2008 to 62.2% from 62.0% for the six months ended June
      30,
      2008. The Company’s actuarially projected ultimate losses remained consistent
      period over period.





*Policy
      Acquisition Expense, Salaries and Benefits Expense and Other Insurance General
      and Administrative Expense less Ceding Commission.* Policy
      acquisition expense, salaries and benefits expense and other insurance general
      and administrative expense less ceding commission decreased $5.7 million or
      29.7% from $19.3 million for the six months ended June 30, 2007 to $13.5 million
      for the six months ended June 30, 2008. The expense ratio decreased from 32.1%
      for the six months ended June 30, 2007 to 26.2% for the six months ended June
      30, 2008. The decrease in expense ratio resulted primarily from ceding
      commission of $13.7 million earned through the Maiden Reinsurance Agreement
      during the first half of 2008 offset by increased policy acquisition expense
      of
      $5.7 million.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $2.5
      million or 69.9% from $3.5 million to $6.0 million for the six months ended
      June
      30, 2007 and 2008, respectively. This increase is attributable to growth in
      revenue and improvements in the expense ratio.


-
          34
          -


(dollars
        in millions unless noted otherwise)


**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 $119 million and $86 million in the six
      months ended June 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 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:


**Six Months Ended****June 30,**($ amounts in thousands)
              
              **2008**
              
              **2007**Cash
                  and cash equivalents provided by (used in):Operating
                  activities
              
              $
              90,132
              
              $
              114,051Investing
                  activities
              
              
              (270,702
              )
              
              (166,871
              )Financing
                  activities
              
              
              221,364
              
              
              122,857




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


Cash
        used
        in investing activities during the period represents, primarily, the net
        purchases (purchases less sales) of investments. For the six months ended
        June
        30, 2008, the Company’s net purchases of fixed income securities totaled
        approximately $238 million, net purchases of equity securities totaled $14
        million and net sales of other investments totaled $13 million. For the six
        months ended June 30, 2007, the Company’s net purchases of fixed income
        securities totaled approximately $112 million, net purchases of equity
        securities totaled approximately $13 million and net purchases of other
        investments totaled approximately $10 million. During 2007, the Company had
        acquisition costs of approximately $12.5 million and additionally the Company
        provided approximately $18 million related to a secured note (see Note 11
“Other
        Investments”) in connection with the Warrantech transaction.




Cash
      provided by financing activities for the six months ended June 30, 2008
      consisted of $40 million from entering into a term loan, $186 million received
      from entering into repurchase agreements offset by dividend payments of $4.8
      million. Cash provided by financing activities for the six months ended June
      30,
      2007 consisted primarily of cash proceeds of $86 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 $2.4 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. 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.


-
          35
          -


(dollars
        in millions unless noted otherwise)


**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. The note is required to be paid in
        full
        immediately, under certain circumstances involving default of payment or
        change
        of control of the Company.





**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 June 30, 2008 there was no outstanding balance on the line of credit. The
      Company has an outstanding letter of credit in place at June 30, 2008 for $22.4
      million that reduced the availability on the line of credit to $2.6 million
      as
      of June 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 June 30, 2008, there were $347.3 million
      principal amount outstanding at interest rates between 2.2% and 2.5%. Interest
      expense associated with these repurchase agreements for the three months ended
      June 30, 2008 was $2.2 million of which $4.0 million was accrued as of June
      30,
      2008. The Company has approximately $350.0 million of collateral pledged in
      support of these agreements.




**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 June 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.


-
          36
          -


(dollars
        in millions unless noted otherwise)


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) in losses per occurrence. Beginning with policies
      effective January 1, 2006, the Company retains the first $1.0 million per
      occurrence. 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 $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 2006, TIC was only a servicing
        carrier for the Georgia Assigned Risk Plan. 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.




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 six 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
      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 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.


-
          37
          -


(dollars
      in millions unless noted otherwise)


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.




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 $270.8
      million, or 21.5% to $1,532.4 million at June 30, 2008 from $1,261.6 million
      as
      of December 31, 2007 (excluding $15.4 million and $28.1 million of other
      investments, respectively). As of June 30, 2008, 90% 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. Additionally, 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
      $1,025.5 million and an amortized cost of $1,065.0 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 $57.6 million with a cost of $101.1 million as of June 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:




**June
                  30, 2008**
              
              **December
                  31, 2007**($
                  amounts in thousands)
              
              **Carrying**
                **Value**
              
              **Percentage of**
                **Portfolio**
              
              **Carrying**
                **Value**
              
              **Percentage of**
                **Portfolio**Cash
                  and cash equivalents
              
              $
              191,086
              
              
              12.5
              %
              $
              145,337
              
              
              11.5
              %Time
                  and short-term deposits
              
              
              258,322
              
              
              16.9
              
              
              148,541
              
              
              11.8U.S.
                  treasury securities
              
              
              21,830
              
              
              1.4
              
              
              19,074
              
              
              1.5U.S.
                  government agencies
              
              
              76,034
              
              
              5.0
              
              
              144,173
              
              
              11.4U.S.
                  agency - collateralized mortgage obligations
              
              
              324,374
              
              
              21.2
              
              
              239,200
              
              
              19.0U.S.
                  agency – mortgage backed securities
              
              
              165,442
              
              
              10.8
              
              
              91,663
              
              
              7.3Other
                  mortgage backed securities
              
              
              4,227
              
              
              0.3
              
              
              4,153
              
              
              0.3Municipal
                  bonds
              
              
              28,348
              
              
              1.8
              
              
              10,428
              
              
              0.8Asset
                  backed securities
              
              
              6,328
              
              
              0.4
              
              
              10,226
              
              
              0.8Corporate
                  bonds
              
              
              398,849
              
              
              26.0
              
              
              369,733
              
              
              29.3Common
                  stock
              
              
              52,345
              
              
              3.4
              
              
              78,533
              
              
              6.3Preferred
                  stock
              
              
              5,218
              
              
              0.3
              
              
              504
              
              
              —$
              1,532,403
              
              
              100.0
              %
              $
              1,261,565
              
              
              100.0
              %




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




-
          38
          -


(dollars
      in millions unless noted otherwise)


Quarterly,
      the Company’s Investment Committee (“Committee”) evaluates for
      other-than-temporary-impairment, whereby it evaluates each security which has
      an
      unrealized loss as of the end of the subject reporting period. 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 six months ended June 30, 2008, based on the criteria above, we determined
      that four equity securities were other-than-temporarily-impaired and accordingly
      wrote them down resulting in a $7.9 million realized loss.




In
        addition to write-downs of $8.0 million the Company took for the impaired
        marketable securities during the six months ended June 30, 2008, at June
        30,
        2008, the Company had $43.9 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, 38 equity securities comprised $42
        million, or 96% of the unrealized loss. The stocks consisted of 17 securities
        in
        the consumer products sector and represent approximately 37% of the total
        fair
        value and 48% of the Company’s unrealized loss, four securities in the financial
        sector and represent approximately 8% of the total fair value and 11% of
        the
        Company’s total unrealized losses and 12 common stocks in the health care,
        industrial and technology sectors which have fair values of approximately
        18%,
        8% and 7%, respectively, and approximately 13%, 15% and 6%, respectively,
        of the Company’s unrealized losses. Additionally, the Company owns 5 stocks in
        other sectors which accounts for 3% of the Company’s unrealized losses. The
        duration of these impairments range from one to 22 months. The remaining
        securities in a loss position are not considered individually significant
        and
        accounted for 4% of the Company’s unrealized losses.




Corporate
      bonds represent 43.3% of the fair value of our fixed maturities and 93.0% of
      the
      total unrealized losses of our fixed maturities. The Company owns 202 corporate
      bonds in the industrial, bank & financial and other sectors, which have a
      fair value of approximately 11.5%, 31.1% and 0.6%, respectively, and 20.9%,
      70.4% and 0.6% 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.





**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.




-
          39
          -


(dollars
      in millions unless noted otherwise)


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 $258.3 million of time and short-term
      deposits) with a fair value of $1,025.5 million and a carrying value of $1,025.4
      million as of June 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 June 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 June 30, 2008.


**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
              
              $
              947,491
              
              $
              (77,974
              )
              $
              —
              
              $
              (77,974
              )
              
              (18.8
              )%100
                  basis point increase
              
              
              984,905
              
              
              (40,560
              )
              
              —
              
              
              (40,560
              )
              
              (9.8
              )No
                  change
              
              
              1,025,465
              
              
              —
              
              
              1,025,432
              
              
              —
              
              
              —100
                  basis point decrease
              
              
              1,069,324
              
              
              43,859
              
              
              —
              
              
              43,859
              
              
              10.6200
                  basis point decrease
              
              
              1,112,943
              
              
              87,478
              
              
              —
              
              
              87,478
              
              
              21.1




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 $358.2 million of debt instruments of which $150.6 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 $2.1 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 $2.1 million after tax
      realized currency loss based on our outstanding foreign denominated reserves
      of
      $65.3 million at June 30, 2008.




-
          40
          -


(dollars
      in millions unless noted otherwise)


*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 June 30, 2008, the equity securities in our
      investment portfolio had a fair value of $57.6 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 June
      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
              
              $
              60,441
              
              $
              2,878
              
              
              
              
              $
              2,878
              
              
              0.7
              %No
                  change
              
              
              57,563
              
              
              
              
              $
              57,5635%
                  decrease
              
              
              54,685
              
              
              (2,878
              )
              
              
              
              
              (2,878
              )
              
              (0.7
              )%




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





***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.


-
          41
          -


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
      time
      within which the Company and individual defendants must answer the complaint
      has
      not yet expired and no responsive pleadings or motions have yet been
      filed.  However, the Company and each of the defendants believe the
      complaint is without merit and intend to vigorously defend the action.





**Item
      4. Submission of Matters to a Vote of Security Holders.**





(a)
            The
                annual meeting of the shareholders was held on May 23,
                2008.




(b)
            All
                of the Company's director nominees, Barry D. Zyskind, Michael Karfunkel,
                George Karfunkel, Donald T. DeCarlo, Abraham Gulkowitz, Isaac Neuberger
                and Jay J. Miller, were elected. There was no solicitation in opposition
                to the Company's nominees.




(c)
            Matters
                voted on at the meeting and the number of votes
                cast:





1.
            Election
                of directors to serve until the 2009 Annual Meeting of Shareholders
                or
                until their successors have been duly elected or appointed and
                qualified:




Director
              
              Voted For
              
              Withhold
                AuthorityBarry
                  D. Zyskind
              
              
              55,886,325
              
              
              1,970,100Michael
                  Karfunkel
              
              
              46,964,353
              
              
              10,892,072George
                  Karfunkel
              
              
              55,802,170
              
              
              2,054,255Donald
                  T. DeCarlo
              
              
              56,661,317
              
              
              1,195,108Abraham
                  Gulkowitz
              
              
              56,656,519
              
              
              1,199,906Isaac
                  Neuberger
              
              
              56,656,419
              
              
              1,200,006Jay
                  J. Miller
              
              
              56,656,319
              
              
              1,200,106





2.
            Ratification
                of the appointment of BDO Seidman, LLP as Independent Auditor for
                the year
                ended December 31, 2008:




Voted
                For
            
            Voted
                Against
            
            Abstentions57,783,853
            
            45,322
            
            27,250






-
          42
          -





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




**Exhibit**
              **Number**
            
            **Description**2.1
            
            Agreement
              for stock purchase and asset purchase agreement by and between Trinity
              Universal Insurance Company and AmTrust Financial Services,
              Inc.31.1
            
            Certification
                of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
                for the quarter ended June 30, 2008.31.2
            
            Certification
                of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
                for the quarter ended June 30, 2008.32.1
            
            Certification
                of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
                for
                the quarter ended June 30, 2008.32.2
            
            Certification
                of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
                for
                the quarter ended June 30, 2008.






-
          43
          -


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:
                  August 11, 2008
              
              
              /s/
                  Ronald E. Pipoly, Jr.Ronald
                  E. Pipoly, Jr.Chief
                  Financial Officer


-
          44
          -