****


**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





(Mark
      One)





x
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934For
                the quarterly period ended September 30,
                2007





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
      FileroNon-accelerated filerx





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




As
      of
      November 8, 2007, the Registrant had one class of Common Stock ($.01 par value),
      of which 59,959,000 shares were issued and outstanding.








INDEX


PagePART
                  I
              
              FINANCIAL
                  INFORMATIONItem
                  1.
              
              Unaudited
                  Financial Statements:Condensed
                  Consolidated Balance Sheets as of September 30, 2007 and December
                  31,
                  2006
              
              3Condensed
                  Consolidated Statements of Income
              
              4—
                  Three and nine months ended September 30, 2007 and 2006Condensed
                  Consolidated Statements of Cash Flows
              
              5—
                  Nine months ended September 30, 2007 and 2006Notes
                  to Condensed Consolidated Financial Statements
              
              6Item
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              18Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              32Item
                  4T.
              
              Controls
                  and Procedures
              
              33PART
                  II
              
              OTHER
                  INFORMATIONItem
                  1a.
              
              Risk
                  Factors
              
              34Item
                  6.
              
              Exhibits
              
              35Signatures
              
              36




2




PART
      1 -
      FINANCIAL INFORMATION





Item
      1.
      Financial Statements


**Condensed
      Consolidated Balance Sheets**


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




**September 30,**
              **2007**
            
            **December 31,**
              **2006****(Unaudited)****Assets**Investments:Fixed
                maturities, held-to-maturity, at amortized cost (fair value $361,414;
                $363,690)
            
            **$**
            **362,890**
            
            $
            366,551Fixed
                maturities, available-for-sale, at market value (amortized cost $454,527;
                $91,368)
            
            
            **445,512**
            
            
            93,168Equity
                securities, available-for-sale, at market value (cost $106,020;
                $90,637)
            
            
            **94,019**
            
            
            94,482Short-term
                investments
            
            
            **98,041**
            
            
            196,140Other
                investments
            
            
            **24,179**
            
            
            13,936**Total
                investments**
            
            
            **1,024,641**
            
            
            764,277Cash
                and cash equivalents
            
            
            **190,732**
            
            
            59,916Assets
                under management
            
            
            **22,377**
            
            
            23,494Accrued
                interest and dividends
            
            
            **12,310**
            
            
            6,138Premiums
                receivable, net
            
            
            **264,343**
            
            
            147,779Note
                receivable - related party
            
            
            **20,540**
            
            
            -Reinsurance
                recoverable
            
            
            **254,423**
            
            
            44,127Funds
                held with reinsured companies
            
            
            **1,348**
            
            
            266Prepaid
                reinsurance premiums
            
            
            **229,696**
            
            
            72,439Prepaid
                expenses and other assets
            
            
            **29,826**
            
            
            12,129Deferred
                policy acquisition costs
            
            
            **59,410**
            
            
            43,064Deferred
                tax asset
            
            
            **31,716**
            
            
            9,542Property
                and equipment, net
            
            
            **12,674**
            
            
            11,175Goodwill
            
            
            **10,211**
            
            
            2,163Intangible
                assets
            
            
            **43,740**
            
            
            27,206**$**
            **2,207,987**
            
            $
            1,223,715**Liabilities
                and Stockholders’ Equity****Liabilities:**Loss
                and loss expense reserves
            
            **$**
            **742,033**
            
            $
            295,805Unearned
                premiums
            
            
            **496,939**
            
            
            323,155Ceded
                reinsurance premiums payable
            
            
            **166,185**
            
            
            23,028Reinsurance
                payable on paid losses
            
            
            **2,211**
            
            
            2,004Federal
                income tax payable
            
            
            **2,759**
            
            
            1,477Funds
                held under reinsurance treaties
            
            
            **14,757**
            
            
            9,948Securities
                sold but not yet purchased, at market
            
            
            **37,570**
            
            
            38,323Securities
                sold under agreements to repurchase, at contract value
            
            
            **92,571**
            
            
            -Accrued
                expenses and other current liabilities
            
            
            **121,082**
            
            
            80,712Other
                liabilities
            
            
            **2,507**
            
            
            2,814Junior
                subordinated debt
            
            
            **123,714**
            
            
            82,476**Total
                liabilities**
            
            
            **1,802,328**
            
            
            859,742**Commitments
                and contingencies**
            
            
            -
            
            
            -**Minority
                Interest**
            
            
            **22,377**
            
            
            23,494**Stockholders’
                equity:**Common
                stock, $.01 par value; 100,000,000 shares authorized, 59,959,000
                issued
                and outstanding in 2007 and 2006
            
            
            **600**
            
            
            600Additional
                paid-in capital
            
            
            **240,175**
            
            
            238,938Accumulated
                other comprehensive income
            
            
            **(17,842**
            **)**
            
            3,705Retained
                earnings
            
            
            **160,349**
            
            
            97,236**Total
                stockholders’ equity**
            
            
            **383,282**
            
            
            340,479**$**
            **2,207,987**
            
            $
            1,223,715




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


3





**AmTrust
      Financial Services, Inc.**


**Condensed
      Consolidated Statements of Income**


**(Unaudited)**


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


**Three Months Ended**
                **September 30,**
              
              **Nine Months Ended**
                **September 30,****2007**
              
              **2006**
              
              **2007**
              
              **2006****Revenues:**Premium
                  income:Net
                  premium written
              
              **$**
              **(30,717**
              **)**
              **$**
              105,599
              
              **$**
              **293,424**
              
              **$**
              314,343Change
                  in unearned premium
              
              
              **112,505**
              
              
              (22,073
              )
              
              **37,476**
              
              
              (88,572
              )**Net
                  earned premium**
              
              
              **81,788**
              
              
              83,526
              
              
              **330,900**
              
              
              225,771Ceding
                  commission –
                  related
                  party
              
              
              **40,054**
              
              
              -
              
              
              **40,054**
              
              
              -Commission
                  and fee income
              
              
              **7,906**
              
              
              2,879
              
              
              **16,688**
              
              
              8,935Net
                  investment income
              
              
              **13,916**
              
              
              7,539
              
              
              **38,326**
              
              
              18,960Net
                  realized gain (loss) on investments
              
              
              **(2,074**
              **)**
              
              4,044
              
              
              **8,948**
              
              
              10,135Other
                  investment loss on managed assets
              
              
              **(4,118**
              **)**
              
              -
              
              
              **(2,217**
              **)**
              
              -**Total
                  revenues**
              
              
              **137,472**
              
              
              97,988
              
              
              **432,699**
              
              
              263,801**Expenses:**Loss
                  and loss adjustment expense
              
              
              **52,141**
              
              
              55,350
              
              
              **211,697**
              
              
              146,008Policy
                  acquisition expenses
              
              
              **27,619**
              
              
              10,635
              
              
              **59,649**
              
              
              27,107Salaries
                  and benefits
              
              
              **12,913**
              
              
              8,014
              
              
              **31,846**
              
              
              19,746Other
                  insurance general and administrative expense
              
              
              **8,292**
              
              
              2,550
              
              
              **20,870**
              
              
              15,588Other
                  underwriting expenses
              
              
              **3,512**
              
              
              3,106
              
              
              **10,052**
              
              
              8,873**Total
                  expenses**
              
              
              **104,477**
              
              
              79,655
              
              
              **334,114**
              
              
              217,322**Operating
                  income from continuing operations**
              
              
              **32,995**
              
              
              18,333
              
              
              **98,585**
              
              
              46,479**Other
                  income (expenses):**Foreign
                  currency gain (loss)
              
              
              **(44**
              **)**
              
              473
              
              
              **75**
              
              
              457Interest
                  expense
              
              
              **(2,650**
              **)**
              
              (1,410
              )
              
              **(6,985**
              **)**
              
              (3,653
              )**Total
                  other expenses**
              
              
              **(2,694**
              **)**
              
              (937
              )
              
              **(6,910**
              **)**
              
              (3,196
              )**Income
                  from continuing operations before provision for income taxes and
                  minority
                  interest**
              
              
              **30,301**
              
              
              17,396
              
              
              **91,675**
              
              
              43,283**Provision
                  for income taxes**
              
              
              **9,985**
              
              
              4,983
              
              
              **26,584**
              
              
              12,058**Minority
                  interest in net loss of subsidiary**
              
              
              **(4,118**
              **)**
              
              -
              
              
              **(2,217**
              **)**
              
              -**Income
                  from continuing operations**
              
              **$**
              **24,434**
              
              **$**
              12,413
              
              **$**
              **67,308**
              
              **$**
              31,225**Discontinued
                  operations:**Gain
                  from discontinued operations
              
              
              -
              
              
              -
              
              
              -
              
              
              250**Income
                  from discontinued operations**
              
              
              **-**
              
              
              -
              
              
              **-**
              
              
              250**Net
                  income**
              
              
              **24,434**
              
              
              12,413
              
              
              **67,308**
              
              
              31,475**Basic
                  earnings per common share**Income
                  from continuing operations
              
              **$**
              **0.41**
              
              **$**
              0.21
              
              **$**
              **1.12**
              
              **$**
              0.57Income
                  from discontinued operations
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**Net
                  income
              
              **$**
              **0.41**
              
              **$**
              0.21
              
              **$**
              **1.12**
              
              **$**
              0.57**Diluted
                  earnings per common share**Income
                  from continuing operations
              
              **$**
              **0.40**
              
              **$**
              0.21
              
              **$**
              **1.11**
              
              **$**
              0.57Income
                  from discontinued operations
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**Net
                  income
              
              **$**
              **0.40**
              
              **$**
              0.21
              
              **$**
              **1.11**
              
              **$**
              0.57**Dividends
                  declared per common share**
              
              **$**
              **0.025**
              
              $
              0.02
              
              **$**
              **0.07**
              
              **$**
              0.02




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


4





**AmTrust
      Financial Services, Inc.**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**


**(in
      thousands)**


**Nine Months Ended September 30,****2007**
              
              **2006****Cash
                  flows from operating activities:**Net
                  income from continuing operations
              
              **$**
              **67,308**
              
              **$**
              31,225Adjustments
                  to reconcile net income from continuing operations to net cash
                  provided by
                  operating activities of continuing operations:Depreciation
                  and amortization
              
              
              **3,484**
              
              
              3,068Realized
                  gain on marketable securities
              
              
              **(12,301**
              **)**
              
              (10,135
              )Bad
                  debt expense
              
              
              **817**
              
              
              1,778Foreign
                  currency (gain) loss
              
              
              **(75**
              **)**
              
              -Non-cash
                  stock compensation expense
              
              
              **1,237**
              
              
              475Non-cash
                  write-down of marketable securities
              
              
              **3,353**
              
              
              -Income
                  from discontinued operations
              
              
              -
              
              
              250Changes
                  in assets - (increase) decrease:Premiums
                  receivable
              
              
              **(67,627**
              **)**
              
              (53,777
              )Reinsurance
                  recoverable
              
              
              **(41,746**
              **)**
              
              (17,816
              )Deferred
                  policy acquisition costs, net
              
              
              **(2,976**
              **)**
              
              (17,305
              )Prepaid
                  reinsurance premiums
              
              
              **(152,179**
              **)**
              
              (56,849
              )Prepaid
                  expenses and other assets
              
              
              **911**
              
              
              (7,405
              )Deferred
                  tax asset
              
              
              **(22,174**
              **)**
              
              (4,149
              )Receivable
                  from discontinued operations
              
              
              -
              
              
              1,480Changes
                  in liabilities - increase (decrease):Ceded
                  reinsurance premium payable
              
              
              **143,284**
              
              
              (1,497
              )Accrued
                  expenses and other current liabilities
              
              
              **19,252**
              
              
              16,853Loss
                  and loss expense reserve
              
              
              **127,253**
              
              
              82,770Unearned
                  premiums
              
              
              **115,447**
              
              
              148,904Funds
                  held under reinsurance treaties
              
              
              **4,809**
              
              
              8,654**Net
                  cash provided in operating activities**
              
              
              **188,077**
              
              
              126,524**Cash
                  flows from investing activities:**Net
                  (purchases) of securities with fixed maturities
              
              
              **(213,519**
              **)**
              
              (191,084
              )Net
                  (purchases) of equity securities
              
              
              **(4,815**
              )
              
              (38,800
              )Net
                  (purchases) sales of other investments
              
              
              **(8,328**
              **)**
              
              360Net
                  sales (purchases) of short-term investments
              
              
              **98,099**
              
              
              (120,309
              )Note
                  receivable - related party
              
              
              **(18,000**
              **)**
              
              -Acquisition
                  of a subsidiary, net of cash obtained
              
              
              **(35,840**
              **)**
              
              -Acquisition
                  of renewal rights and goodwill
              
              
              **(1,582**
              **)**
              
              (9,963
              )Purchase
                  of property and equipment
              
              
              **(797**
              **)**
              
              (2,579
              )**Net
                  cash used in investing activities**
              
              
              **(184,782**
              **)**
              
              (362,375
              )**Cash
                  flows from financing activities:**Issuance
                  of junior subordinated debentures
              
              
              **40,000**
              
              
              30,928Reverse
                  repurchase agreements, net
              
              
              **92,571**
              
              
              -Issuance
                  of common stock
              
              
              -
              
              
              256Additional
                  paid-in-capital
              
              
              -
              
              
              166,085Repayment
                  of mortgage note - discontinued operations
              
              
              -
              
              
              (25,000
              )Foreign
                  currency translation
              
              
              **(333**
              **)**
              
              -Debt
                  financing fees
              
              
              **(820**
              **)**
              
              -Dividends
                  distributed on common stock
              
              
              **(3,897**
              **)**
              
              (1,200
              )**Net
                  cash provided by financing activities**
              
              
              **127,521**
              
              
              171,069**Net
                  increase in cash and cash equivalents**
              
              
              **130,816**
              
              
              (64,782
              )**Cash
                  and cash equivalents, beginning of the period**
              
              
              **59,916**
              
              
              115,847**Cash
                  and cash equivalents, end of the period**
              
              $
              **190,732**
              
              $
              51,065**Supplemental
                  Cash Flow Information**Income
                  tax payments
              
              **$**
              **28,996**
              
              $22,137Interest
                  payments on debt
              
              
              **6,710**
              
              3,090




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




5


**Notes
      to Unaudited Condensed Consolidated Financial Statements**


**(Unaudited)**


**(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, 2006, previously filed with the Securities and Exchange Commission
      (“SEC”) on March 16, 2007. The balance sheet at December 31, 2006 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, 2006, included in the Company’s Form 10-K filed
      with the SEC.





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**




In
      February 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 155, “ *Accounting
      for Certain Hybrid Financial Instruments* ”
(“SFAS
      155”). SFAS No. 155 amends SFAS No. 133, “ *Accounting
      for Derivative Instruments and Hedging Activities”* ,
      and
      SFAS No. 140, “ *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities”* ,
      and
      allows an entity to remeasure at fair value a hybrid financial instrument that
      contains an embedded derivative that otherwise would require bifurcation from
      the host if the holder irrevocably elects to account for the whole instrument
      on
      a fair value basis. Subsequent changes in the fair value of the instrument
      would
      be recognized in earnings. SFAS No. 155 also removed an exception included
      in an
      interpretation of SFAS No. 133 (Implementation Issue No. B39) that kept holders
      of mortgage-backed securities from testing for the need to bifurcate the value
      embedded in the mortgage-backed securities related to the ability to prepay.
      The
      FASB is currently reviewing the removal of such exception. SFAS No. 155 was
      effective for financial instruments acquired or issued after the beginning
      of an
      entity’s first fiscal year that begins after September 15, 2006. The adoption of
      the statement did not have a material impact on the Company’s results of
      operations or financial condition.




In
      June 2006, the FASB issued Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement
      No. 109* ”
(“FIN
      48”). FIN 48 seeks to reduce the diversity in practice associated with certain
      aspects of measurement and recognition in accounting for income taxes and
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. The interpretation also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition. Under FIN 48, an entity may only recognize
      or continue to recognize tax positions that meet a “more likely than not”
threshold. FIN 48 was effective for fiscal years beginning after
      December 15, 2006. The Company adopted FIN 48 as of January 1, 2007, and
      the adoption had no significant impact on the Company’s consolidated financial
      statements (See Note 10. Income Taxes).




In
      September 2006, the FASB issued SFAS No. 157,*Fair
      Value Measurements*(“SFAS
      No. 157”). SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in GAAP, and enhances disclosures about fair value
      measurements. SFAS No. 157 applies when other accounting pronouncements require
      fair value measurements; it does not require new fair value measurements. The
      Company does not believe the adoption of SFAS No. 157, which becomes effective
      in 2008, will have a material impact on its financial condition or results
      of
      operations.




In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ("SFAS
      No. 159"), which provides reporting entities the ability to choose to
      report many financial instruments and certain other items at fair value with
      changes in fair value included in current earnings.  SFAS No. 159
      establishes presentation and disclosure requirements designed to facilitate
      comparisons between companies that choose different measurement attributes
      for
      similar types of assets and liabilities. The standard also requires additional
      information to aid financial statement users' understanding of a reporting
      entity's choice to use fair value on its earnings and also requires entities
      to
      display on the face of the balance sheet the fair value of those assets and
      liabilities which the reporting entity has chosen to measure at fair value.
      SFAS
      No. 159 is effective as of the beginning of a reporting entity's first fiscal
      year beginning after November 15, 2007. Early adoption is permitted as of the
      beginning of the previous fiscal year provided the entity makes that choice
      in
      the first 120 days of that fiscal year and also elects to apply the provisions
      of SFAS No. 157. Because application of the standard is optional, any impacts
      are limited to those financial assets and liabilities to which SFAS No. 159
      would be applied, which has yet to be determined. The Company will adopt the
      standard in fiscal 2008.





6




**3.**  **Investments**





The
      original cost, estimated market value and gross unrealized appreciation and
      depreciation of available-for-sale securities as of September 30, 2007, are
      presented in the table below:




*(a)
      Available-for-Sale Securities*





Original
                or
              amortized
              cost
            
            Gross
              unrealized
              gains
            
            Gross
              unrealized
              losses
            
            Market
              valuePreferred
                stock
            
            $
            750
            
            $
            -
            
            $
            (84
            )
            $
            666Common
                stock
            
            
            105,270
            
            
            6,028
            
            
            (17,945
            )
            
            93,353Fixed
                maturities
            
            
            454,527
            
            
            1,472
            
            
            (10,487
            )
            
            445,512$
            560,547
            
            $
            7,500
            
            $
            (28,516
            )
            $
            539,531




*(b)
      Held-to-Maturity Securities*




The
      amortized cost, estimated market value and gross unrealized appreciation and
      depreciation of held to maturity securities as of September 30, 2007 are
      presented in the table below:





Amortized
              cost
            
            Unrealized
              gains
            
            Unrealized
              losses
            
            Fair
              valueObligations
                of U.S. Treasury, Government Corporations and agencies
            
            $
            309,405
            
            $
            159
            
            $
            (806
            )
            $
            308,758Mortgage-backed
                securities
            
            
            53,485
            
            
            41
            
            
            (870
            )
            
            52,656$
            362,890
            
            $
            200
            
            $
            (1,676
            )
            $
            361,414




*(c)
      Investment Income*




Net
      investment income for the three and nine months ended September 30, 2007 and
      2006 were derived from the following sources:





Three
                Months Ended September 30,
            
            Nine
                Months Ended September 30,2007
            
            2006
            
            2007
            
            2006Fixed
                maturities
            
            $
            11,242
            
            $
            6,581
            
            **$**
            27,408
            
            $
            12,906Equity
                securities
            
            
            243
            
            
            (460
            )
            
            1,683
            
            
            466Cash
                and cash equivalents
            
            
            4,075
            
            
            1,333
            
            
            8,730
            
            
            5,588Loss
                on other investments
            
            
            (2,045
            )
            
            -
            
            
            (525
            )
            
            -Loss
                on equity investment in Warrantech
            
            
            (217
            )
            
            -
            
            
            (432
            )
            
            -Interest
                on note receivable - related party
            
            
            765
            
            
            -
            
            
            2,023
            
            
            -14,063
            
            
            7,454
            
            
            38,887
            
            
            18,960Less:
                Investment expenses
            
            
            (147
            )
            
            85
            
            
            (561
            )
            
            -$
            13,916
            
            $
            7,539
            
            **$**
            38,326
            
            $
            18,960




7




*(d)
      Other-Than-Temporary Impairment*




We
      review
      our investment portfolio for impairment on a quarterly basis. Impairment of
      investment securities result in a charge to operations when a market decline
      below cost is deemed to be other-than-temporary. As of September 30, 2007,
      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 two equity
      investments were other-than-temporarily impaired and accordingly wrote down
      the
      investments and recorded a $3.4 million realized loss during the three months
      ended September 30, 2007.




The
      tables below summarize the gross unrealized losses of our fixed maturity and
      equity securities as of September 30, 2007:





Less
                than 12 months
            
            12
                months or more
            
            TotalFair
                market
              value
            
            Unrealized
              losses
            
            Fair
                market
              value
            
            Unrealized
              losses
            
            Fair
                market
              value
            
            Unrealized
              losses**Available-for-sale
                securities:**Common
                stock
            
            $
            39,763
            
            $
            (9,631
            )
            $
            15,371
            
            $
            (8,398
            )
            $
            55,134
            
            $
            (18,029
            )Fixed
                maturities
            
            
            242,758
            
            
            (10,148
            )
            
            17,442
            
            
            (339
            )
            
            260,200
            
            
            (10,487
            )Total
                temporarily impaired securities available-for-sale
                securities
            
            $
            282,521
            
            $
            (19,779
            )
            $
            32,813
            
            $
            (8,737
            )
            $
            315,334
            
            $
            (28,516
            )




Less
                than 12 months
            
            12
                months or more
            
            TotalFair
                market value
            
            Unrealized
                losses
            
            Fair
                market value
            
            Unrealized
                losses
            
            Fair
                market value
            
            Unrealized
                losses**Held-to-maturity
                securities:**Obligations
                of U.S. Treasury, Government corporations and agencies
            
            $
            124,628
            
            $
            (547
            )
            $
            86,382
            
            $
            (259
            )
            $
            211,010
            
            $
            (806
            )Mortgage-backed
                securities
            
            
            36,761
            
            
            (489
            )
            
            7,281
            
            
            (381
            )
            
            44,042
            
            
            (870
            )Total
                temporarily impaired — held-to-maturity securities
            
            $
            161,389
            
            $
            (1,036
            )
            $
            93,663
            
            $
            (640
            )
            $
            255,052
            
            $
            (1,676
            )




During
      the second quarter of 2007, the Company entered into repurchase
      agreements. The agreements are accounted for as collateralized borrowing
      transactions and are recorded at contract amounts. As of September 30, 2007
      there were $92,571 principal amount outstanding at interest rates between 5.21%
      and 5.29%. Interest expense associated with these repurchase agreements through
      September 30, 2007 was $1,522 of which $943 was accrued as of September 30,
      2007. The Company has $95,571 of collateral pledged in support of these
      agreements.





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 as
      of
      September 30, 2007 and was $9,491 for corporate bonds and $28,079 for equity
      securities. However, these transactions result in off-balance sheet risk, as
      the
      Company’s ultimate cost to satisfy the delivery of securities sold, not yet
      purchased, may exceed the amount reflected at September 30, 2007. Substantially
      all securities owned are pledged to the clearing broker to sell or repledge
      the securities to others subject to certain limitations.




8




**4.**  **Assets
      Under Management**





The
      original cost, estimated market value and gross unrealized appreciation and
      depreciation of equity securities and securities sold short, at market, are
      presented in the table below as of September 30, 2007:





*(a)
      Trading Securities*




Original
                or
              amortized
              cost
            
            Gross
              unrealized
              gains
            
            Gross
              unrealized
              losses
            
            Market
              valueCommon
                stock - long
            
            $
            24,475
            
            $
            989
            
            $
            (4,346
            )
            $
            21,118Common
                stock - short
            
            
            (4,377
            )
            
            29
            
            
            (448
            )
            
            (4,796
            )Total
            
            $
            20,098
            
            $
            1,018
            
            $
            (4,794
            )
            $
            16,322




Included
      in assets under management (See Note 14. “Related Party Transactions”) were cash
      and cash equivalents of $6,048 and dividends receivable of $7. Proceeds from
      the
      sale of investments in trading securities during the three and nine months
      ended
      September 30, 2007 were approximately $7,635 and $20,318, respectively.
      Purchases of investments during the three and nine months ended September 30,
      2007 were approximately $7,694 and $31,287, respectively.




*(b)
      Investment Income*




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





Investment
              income
            
            Net realized
              gain
                (loss)
            
            Net unrealized
              gain
                (loss)
            
            TotalEquity
                securities
            
            $
            25
            
            $
            358
            
            $
            (4,496
            )
            $
            (4,113
            )Cash
                and cash equivalents
            
            
            57
            
            
            -
            
            
            -
            
            
            5782
            
            
            358
            
            
            (4,496
            )
            
            (4,056
            )Less:
                Investment expenses
            
            
            (62
            )
            
            -
            
            
            -
            
            
            (62
            )$
            20
            
            $
            358
            
            $
            (4,496
            )
            $
            (4,118
            )




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




Investment
                income
              
              Net
                  realized
                gain
                  (loss)
              
              Net
                  unrealized
                gain
                  (loss)
              
              TotalEquity
                  securities
              
              $
              130
              
              $
              1,482
              
              $
              (3,908
              )
              $
              (2,296
              )Cash
                  and cash equivalents
              
              
              250
              
              
              -
              
              
              -
              
              
              250380
              
              
              1,482
              
              
              (3,908
              )
              
              (2,046
              )Less:
                  Investment expenses
              
              
              (171
              )
              
              -
              
              
              -
              
              
              (171
              )$
              209
              
              $
              1,482
              
              $
              (3,908
              )
              $
              (2,217
              )




**5.**  **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 September 30, 2007 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.




9




The
      table
      below summarizes the Company’s trust preferred securities as of September 30,
      2007:





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
              NotesAmTrust
                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 London Interbank Offered
                Rate
                (“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.




**6.
      Line of Credit**





The
      Company entered into an agreement for an unsecured line of credit on June 30,
      2007 with JP Morgan Chase Bank, N.A. in the aggregate amount of $50,000. The
      line is used for general corporate purposes as required, as well as collateral
      for letters of credit. The agreement matures on June 30, 2008.  
Interest payments are required to be paid monthly on any unpaid principal and
      bears interest at a rate of LIBOR plus 150 basis points.  As of September
      30, 2007 there was no outstanding balance on the line of credit. The Company
      has
      an outstanding letter of credit in place at September 30, 2007 for $16,032
      that
      reduced the availability on the line of credit to $33,968 as of September 30,
      2007.





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





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




**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Income
                from continuing operations
            
            **$**
            **24,434**
            
            $
            12,413
            
            **$**
            **67,308**
            
            $
            31,225Income
                from discontinued operations
            
            
            **-**
            
            
            -
            
            
            **-**
            
            
            250Net
                income available to common shareholders
            
            **$**
            **24,434**
            
            $
            12,413
            
            **$**
            **67,308**
            
            $
            31,475Weighted
                average number of common shares outstanding - basic
            
            
            **59,959**
            
            
            59,959
            
            
            **59,959**
            
            
            54,879Potentially
                dilutive shares:Dilutive
                shares from stock-based compensation
            
            
            **1,020**
            
            
            -
            
            
            **676**
            
            
            -Weighted
                average number of common shares outstanding - dilutive
            
            
            **60,979**
            
            
            59,959
            
            
            **60,635**
            
            
            54,879Basic
                earnings per common share:Income
                from continuing operations
            
            **$**
            **0.41**
            
            **$**
            0.21
            
            **$**
            **1.12**
            
            **$**
            0.57Income
                from discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income available to common shareholders
            
            **$**
            **0.41**
            
            **$**
            0.21
            
            **$**
            **1.12**
            
            **$**
            0.57Diluted
                earnings per common share:Income
                from continuing operations
            
            **$**
            **0.40**
            
            **$**
            0.21
            
            **$**
            **1.11**
            
            **$**
            0.57Income
                from discontinued operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income available to common shareholders
            
            **$**
            **0.40**
            
            **$**
            0.21
            
            **$**
            **1.11**
            
            **$**
            0.57




As
      of
      September 30, 2007, there were approximately less than 100 anti-dilutive
      securities excluded from diluted earnings per share.




10




**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 $457 and $1,237 for the three and nine months ended
      September 30, 2007, respectively compared to $224 and $475 for the three and
      nine months ended September 30, 2006, respectively.





The
      following schedule shows all options granted, exercised, expired and exchanged
      under the 2005 Plan for the nine months ended September 30, 2006 and
      2007:





Number
                of
              Shares
            
            Amount
                Per
              ShareOutstanding,
                December 31, 2005
            
            
            **-**Granted
            
            
            **1,175**
            
            $
            7.00Outstanding,
                September 30, 2006
            
            
            **1,175**
            
            $
            7.00Outstanding,
                December 31, 2006
            
            
            **2,390**
            
            $
            7.00-7.50Granted
            
            
            **160**
            
            
            10.56-10.77Exercised
            
            
            **-**
            
            
            -Cancelled
            
            
            **(55**
            **)**
            
            7.50Outstanding,
                September 30, 2007
            
            
            **2,495**
            
            $
            7.00-10.77





The
      weighted average grant date fair value of options granted during the first
      nine
      months of 2007 was $10.72. As of September 30, 2007, there were approximately
      $4,300 of total unrecognized compensation cost related to non-vested share-based
      compensation arrangements.





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





The
      following table summarizes the components of comprehensive income net of
      tax:




Three Months Ended
              September 30,
            
            Nine Months Ended
              September 30,2007
            
            2006
            
            2007
            
            2006Net
                income
            
            **$**
            **24,434**
            
            **$**
            12,413
            
            **$**
            **67,308**
            
            $
            31,475Unrealized
                holding (loss) gain
            
            
            **(18,098**
            **)**
            
            3,742
            
            
            **(23,418**
            **)**
            
            2,371Reclassification adjustment
            
            
            **(2,089**
            **)**
            
            887
            
            
            **2,405**
            
            
            1,644Foreign
                currency translation
            
            
            **899**
            
            
            (1,416
            )
            
            **(534**
            **)**
            
            2,125Comprehensive
                income net of tax
            
            **$**
            **5,146**
            
            **$**
            15,626
            
            **$**
            **45,761**
            
            
            37,615




11




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





Income
      tax expense for the three and nine months ended September 30, 2007 was $9,985
      and $26,584, respectively, compared to $4,983 and $12,058 for the three and
      nine
      months ended September 30, 2006. The following table reconciles the Company’s
      statutory federal income tax rate to its effective tax rate.




**Three
                Months Ended**
              **September
                30,**
            
            **Nine
                Months Ended**
              **September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Income
                from continuing operations before provision for income taxes and
                minority
                interest
            
            **$**
            **30,301**
            
            **$**
            17,396
            
            **$**
            **91,675**
            
            $
            43,283Less:
                minority interest
            
            
            **(4,118**
            **)**
            
            -
            
            
            **(2,217**
            **)**
            
            -Income
                from continuing operations after minority interest before provision
                for
                income taxes
            
            $
            **34,419**
            
            $
            17,396
            
            **$**
            **93,892**
            
            $
            43,283Income
                taxes at statutory rates
            
            $
            **12,047**
            
            $
            6,045
            
            **$**
            **32,863**
            
            **$**
            15,237Effect
                of income not subject to US taxation
            
            
            **(2,982**
            **)**
            
            (1,062
            )
            
            **(5,972**
            **)**
            
            (3,179
            )Other,
                net
            
            
            **920**
            
            
            -
            
            
            **(307**
            **)**
            
            -Provision
                for income taxes as shown on the consolidated statements of
                earnings
            
            **$**
            **9,985**
            
            **$**
            4,983
            
            **$**
            **26,584**
            
            **$**
            12,058GAAP
                effective tax rate
            
            
            **29.0**
            **%**
            
            28.6
            %
            
            **28.3**
            **%**
            
            27.9
            %




We
      adopted FIN 48 on January 1, 2007. Under FIN 48, tax benefits are
      recognized only for tax positions that are more likely than not to be sustained
      upon examination by tax authorities. The amount recognized is measured as the
      largest amount of benefit that is greater than 50 percent likely to be realized
      upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed
      in
      tax returns that do not meet these recognition and measurement standards. The
      adoption did not have a material effect on the Company’s financial statements
      and we do not expect the change to have a significant impact on our results
      of
      operations or financial position during the next twelve months.




As
      permitted by FIN 48, the Company also adopted an accounting policy to
      prospectively classify accrued interest and penalties related to any
      unrecognized tax benefits in its income tax provision.  Previously, the
      Company’s policy was to classify interest and penalties as an operating expense
      in arriving at pre-tax income.  At September 30, 2007, the Company does not
      have accrued interest and penalties related to any unrecognized tax
      benefits.  The years subject to potential audit varies depending on the tax
      jurisdiction.  Generally, the Company’s statutes are open for tax years
      ended December 31, 2004 and forward.  The Company’s major taxing
      jurisdictions include the U.S. (federal and state), the United Kingdom and
      Ireland.





During
      2006, the Internal Revenue Service (“IRS”) completed an audit of the Company’s
      recently acquired subsidiaries, Associated Industries Insurance Services, Inc.
      (“AIIS”) and Associated Industries Insurance Company’s (“AIIC”) (collectively
“Associated”) (see Note 12. Acquisitions). 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 $1,200 for
      penalties and interest) and has reflected this position, per FIN 48 guidelines,
      in the consolidated financial statements.




12




**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. Additionally, the Company provided
      Warrantech with a $20,000 secured note due January 30, 2012 (note receivable
      -
      related party). Interest on the note is accrued 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. 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 premiums
      of
      approximately $24,000 during the nine months ended September 30, 2007. As the
      Company does not exhibit control over Warrantech, the Company accounts for
      this
      investment under the equity method. The Company recorded investment loss of
      approximately $217 and $432 from its equity investment for the three and nine
      months ended September 30, 2007, respectively. As of September 30, 2007 the
      carrying value of the note receivable was $20,540 (note receivable - related
      party).




**12.****Acquisitions**





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). The Company estimates the contingency period will
      last approximately one year at which time the Company 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.





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 2007. The preliminary purchase price allocation as of the date of
      acquisition is as follows:





AssetsInvestments
            
            **$**
            131,804Cash
            
            
            14,449Accounts
                receivable
            
            
            29,794Reinsurance
                recoverable
            
            
            168,480Deferred
                acquisition costs, net
            
            
            4,228Property
                and equipment
            
            
            1,689Goodwill
            
            
            3,720Intangibles
            
            
            10,210Deferred
                income taxes
            
            
            9,322Other
                assets
            
            
            14,865Total
                Assets
            
            $
            388,561LiabilitiesLoss
                and loss adjustment expenses
            
            $
            308,965Unearned
                premiums
            
            
            26,925Accounts
                payable and accrued expenses
            
            
            13,817Total
                Liabilities
            
            $
            349,707Total
                Purchase Price
            
            $
            38,854




13





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, 2006, are set forth below:





Three Months Ended
              September 30,
            
            Nine Months Ended
              September 30,2007
            
            2006
            
            2007
            
            2006Net
                earned premium
            
            $
            91,182
            
            $
            95,069
            
            $
            368,359
            
            $
            258,246Income
                from continuing operations
            
            
            18,433
            
            $
            13,881
            
            
            65,209
            
            
            33,820Income
                from continuing operations:per
                common share - basic
            
            $
            0.31
            
            $
            0.23
            
            $
            1.09
            
            $
            0.62per
                common share - diluted
            
            $
            0.30
            
            $
            0.23
            
            $
            1.08
            
            $
            0.62




In
      April 2007 the Company, through a subsidiary, acquired all the issued and
      outstanding stock of IGI Group, Ltd. (“IGI”), a United Kingdom specialty issuer.
      The acquisition should enable the Company to expand its presence in the United
      Kingdom through IGI’s distribution network and to leverage IGI’s experienced
      administration and claims handling capabilities. The results of operations
      have
      been included since the acquisition date. The Company recorded a preliminary
      purchase price of approximately $15,300, which included cash of $14,800 and
      approximately $500 of direct acquisition costs. The initial allocation of the
      purchase price resulted in goodwill and intangible assets of approximately
      $3,000 and $8,000, respectively. During the third quarter the purchase price
      was
      finalized and resulted in adjustment of good will and intangibles to
      approximately $4,000 and $7,000, respectively. The Company recorded intangibles
      primarily for trademarks and distribution networks. The trademark was determined
      to have an indefinite live and the remaining intangible asset lives were
      determined to have useful lives ranging between five and 20 years. The Company
      has not presented pro forma results of operations because this acquisition
      was
      not material to AmTrust’s consolidated results of operations.





**13.**  **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 will not have a material adverse effect on the Company’s financial
      position or results of operations.





**14.**  **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 AmTrust. 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
      Bermuda reinsurer.





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 Insurance Company Limited (“IGI”),
      net of commissions) and 40% of losses and (b) AII transfered 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, which after the first year would
      be
      subject to adjustment (up to a maximum of 32% and a minimum of 30%) based on
      the
      loss ratio of the ceded business. 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. The Company recorded approximately $40,054 of ceding
      commission during the third quarter of 2007 as a result of this
      transaction.





14




The
      following is the effect on the Company’s balance sheet as of September 30, 2007
      and the results of operations for the three months ended September 30, 2007
      related to reinsurance agreement with Maiden Insurance:





Assets
                and liabilities:Reinsurance
                recoverable
            
            $
            24,745Ceded
                reinsurance payable
            
            
            115,499Results
                of operations:Premium
                written - ceded
            
            $
            (190,801
            )Change
                in unearned premium - ceded
            
            
            127,835Earned
                premium - ceded
            
            
            (62,966
            )Ceding
                commission on premium written
            
            
            59,148Ceding
                commission – deferred
            
            
            (19,094
            )Cedng
                commission earned
            
            
            40,054





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.





AmTrust,
      through subsidiaries, has entered into a reinsurance brokerage agreement and
      an
      asset management agreement with Maiden Insurance, under which the Company
      receives a brokerage commission of 1.25% of reinsured premium and an annual
      asset management fee of 0.35% of assets under management, respectively. The
      Company recorded $2,400 of brokerage commission during the third quarter of
      2007.





*Leap
      Tide Transactions*





AmTrust
      Capital Management, Inc. (“ACM”), our wholly owned subsidiary, currently manages
      approximately $82,000 dollars of our assets.  These assets are held in a
      Bermuda managed account




ACM
      also
      serves as the Investment Manager of Leap Tide Partners, L.P., a domestic
      partnership, 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 ACM (the “Hedge
      Funds”).  To date, approximately $32,000 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 arms-length and did not violate our Code of Business Conduct and
      Ethics.





*Lease
      Agreement*





In
      June
      2002, the Company entered into a least agreement 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. The Company paid approximately $100 and $300 for the lease for the
      three months ended September 30, 2007 and 2006, respectively. At the time
      entering into the agreement, the Company was privately held and did not have
      an
      audit committee. The lease expires in August 2008 and the audit committee will
      review any potential renewal lease.





*Employment
      Relationship*





Barry
      Karfunkel, an analyst with a Company subsidiary, earned approximately $56 and
      $169 for the three and nine months ended September 30, 2006 and 2007,
      respectively. Barry Karfunkel is the son of Michael Karfunkel and the
      brother-in-law of Barry Zyskind.




**15.****Segments**




The
      Company currently operates three business segments, Workers’ Compensation
      Insurance; Specialty Risk and Extended Warranty Insurance; and Specialty
      Middle-Market Property and Casualty Insurance. The “Corporate & Other”
segment represents the activities of the holding company including interest
      income attributed to holding company assets 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. These operating segments
      are
      segments of the Company for which separate financial information is available
      and for which operating results are evaluated regularly by executive management
      in deciding how to allocate resources and in assessing performance.





15




The
      following tables summarize business segments as follows:




Workers’
                compensation
            
            
            Specialty risk
              and extended
              warranty
            
            
            Specialty
              middle-market
              property
                and
              casualty
              insurance
            
            
            Corporate
              and
                other
            
            
            TotalThree
                months ended September 30, 2007Gross
                premium written
            
            $
            67,377
            
            $
            76,186
            
            $
            49,699
            
            $
            -
            
            $
            193,262Earned
                premium
            
            
            52,387
            
            
            18,299
            
            
            11,104
            
            
            (2)
            
            
            81,788Ceding
                commission revenue – related party
            
            
            17,368
            
            
            8,576
            
            
            14,110
            
            
            -
            
            
            40,054Investment
                income and other revenues
            
            
            5,763
            
            
            3,191
            
            
            2,888
            
            
            (4,118
            )
            
            7,724Commission
                and fee revenue
            
            
            2,250
            
            
            3,131
            
            
            -
            
            
            2,525
            
            
            7,906Operating
                income from continuing operations
            
            
            20,280
            
            
            9,589
            
            
            4,504
            
            
            (1,378
            )
            
            32,995Interest
                expense
            
            
            1,003
            
            
            1,038
            
            
            579
            
            
            -
            
            
            2,650Income
                taxes
            
            
            5,656
            
            
            2,418
            
            
            1,169
            
            
            742
            
            
            9,985Income
                from continuing operations
            
            
            13,597
            
            
            6,207
            
            
            2,756
            
            
            1,874
            
            
            24,434Three
                months ended September 30, 2006Gross
                premium written
            
            $
            66,225
            
            $
            40,362
            
            $
            29,406
            
            $
            -
            
            $
            135,993Earned
                premium
            
            
            57,009
            
            
            16,894
            
            
            9,623
            
            
            -
            
            
            83,526Investment
                income and other revenues
            
            
            7,815
            
            
            2,280
            
            
            1,329
            
            
            159
            
            
            11,583Commission
                and fee revenue
            
            
            1,534
            
            
            1,345
            
            
            -
            
            
            -
            
            
            2,879Operating
                income from continuing operations
            
            
            13,426
            
            
            1,614
            
            
            3,134
            
            
            159
            
            
            18,333Interest
                expense
            
            
            964
            
            
            283
            
            
            163
            
            
            -
            
            
            1,410Income
                taxes
            
            
            3,609
            
            
            138
            
            
            1,187
            
            
            49
            
            
            4,983Income
                from continuing operations
            
            
            9,294
            
            
            981
            
            
            2,028
            
            
            110
            
            
            12,413




Workers’
                compensation
            
            Specialty risk
              and extended
              warranty
            
            Specialty
              middle-market
                property and
              casualty insurance
            
            Corporate
              and
                other
            
            TotalNine
                months ended September 30, 2007Gross
                premium written
            
            $
            235,479
            
            $
            193,457
            
            $
            164,018
            
            $
            -
            
            $
            592,954Earned
                premium
            
            
            183,507
            
            
            76,327
            
            
            71,069
            
            
            (3
            )
            
            330,900Ceding
                commission revenue – related party
            
            
            17,368
            
            
            8,576
            
            
            14,110
            
            
            -
            
            
            40,054Investment
                income and other revenues
            
            
            23,352
            
            
            10,207
            
            
            13,715
            
            
            (2,217
            )
            
            45,057Commission
                and fee revenue
            
            
            7,290
            
            
            6,626
            
            
            -
            
            
            2,772
            
            
            16,688Operating
                income from continuing operations
            
            
            53,629
            
            
            24,696
            
            
            19,705
            
            
            555
            
            
            98,585Interest
                expense
            
            
            3,078
            
            
            2,253
            
            
            1,654
            
            
            -
            
            
            6,985Income
                taxes
            
            
            14,306
            
            
            6,369
            
            
            5,122
            
            
            787
            
            
            26,584Income
                from continuing operations
            
            
            36,244
            
            
            16,075
            
            
            12,928
            
            
            2,061
            
            
            67,308Nine
                months ended September 30, 2006Gross
                premium written
            
            $
            194,695
            
            $
            85,546
            
            $
            92,762
            
            $
            -
            
            $
            373,003Earned
                premium
            
            
            156,488
            
            
            41,490
            
            
            27,792
            
            
            1
            
            
            225,771Investment
                income and other revenues
            
            
            19,474
            
            
            5,163
            
            
            3,459
            
            
            999
            
            
            29,095Commission
                and fee revenue
            
            
            5,152
            
            
            3,783
            
            
            -
            
            
            -
            
            
            8,935Operating
                income from continuing operations
            
            
            33,971
            
            
            6,010
            
            
            5,499
            
            
            999
            
            
            46,479Interest
                expense
            
            
            2,532
            
            
            671
            
            
            450
            
            
            -
            
            
            3,653Income
                taxes
            
            
            8,759
            
            
            1,614
            
            
            1,406
            
            
            279
            
            
            12,058Income
                from continuing operations
            
            
            23,265
            
            
            3,849
            
            
            3,640
            
            
            471
            
            
            31,225




16




Workers’
                compensation
            
            Specialty risk
              and extended
              warranty
            
            Specialty
              middle-market
                property and
              casualty
                insurance
            
            Corporate
              and
                other
            
            TotalAs
                of September 30, 2007Fixed
                assets
            
            $
            5,586
            
            $
            4,087
            
            $
            3,001
            
            $
            -
            
            $
            12,674Goodwill
                and intangible assets
            
            
            28,654
            
            
            13,204
            
            
            12,093
            
            
            -
            
            
            53,951Total
                assets
            
            
            1,192,890
            
            
            370,042
            
            
            621,678
            
            
            23,377
            
            
            2,207,987As
                of September 30, 2006Fixed
                assets
            
            $
            5,287
            
            $
            2,326
            
            $
            2,006
            
            $
            -
            
            $
            9,619Goodwill
                and intangible assets
            
            
            17,951
            
            
            6,168
            
            
            6,168
            
            
            -
            
            
            30,287Total
                assets
            
            
            769,446
            
            
            193,332
            
            
            114,955
            
            
            -
            
            
            1,077,733




17





**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
      acquisitions of access to distribution networks and renewal rights to
      established books of specialty insurance business. We have operations in three
      business segments:




·
            Workers’
                compensation for small businesses (average premium less than $5,000
                per
                policy) 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.





The
      Company transacts business through seven insurance company subsidiaries:
      Technology Insurance Company, Inc. (“TIC”), Rochdale Insurance Company (“RIC”),
      Wesco Insurance Company (“WIC”) and Associated Industries Insurance Company,
      Inc. (“AIIC”), which are domiciled in New Hampshire, New York, Delaware and
      Florida, respectively; and AmTrust International Insurance Ltd. (“AII”), AmTrust
      International Underwriters Limited (“AIU”) and IGI Insurance Company, Ltd.
      (“IGI”), which are domiciled in Bermuda, Ireland and England,
      respectively.





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 business workers’
compensation and specialty middle market segments has not been significant.
      We
      believe that this is because we serve many small businesses in different
      geographic locations. In addition, seasonality may have been muted by our
      acquisition activity.





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 represent 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 workers’ compensation 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 2006 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 34 months, but range in duration from one month to 60
      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.





18





*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 25.6% and 15.8%
      for
      the three months ended September 30, 2007 and 2006, respectively, and 24.8%
      and
      19.1% for the nine months ended September 30, 2007 and 2006, 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 74.6% and 91.6% for the three months ended September 30, 2007 and
      2006, respectively, and 85.9% and 92.4% for the nine months ended September
      30,
      2007 and 2006, respectively. The decline in the combined ratio period over
      period resulted primarily from entering into a reinsurance agreement with Maiden
      Insurance during 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.





**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, 2006.




19




**Results
      of Operations**





**Consolidated
      Results of Operations (Unaudited)**




Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Gross
                premium written
            
            $
            193,262
            
            $
            135,993
            
            $
            592,954
            
            $
            373,003Net
                premium written
            
            $
            (30,717
            )
            $
            105,599
            
            $
            293,424
            
            $
            314,343Change
                in unearned premium
            
            
            112,505
            
            
            (22,073
            )
            
            (37,476
            )
            
            (88,572
            )Net
                earned premium
            
            
            81,788
            
            
            83,526
            
            
            330,900
            
            
            225,771Ceding
                commission – related party
            
            
            40,054
            
            
            -
            
            
            40,054
            
            
            -Commission
                and fee income
            
            
            7,906
            
            
            2,879
            
            
            16,688
            
            
            8,935Net
                investment income
            
            
            13,916
            
            
            7,539
            
            
            38,326
            
            
            18,960Net
                realized gain (loss) on investments
            
            
            (2,074
            )
            
            4,044
            
            
            8,948
            
            
            10,135Other
                investment income (loss) on managed assets
            
            
            (4,118
            )
            
            -
            
            
            (2,217
            )
            
            -Total
                revenue
            
            
            137,472
            
            
            97,988
            
            
            432,699
            
            
            263,801Loss
                and loss adjustment expense
            
            
            52,141
            
            
            55,350
            
            
            211,697
            
            
            146,008Policy
                acquisition expenses
            
            
            27,619
            
            
            10,635
            
            
            59,649
            
            
            27,107Salaries
                and benefits
            
            
            12,913
            
            
            8,014
            
            
            31,846
            
            
            19,746Other
                insurance general and administrative expense
            
            
            8,292
            
            
            2,550
            
            
            20,870
            
            
            15,588Other
                underwriting expenses
            
            
            3,512
            
            
            3,106
            
            
            10,052
            
            
            8,873104,477
            
            
            79,655
            
            
            334,114
            
            
            217,322Operating
                income from continuing operations
            
            
            32,995
            
            
            18,333
            
            
            98,585
            
            
            46,479Other
                income (expense):Foreign
                currency gain (loss)
            
            
            (44
            )
            
            473
            
            
            75
            
            
            457Interest
                expense
            
            
            (2,650
            )
            
            (1,410
            )
            
            (6,985
            )
            
            (3,653
            )Total
                other expense
            
            
            (2,694
            )
            
            (937
            )
            
            (6,910
            )
            
            (3,196
            )Income
                from continuing operations before provision for income taxes and
                minority
                interest
            
            
            30,301
            
            
            17,396
            
            
            91,675
            
            
            43,283Provision
                for income taxes
            
            
            9,985
            
            
            4,983
            
            
            26,584
            
            
            12,058Minority
                interest in net loss of subsidiary
            
            
            (4,118
            )
            
            -
            
            
            (2,217
            )
            
            -Net
                income from continuing operations
            
            $
            24,434
            
            $
            12,413
            
            $
            67,308
            
            $
            31,225Gain
                from discontinued operations
            
            
            -
            
            
            
            
            
            -
            
            
            250Net
                income
            
            $
            24,434
            
            $
            12,413
            
            $
            67,308
            
            $
            31,475Key
                Measures:Net
                loss ratio
            
            
            63.9
            %
            
            66.3
            %
            
            64.0
            %
            
            64.7
            %Net
                expense ratio
            
            
            10.7
            %
            
            25.4
            %
            
            21.9
            %
            
            27.7
            %Net
                combined ratio
            
            
            74.6
            %
            
            91.7
            %
            
            85.9
            %
            
            92.4
            %





***Consolidated
      Result of Operations for the Three Months Ended September 30, 2007
      and******2006***





*Gross
      Premium Written* .
      Gross
      premium written increased $57.3 million or 42.1% from $136.0 million to $193.3
      million for the three months ended September 30, 2006 and 2007, respectively.
      The increase of $57.3 million was attributable to a $1.2 million increase in
      our
      small business workers’ compensation business, a $35.8 million increase in our
      specialty risk and extended warranty business and a $20.3 million increase
      in
      our specialty middle-market property and casualty business. The increase in
      the
      specialty middle-market gross premiums written resulted, primarily, from the
      underwriting of new programs and the growth of existing programs. 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
      as well as the acquisition of IGI in the second quarter of 2007, which
      contributed $24.8 million of premiums.





20





*Net
      Premium Written* .
      Net
      premium written decreased $136.3 million or (129.1%) from $105.6 million to
      $(30.7) million for the three months ended September 30, 2006 and 2007,
      respectively. The decrease of $136.3 million was net of $190.8 million of
      written premium ceded to Maiden Insurance during the third quarter of 2007
      under
      the terms of a reinsurance agreement entered into during the third quarter
      of
      2007. Before cessions to Maiden Insurance, net written premium increased $54.5
      million in the third quarter of 2007 compared to the third quarter of 2006.
      The
      increase before cessions by segment was: small business workers’ compensation -
      $2.2 million; specialty risk and extended warranty - $37.3 million; and
      specialty middle market property and casualty - $15.0 million.





*Net
      Premium Earned* .
      Net
      premium earned decreased $1.7 million or (2.1%) from $83.5 million for the
      three
      months ended September 30, 2006 to $81.8 million for the three months ended
      September 30, 2007. The decrease of $1.7 million was net of earned premium
      ceded
      to Maiden Insurance during the third quarter of 2007 under the terms of a
      reinsurance agreement entered into during the third quarter of 2007. Before
      cessions to Maiden Insurance, earned premium increased $61.2 million in the
      third quarter of 2007 compared to the third quarter of 2006. The increase by
      segment before cessions was: small business workers’ compensation - $15.6
      million; specialty risk and extended warranty - $27.4 million; and specialty
      middle market property and casualty - $18.2 million.





*Commission
      and*  *Fee
      Income.* Commission and fee income increased $5.0 million or 174.6% from $2.9 million
      to
      $7.9 million for the three months ended September 30, 2006 and 2007,
      respectively. A majority of the increase resulted from entering into a
      reinsurance agreement with Maiden Insurance whereby the Company earned
      reinsurance brokerage fees.





*Net
      Investment Income.* Net
      investment income increased $6.4 million or 84.6% from $7.5 million to $13.9
      million for the three months ended September 30, 2006 and 2007, respectively.
      The increase resulted from increased invested assets. Average invested assets
      (excluding equity securities) was approximately $1.02 billion for the three
      months ended September 30, 2007 compared to approximately $612 million for
      the
      three months ended September 30, 2006, an increase of $410 million or 67.0%.
      In
      addition, yields on the Company’s fixed maturities have increased over the same
      time period from 4.9% to 5.4%.





*Net
      Realized Gains (Losses) on Investments.* Net
      realized losses on investments for the three months ended September 30, 2007
      were $(2.1) million, compared to a gain of $4.0 million for the same period
      in
      2006. The decrease related to the timing of certain sales of underperforming
      investments of the Company’s equity portfolio and the write-down of two equity
      securities of $3.4 million that were determined to be other than temporarily
      impaired during the third quarter of 2007.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $3.2 million or 5.8% from $55.3 million
      for
      the three months ended September 30, 2006 to $52.1 million for the three months
      ended September 30, 2007. The Company’s loss ratio for the three months ended
      September 30, 2007 decreased to 63.9% from 66.3% for the three months ended
      September 30, 2006. The decrease resulted from a decrease in the Company’s
      actuarially projected ultimate losses based on the Company’s 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 $12.4 million or 58.6%
      from $21.2 million for the three months ended September 30, 2006 to $8.8 million
      for the three months ended September 30, 2007. The expense ratio for the same
      periods decreased from 25.4% to 10.7%, respectively. The decrease in expense
      ratio resulted primarily from ceding commission of $40.1 million earned through
      the reinsurance agreement with Maiden Insurance during the third quarter of
      2007.





*Operating
      Income from Continuing Operations.* Income
      from continuing operations increased $14.7 million or 80.0% from $18.3 million
      to $33.0 million for the three months ended September 30, 2006 and 2007,
      respectively. This increase is attributable to strong growth in gross premium
      written, commission and fee income and investment income combined with an
      improvement in the net expense ratio which resulted from the reinsurance
      agreement with Maiden Insurance entered into the third quarter of
      2007.





*Interest
      Expense.*Interest
      expense for the three months ended September 30, 2007 was $2.7 million, compared
      to $1.4 million for the same period in 2006. The increase was primarily
      attributable to interest expense on $40.0 million of junior subordinated
      debentures issued by the Company in the first quarter of
      2007.





*Income
      Tax Expense (Benefit).* Income
      tax expense for three months ended September 30, 2007 was $10.0 million which
      resulted in an effective tax rate of 29.0%. Income tax expense for three months
      ended September 30, 2006 was $5.0 million which resulted in an effective tax
      rate of 28.6%.





21





***Consolidated
      Result of Operations for the Nine Months Ended September 30, 2007
      and***  ***2006***





*Gross
      Premium Written* .
      Gross
      premium written increased $220.0 million or 59.0% from $373.0 million for the
      nine months ended September 30, 2006 to $593.0 million for the nine months
      ended
      September 30, 2007. The increase was attributable to a $40.7 million increase
      in
      our small business workers’ compensation business, a $108.0 million increase in
      our specialty risk and extended warranty business and a $71.3 million increase
      in our specialty middle-market property and casualty business. The increase
      in
      the Small Business Workers’ Compensation segment related primarily to
      $19.1 million of additional premiums resulting from the acquisition from
      Muirfield Underwriters, Ltd. of its distribution network and the renewal rights
      to its existing business during the second quarter of 2006 and $17.0 million
      from organic growth. 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 $40.3 million of premiums. 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 $20.9 million or (6.7%) from $314.3 million to $293.4
      million for the nine months ended September 30, 2006 and 2007, respectively.
      The
      decrease of $20.9 million was net of $190.8 million of written premium ceded
      to
      Maiden Insurance during the third quarter of 2007 under the terms of a
      reinsurance agreement entered into during the third quarter of 2007. Before
      cessions to Maiden Insurance, net written premium increased $169.9 million
      for
      the nine months ended September 30, 2007 compared to the nine months ended
      ended
      September 30, 2006. The increase before cessions by segment was: small business
      workers’ compensation - $40.5 million; specialty risk and extended warranty -
      $90.7 million; and specialty middle market property and casualty - $38.7
      million.





*Net
      Premium Earned* .
      Net
      premium earned increased $105.1 million or 46.6% from $225.8 million for the
      nine months ended September 30, 2006 to $330.9 million for the nine months
      ended
      September 30, 2007. The increase of $105.1 million was net of earned premium
      ceded to Maiden Insurance during the third quarter of 2007 under the terms
      of a
      reinsurance agreement entered into during the third quarter of 2007. Before
      cessions to Maiden Insurance, earned premium increased $168.1 million for the
      nine months ended September 30, 2007 compared to the nine months ended September
      30, 2007 in the third quarter of 2007. The increase by segment before cessions
      was: small business workers’ compensation - $47.2 million; specialty risk and
      extended warranty - $60.8 million; and specialty middle market property and
      casualty - $60.1 million.





*Commission
      and*  *Fee
      Income.* Commission and fee income increased $7.8 million or 86.8% from $8.9 million
      to
      $16.7 million for the nine months ended September 30, 2006 and 2007,
      respectively. The increase resulted from contract awarded to the Company,
      effective January 1, 2007, to administer a portion of the Virginia Workers’
Compensation Insurance Plan, reinsurance brokerage fees earned from Maiden
      Insurance during the third quarter of 2007 and fees for warranty administration
      from specialty risk and extended warranty customers for which a subsidiary
      of
      the Company acts as warranty administrator.





*Net
      Investment Income.* Net
      investment income increased $19.3 million or 102.1% from $19.0 million to $38.3
      million for the nine months ended September 30, 2006 and 2007, respectively.
      The
      increase resulted from an increase of average invested assets. Average invested
      assets (excluding equity securities) were approximately $821.6 million for
      the
      nine months ended September 30, 2007 compared to approximately $519.3 million
      for the nine months ended September 30, 2006, an increase of $302.3 million
      or
      58.3%. In addition, yields on the Company’s fixed maturities have increased over
      the same time period from 4.9% to 6.2%.





*Net
      Realized Gains on Investments.* Net
      realized gains on investments for the nine months ended September 30, 2007
      were
      $8.9 million, compared to $10.1 million for the same period in 2006. The
      decrease relates to a write-down of $3.4 million of investments in the
      third quarter of 2007 offset by an increase in the average assets held
      in our equity portfolio during the period and the realization of gains on
      certain value stocks in the portfolio due to active portfolio
      management.




*Loss
      and Loss Adjustment Expenses.*Loss and
      loss adjustment expenses increased $65.7 million or 45.0% from $146.0 million
      for the nine months ended September 30, 2006 to $211.7 million for the nine
      months ended September 30, 2007. The Company’s loss ratio for the nine months
      ended September 30, 2007 decreased to 64.0% from 64.7% for the nine months
      ended
      September 30, 2006. The Company’s overall loss ratio had remained relatively
      consistent over the periods.




*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 $9.9 million or
      15.8% from $62.4 million for the nine months ended September 30, 2006 to $72.3
      million for the nine months ended September 30, 2007. Despite the increase,
      the
      expense ratio for the same periods decreased from 27.7% to 21.9%, respectively.
      The decrease in expense ratio resulted primarily from ceding commissions of
      $40.1 million earned through the reinsurance agreement with Maiden Insurance
      during the third quarter of 2007.




22





*Operating
      Income from Continuing Operations.* Income
      from continuing operations increased to $98.6 million for the nine months ended
      September 30, 2007, from $46.5 million for the nine months ended September
      30,
      2006, an increase of $52.1 million or 112.1%. This increase is attributable
      to
      strong growth in gross premium written combined with a consistent loss ratio
      and
      an improvement in the net expense ratio.





*Interest
      Expense.* Interest
      expense for the nine months ended September 30, 2007 was $7.0 million, compared
      to $3.7 million for the same period in 2006. The increase was primarily
      attributable to interest expense on $30.0 million and $40.0 million of junior
      subordinated debentures issued by the Company in July, 2006 and March,
      2007, respectively.





*Income
      Tax Expense (Benefit).* Income
      tax expense for nine months ended September 30, 2007 was $26.6 million resulting
      in an effective tax rate of 28.3%. Income tax expense for nine months ended
      September 30, 2006 was $12.1 million which resulting in an effective tax rate
      of
      27.9%.





**Small
      Business Workers’ Compensation Segment (Unaudited)**




Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Gross
                premium written
            
            $
            67,377
            
            $
            66,225
            
            $
            235,479
            
            $
            194,695Net
                premium written
            
            
            68
            
            
            58,187
            
            
            152,994
            
            
            172,783Change
                in unearned premium
            
            
            52,319
            
            
            (1,178
            )
            
            30,513
            
            
            (16,295
            )Net
                premium earned
            
            
            52,387
            
            
            57,009
            
            
            183,507
            
            
            156,488Ceding
                commission revenue
            
            
            17,368
            
            
            -
            
            
            17,368
            
            
            -Loss
                and loss adjustment expense
            
            
            31,516
            
            
            35,228
            
            
            111,897
            
            
            94,529Policy
                acquisition expenses
            
            
            11,924
            
            
            9,042
            
            
            30,608
            
            
            22,970Salaries
                and benefits
            
            
            4,459
            
            
            5,321
            
            
            14,691
            
            
            13,526Other
                insurance general and administrative expense
            
            
            8,412
            
            
            1,909
            
            
            15,321
            
            
            11,02856,311
            
            
            51,500
            
            
            172,517
            
            
            142,053Net
                premiums earned less expenses included in combined ratio
            
            $
            13,444
            
            $
            5,509
            
            $
            28,358
            
            $
            14,435Key
                Measures:Net
                loss ratio
            
            
            60.2
            %
            
            61.8
            %
            
            61.0
            %
            
            60.4
            %Net
                expense ratio
            
            
            14.2
            %
            
            28.5
            %
            
            23.6
            %
            
            30.4
            %Net
                combined ratio
            
            
            74.3
            %
            
            90.3
            %
            
            84.5
            %
            
            90.8
            %





***Small
      Business Workers’ Compensation Segment Results of Operations for the Three
      Months Ended September 30, 2007 and 2006***





*Gross
      Premium Written* .
      Gross
      premium written increased $1.2 or 1.7% from $66.2 million for the three months
      ended September 30, 2006 to $67.4 million for the three months ended September
      30, 2007. On an overall basis, gross premium written was relatively flat as
      both
      premium rates and policies issued were consistent with the prior
      period.





*Net
      Premium Written* .
      Net
      premium written decreased $58.1 million or (99.9%) from $58.2 million to $0.1
      million for the three months ended September 30, 2006 and 2007, respectively.
      The decrease of $58.1 million was net of $60.3 million of premium written ceded
      to Maiden Insurance during the third quarter of 2007 under the terms of a
      reinsurance agreement entered into during the third quarter of 2007. Before
      cessions to Maiden Insurance, net premium written increased $2.2 million in
      the
      third quarter of 2007 compared to the third quarter of 2006. The increase of
      $2.2 million resulted from gross premium written being consistent period over
      period.





*Net
      Premium Earned* .
      Net
      premium earned decreased $4.6 million or (8.1%) from $57.0 million for the
      three
      months ended September 30, 2006 to $52.4 million for the three months ended
      September 30, 2007. The decrease of $4.6 million was net of earned premium
      of
      $20.2 million ceded to Maiden Insurance during the third quarter of 2007. Before
      cessions to Maiden Insurance, earned premium increased $15.6 million in the
      third quarter of 2007 compared to the third quarter of 2006. This increase
      was a
      result of the premium in the preceeding twelve months being greater than the
      twelve months preceding September30, 2006..




23




*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $3.7 million or 10.5% from $35.2 million
      for
      the three months ended September 30, 2006 to $31.5 million for the three months
      ended September 30, 2007. The Company’s loss ratio for the segment for the three
      months ended September 30, 2007 decreased to 60.2% from 61.8% for the three
      months ended September 30, 2006. The overall loss ratio had remained relatively
      consistent over the periods.





*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 $8.9 million or
      (54.4%) from $16.3 million for the three months ended September 30, 2006 to
      $7.4
      million for the three months ended September 30, 2007. The expense ratio
      decreased from 28.5% for the three months ended September 30, 2006 to 14.2%
      for
      the three months ended September 30, 2007. The decrease in expense ratio
      resulted primarily from ceding commissions of $17.4 million earned through
      the
      reinsurance agreement with Maiden Insurance during the third quarter of 2007
      offset by increased salary expense.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $7.9
      million or 144.0% from $5.5 million for the three months ended September 30,
      2006 to $13.4 million for the three months ended September 30, 2006. This
      increase is attributable to strong growth in gross written premium combined
      with
      improvements in the expense ratio attributable to ceding commission from Maiden
      Insurance during the third quarter of 2007.





***Small
      Business Workers’ Compensation Segment Results of Operations for the Nine Months
      Ended September 30, 2007 and 2006***





*Gross
      PremiumWritten.* Gross
      premium written increased $40.8 million or 20.9% from $194.7 million for the
      nine months ended September 30, 2006 to $235.5 million for the nine months
      ended
      September 30, 2007. The increase in the Small Business Workers’
Compensation segment related primarily to $19.1 million of additional premiums
      resulting from the acquisition from Muirfield Underwriters, Ltd. of its
      distribution network and $17.1 million from organic growth.




*Net
      Premium Written* .
      Net
      premium written decreased $19.8 million or (11.5%) from $172.8 million to $153.0
      million for the nine months ended September 30, 2006 and 2007, respectively.
      The
      decrease of $19.8 million was net of $60.3 million of written premium ceded
      to
      Maiden Insurance during the third quarter of 2007 under the terms of a
      reinsurance agreement entered into during the third quarter of 2007. Before
      cessions to Maiden Insurance, net written premium increased $40.5 million for
      the nine months ended September 30, 2007 compared to the nine months ended
      September 30, 2006. The increase of $40.5 million resulted from an increase
      in
      gross premium written in 2007.





*Net
      Premium Earned*.
      Net
      premium earned increased $27.0 million or 17.3% from $156.5 million for the
      nine
      months ended September 30, 2006 to $183.5 million for the nine months ended
      September 30, 2007. The increase of $27.0 million was net of earned premium
      ceded to Maiden Insurance during the third quarter of 2007. Before cessions
      to
      Maiden Insurance, earned premium increased $47.2 million for the nine months
      ended September 30, 2007 compared to the nine months ended September 30, 2006.
      This increase was a result of an increase in gross premium
      written.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses increased $17.4 million or 18.4% from $94.5 million
      for
      the nine months ended September 30, 2006 to $111.9 million for the nine months
      ended September 30, 2007. The Company’s loss ratio for the segment for the nine
      months ended September 30, 2007 increased to 61.0% from 60.4% for the nine
      months ended September 30, 2006. The overall loss ratio had remained relatively
      consistent over the periods.




*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 $4.3 million or
      (9.0%) from $47.5 million for the nine months ended September 30, 2006 to $43.2
      million for the nine months ended September 30, 2007. The expense ratio
      decreased from 30.4% for the nine months ended September 30, 2006 to 23.6%
      for
      the nine months ended September 30, 2007. The decrease in expense ratio resulted
      primarily from ceding commission of $17.4 million earned from the reinsurance
      agreement with Maiden Insurance during the third quarter of 2007.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $13.9
      or
      96.5% from $14.4 million for the nine months ended September 30, 2006 to $28.4
      million for the nine months ended September 30, 2006. This increase is
      attributable to strong growth in revenue combined with improvements in the
      expense ratio.





24





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




**Three
                Months Ended****September
                30,**
            
            **Nine
                Months Ended****September
                30,****2007**
            
            **2006**
            
            **2007**
            
            **2006**Gross
                premium written
            
            $
            76,186
            
            $
            40,362
            
            $
            193,457
            
            $
            85,546Net
                premium written
            
            
            (19,266
            )
            
            28,178
            
            
            71,536
            
            
            65,557Change
                in unearned premium
            
            
            37,565
            
            
            (11,284
            )
            
            4,791
            
            
            (24,067
            )Net
                premium earned
            
            
            18,299
            
            
            16,894
            
            
            76,327
            
            
            41,490Ceding
                commission
            
            
            8,576
            
            
            -
            
            
            8,576
            
            
            -Loss
                and loss adjustment expense
            
            
            13,630
            
            
            13,783
            
            
            55,642
            
            
            34,458Policy
                acquisition expenses
            
            
            4,802
            
            
            -
            
            
            7,196
            
            
            -Salaries
                and benefits
            
            
            5,424
            
            
            1,981
            
            
            9,510
            
            
            4,010Other
                insurance general and administrative expense
            
            
            (1,749
            )
            
            516
            
            
            231
            
            
            2,17522,107
            
            
            16,280
            
            
            72,579
            
            
            40,643Net
                premiums earned less expenses included in combined ratio
            
            $
            4,768
            
            $
            614
            
            $
            12,324
            
            $
            847Key
                Measures:Net
                loss ratio
            
            
            74.5
            %
            
            81.6
            %
            
            72.9
            %
            
            83.1
            %Net
                expense ratio
            
            
            (0.5)
            %
            
            14.8
            %
            
            11.0
            %
            
            14.9
            %Net
                combined ratio
            
            
            73.9
            %
            
            96.4
            %
            
            83.9
            %
            
            98.0
            %




***Specialty
      Risk and Extended Warranty Segment Results of Operations for the Three Months
      Ended September 30, 2007 and***  ***2006***





*Gross
      Premium Written* .
      Gross
      premium written increased $35.8 million or 88.8% from $40.4 million for the
      three months ended September 30, 2006 to $76.2 million for the three months
      ended September 30, 2007. The increase in premium 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 $24.8 million of premiums
      in the third quarter of 2007.




*Net
      Premium Written*.
      Net
      premium written decreased $47.4 million or (168.4%) from $28.1 million to
      $(19.3) million for the three months ended September 30, 2006 and 2007,
      respectively. The decrease of $47.4 million was net of $84.7 million of written
      premium ceded to Maiden Insurance during the third quarter of 2007 under the
      terms of a reinsurance agreement entered into during the third quarter of 2007.
      Before cessions to Maiden Insurance, net written premium increased $37.2 million
      in the third quarter of 2007 compared to the third quarter of 2006. The increase
      of $37.2 million resulted from an increase in gross premiums written in
      2007.





*Net
      Premium Earned* .
      Net
      premiums earned increased $1.4 million or 8.3% from $16.9 million for the three
      months ended September 30, 2006 to $18.3 million for the three months ended
      September 30, 2007. The increase of $1.4 million was net of earned premium
      ceded
      to Maiden Insurance during the third quarter of 2007. Before cessions to Maiden
      Insurance, earned premium increased $27.4 million in the third quarter of 2007
      compared to the third quarter of 2006. The increase was a result of an increase
      in gross written premium in 2007.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses decreased $0.2 million or 1.1% from $13.8 million
      for
      the three months ended September 30, 2006 to $13.6 million for the three months
      ended September 30, 2007. The loss ratio for the segment for the three months
      ended September 30, 2007 decreased to 74.5% from 81.6% for the three months
      ended September 30, 2006. The decrease is primarily the result of the Company
      discontinuing a 2006 program from its European book of business.





*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 $2.6 million or
      (104.0%) from $2.5 million for the three months ended September 30, 2006 to
      $(0.1) million for the three months ended September 30, 2007. The expense ratio
      decreased from 14.8% for the three months ended September 30, 2006 to (0.5%)
      for
      the three months ended September 30, 2007. The decrease in expense ratio
      resulted primarily from ceding commissions of $8.6 million earned through the
      reinsurance agreement with Maiden Insurance during the third quarter of 2007
      offset by increased salary expense.




25





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $4.2
      million from $0.6 million for the three months ended September 30, 2006 to
      $4.8
      million for the three months ended September 30, 2007. This increase is
      attributable to strong growth in gross premium written combined with
      improvements in the expense ratio attributable from ceded commission from Maiden
      Insurance during the third quarter of 2007.





***Specialty
      Risk and Extended Warranty Segment Results of Operations for the Nine Months
      Ended September 30, 2007 and***  ***2006***





*Gross
      Premium Written* .
      Gross
      premium written increased $108.0 million or 126.1% from $85.5 million for the
      nine months ended September 30, 2006 to $193.5 million for the nine months
      ended
      September 30, 2007. The increase in premium 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 $40.3
      million of premiums.




*Net
      Premium Written* .
      Net
      premium written increased $5.9 million or 9.1% from $65.6 million to $71.5
      million for the nine months ended September 30, 2006 and 2007, respectively.
      The
      increase of $5.9 million was net of $84.7 million of written premium ceded
      to
      Maiden Insurance during the third quarter of 2007 under the terms of a
      reinsurance agreement entered into during the third quarter of 2007. Before
      cessions to Maiden Insurance, net written premium increased $90.6 million for
      the nine months ended September 30, 2007 compared to the nine months ended
      September 30, 2006. The increase of $90.6 million resulted from an increase
      in
      gross premiums written in 2007.





*Net
      Premium Earned* .
      Net
      premium earned increased $34.8 million or 84.0% from $41.5 million for the
      nine
      months ended September 30, 2006 to $76.3 million for the nine months ended
      September 30, 2007. The increase of $34.8 million was net of earned premium
      ceded to Maiden Insurance during the third quarter of 2007. Before cessions
      to
      Maiden Insurance, earned premium increased $60.8 million for the nine months
      ended September 30, 2007 compared to September 30, 2006. This increase was
      a
      result of an increase in gross premium written.





*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses increased $21.1 million or 61.5% from $34.5 million
      for
      the nine months ended September 30, 2006 to $55.6 million for the nine months
      ended September 30, 2007. The loss ratio for the segment for the nine months
      ended September 30, 2007 decreased to 72.9% from 83.1% for the nine months
      ended
      September 30, 2006. The decrease is primarily the result of the Company
      discontinuing a 2006 program from its European book of business.




*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 $2.2 million from
      $6.2 million for the nine months ended September 30, 2006 to $8.4 million for
      the nine months ended September 30, 2007. The expense ratio for the same periods
      decreased from 14.9% to 11.0%, respectively. The decrease in expense ratio
      resulted primarily from ceding commission of $8.6 million earned through the
      reinsurance agreement with Maiden Insurance during the third quarter of 2007.




*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).*Net premiums earned less expenses included in combined ratio increased $11.5
      million from $0.8 million for the nine months ended September 30, 2006 to $12.3
      million for the nine months ended September 30, 2007. This increase is
      attributable to growth in revenue and an improvement in the loss ratio and
      expense ratio.





26




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





Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Gross
                premium written
            
            $
            49,699
            
            $
            29,406
            
            $
            164,018
            
            $
            92,762Net
                premium written
            
            
            (11,516
            )
            
            19,234
            
            
            68,897
            
            
            76,003Change
                in unearned premium
            
            
            22,620
            
            
            (9,611
            )
            
            2,172
            
            
            (48,211
            )Net
                premiums earned
            
            
            11,104
            
            
            9,623
            
            
            71,069
            
            
            27,792Ceding
                commission
            
            
            14,110
            
            
            -
            
            
            14,110
            
            
            -Loss
                and loss adjustment expense
            
            
            7,086
            
            
            6,338
            
            
            44,246
            
            
            17,020Policy
                acquisition expenses
            
            
            10,893
            
            
            1,593
            
            
            21,845
            
            
            4,137Salaries
                and benefits
            
            
            3,030
            
            
            712
            
            
            7,644
            
            
            2,211Other
                insurance general and administrative expense
            
            
            1,628
            
            
            124
            
            
            5,318
            
            
            2,38522,637
            
            
            8,767
            
            
            79,053
            
            
            25,753Net
                premiums earned less expenses included in combined ratio
            
            $
            2,577
            
            $
            856
            
            $
            6,126
            
            $
            2,039Key
                Measures:Net
                loss ratio
            
            
            63.8
            %
            
            65.9
            %
            
            62.3
            %
            
            61.2
            %Net
                expense ratio
            
            
            13.0
            %
            
            25.2
            %
            
            29.1
            %
            
            31.4
            %Net
                combined ratio
            
            
            76.8
            %
            
            91.1
            %
            
            91.4
            %
            
            92.7
            %





***Specialty
      Middle Market Segment Result of Operations for the Three Months Ended September
      30, 2007 and***  ***2006***





*Gross
      Premium Written* .
      Gross
      premium increased $20.3 million or 69.0% from $29.4 million for the three months
      ended September 30, 2006 to $49.7 million for the three months ended September
      30, 2007. The increase related primarily to $13.5 million from other liability
      production and $6.2 million from commercial automobile liability.





*Net
      Premium Written* .
      Net
      premium decreased $30.7 million or 159.9% from $19.2 million for the three
      months ended September 30, 2006 to $(11.5) million for the three months ended
      September 30, 2007. The decrease of $30.7 million was net of $45.8 million
      of
      written premium ceded to Maiden Insurance during the third quarter of 2007
      under
      the terms of a reinsurance agreement entered into during the third quarter
      of
      2007. Before cessions to Maiden Insurance, net written premium increased $15.0
      million in the third quarter of 2007 compared to the third quarter of 2006.
      The
      increase of $15.0 million resulted from an increase in gross premiums written
      in
      2007.





*Net
      Premium Earned* .
      Net
      premium earned increased $1.5 million or 15.4% from $9.6 million for the three
      months ended September 30, 2006 to $11.1 million for the three months ended
      September 30, 2007. The increase of $1.5 million was net of earned premium
      ceded
      to Maiden Insurance during the third quarter of 2007. Before cessions to Maiden
      Insurance, earned premium increased $18.2 million in the third quarter of 2007
      compared to the third quarter of 2006. This increase was a result of an increase
      in gross premium written.




*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses increased $0.7 million or 11.8% from $6.3 million
      for
      the three months ended September 30, 2006 compared to $7.1 million for the
      three
      months ended September 30, 2007. The loss ratio for the segment decreased for
      the three months ended September 30, 2007 to 63.8% from 65.9% for the three
      months ended September 30, 2006. The decrease resulted from a decrease in the
      Company’s actuarially projected ultimate losses based on the Company’s 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 $1.0 million or
      (40.7%) from $2.4 million for the three months ended September 30, 2006 to
      $1.4
      million for the three months ended September 30, 2007. The expense ratio
      decreased from 25.2% for the three months ended September 30, 2006 to 13.0%
      for
      the three months ended September 30, 2007. The decrease in expense ratio
      resulted primarily from ceding commission of $14.1 million earned through the
      reinsurance agreement with Maiden Insurance during the third quarter of 2007
      offset by increased salary expense.




27





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).*Net premiums earned less expenses included in combined ratio were $2.6 million
      and $0.9 million for the three months ended September 30, 2007 and 2006,
      respectively. This increase is attributable to growth in gross premium written
      and improvements in the expense ratio.





***Specialty
      Middle Market Segment Result of Operations for the Nine Months Ended September
      30, 2007 and***  ***2006***





*Gross
      Premium Written* .
      Gross
      premium increased $71.3 million or 76.8% from $92.8 million for the nine months
      ended September 30, 2006 to $164.0 million for the nine months ended September
      30, 2007. The increase resulted primarily from commercial automobile and other
      liability. In addition, the increase includes $8.4 million in gross premiums
      written which is fully reinsured by HSBC Insurance Company of Delaware pursuant
      to an agreement entered into in connection with the Company’s acquisition of
      Wesco Insurance Company in September 2006.





*Net
      Premium Written* .
      Net
      premium decreased $7.1 million or (9.3%) from $76.0 million to $68.9 million
      for
      the nine months ended September 30, 2006 and September 30, 2007, respectively.
      The decrease of $7.1 million was net of $45.8 million of written premium ceded
      to Maiden Insurance during the third quarter of 2007 under the terms of a
      reinsurance agreement entered into during the third quarter of 2007. Before
      cessions to Maiden Insurance, net written premium increased $38.7 million in
      the
      third quarter of 2007 compared to the third quarter of 2006. The increase of
      $38.7 million resulted from an increase in gross premiums written in
      2007.





*Net
      Premium Earned* .
      Net
      premium earned increased $43.3 million or 155.7% from $27.8 million for the
      nine
      months ended September 30, 2006 to $71.1 million for the nine months ended
      September 30, 2007. The increase of $43.2 million was net of earned premium
      ceded to Maiden Insurance during the third quarter of 2007. Before cessions
      to
      Maiden Insurance, earned premium increased $61.3 million for the nine months
      ended September 30, 2007 compared to the nine months ended September 30, 2006.
      This increase was a result of an increase in gross premium written.




*Loss
      and Loss Adjustment Expenses.* Loss and
      loss adjustment expenses increased $27.2 million or 160.0% from $17.0 million
      for the nine months ended September 30, 2006 compared to $44.2 million for
      the
      nine months ended September 30, 2007. The loss ratio for the segment increased
      for the nine months ended September 30, 2007 to 62.3% from 61.2% for the nine
      months ended September 30, 2006. The increase resulted from an increase in
      the
      Company’s actuarially projected ultimate losses based on the Company’s 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 $12.0 million or
      137.0% from $8.7 million for the nine months ended September 30, 2006 to $20.7
      million for the nine months ended September 30, 2007. The expense ratio
      decreased from 31.4% for the nine months ended September 30, 2006 to 29.1%
      for
      the nine months ended September 30, 2007. The decrease in expense ratio resulted
      primarily from ceding commission of $14.1 million earned through the reinsurance
      agreement with Maiden Insurance during the third quarter of 2007 offset by
      increased salary expense.





*Net
      Premiums Earned less Expenses Included in Combined Ratio (Underwriting
      Income).* Net premiums earned less expenses included in combined ratio increased $4.1
      million or 200.4% from $2.0 million to $6.1 million for the nine months ended
      September 30, 2006 and 2007, respectively. This increase is attributable to
      growth in gross premium written and improvements in the expense ratio offset
      by
      increases to the loss ratio.





**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 $126.8 million and $81.1 million in the
      nine months ended September 30, 2007 and 2006, 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 and the issuance
      of
      junior subordinated debentures in the amount of $40 million should provide
      us
      sufficient liquidity to fund our current operations and anticipated growth
      for
      at least the next twelve months.




28





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




**Nine
                Months Ended****September
                30,****2007**
            
            **2006**Cash
                and cash equivalents provided by (used in):Operating
                activities
            
            **$**
            **188,077**
            
            $
            126,524Investing
                activities
            
            
            **(184,782**
            **)**
            
            (362,375
            )Financing
                activities
            
            
            **127,521**
            
            
            171,069Change
                in cash and cash equivalents
            
            **$**
            **130,816**
            
            $
            (64,782
            )




The
      increase in the cash provided by operating activities from 2006 to 2007 reflects
      the growth in premium and associated increase in cash receipts during the
      period.





Cash
      used
      in investing activities during the period represents, primarily, the net
      purchases (purchases less sales) of investments. For the nine months ended
      September 30, 2007, the Company’s net purchases of fixed income securities
      totaled approximately $115.4 million, net purchases of other investments totaled
      approximately $8.3 million offset by net sales of equity securities totaled
      approximately $4.8 million. During 2007, the Company had acquisition costs
      of
      approximately $37.4 million and additionally the Company provided approximately
      $18.0 million related to a secured note (see Note 11. Other Investments) in
      connection with the Warrantech transaction.  For the nine months ended
      September 30, 2006, the Company’s net purchases of fixed income securities
      totaled approximately $311.4 million, net purchases of equity securities totaled
      approximately $38.8 million and acquisition costs were approximately $10
      million.




Cash
      provided by financing activities for the nine months ended September 30, 2007
      consisted primarily of cash proceeds of $93 million from entering into
      repurchase agreements, $40 million generated by the issuance of additional
      junior subordinated debt in connection with the issuance of trust preferred
      securities offset by dividend payments of approximately $3.9 million. Cash
      provided by financing activities for the nine months ended September 30, 2006
      consisted of approximately $166 million generated by the net proceeds of the
      issuance of 25.6 million shares of common stock in a private placement, $30
      million generated by the issuance of additional junior subordinated debt in
      connection with the issuance of trust preferred securities off-set by the
      repayment of short term borrowings of approximately $25 million.





**Other
      Material Changes in Financial Position**





**September 30,**
              **2007**
            
            **December 31,**
              **2006**Selected
                Assets:Total
                Investments
            
            $
            1,024,641
            
            $
            764,277Premiums
                receivable, net
            
            
            264,343
            
            
            147,779Reinsurance
                recoverable
            
            
            254,423
            
            
            44,127Selected
                Liabilities:Loss
                and loss expense reserves
            
            
            742,033
            
            
            295,805Unearned
                premium
            
            
            496,939
            
            
            323,155Reinsurance
                payable on paid losses
            
            
            166,185
            
            
            23,028




Investments
      increased $260,364, premium receivables increased $116,564, loss and loss
      expense reserves increased $446,228 and unearned premium increased $173,784.
      A
      majority of these increases were through the acquisition of AIIS and IGI in
      2007. Reinsurance recoverable increased $210,296 and reinsurance payable on
      paid
      losses increased $143,157 primarily from entering into a reinsurance contract
      with Maiden Insurance in the third quarter of 2007.





**Junior
      Subordinated Debt**





On
      March
      22, 2007, the Company issued $40 million in principal amount of junior
      subordinated debentures (the “Debentures”) in connection with the issuance of
      trust preferred securities by a trust pursuant to an indenture with Wilmington
      Trust Company, as trustee. The Debentures mature on March 15, 2037 and bear
      interest at a rate per annum of 7.93% until March 15, 2012 and, thereafter,
      at a
      floating rate per annum equal to the sum of the three-month London Interbank
      Offered Rate for U.S. dollars (LIBOR) determined each quarter plus three
      percent. The New Debentures are redeemable at the Company’s election after March
      15, 2012. The Company incurred placement fees in the amount of $0.8 million
      in
      connection with the financing which will be amortized over 30
      years.





29




**Line
      of Credit**





The
      Company entered into an agreement for an unsecured line of credit on June 30,
      2007 with JP Morgan Chase Bank, N.A. in the aggregate amount of $50 million.
      The
      line will be used for general corporate purposes as required, as well as
      collateral for letters of credit. The agreement matures on June 30,
      2008.   Interest payments are required to be paid monthly on any
      unpaid principal and bears interest at LIBOR plus 150 basis points.  As of
      September 30, 2007 there was no outstanding balance on the line of credit.
      The
      Company has an outstanding letter of credit in place at September 30, 2007
      for
      $16.0 million that reduced the availability on the line of credit to $34.0
      million as of September 30, 2007.





**Reinsurance**





We
      purchase excess of loss workers’ compensation reinsurance to protect us from the
      impact of large losses. Under this reinsurance program, we pay our reinsurers
      a
      percentage of our net or gross earned insurance premiums, subject to certain
      minimum reinsurance premium requirements. Our reinsurance program for 2007
      includes multiple reinsurers in five layers of reinsurance that provide us
      with
      coverage in excess of a certain specified amount per loss occurrence, or
      retention level. Our reinsurance program for 2007 provides coverage for claims
      in excess of $1.0 million per occurrence with coverage up to $130.0 million
      per
      occurrence, subject to certain exclusions and restrictions, including a $1.25
      million aggregate deductible applicable to the first layer of this reinsurance
      coverage. Our reinsurance for workers’ compensation losses caused by acts of
      terrorism is more limited than our reinsurance for other types of workers’
compensation losses. 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.





Since
      January 2003, we have maintained quota share reinsurance for our extended
      warranty and accidental damage insurance underwritten in the European Union
      and
      certain coverage plans underwritten in the United States. This reinsurance
      also
      covers certain other risks we underwrite in the European Union. Under these
      quota share reinsurance arrangements, we cede a portion (15% for the majority
      of
      the programs incepting in 2007) of each reinsured risk to our reinsurers and
      recover the same percentage of ceded loss and loss adjustment expenses, subject
      to certain exclusions and restrictions. In return for this reinsurance
      protection, we pay the reinsurers their pro rata shares of the insurance
      premiums on the ceded business, less a ceding or overriding commission. For
      the
      most part, coverage for losses arising out of acts of terrorism is excluded
      from
      this reinsurance. The majority of our extended warranty and accidental damage
      insurance underwritten in the United States is not reinsured with third party
      reinsurers. However, a portion of these risks as well as much of the risk that
      we retain under our various third party reinsurance arrangements are ceded
      under
      reinsurance arrangements with AII.




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 Insurance Company Limited (“IGI”),
      net of commissions) and 40% of losses and (b) AII transfered 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 million (“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, which after the first year would
      be
      subject to adjustment (up to a maximum of 32% and a minimum of 30%) based on
      the
      loss ratio of the ceded business. 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. The Company recorded approximately $40.1 million of
      ceding commission during the third quarter of 2007 as a result of this
      transaction.





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.





AmTrust,
      through subsidiaries, has entered into a reinsurance brokerage agreement and
      an
      asset management agreement with Maiden Insurance, under which the Company
      receives a brokerage commission of 1.25% of reinsured premium and an annual
      asset management fee of 0.35% of assets under management, respectively. The
      Company recorded $2,400 of brokerage commission during the third quarter of
      2007.





30




**Investment
      Portfolio**





As
      of
      September 30, 2007 and December 31, 2006, our investment portfolio, including
      cash and cash equivalents, had a net carrying value of $1,061.1 million and
      $771.9 million, respectively (excluding $24.2 million and $13.9 million of
      other
      investments, respectively), an increase of 37.5% from December 31, 2006. A
      majority of our fixed maturities are classified as available for sale (55%)
      at
      September 30, 2007, 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 (45%) is not impacted by changing interest rates.
      Our fixed maturity securities, gross, as of this date had a fair value of $806.9
      million and an amortized cost of $817.4 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
      $94.0 million with a cost of $106.0 million as of September 30, 2007. Securities
      sold but not yet purchased, represent obligations of the Company to deliver
      the
      specified security at the contracted price and thereby, create a liability
      to purchase the security in the market at prevailing rates. Sales of
      securities under repurchase agreements are accounted for as collateralized
      borrowing transactions and are recorded at their contracted amounts. Our
      investment portfolio is summarized in the table below by type of
      investment  :





September
                30, 2007
            
            December
                31, 2006Carrying
              Value
            
            Percentage
                of
              Portfolio
            
            Carrying
              Value
            
            Percentage
                of
              PortfolioCash
                and cash equivalents
            
            **$**
            **190,732**
            
            
            **16.1**
            **%**
            $
            59,916
            
            
            7.4
            %Time
                and short-term deposits
            
            
            **98,041**
            
            
            **8.2**
            
            
            196,140
            
            
            24.2U.S.
                treasury securities
            
            
            **18,919**
            
            
            **1.6**
            
            
            22,799
            
            
            2.8U.S.
                government agencies
            
            
            **322,953**
            
            
            **27.1**
            
            
            288,325
            
            
            35.6Municipal
                bonds
            
            
            **10,602**
            
            
            **0.9**Mortgage
                and asset backed securities
            
            
            **133,732**
            
            
            **11.2**
            
            
            55,427
            
            
            6.8Corporate
                bonds
            
            
            **322,195**
            
            
            **27.0**
            
            
            93,168
            
            
            11.5Common
                stock
            
            
            **93,352**
            
            
            **7.8**
            
            
            94,042
            
            
            11.6Preferred
                stocks
            
            
            **667**
            
            
            **0.1**
            
            
            439
            
            
            0.1Investment
                portfolio, gross
            
            **$**
            **1,191,193**
            
            
            **100.0**
            **%**
            $
            810,256
            
            
            100.0
            %Securities
                sold but not yet purchased
            
            
            **(37,570**
            **)**
            
            
            
            
            (38,323
            )Securities
                sold under agreements to repurchase
            
            
            **(92,571**
            **)**
            
            
            
            
            -Investment
                portfolio, net
            
            **$**
            **1,061,052**
            
            
            
            
            **$**
            771,933





As
      of
      September 30, 2007, the weighted average duration of our fixed income securities
      was 5.2 years.





We
      review
      our investment portfolio for impairment on a quarterly basis. Impairment of
      investment securities results in a charge to operations when a market decline
      below cost is deemed to be other-than-temporary. The Company considers
      investments subject to impairment testing when an asset is in an unrealized
      loss
      position in excess of 30%. As of September 30, 2007, we reviewed our
      fixed-maturity and equity securities portfolios to evaluate the necessity of
      testing for other-than temporary declines in fair value.  We determined
      that two equity security investments were Other-Than-Temporarily impaired and
      accordingly wrote them down resulting in a $3.4 million realized loss during
      the
      three months ended September 30, 2007.




Additionally,
      the Company had $18.0 million of gross unrealized losses related to marketable
      equity securities.  The Company's investments in marketable equity
      securites 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, five equity securities
      comprised $12.8 million, or 71%, of the losses.  Three securities in the
      media sector represent approximately 8 percent of the total fair value and
      40
      percent of the Company's total unrealized losses.  The Company also owns
      two common stocks in the automotive and construction sector which have fair
      value of approximately 3 percent and 1 percent, respectively, and approximately
      17 percent and 14 percent, respectively, of the Company's total unrealized
      losses.  The duration of these impairments ranges from four to twenty
      months.  Additionally, the Company holds 28 securities in a loss position
      of approximately $5.2 million which are not considered individually
      significant.  The duration of impairment on these marketable securities is
      primarily less that 12 months. Based on the Company's ability and intent to
      hold
      these investments for a sufficient time for recovery of fair value, the Company
      does not consider these investments to be other-than-temporarily impaired at
      September 30, 2007.




31





**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 credit risk, interest rate risk, foreign currency risk and
      equity price risk.





*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. The Company believes it has a conservative investment policy
      and that virtually all of its mortgage-backed securities are government or
      agency guaranteed.




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 “Item 2. Management’s Discussion and Analysis of Financial Condition
      and Results of Operation—Reinsurance.”




*Interest
      Rate Risk.* We had
      fixed maturity securities (excluding $98.0 million of time and short-term
      deposits) with a fair value of $806.9 million and a carrying value of $808.4
      million as of September 30, 2007 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.





During
      the second quarter of 2007, the Company has entered into reverse repurchase
      agreements. The agreements are accounted for as collateralized borrowing
      transactions and are recorded at contract amounts. As of September 30, 2007,
      there were $92.6 principal amount outstanding at interest rates between 5.21%
      and 5.29%. Interest expense associated with these reserves repurchase agreements
      through September 30, 2007 was $1.5 million of which $0.9 million was accrued
      as
      of September 30, 2007. The Company has $95.6 million of collateral pledged
      in
      support of these agreements.





The
      table
      below summarizes the interest rate risk associated with our fixed maturity
      securities including securities sold but not yet purchased and reverse
      repurchase agreements by illustrating the sensitivity of the fair value and
      carrying value of our fixed maturity securities as of September 30, 2007 to
      selected hypothetical changes in interest rates, and the associated impact
      on
      our stockholders’ equity. Because we anticipate that the Company will continue
      to meet its obligations out of income, we classify our fixed maturity
      securities, other than redeemable preferred stock, mortgage backed and corporate
      obligations, as held-to-maturity and carry them on our balance sheet at cost
      or
      amortized cost, as applicable. Any redeemable preferred stock we hold from
      time
      to time is classified as available-for-sale and carried on our balance sheet
      at
      fair value. Temporary changes in the fair value of our fixed maturity securities
      that are held-to-maturity, such as those resulting from interest rate
      fluctuations, do not impact the carrying value of these securities and,
      therefore, do not affect our shareholders’ equity. However, temporary changes in
      the fair value of our fixed maturity securities that are held as
      available-for-sale do impact the carrying value of these securities and are
      reported in our shareholders’ equity as a component of other comprehensive
      income, net of deferred taxes. The selected scenarios in the table below are
      not
      predictions of future events, but rather are intended to illustrate the effect
      such events may have on the fair value and carrying value of our fixed maturity
      securities and on our shareholders’ equity, each as of September 30, 2007.


**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****($
                  in thousands)**200
                  basis point increase
              
              $
              739,873
              
              $
              (67,053
              )
              $
              —
              
              $
              (38,781
              )
              
              (10.1
              )%100
                  basis point increase
              
              
              770,831
              
              
              (36,045
              )
              
              —
              
              
              (20,273
              )
              
              (5.2
              )No
                  change
              
              
              806,926
              
              
              —
              
              
              808,402
              
              
              —
              
              
              —100
                  basis point decrease
              
              
              830,315
              
              
              23,389
              
              
              —
              
              
              18,550
              
              
              4.8200
                  basis point decrease
              
              
              759,608
              
              
              47,318
              
              
              —
              
              
              38,180
              
              
              10.0
  32




*Foreign
      Currency Risk.* We write
      insurance in the United Kingdom and certain other European Union member
      countries through AIU and IGI. While the functional currency of AIU is the
      Euro
      and IGI is the British Pound, we write coverages that are settled in local
      currencies, primarily 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 $2.5 million after tax realized currency loss based on our
      outstanding foreign denominated reserves of $76.2 million at September 30,
      2007.





*Equity
      Price Risk.* Equity
      price risk is the risk that we may incur losses due to adverse changes in the
      market prices of the equity securities we hold in our investment portfolio,
      which include common stocks, non-redeemable preferred stocks and master limited
      partnerships. We classify our portfolio of equity securities as
      available-for-sale and carry these securities on our balance sheet at fair
      value. Accordingly, adverse changes in the market prices of our equity
      securities result in a decrease in the value of our total assets and a decrease
      in our shareholders’ equity. As of September 30, 2007, the equity securities in
      our investment portfolio had a fair value of $94.0 million, representing
      approximately eight percent of our total invested assets on that date. We are
      fundamental long buyers and short sellers, with a focus on value oriented
      stocks. The table below illustrates the impact on our equity portfolio and
      financial position given a hypothetical movement in the broader equity markets.
      The selected scenarios in the table below are not predictions of future events,
      but rather are intended to illustrate the effect such events may have on the
      carrying value of our equity portfolio and on shareholders’ equity as of
      September 30, 2007. 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****($
                in thousands)**5%
                increase
            
            $
            98,720
            
            $
            4,701
            
            
            
            
            $
            4,701
            
            
            1.2
            %No
                change
            
            
            94,019
            
            
            
            
            $
            94,0195%
                decrease
            
            
            89,318
            
            
            (4,701
            )
            
            
            
            
            (4,701
            )
            
            -1.2
            %




*Off
      Balance Sheet Risk* - The
      Company has off-balance sheet 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
      4T. 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.




33





PART
      II -
      OTHER INFORMATION





**Item
      1A. Risk Factors**





The
      following paragraphs supplement the risk factors set forth in our annual report
      on Form 10-K for the year ended December 31, 2006.





**Our
      relationship with Maiden Holdings, Ltd. and its subsidiaries may present, and
      make us vulnerable to, potential conflicts of interest, related party
      transactions, business opportunity issues and legal
      challenges.**





**** Maiden
      Holdings, Ltd, (“Maiden”) is a Bermuda insurance holding company formed by
      Michael Karfunkel, George Karfunkel and Barry D. Zyskind, our principal
      shareholders, and, respectively, the Chairman of our Board of Directors, a
      Director and our Chief Executive Officer. Messrs. Karfunkel, Karfunkel and
      Zyskind own 57% of our outstanding shares of common stock and each owns 6.5%
      of
      Maiden’s outstanding shares of common stock. Mr. Zyskind serves as
      non-executive Chairman of the Board of Maiden. Max G. Caviet, an executive
      officer of AmTrust, serves as President and Chief Executive Officer of Maiden
      and will continue to serve as an executive officer of both companies during
      a
      transitional period which will not extend beyond December 31, 2007. Following
      the transitional period, Mr. Caviet is expected to resign his positions at
      AmTrust. Conflicts of interest could arise with respect to business
      opportunities that could be advantageous to Maiden or its subsidiaries, on
      the
      one hand, and us or our subsidiaries, on the other hand. In addition, potential
      conflicts of interest may arise should the interests of AmTrust and Maiden
      diverge. A majority of Maiden's directors are not affiliated with
      AmTrust.





Mr. Zyskind's service as our President and Chief Executive Officer and
      non-executive Chairman of the Board of Maiden, and Mr. Caviet's service for
      a transitional period as an executive officer of AmTrust and as Maiden’s
      President and Chief Executive Officer, could also raise a potential challenge
      under anti-trust laws.  Section 8 of the Clayton Antitrust Act, or the
      Clayton Act, prohibits a person from serving as a director or officer in any
      two
      competing corporations under certain circumstances. If AmTrust and Maiden are
      in
      the future deemed to be competitors within the meaning of the Clayton Act,
      certain thresholds relating to direct competition between AmTrust and Maiden
      are
      met, and the Department of Justice and Federal Trade Commission challenge the
      arrangement, Messrs. Zyskind and Caviet may be required to resign their
      positions with one of the companies, among other things.




**We
      are dependent on Maiden for commission and fee income.**





**** We
      are
      dependent on Maiden for commission and fee income through the quota share
      reinsurance agreement by which Maiden’s subsidiary, Maiden Insurance Company,
      Ltd. (“Maiden Insurance”), reinsures AmTrust’s insurance subsidiaries; the asset
      management agreement between Maiden and Maiden Insurance and our subsidiary,
      AII
      Insurance Management Ltd., by which we manage Maiden’s and Maiden Insurance’s
      invested assets; and the reinsurance brokerage agreement, by which our
      subsidiary, AII Reinsurance Broker Limited provides Maiden Insurance certain
      reinsurance brokerage services. Effective July 1, 2007, Maiden Insurance
      assumes, through the quota reinsurance, approximately 40% of our net business
      premiums.  The term of our quota share reinsurance agreement with Maiden
      Insurance is for a period of three years, subject to certain early termination
      rights. We receive a ceding commission of 31% of ceded written premiums, which
      after the first year would be subject to adjustment (up to a maximum of 32%
      and
      a minimum of 30%) based on the loss ratio of the ceded business. Pursuant to
      the
      asset management agreement, we receive a quarterly fee equal to 0.0875% of
      the
      average value of Maiden’s and Maiden Insurance’s invested assets. The asset
      management agreement has a one year term and will renew automatically for
      successive one year terms unless notice of intent not to renew is provided.
      Pursuant to the reinsurance brokerage agreement, we receive a brokerage
      commission equal to 1.25% of the premium ceded to Maiden Insurance under the
      quota share reinsurance agreement.





There
      is
      no assurance that these arrangements will remain in place beyond their current
      terms and we may not be able to readily replace these arrangements if they
      terminate. If we were unable to continue or replace our current reinsurance
      arrangements on equally favorable terms, our underwriting capacity and
      commission and fee income could decline, we could experience a downgrade in
      our A.M. Best rating, and our results of operations may be adversely
      affected.





34




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





**Exhibit**
              **Number**
            
            **Description**31.1
            
            Certification
                of the Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
                for the quarter ended September 30, 2007.31.2
            
            Certification
                of the Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a),
                for the quarter ended September 30, 2007.32.1
            
            Certification
                of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
                for
                the quarter ended September 30, 2007.32.2
            
            Certification
                of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350,
                for
                the quarter ended September 30,
                2007.




35




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. Zyskind
              President
                and Chief Executive OfficerDate:
                  November 14, 2007
            
            /s/ Ronald
                E. Pipoly, Jr.Ronald
                E. Pipoly,Jr.
              Chief
                Financial Officer




36